UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Amendment No. )
BODISEN BIOTECH, INC.
--------------------------------------------
(Name of small business issuer in its charter)
Delaware 5191 98-0381367
---------------------------- ---------------------------- --------------------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation) Classification Code Number) Identification No.)
North Part of Xinquia Road, Yang Ling AG, High-Tech Industries Demonstration
Zone, Yang Ling, China 712100
Telephone 86-29-870749
(Address and telephone number of principal executive offices)
North Part of Xinquia Road, Yang Ling AG, High-Tech Industries Demonstration
Zone, Yang Ling, China 712100
(Address of principal place of business or intended principal place of business)
Copies of all communications to:
Stephen W. Johnson, Esq.
Reed Smith LLP, 435 Sixth Avenue, Pittsburgh, PA, 15219
Telephone 412-288-3131
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
--------------------- ------------------- ----------------------- ------------------------ ---------------------------
Title of each class Amount of shares Proposed maximum Proposed maximum Amount of registration
of securities to be to be registered offering price per aggregate offering fee
registered unit (1) price (1)
--------------------- ------------------- ----------------------- ------------------------ ---------------------------
Common Stock $ 17,771,459.81 $2,091.70
--------------------- ------------------- ----------------------- ------------------------ ---------------------------
(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(c) of the Securities Act of 1933 based upon the
average of the Registrant's common stock price as determined under the
terms of the conversion of the debenture and warrants as set forth in the
respective agreements.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
The information contained in this U.S. Prospectus/U.K. Admission Document is not
complete and may be changed. We may not sell these securities until the
registration statement filed with the US Securities and Exchange Commission (the
"SEC") is effective. This U.S. Prospectus/U.K. Admission Document is not an
offer to sell these securities and it is not an offer to buy these securities in
any state where the offer or sale is not permitted.
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in
any doubt about the contents of this document you should consult a person
authorised under the Financial Services and Markets Act 2000 who specialises in
advising on the acquisition of shares and other securities. The whole of the
text of this document should be read.
You should be aware that an investment in the Company involves a high degree of
risk and prospective investors should also carefully consider the section
entitled "Risk Factors" in Part I of this document before taking any action.
This document is an Admission Document which has been produced in accordance
with the AIM Rules and has not been filed with the Registrar of Companies in
England and Wales. This document also constitutes a prospectus which is part of
a registration statement that has been filed with the SEC. Because this Placing
is being made in the UK, this document is referred to as an Admission Document.
The Directors of Bodisen Biotech, Inc., whose names appear on page 22 of this
document, accept responsibility for the information contained in this document
and compliance with the AIM Rules. To the best of the knowledge and belief of
our Directors (who have taken all reasonable care to ensure that such is the
case), the information contained in this document is in accordance with the
facts and does not omit anything likely to affect the import of such
information.
Application will be made for our issued and to be issued Common Stock to be
admitted to trading on AIM. It is expected that Admission will take place and
that trading will commence on o o 2005.
AIM is a market designed primarily for emerging or smaller companies to which a
higher investment risk tends to be attached than to larger or more established
companies. AIM securities are not admitted to the Official List of the UK
Listing Authority. A prospective investor should be aware of the risks of
investing in such companies and should make the decision to invest only after
careful consideration and, if appropriate, consultation with an independent
financial adviser. The AIM Rules are less demanding than those of the Official
List of the UK Listing Authority. Further, London Stock Exchange plc has not
itself examined or approved the contents of this document. The Existing Common
Stock is traded in the over-the-counter market and quoted through the
Over-The-Counter ("OTC") Bulletin Board under the symbol "BBOI". On o o 2005,
the closing sales price of the common stock was o per share. The Common Stock is
not dealt in on any other recognised investment exchange; however, application
has been made to list the Common Stock on the American Stock Exchange. The
Exchange is currently reviewing that application. No assurance can be given as
to the whether or when a listing on AMEX will occur.
--------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED , 2005
BODISEN BIOTECH, INC.
(Incorporated in the State of Delaware, USA)
Placing of o Common Stock of op each at op per share
and
Admission to trading on AIM of the London Stock Exchange
This Admission Document is dated o o 2005
Nominated Adviser and Broker
Charles Stanley & Co. Limited
------------------------------------------------------------------------------------------------------------------------
Share capital immediately following Admission
Authorised Issued
Number (pound) Number (pound)
o o Common Stock of op each o o
------------------------------------------------------------------------------------------------------------------------
All of the shares of our common stock, $0.0001 par value, (the "Common Stock")
offered hereby (the "Offering") are being issued and sold by us, Bodisen
Biotech, Inc. (the "Company").
The Placing Shares will, on Admission, rank pari passu in all respects with our
existing Common Stock then in issue and will rank in full for all dividends and
other distributions declared, paid or made in respect of our Common Stock after
Admission.
In accordance with the AIM Rules, Charles Stanley & Co. Limited has confirmed to
the London Stock Exchange that it has satisfied itself that the Directors have
received independent advice and guidance as to the nature of their
responsibilities and obligations to ensure compliance by the Company with the
AIM Rules and that, to the best of its information and belief (having made due
and careful enquiry), all relevant requirements of the AIM Rules have been
complied with. In giving its confirmation to the London Stock Exchange, no
liability whatsoever is accepted by Charles Stanley & Co. Limited for the
accuracy of any information or opinions contained in this document or for the
omission of any material information.
Charles Stanley & Co. Limited, which is regulated by the Financial Services
Authority, is acting as Nominated Adviser and Broker for the Company, and no one
else, in relation to the Placing and will not be responsible to any person other
than the Company for providing the protections afforded to its customers or for
advising on the contents of this document or any transaction or arrangement
referred to herein. Charles Stanley & Co. Limited has not approved this
Admission Document for the purposes of section 21 of the Financial Services and
Markets Act 2000. No action has been taken nor will be taken in any jurisdiction
outside the United Kingdom by either the Company or Charles Stanley & Co.
Limited that would permit a public offer of Common Stock in any such
jurisdiction where action for that purpose is required, nor has any such action
been taken with respect to the possession or distribution of this document.
Persons into whose possession this document comes are required by the Company
and Charles Stanley & Co. Limited to inform themselves about and to observe any
restriction as to the Placing and the distribution of this document. The
distribution of this document in jurisdictions other than the United Kingdom and
the United States may be restricted by law and therefore persons into whose
possession this document comes should inform themselves about and observe any
such restriction. Any failure to comply with these restrictions may constitute a
violation of the securities law of any such jurisdictions.
These shares are offered by the underwriter on a best efforts basis. Because the
offering is being conducted on a best efforts basis, the underwriter is not
required to sell any minimum number or dollar amount of shares and is not
obligated to purchase the shares if they are not sold to the public. Funds
received by the underwriter from investors in the offering will be deposited
with an escrow agent in a non-interest bearing account until the closing of the
offering. The distribution of this document in jurisdictions, other than the
United Kingdom and the United States, may be restricted by law and therefore
persons into whose possession this document comes should inform themselves about
and observe any such restriction. Any failure to comply with these restrictions
may constitute a violation of the securities law of any such jurisdictions.
This Admission Document and its contents are confidential and it should not be
distributed, published or reproduced in whole or in part or disclosed by
recipients to any other person. This Admission Document is for distribution only
to persons in the United Kingdom who fall within the exemptions contained in
Articles 19 and 49 of the Financial Services and Market Act 2000 (Financial
Promotion) Order 2001 (as amended) (such as persons who are authorised or exempt
persons within the meaning of the Financial Services and Market and certain
other investment professionals, high net worth companies, unincorporated
associations or partnerships and the trustees of high value trusts) and persons
who are otherwise permitted by law to receive it. This document and its contents
are directed only at persons having professional experience in matters relating
to investments and ay investments or investment activity to which this document
relates is only available to such persons. Persons of any other description
should not rely on this document or act upon its contents.
The Placing described in this Admission Document is only being made in the
United Kingdom and the United States. This Admission Document does not
constitute an offer to sell, or the solicitation of an offer to buy, shares in
any jurisdiction in which such offer or solicitations is unlawful and, in
particular, is not for distribution in or into Canada, Australia, the Republic
of Ireland or Japan or to any national, resident or citizen of Canada,
Australia, the Republic of Ireland or Japan. The issue of Ordinary Shares has
not been and will not be registered under the applicable securities laws of
Canada, Australia, the Republic of Ireland or Japan.
This document does not constitute an offer, nor the solicitation of an offer, to
subscribe or buy any of the Common Stock to any person in any jurisdiction to
whom it is unlawful to make such offer or solicitation in such jurisdiction.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE ADMISSION DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
2
CONTENTS
Page
Directors, secretary and advisers 4
Definitions 5
Placing Statistics and Expected Timetable 8
Summary and Key Information 9
Part I Risk Factors 11
Part II Information on Bodisen 17
Part III Management's Discussion and Analysis of
Financial Condition and Results of Operation 30
Part IV Summary financial information for the three years ended 31
December 2004 and the quarter ended 31 March 2005 35
Part V Pro Forma 84
Part VI Additional Information 85
Information not required in Prospectus 111
Indemnification of Directors and Officers 111
Other expenses of Issuance and Distribution 111
Recent sales of unregistered securities 112
Exhibits 113
Undertakings 113
Signatures 115
Exhibit index 116
3
DIRECTORS, SECRETARY AND ADVISERS
Directors: Qiong Wang - Chairman and Chief
Executive Officer
Chen Bo - Executive Director and
President
Patrick McManus - Non Executive Director
David Gatton - Non Executive Director
Weirui Wan - Non Executive Director
Registered Office: The Corporation Trust Company,
Corporation Trust Center, 1209
Orange Street, Wilmington, DE 19801
Telephone number: (302) 658-7581
Principal Place of Business: North Part of Xinquia Road, Yang
Ling AG, High-Tech Industries
Demonstration Zone, Yang Ling,
China 712100
Nominated Adviser & Broker: Charles Stanley & Co. Limited
25 Luke Street
London EC2A 4AR
Auditor: Kabani & Company, Inc.
6033 West Century Blvd. Suite 810,
Los Angeles, CA 90045, USA
Reporting Accountant: Deloitte & Touche LLP
Stonecutter Court, 1 Stonecutter
Street, London EC4A 4TR
UK and US Legal Advisers to the Reed Smith LLP
Company: Minerva House, 5 Montague Close, London
SE1 9BB
UK and US Advisers to the Broker: Jones Day
21 Tudor Street, London, EC4Y 0DJ
Registrars: Computershare Investor Services plc
Ordnance House, 31 Pier Road,
St Helier, Jersey JE4 8PW
4
DEFINITIONS
The following definitions apply throughout this document unless the context
otherwise requires:
"Act" the Companies Act 1985, as amended
"Admission" admission of the issued Common Stock (including the Placing
Shares) to trading on AIM becoming effective in accordance
with the AIM rules
"AIM" the AIM market of the London Stock Exchange
"AIM Rules" the rules for AIM companies and their nominated
advisers as issued by the London Stock Exchange, as amended
from time to time
"Articles" the Articles of Association of the Company
"Board" or
"Directors" the directors of the Company whose names are set out on page
23 of this document
"Certificate of
Incorporation" the amended and restated certificate of incorporation of the
Company filed with the State of Delaware
"Charles Stanley" Charles Stanley & Co. Limited, which is regulated for the
conduct of investment business in the UK by the Financial
Services Authority and is a member of the London Stock
Exchange, the Company's Nominated Adviser and Broker
"Common Stock" Common Stock of op each in the capital of the Company
"Company" or
"Bodisen" Bodisen Biotech Inc, or its businesses, as the context
requires
"CREST" the relevant system (as defined in the CREST Regulations) in
respect of which CRESTCo is the Operator (as defined in the
CREST Regulations)
"CRESTCo" CRESTCo Limited
"CREST
Regulations" the Uncertificated Securities Regulations 2001 (SI
2001/3755), as amended
"DGCL" The Delaware General Corporate Law
"DI" a depositary interest representing underlying Common Stock
"Enlarged Issued
Share Capital" the issued share capital of the Company following Admission,
comprising the existing Common Stock and the Placing Shares
5
"Existing
Common Stock" Common Stock in issue at the date of this document
"Group" the Company and its subsidiaries
"Internal
Revenue Code" the US Internal Revenue Code of 1986, as amended
"London Stock
Exchange" London Stock Exchange plc
"Net Asset Value" the net asset value of the Group
"Official List" the Official List of the UK Listing Authority
"OTC" Over the Counter Bulletin Board
"Placing" the conditional placing by Charles Stanley of the Placing
Shares at the Placing Price pursuant to the Placing
Agreement as described in paragraph 16 of Part VI of this
document
"Placing Agreement" the conditional agreement relating to the Placing
between the (1) the Company (2) the Directors and certain of
the senior managers and (3) Charles Stanley, further details
of which are set out in paragraph 16 of Part VI of this
document
"Placing Price" o pence per Common Stock
"Placing Shares" o new Common Stock to be issued pursuant to the Placing
"Proposals" the Placing, Admission and other matters contemplated in
this document
"RMB" Renminbi, the currency of the People's Republic of China
"SEC" US Securities and Exchange Commission
"Share Schemes" the 2004 stock option scheme described in paragraph 7 of
Part VI of this document
"Stockholders" holders of Common Stock
"United Kingdom"
or "UK" the United Kingdom of Great Britain and Northern Ireland
"UK Listing Authority" the Financial Services Authority acting
in its capacity as the competent authority for the purposes
of Part VI of the Financial Services and Markets Act 2000
"United States"
or "US" The United States of America, its territories and
possessions, any state of the United States and the District
of Columbia
6
"US Securities
Act" The United States Securities Act of 1933, as amended
"Yang Ling" Yang Ling Bodisen Biology Science and Technology Development
Company Limited
"$" US dollars, the lawful currency of the US
"(pound)" the lawful currency of the United Kingdom
All references to times in this document are to British
Summer Time, unless stated otherwise. References to the
singular shall include references to the plural where
applicable, and vice versa.
7
PLACING STATISTICS
Placing Price opence
Number of Common Stock in issue prior to the Placing o
Number of Placing Shares to be issued o
Number of Common Stock in issue immediately following Admission o
Percentage of Enlarged Share Capital the subject of the Placing o per cent.
Market capitalisation of the Company following the Placing at the Placing Price o
Gross proceeds of the Placing o
Net proceeds of the Placing o
EXPECTED TIMETABLE
Admission and dealings commence in Common Stock on AIM 8.00 am on o o
2005
CREST accounts credited by o o 2005
Definitive share certificates despatched o o 2005
8
SUMMARY AND KEY INFORMATION
The following is a summary of what our Directors believe to be the most
important information regarding us and our securities being offered under the
Placing. Since this is a summary, it may not contain all of the information that
is important to you. To understand our business and the Placing fully, you are
urged to read this entire document, the financial statements and related notes
carefully. Attention is drawn, in particular, to the section headed "Risk
Factors" set out in Part I below.
Our Company
We were incorporated on January 14, 2000 in Delaware with our principal place of
business now based in The People's Republic of China. We are located at: Bodisen
Biotech, Inc., North Part of Xinquia Road, Yang Ling AG, High-Tech Industries
Demonstration Zone, Yang Ling, China 712100, Telephone: +862987074957. We file
periodic reports with the SEC and our common stock trades on the OTC in the
United States under the symbol BBOI. We are primarily engaged in developing,
manufacturing and selling organic fertilizers and pesticides in The People's
Republic of China.
Our Business
Our sole operating subsidiary, Yang Ling, was founded in The People's Republic
of China on August 31, 2001 and is headquartered in the Shaanxi Province,
People's Republic of China. Yang Ling primarily manufactures and markets organic
fertilizers and pesticides to 20 agricultural provinces of China. We produce
numerous proprietary product lines, from pesticides to crop specific fertilizer,
which are then marketed and sold to farmers. We conduct research and development
to further improve existing products and to develop new formulas and products.
Background of the Company
Prior to March 1, 2004, we were known as Stratabid.com, Inc. ("Stratabid").
Stratabid was a startup stage Internet-based commercial mortgage origination
business. Stratabid operated primarily through its wholly-owned subsidiary,
Stratabid.com Online (B.C.) Ltd. ("Stratabid.com Online"), which provided
services throughout Canada. On January 14, 2004, Stratabid created a
wholly-owned subsidiary corporation Bodisen Holdings, Inc., a Delaware
corporation ("BHI"), to pursue a merger with Bodisen International, Inc., a
Delaware corporation ("BII") and the parent company of Yang Ling. On February
11, 2004, Stratabid and BHI entered into an Agreement and Plan of Merger with
BII and the shareholders of BII, providing for the merger of BII into BHI, with
BHI being the surviving entity in the merger. The transactions provided for in
the Agreement and Plan of Merger closed on February 24, 2004. In the merger,
Stratabid acquired 100 per cent. of BII's outstanding stock in exchange for the
issuance by Stratabid of 3 million shares of its common stock to the holders of
BII shares. The Stratabid shares issued in the merger constituted approximately
66 per cent. of the outstanding shares of Stratabid after the merger. After the
merger, we paid a 3 for 1 stock dividend and then, by prior agreement, redeemed
3.0 million post dividend shares held by the former CEO of Stratabid. After
these transactions, the shareholders of BII held approximately 79 per cent. of
the Stratabid common stock outstanding. On February 25, 2004, Stratabid sold
Stratabid.com Online to Derrek Wasson, Stratabid's former Chief Executive
Officer. On March 1, 2004, Stratabid changed its name from Stratabid.com, Inc.
to our current name Bodisen Biotech, Inc.
9
The Placing by the Company
We are Placing o Common Stock of op each at op per share.
Our shares will be marketed and sold by Charles Stanley & Co. Limited, who will
offer the Placing Shares on a best efforts basis. We intend to use the net
proceeds of the Placing for product development, to expand into new territories
and develop OEM manufacturing under the Bodisen brand, to add two new production
lines and for working capital purposes. See "Reasons for the Placing and Use of
Proceeds" for a complete description.
10
PART I
RISK FACTORS
You should carefully consider the risks described below before making an
investment in Bodisen. All of these risks may impair its business operations. If
any of the following risks actually occur, its business, financial condition or
results of operations could be materially adversely affected. In such case, the
trading price of its common stock could decline, and you may lose all or part of
your investment.
1. RISKS RELATING TO OUR BUSINESS
Our management own a significant amount of our common stock, giving them
influence or control in corporate transactions and other matters, and their
interests could differ from those of other stockholders.
Our principal executive officers, Wang Qiong and Chen Bo, own approximately
47.96 percent of our outstanding common stock. As a result, they are in a
position to significantly influence or control the outcome of matters requiring
a stockholder vote, including the election of directors, the adoption of any
amendment to its certificate of incorporation or bylaws, and the approval of
significant corporate transactions. Their control may delay or prevent a change
of control on terms favourable to our other stockholders and may adversely
affect your voting and other stockholders rights.
We may require additional financing in the future and a failure to obtain such
required financing will inhibit our ability to grow.
The continued growth of our business may require additional funding from time to
time. Funding would be used for general corporate purposes, which may include
acquisitions, investments, repayment of debt, capital expenditures, repurchase
of our capital stock and any other purposes that we may specify in any Admission
Document supplement. Obtaining additional funding would be subject to a number
of factors, including market conditions, operational performance and investor
sentiment. These factors may make the timing, amount, terms and conditions of
additional funding unattractive, or unavailable, to us.
The terms of any future financing may adversely affect your interest as
stockholders.
If we require additional financing in the future, we may be required to incur
indebtedness or issue equity securities, the terms of which may adversely affect
your interests in us. For example, the issuance of additional indebtedness may
be senior in right of payment to your shares upon our liquidation. In addition,
indebtedness may be under terms that make the operation of its business more
difficult because the lender's consent will be required before we can take
certain actions. Similarly, the terms of any equity securities we issue may be
senior in right of payment of dividends to your common stock and may contain
superior rights and other rights as compared to your common stock. Further, any
such issuance of equity securities may dilute your interest in us.
Our corporate structure may subject our stockholders to two levels of taxation
on the payment of dividends or the disposition of its operating subsidiary,
thereby substantially reducing the return on its stockholders' investment.
11
If Yang Ling pays a dividend to us, its parent company, for distribution to the
stockholders as a dividend, or if Yang Ling (rather than us, its parent company)
is ultimately sold, the dividend or the proceeds of that transaction would be
subject to two levels of tax -- one at the parent corporate level and one at the
parent stockholder level. Because our operations are conducted through Yang Ling
in China, any dividends payable by us must come from Yang Ling and it is more
likely that Yang Ling, rather than the parent company, will ultimately be sold.
Thus, if Yang Ling pays a dividend to us in the future or if Yang Ling is sold
in the future, those proceeds may be subject to two levels of taxation: (i) we
will pay tax on the dividend or sale proceeds received from Yang Ling, and (ii)
our stockholders will pay tax on the distribution of the dividend or the
proceeds of the sale. These two levels of taxation will effectively reduce the
financial return on your investment in us.
We do not anticipate paying dividends on its common stock.
We have never paid dividends on our common stock and do not anticipate paying
dividends in the foreseeable future. Our Directors intend to follow a policy of
retaining all of our earnings, if any, to finance the development and expansion
of our business.
We may not be able to adequately protect and maintain its intellectual property.
Our success will depend on its ability to continue to develop and market
fertilizer and pesticide products. We currently have not applied for patents for
our products or formulas, as our Directors believe an application for such
patents would result in public knowledge of our proprietary technology and
formulas.
Our success depends on our management team and other key personnel, the loss of
any of whom could disrupt our business operations.
Our future success will depend in substantial part on the continued service of
our senior management, including Mrs. Wang Qiong, our Chairman and Chief
Executive Officer, Chen Bo, our President, and Wang Chunsheng, our Chief
Operational Officer. The loss of the services of one or more of our key
personnel could impede implementation of our business plan and result in reduced
profitability. We do not carry key person life insurance in respect of any of
our officers or employees. Our future success will also depend on the continued
ability to attract, retain and motivate highly qualified technical sales and
marketing customer support. Because of the rapid growth of the economy in The
People's Republic of China, competition for qualified personnel is intense. The
Company cannot assure you that it will be able to retain its key personnel or
that it will be able to attract, assimilate or retain qualified personnel in the
future.
2. RISKS RELATING TO THE AGRICULTURAL INDUSTRY IN THE PEOPLE'S REPUBLIC OF CHINA
Our success depends upon the development of The People's Republic of China's
agricultural industry.
12
The People's Republic of China is currently the world's most populous country
and one of the largest producers and consumers of agricultural products. Roughly
half of The People's Republic of China's labor force is engaged in agriculture,
even though only about 10 per cent. of the land is suitable for cultivation.
Although The People's Republic of China hopes to further increase agricultural
production, incomes for Chinese farmers are stagnating. Despite the Chinese
government's continued emphasis on agricultural self-sufficiency, inadequate
port facilities and a lack of warehousing and cold storage facilities impedes
the domestic agricultural trade. Since we rely on the local farmer to purchase
its products, which are generally purchased under a "Cash on Delivery" or on
9-12 months credit, a farmer's inability to sell his agricultural goods could
hinder his ability to timely pay his credit obligations to us.
We do not have written or verbal sales contracts with its customers.
The pesticide/fertilizer industry in The People's Republic of China does not
rely on written or verbal contracts. As such, we sell our products through
informal indications of interest. Product orders are filled on a first
come-first served basis.
We do not have supplier contracts with trade vendors
Typical of the agricultural industry in The People's Republic of China, we do
not have supplier contracts with trade vendors. Instead, business is conducted
on an order-by-order basis. Despite the lack of supplier contracts, the
Directors believe that we have very good relations with the agricultural vendor
community.
3. RISKS RELATING TO THE PEOPLE'S REPUBLIC OF CHINA
The People's Republic of China's Economic Policies could affect our Business.
Substantially all of our assets are located in The People's Republic of China
and substantially all of our revenue is derived from our operations in The
People's Republic of China. Accordingly, our results of operations and prospects
are subject, to a significant extent, to the economic, political and legal
developments in The People's Republic of China.
While The People's Republic of China's economy has experienced significant
growth in the past twenty years, such growth has been uneven, both
geographically and among various sectors of the economy. The Chinese government
has implemented various measures to encourage economic growth and guide the
allocation of resources. Some of these measures benefit the overall economy of
The People's Republic of China, but they may also have a negative effect on us.
For example, operating results and financial condition may be adversely affected
by the government control over capital investments or changes in tax
regulations. The economy of The People's Republic of China has been changing
from a planned economy to a more market-oriented economy. In recent years the
Chinese government has implemented measures emphasizing the utilization of
market forces for economic reform and the reduction of state ownership of
productive assets, and the establishment of corporate governance in business
enterprises; however, a substantial portion of productive assets in The People's
Republic of China are still owned by the Chinese government. In addition, the
13
Chinese government continues to play a significant role in regulating industry
development by imposing industrial policies. It also exercises significant
control over The People's Republic of China's economic growth through the
allocation of resources, the control of payment of foreign currency-denominated
obligations, the setting of monetary policy and the provision of preferential
treatment to particular industries or companies.
Capital outflow policies in The People's Republic of China may hamper our
ability to remit income to the United Kingdom.
The People's Republic of China has adopted currency and capital transfer
regulations. These regulations may require us to comply with complex regulations
for the movement of capital. Although our Directors believe that we are
currently in compliance with these regulations, should these regulations or the
interpretation of them by courts or regulatory agencies change; we may not be
able to remit all income earned and proceeds received in connection with its
operations or from the sale of its operating subsidiary to our stockholders.
Fluctuation of the Renminbi could materially affect our financial condition and
results of operations.
The value of the Renminbi fluctuates and is subject to changes in The People's
Republic of China's political and economic conditions. Since 1994, the
conversion of Renminbi into foreign currencies, including United States dollars,
has been based on rates set by the People's Bank of China which are set based
upon the interbank foreign exchange market rates and current exchange rates of a
basket of currencies on the world financial markets. As of July 21, 2005, the
exchange rate between the Renminbi and the United States dollar was 8.11
Renminbi to every one United States dollar.
We may face obstacles from the communist system in The People's Republic of
China.
Foreign companies conducting operations in The People's Republic of China face
significant political, economic and legal risks. The Communist regime in The
People's Republic of China, including a cumbersome bureaucracy, may hinder
Western investment.
We may have difficulty establishing adequate management, legal and financial
controls in The People's Republic of China.
The People's Republic of China historically has not adopted a Western style of
management and financial reporting concepts and practices, as well as in modern
banking, computer and other control systems. We may have difficulty in hiring
and retaining a sufficient number of qualified employees to work in The People's
Republic of China. As a result of these factors, we may experience difficulty in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards.
It will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in The People's Republic of
China.
Because our Executive Officers and several of our Directors, including, the
chairman of our Board of Directors, are Chinese citizens it may be difficult, if
not impossible, to acquire jurisdiction over these persons in the event a
lawsuit is initiated against us and/or our officers and directors by a
stockholder or group of stockholders in the United Kingdom. Also, because the
majority of our assets are located in The People's Republic of China it would
also be extremely difficult to access those assets to satisfy an award entered
against us in an English court.
14
We may face judicial corruption in The People's Republic of China.
Another obstacle to foreign investment in The People's Republic of China is
corruption. There is no assurance that we will be able to obtain recourse, if
desired, through The People's Republic of China's poorly developed and sometimes
corrupt judicial systems.
The admission of The People's Republic of China into the World Trade
Organization could lead to increased foreign competition for us.
Domestic competition in the compound fertilizer industry is largely fragmented
and foreign competition is minimal. However, as a result of The People's
Republic of China becoming a member of the World Trade Organization ("WTO"),
import restrictions on agricultural products are expected to be reduced. With
the lowering of import restrictions and the WTO's requirement for a reduction of
import tariffs as condition of membership, such reduced import restrictions and
tariffs for us may result in an increase of foreign products and could in turn
lead to increased competition in the domestic agricultural market.
The Company may not be able to obtain regulatory approvals for its products.
The manufacture and sale of agricultural products in The People's Republic of
China is regulated by the People's Republic of China and the Shaanxi Provincial
Government. Although our licenses and regulatory filings are current, the
uncertain legal environments in The People's Republic of China and its industry
may be vulnerable to local government agencies or other parties who wish to
renegotiate the terms and conditions of, or terminate their agreements or other
understandings with us.
4. RISKS RELATING TO THE PLACING
There may not be sufficient liquidity in the market for our securities in order
for investors to sell their securities.
Our Common Stock is traded on the OTC and has a limited public market. There is
also a limited public market for AIM securities, which are not admitted to the
Official List of the UK Listing Authority. Since there is a limited public
market for our securities, there can be no assurance that a trading market will
develop further or be maintained in the future.
5. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included in this Admission Document, are "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as well as historical information. These
forward looking statements include statements regarding profitability,
liquidity, market risk and financial and other goals. Forward-looking statements
include those that use forward-looking terminology, such as the words
"anticipate," "believe," "estimate," "expect," "intend," "may," "project,"
"plan," "will," "shall," "should," and similar expressions, including when used
in the negative. Although the Directors believe that the expectations reflected
in these forward-looking statements are reasonable and achievable, these
statements involve risks and uncertainties and no assurance can be given that
15
actual results will be consistent with these forward-looking statements.
Important factors that could cause actual results, performance or achievements
to differ from these forward-looking statements include the factors described in
the "Risk Factors" section and elsewhere in this Admission Document.
All forward-looking statements attributable to Bodisen are expressly qualified
in their entirety by these factors. Because of these and other uncertainties,
our actual results and performance may be materially different from results
indicated by these forward looking statements. In addition, our past results of
operations are not necessarily indicative of our future performance. The forward
looking statements contained in this Admission Document are made as of the date
of this Admission Document. The Company undertakes no obligation to update or
revise these forward-looking statements, whether to reflect events or
circumstances after the date initially filed or published or to reflect the
occurrence of unanticipated events, or otherwise.
16
PART II
INFORMATION ON BODISEN
1. INTRODUCTION
Bodisen Biotech Inc. is a company incorporated in the State of Delaware in the
US with its principal place of business based in the Shaanxi Province of The
People's Republic of China. There is also a representative office in Beijing.
Bodisen files periodic reports with the SEC and its common stock trades on the
OTC under the symbol BBOI. The Company is engaged in the research, manufacturing
and marketing of proprietary technology-based environmentally friendly
fertilizers and pesticides. Bodisen sells over 60 packaged products in 3
categories to farmers through a network of 600 distribution centres throughout
China.
2. INDUSTRY OVERVIEW
The organic fertilizer business in China is still in its infancy. Compared with
traditional chemical fertilizer, organic fertilizer is composed of natural
nutritional elements that enhance soil quality to increase crop yields, without
the chemical side effect of harming soil fertility. By contrast to traditional
compound chemical fertilizer, organic compound fertilizer accelerates
reproduction of soil microbes to improve soil quality through the decomposition
of organic material. This enhancement of soil microbes by organic fertilizer
improves the soil's retention of nitrogen. Moreover, this application can
activate dormant soil by increasing soil nitrites or nitrates and moisture
content that otherwise is not enhanced by traditional chemical fertilizers. This
process controls the release of nutritional elements that enhances the quality,
quantity and health of crops. As a result of years of intensive farming, China's
soil quality is low compared to international standards; therefore it has been
widely recognized that organic fertilizer can be more effective than traditional
chemical fertilizer in stabilizing and enhancing soil quality. Based on these
considerations, and the fact that organic fertilizer can be widely utilized, the
market for organic fertilizer is rapidly growing and the use of organic
fertilizer has become popular throughout China.
3. BUSINESS
3.1 History
Prior to March 1, 2004, Bodisen was called Stratabid.com, Inc. ("Stratabid").
The Company was a startup stage Internet-based commercial mortgage origination
business. The Company operated primarily through its wholly-owned subsidiary,
Stratabid.com Online (B.C.) Ltd. ("Stratabid.com Online"), which provided
services throughout Canada.
Yang Ling Bodisen Biology Science and Technology Development Company Limited
("Yang Ling") was founded in the People's Republic of China on August 31, 2001.
Yang Ling, located in Yang Ling Agricultural High-Tech Industries Demonstration
Zone, was primarily engaged in developing, manufacturing and selling pesticides
and compound organic fertilizers in the People's Republic of China. On November
19, 2003, Yang Ling incorporated Bodisen International, Inc. ("BII"), a Delaware
corporation, as a non-operative holding company.
17
On January 14, 2004, Stratabid created a wholly-owned subsidiary corporation
known as Bodisen Holdings, Inc., a Delaware corporation ("BHI"), to pursue a
merger with BII the parent of Yang Ling. On February 11, 2004, Stratabid and BHI
entered into an Agreement and Plan of Merger with BII and the shareholders of
BII, providing for the merger of BII into BHI, with BHI being the surviving
entity in the merger. The transactions provided for in the Agreement and Plan of
Merger closed on February 24, 2004. In the merger, Stratabid acquired 100 per
cent. of BII's outstanding stock in exchange for the issuance by Stratabid of 3
million shares of its common stock to the holders of BII shares. The Stratabid
shares issued in the merger constituted approximately 66 per cent. of the
outstanding shares of Stratabid after the merger. After the merger, Bodisen paid
a 3 for 1 stock dividend and then, by prior agreement, redeemed 3 million post
dividend shares held by the former CEO of Stratabid. After these transactions,
the shareholders of BII held approximately 79 per cent. of the Stratabid common
stock outstanding. On February 25, 2004, Stratabid sold Stratabid.com Online to
Derrek Wasson, Stratabid's former Chief Executive Officer. On March 1, 2004,
Stratabid changed its name from Stratabid.com, Inc. to Bodisen Biotech, Inc.
Ms. Wang Qiong has served as the Chairman of the Board of Directors since
founding Bodisen in September 2001. The company has grown, through the
development of the product line to over 60 items, as well as the building of the
Bodisen brand name. The mandate of the government of China that farmers increase
crop yields to decrease the nation's dependence on food imports, together with
the growing emphasis on the need to use "green" fertilizers, has also been a
factor in the growth of the Company.
3.2 Products
Bodisen maintains over 60 package products, which are broken down into 3 product
line categories:
3.2.1 Organic Compound Fertilizer This product is Bodisen's leading
product line, accounting for 60 per cent. of Group turnover.
Plants tend to easily absorb organic fertilizer without the side
effects found in synthetic chemical fertilizer products, and
this organic process strengthens photosynthesis, which improves
the overall health of a plant in resisting drought and disease.
The International Organization for Standardization (ISO 9001:
2000) has qualified Bodisen's organic compound fertilizer
products.
Organic fertilizers improve the cation exchange capacity, or
"CEC's" of the soil. This not only allows for improved uptake of
nutrients by the plant but can also reduce leaching, which is of
particular concern in sandy soil. Leaching moves nutrients away
from the plant roots and into the subsurface water. Principal
functions include:
o to preserve nitrogen and improve the soil fertility;
o deliquesce phosphorous and potash fertilizer;
o resist plant diseases; and
o activate and keep soil moisture content.
3.2.2 Liquid Fertilizers
The early application of liquid fertilizers aids absorption of
the key elements and nutrients of the fertilizer which
strengthens photosynthesis and improves the health of the plant
making it resistant to disease. The liquid fertilizer increases
the plant's yield and shortens the time to harvest whilst
heightening the colour and lustre of fruit and vegetables.
18
The liquid fertilizer is sold to the farmer in a concentrated
form and needs to be mixed by the farmer with water before
spraying onto the plant. Since the liquid fertilizer is applied
directly to the plant it is more easily absorbed by the plant.
3.2.3 Pesticides
Bodisen's pesticide products can be applied to all fruit trees
and vegetable crops; it will also eliminate harmful bugs that
reduce overall crop yields. A sample of these pests that bring
harm to crops in China include, but are not limited to; the
peach fruit fly, white aphid, red aphid, red mite, cotton
bollworm, maize mite, cabbage butterfly, leaf acaroids, pear
mite, grain worm, wheat moth, and the millet fly.
4. MARKET INFORMATION
Compared to chemical fertilizers, organic fertilizers are composed of natural
nutritional elements that not only improve the quality and yield of the crops
but also improve the soil quality; this in turn improves the yield. Organic
compound fertilizer accelerates reproduction of soil microbes to improve soil
quality through the decomposition of organic material and the improvement of the
soil's retention of nitrogen. Moreover, this application can activate dormant
soil by increasing soil nitrates and moisture content that otherwise is not
enhanced by traditional chemical fertilizers. This process controls the release
of nutritional elements that enhances the quality, quantity and health of crops.
To encourage farmers, of which there are 800 million in China, to remain on
their land, the government recently eliminated an agriculture tax, which
effectively increased their disposable income by 20%. Although organic compound
fertilizers are more expensive than chemical fertilizers, the extra cost is
justified by the increase of quality and yield and, consequently, the increased
margin attained at the market.
5. SALES AND MARKETING
All three product lines are sold directly to the Chinese farming community in
rural areas or wholesalers through a distribution network. The distribution
network consists of 12 branches, with each branch consisting of five sales
teams; each team is responsible for an assigned territory.
Since inception, the Bodisen brand has been marketed and promoted through trade
fairs, conventions and the print media, and through television and radio
advertising in China. Since the end-user for its products is the local farmer,
educational seminars to promote products and organic fertilizers directly to
farmers are extensively used. To capture a share of the market, free samples of
the products are distributed to allow a trial period to take place, the results
of which are made know to the surrounding area. The cost of this is not material
and is often offset by new sales in that test zone.
The primary tasks in respect of sales and marketing are to strengthen the home
market in the Shaanxi province and to expand the market outside the Shaanxi
province into new districts where the Company's products are not well
established. All orders that are signed with customers are informal indications
of interest and there are no written or verbal sales contracts with the
Company's customers. Signed orders on file with the Company are filled on a
first come-first served basis, as the product is manufactured and distributed.
It is our intention to increase marketing in regions where our products are not
well known. In addition, promotion of the products through national newspapers
in China explaining the advantages of the high-tech nature of its environmental
or "green" product lines will be undertaken. In order to enter the untapped
markets of western China, the Company will explore selling exclusive franchise
opportunities to new wholesale agents.
6. RAW MATERIALS
There are numerous suppliers and vendors of raw materials in the Shaanxi
Province of China. To manufacture the organic compound fertilizer Bodisen uses
carbamide, ammonium, potassium chloride and zeolite powder. Carbamide, potassium
chloride, bluestone, zinc sulfate, borax, citric acid and bitter salt, together
with other materials, are used to manufacture liquid fertilizer. Pesticides are
manufactured using Mieduowie, zinc sulphur phosphor, emulsification agents,
Dimethylbenzene, sulfur powder and Fumeishuang.
No supplier contracts are entered into with trade vendors and business is
conducted on an order-by-order basis, a practice that is typical throughout the
industry in China. The Directors believe that the Company has very good
relations with the agricultural vendor community.
7. RESEARCH AND DEVELOPMENT
The research and development team consists of four professionals, who perform
administrative and ministerial functions. Much of the research is done in close
cooperation with universities and research laboratory's in the Yang Ling and
Xian Metropolitan areas with related costs incurred by such universities and
research laboratory's and not by the Company. In 2005, the Company has budgeted
to spend US $130,000 on research and development, a majority of which is
dedicated to current experiments to develop new products. The following projects
are ongoing from 2004 and are currently scheduled for completion in 2006:
7.1 Project Ion
Project Ion is the study of metal ions, copper, zinc and manganese in
combination with silver positive ions to control and remove crop disease brought
about by fungi. The objective is to determine whether the combination of these
metal ions will prohibit the release of an intrusive enzyme from fungi that
kills crops in China.
7.2 Project Fly
Project Fly is the development of a protein abstract from a common fly to
develop bacteria-based pesticides, which may have a better effect on a plant's
resistance to insects. This project seeks to isolate a series of anti-bacteria
peptides from the proteins of a common fly. This kind of anti-bacteria peptide
could effectively control many pathogens which may prove better than the
pesticides which are currently available.
7.3 Project Amino Acid
Project Amino Acid is a program that was developed to build a new compound
fertilizer product, based on a proactive amino acid enzyme.
19
7.4 Project Build
Project Build utilizes a technique for the manufacturing of organic compound
fertilizer, which could enhance the quality of organic fertilizer products.
8. INTELLECTUAL PROPERTY
The Company owns trademarks in the "Bodisen" name, which is used on all
products. Bodisen is also a recognized trade name in the provinces in China in
which the Company conducts business. Bodisen does not hold patents and has not
applied for patents on proprietary technology or formulas because the Directors
believe that application for such patents in China would result in public
knowledge of the proprietary technology and formulas. The Company acquired
rights for fluid and compound fertilizer technology from a third party. Most
intellectual property was developed in-house or with various universities and
research laboratories. Only certain key executives of the Company have knowledge
of such proprietary technology and formulas. Since the Company does not hold
patents for its products, the Company may not be in a position to adequately
protect its intellectual property rights. See "Risk Factors" in Part I.
9. GOVERNMENT AND ENVIRONMENTAL REGULATION
Through the laws and regulation of The People's Republic of China and Shaanxi
Provincial government and through the government district where the Company is
domiciled, Bodisen's products and services are subject to material regulation by
governmental agencies responsible for the agricultural industry. Business and
company registrations, along with the products, are certified on a regular basis
and must be in compliance with the laws and regulations of the state, [local]
governments and industry agencies, which are controlled and monitored through
the issuance of licenses. To date, the Company has been compliant with all
registrations and requirements for the issuance and maintenance of all licenses
required by the governing bodies. As of the date of this document, all license
fees and filings are current. These licenses include:
9.1 Production of Organic Compound Fertilizer License
Authorised by the Shaanxi Soil and Fertilizer Institution. After June 2004, this
production license was transferred to a Production License authorized by the
Ministry of Agriculture, The People's Republic of China.
9.2 Certificate for Pesticide Registration
Pesticide registration is required for the production of liquid fertilizer and
issued by Ministry of Agriculture, People's Republic of China.
9.3 Production Standard
The Company is registered with Bureau of Quality Controls and Technology,
Shaanxi Provincial Government, Xi'an.
There is no prohibitive cost in obtaining and maintaining these licenses, and it
is illegal to do business without these licenses. Since it is an accepted
business practice to operate within the regulations of the issued license, the
issuance of the license is considered a cost of doing business and the fees
associated with this are minimal. If the Company were to lose any of these
licenses, it would only have a limited time to reapply for such licenses and
would face possible regulatory fines. The Company is not subject to any
environmental controls or restrictions that require the outlay of capital or the
obtaining of a permit in order to engage in business operations.
20
10. COMPETITION
The Directors consider that in China the compound fertilizer industry is largely
fragmented with most competitors operating small regional factories, serving
local requirements. Most companies in this industry in China do not promote
their products through brand name recognition. Bodisen has not yet identified
any competition in the Shaanxi province that operates in all three segments
(compound, liquid and pesticide) of the organic fertilizer business. The
Directors believe that the Company's nearest Chinese competitor is Tian Bang
Shaanxi and that the only international competing company is DuPont.
11. FUTURE PROSPECTS AND CURRENT TRADING
Current trading is generally in line for the period ending June 30, 2005. The
Company had posted sales of $ 4,701,675 for the period ended March 31, 2005
(unaudited). Net income for the period was $ 796,133 compared to $461,549 for
the same quarter a year earlier. The net income includes a one time charge of
$416,703 associated with the aggregate fair value of the warrants which were
issued in connection with the $3 million convertible financing which was
completed on March 16, 2005. The net income would have been $1,213,436 in the
absence of this one-time charge, reflecting the substantial increase in the
demand for the Company's products in the markets in which it has operated and
the new markets that it has entered.
The signing of the new distributors to the distribution network of the Company
is expected to allow the Company to expand its reach geographically and more
easily develop the brand name of the Company.
It is also proposed that the Company seek EOM manufacturing facilities in
distant provinces so that the Company can expand its distribution without
incurring the high cost of transporting its products long distances. Although no
agreements are in place, Company management is searching for targets, possible
facilities have been identified and the Company is holding informal talks to
assess the feasibility. One concern the Company has to expansion would be the
Company's ability to protect their proprietary technology and formulas.
The Company continues to work in close cooperation with local universities and
research laboratories in the Yang Ling and Xian Metropolitan areas to improve
existing products and develop new products to drive the Company's sales in the
future. The pace of discovery can never be predicted as such the ability to
forecast the impact of these improvements and discoveries cannot be predicted.
Current R&D is discussed in section 7 of Part II.
21
12. REASONS FOR THE PLACING AND USE OF PROCEEDS
The Group relies on an experienced management team and skilled workforce, many
of whom have worked with their respective companies for a number of years and
the Directors believe that Admission will help the Group attract and retain key
employees whom the Group will be able to incentivise through the grant of share
options.
The net proceeds of the Placing available to the Group after the expenses of the
Placing and Admission will be (pound)o million. The net proceeds will be used
for product development, to expand into new territories and develop OEM
manufacturing under the Bodisen brand, to add two new production lines for
compound fertilizers. Any remaining sum will be used for marketing, advertising
and to augment the Group's existing working capital facilities.
13. DIRECTORS AND EXECUTIVE OFFICERS,
Directors and Officers
Wang Qiong (41) (Chairman and Chief Executive Officer of Bodisen and Yang Ling)
Mrs. Wang Qiong has served as the Chairman of the Board of Bodisen since the
merger of BHI and BII and she has been on the board of Yang Ling since Yang Ling
was founded in August 2001. Mrs. Wang Qiong has over 10 years experience in the
fertilizer and chemical industry. From 1997 to May 2001, she was the Chief
Executive Officer and President of Shaanxi Bodisen Chemical Co., Ltd., which
changed its name to Bodisen International, Inc. on August 31, 2001. From May
1996 to December 1997, she was the President of Yang Ling Kang Yuan Chemical
Company, a company dedicated to the research and development of agricultural
products. Mrs. Wang Qiong graduated from North-West Agronomy College, with a
Bachelor of Science degree in 1986.
Chen Bo (48) (Director and President of Bodisen and Yang Ling)
Mr. Chen, the President of Bodisen, is one of its original founders and
stockholders. From August 1997 to August 2001, Mr. Chen Bo was Chief Operations
Officer and Chief Technology Officer of Shaanxi Bodisen Chemical Co., Ltd. From
July 1994 to December 1997, he was the Chief Executive Officer and President of
Yang Ling Shikanglu Chemurgical Technology Development Co., Ltd. Mr. Chen
received his Bachelor of Science degree from Shaanxi Normal College in July
1984.
Patrick McManus (51) (Non-Executive Director of Bodisen)
Mr. Patrick McManus, CPA, J.D joined Bodisen's Board of Directors on May 1, 2004
as an independent board member. Mr. McManus brings over 25 years of experience
in business, finance and law to Bodisen. He was elected Mayor of the City of
Lynn, Massachusetts in 1992 and served in this position until his retirement to
the private practice of law and accounting in 2002. While serving the City of
Lynn as its Mayor, he was elected a member and trustee of the Executive
Committee of the U.S. Conference of Mayors (USCM) with responsibility for
developing policy for the USCM. He also served as the Chairman of the USCM
Science and Technology Subcommittee, the Urban Water Council, and the USCM Audit
Committee. Mayor McManus started his career in business with the General
Electric Company in 1979, and was a Professor of Business and Finance at Salem
State College in Massachusetts. Mayor McManus is an expert on China. He was
instrumental in establishing a close alliance as well as coordinating a regular
exchange of visits by members of the U.S. Conference of Mayors and the China
Association of Mayors. Mr. McManus has been a Certified Public Accountant since
1985. Mr. McManus received his Juris Doctorate from Boston College Law School
and an M.B.A from Suffolk University
22
David Gatton( 52) (Non-Executive Director of Bodisen)
Mr. Gatton joined Bodisen's Board of Directors on May 1, 2004 as an independent
board member. Since 1985 Mr. Gatton has served as the Chairman and President of
Development Initiatives, Inc, a Washington, D.C.-based government relations firm
specializing in urban affairs, business development and marketing, serving a
variety of public and private clients. Mr. Gatton advises cities, organizations,
and companies on business development strategies, public/private partnerships
and marketing initiatives. He has advised various organizations on tax reform,
economic development initiatives and a variety of environmental laws, including
the reauthorization of the following Acts of the United States: the Clean Water
Act, the Safe Drinking Water Act, the Resource Conservation and Recovery Act,
Superfund and the Clean Air Act. Some of Mr. Gatton's major accomplishments
include: development of U.S.-Sino Memorandum of Cooperation between U.S. and
China Association of Mayors, development of a national brownfield redevelopment
initiative, development of several multifamily low- and moderate-income housing
developments, business development strategies for various private firms, and
assistance in development of economic development projects for numerous cities.
Mr. Gatton holds a B.A. from Cornell College, and a Master's degree from Harvard
University.
Weirui Wan (64) (Non-Executive Director of Bodisen)
Mr. Weirui Wan joined Bodisen's Board of Directors on May 1, 2004 as an
independent board member. Mr. Wan has over 40 years of experience in management
and leadership positions in the agricultural sector in China. He started his
career in 1967 as an agricultural scientist at the Chinese Academy of Water and
Soil Preservation, China's leading government agency on soil and agricultural
studies. In 1984, Mr. Wan was appointed the position of Deputy Director of the
Chinese Academy of Water and Soil Preservation. In 1997, Mr. Wan moved to the
city of Yang Ling and was appointed Deputy Governor of the Yang Ling
Agricultural High-Tech Industries Demonstration Zone and was in charge of
building the zone into the agricultural hub of China. Mr. Wan retired as Deputy
Governor in 2001 and is currently on the Advisory Board of Yang Ling
Agricultural High-Tech Industries Demonstration Zone. Mr. Wan graduated from
Beijing University of Agriculture in 1967 with a Bachelor's degree in
Agriculture.
Wang Chunsheng (42) (COO of Bodisen, Executive Vice President and COO of Yang
Ling)
Mr. Wang Chunsheng, joined Bodisen in September 2001 as Chief Operations
Officer. From September 1999 to August 2001, Mr. Wang Chunsheng was Vice General
Manager of the Shaanxi Bodisen Chemical Co. Ltd. responsible for sales and
marketing. From January 1997 to July 1999, he held a position as Senior Sales
Manager with the Ling Kangyuan Agriculture Chemical Company. Mr. Wang Chunsheng
holds agronomist certification.
Shuiwang Wei (45) (CFO of Bodisen and Yang Ling)
Mr. Wei is a Certified Public Accountant in China. He joined Bodisen as its
financial controller in January 2004, a post he held until his promotion to the
position of Chief Financial Officer in April 2004. He started his career in the
accounting department of Xi'An Machinery Company in 1982 as an accountant and he
was promoted to the head of accounting in 1995. He joined Xi'An He Feng
Fertilizer Company in 1996 as the head of accounting department. Mr. Wei has a
Bachelor's degree in Accounting.
14. EMPLOYEES
23
The only Bodisen employees are its four executive staff, each of whom is also an
employee of Yang Ling. Yang Ling has over 450 staff, of which approximately 20
are executive and senior managers, 30 are business and accounting staff, 10 are
warehouse and purchasing staff, 15 are drivers or secretaries and the balance
being production workers. The average number of staff employed by the Company
for each of the years 2002 to 2004 is:
As at December 31, 2002: 90 employees
As at March 15, 2004: 349 employees
As at December 31, 2004: 487 employees
15. DEBT/BANKING FACILITIES
The Company has entered into a pledged short term loan with the Yangling
Xinonglu branch of the Xianyang City Commercial Bank. The loan is for 3.5
million RMB. The loan is to provide working capital. The interest rate of the
loan is 6.05% per annum, payable quarterly with a maturity date of October 28,
2005. The pledge relating to the loan expires two years after this date.
The Company also entered into a second pledged short term loan with the Yangling
Xinonglu Branch of Xianyang City Commercial Bank. The loan is for 5.0 million
RMB. The loan is to provide working capital. The interest rate is 6.51% per
annum, payable quarterly. To date, the Company has repaid 0.5 million RMB of the
loan and is currently negotiating an extension of the May 30, 2005 maturity
date.
The Company also entered into a long term support loan from the Shanxi
Technology Bureau of the Shanxi Province Government of People's Republic of
China. The loan is interest free and secured by assets of the Company, at the
amount of RMB 0.1 million.
16. THE PLACING
The Company is proposing to raise approximately (pound)10 million by issuing o
Placing Shares at the Placing Price. The Placing Shares represent approximately
o per cent. of the Enlarged Issued Share Capital. The Placing Shares will be
authorised under Title 8 of Delaware's General Corporation Law.
Pursuant to its obligations under the Placing Agreement, Charles Stanley has
conditionally placed the Placing Shares at the Placing Price with institutional
and other investors. The Placing has not been underwritten by Charles Stanley or
any other person.
The Placing Agreement is conditional, inter alia, upon Admission having taken
place by not later than 9.00 a.m. on o o 2005 or such later time and date, being
not later than 9.00 a.m. on o o 2005, as the Company and Charles Stanley may
agree. The Placing Agreement contains provisions entitling Charles Stanley to
terminate the Placing Agreement at any time prior to Admission in certain
circumstances. If this right is exercised the Placing will lapse. Further
details of the Placing Agreement are set out in paragraph 16 of Part VI of this
document.
The Placing Shares will rank pari passu with the Existing Common Stock in all
respects including the right to receive all dividends declared or paid (after
the date of allotment of the Placing Shares) on the Common Stock of the Company.
The Company, being traded in the U.S. does not have an ISIN but does have a
CUSIP number of 096892104.
24
Application has been made to the London Stock Exchange for the Enlarged Issued
Share Capital to be admitted to trading on AIM. It is expected that Admission
will become effective and that dealings will commence on o o 2005.
17. SETTLEMENT AND CREST
Application has been made to the London Stock Exchange for the Existing Common
Stock and the Placing Shares to be admitted to trading on AIM. It is expected
that Admission will become effective and that dealings in the issued ordinary
share capital of the Company will commence on [ ] 2005.
Securities issued by non-UK registered companies, such as the Company, cannot be
held or transferred in the CREST system. However, to enable investors to settle
such securities through the CREST system, a depository or custodian can hold the
relevant securities and issue dematerialised depository interests (DI) which are
held on trust for their holders. The Company's Articles of Association permit it
to issue DIs in uncertified form.
With effect from Admission, it will be possible for CREST members to hold and
transfer interests in the Common Stock within CREST pursuant to a DI arrangement
established by the Company. CREST is a voluntary system and holders of Common
Stock who wish to receive and retain share certificates will also be able to do
so. Further details of CREST and the arrangements in respect of DIs is set out
in paragraph 17 of Part VI of this document.]
18. LOCK-IN ARRANGEMENTS
Immediately following Admission, the Directors will be interested, in aggregate,
in o Common Stock, representing approximately o per cent. of the issued share
capital of the Company. Under the terms of the Lock-in agreements, which are
described more fully in paragraph 16 of Part VI of this document the Directors
have undertaken that, subject to certain exceptions, they will not sell or
otherwise dispose of, or agree to sell or dispose of, any of their respective
interests in the Common Stock held immediately following Admission at any time
prior to the first anniversary of Admission, and, at any time after the first
anniversary of Admission, without the consent of the Company and the Company's
nominated adviser and broker.
19. DIVIDEND POLICY
The Board intends to adopt a dividend policy appropriate to the Group's
financial performance. This will take into account its ability to operate and
grow and the need to retain a prudent level of cash resources. The Company does
not expect to pay a dividend in the short term.
20. SHARE SCHEME AND MANAGEMENT INCENTIVE ARRANGEMENTS
Executive turnover is relatively low with the majority of key management having
been employed by the Company for more than six years. The Board believes that
the retention of senior management will be a key driver to the success of the
Group. Consequently, the Company intends to implement the Share Schemes
conditional upon Admission, details of which are set out in paragraph 7 of Part
VI of this document.
25
21. CORPORATE GOVERNANCE
The Board intends to comply with the principles of good governance and the
recommendations of best practice as set out in the Combined Code so far as is
practicable and appropriate for an AIM company of its size, and in this
connection the Board shall take into account the guidance issued by the Quoted
Companies Alliance.
The Board intends to hold board meetings regularly throughout the year. The
Board will be responsible for formulating, reviewing and approving strategy,
budgets, acquisitions, capital expenditure and senior personnel appointments.
The executive directors and senior management will meet regularly to consider
operational matters.
An audit committee (consisting of Patrick McManus, as Chairman and David
Gatton), a nominating committee (consisting of Wan Weirui as Chairman) and a
remuneration committee (consisting of David Gatton, as Chairman, and Patrick
McManus) have been established with effect from Admission. The audit committee
will meet at least twice a year and will be responsible for ensuring that the
financial performance, position and prospects of the Company are properly
monitored and reported on, and for meeting the auditors and reviewing their
reports relating to accounts and internal controls. The remuneration committee
will review the performance of executive directors and set the scale and
structure of their remuneration and the basis of their service agreements with
due regard to the interests of shareholders. The remuneration committee will
also determine the payment of bonuses to executive directors and the allocation
of share options to employees.
The Company has adopted a dealing code for all directors and employees in terms
no less exacting than the Model Code for Directors' dealings as set out in the
Listing Rules of the UK Listing Authority and will take all reasonable steps to
ensure compliance by the Board and any relevant employees.
The Company is compliant with all US corporate governance rules applicable to
small business issuers.
22. TAXATION
Your attention is drawn to the taxation information set out in paragraph 13 of
Part VI of this document.
23. EFFECTS OF A US DOMICILE AND SEC FILING
Bodisen files periodic reports with the US Securities and Exchange Commission
(SEC) pursuant to Section 15(d) of the Securities Exchange Act of 1934, as
amended. After admission on AIM, it will also have an obligation to notify both
the SEC and the London Stock Exchange of relevant information.
26
24. PLAN OF DISTRIBUTION
The selling agent, Charles Stanley & Co. Limited, 25 Luke Street, London EC2A
4AR, has agreed, subject to the terms and conditions contained in a selling
agency agreement with the Company, to sell, as selling agent for it on a best
efforts basis, ________ shares of common stock. Because this offering is on a
best efforts basis and there is no minimum number of dollar amount of shares to
be sold, the selling agent is not obligated to purchase any shares if they are
not sold to the public.
The selling agent has informed the Company that it proposes to sell the common
stock as selling agent for it, subject to prior sale, when, as if issued by the
Company, in part to the public at the public offering price set forth on the
cover page of this Admission Document and, in part, through certain selected
dealers, who are members of the National Association of Securities Dealers,
Inc., to customers of such selected dealers at the public offering price. Each
selected dealer will receive a commission of $ for each share that it sells. The
selling agent reserves the right to reject any order for the purchase of common
stock through it in whole or in part.
The Placing is not contingent upon the occurrence of any event or the sale of a
minimum or maximum number or dollar amount of shares. Funds received by the
selling agent from investors in the Placing will be deposited with an escrow
agent in a non-interest bearing escrow account until the closing of the Placing.
Closing is expected to occur on or about , 2005.
The public offering price will be determined through negotiations between
Bodisen and the selling agent. A variety of factors will be considered in
determining the price, including the trading history of the Company's common
stock (including the frequency and volume of trades and actual trading prices),
its history and prospects, its past and present earnings and its prospects for
future earnings, the current performance and prospects of the banking industry
in general and the banking market in which the Company competes, and the general
condition of the securities market and the prices of equity securities of
comparable companies.
Bodisen will pay its own expenses of the offering, including its legal,
accounting, printing and other expenses and expenses associated with qualifying
its shares for sale in various states. In addition, the Company has agreed to
reimburse the selling agent for reasonable and customary costs of informational
investor meetings. The Directors expect that the total amount of offering
expenses that the Company will pay will be approximately $________.
The selling agency agreement also provides that Bodisen will indemnify the
selling agent against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the selling agent
may be required to make in respect thereof.
The selling agent has advised the Company that it may make a market in the
common stock. The selling agent, however, is not obligated to make a market in
the common stock. It also may discontinue any market making at any time without
notice.
The selling agent provides investment banking services to the Company from time
to time in the ordinary course of business.
27
25. INTEREST OF NAMED EXPERTS AND COUNSEL
Each of the selling agent, the Company's legal counsel and the Company's
reporting accountant will receive fees as a result of the work done by them for
the AIM admission. The selling agent will also receive a commission based on the
value of the shares placed prior to the AIM admission. None of the selling
agent, legal counsel or reporting accountant receive any interest in the
Company's equity as a result of this AIM admission.
26. LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by the
Company and certain other legal matters have been passed upon by the law firm of
Reed Smith LLP.
27. EXPERTS
Kabani & Company, Inc., an independent certified public accounting firm (a
member firm of the AICPA SEC practice section) located at 6033 West Century
Blvd, Suite 810, Los Angeles, CA 90045, USA,, audited the financial statements
of Bodisen Biotech, Inc. for the period ending December 31, 2004 and reviewed
those for the period ending as of March 31, 2005, included in this Admission
Document. Kabani & Company, Inc. intend to review the financial statements for
the period ending June 30, 2005.
28. LIMITATION ON LIABILITY AND COMMISSION POSITION OF INDEMNIFICATION
FOR SECURITIES ACT lIABILITIES
Our certificate of incorporation and our bylaws provide that our directors and
officers and former directors and officers shall be indemnified by us to the
fullest extent authorised by Delaware law, against liability to the Corporation
or to its stockholders or to other security holders for monetary damages for (i)
any breach of the director's duty of loyalty to the Corporation or to its
stockholders or other security holders; (ii) acts or omissions of the director
not in good faith or which involve intentional misconduct or a knowing violation
of the law by such director; (iii) acts by such director as specified by the
Delaware Corporation Law; or (iv) any transaction from which such director
derived an improper personal benefit. Insofar as indemnification for liabilities
arising under the Securities Act of 1933, as amended, (the "Securities Act") may
be permitted to our directors and officers pursuant to the foregoing provision,
we have been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
29. WHERE YOU CAN FIND MORE INFORMATION
Bodisen Biotech, Inc. is subject to the informational requirements of the
Exchange Act of 1934 and, accordingly, files registration statements and other
information with the SEC. You may obtain these documents electronically through
the SEC's website at http://www.sec.gov. You may also obtain copies of this
information by mail from the Public Reference Branch at: U.S. Securities and
Exchange Commission 450 5th Street, NW, Room 1300 Washington, D.C. 20549-0102
Telephone: (202) 942-8090 Fax: (202) 628-9001. Bodisen Biotech, Inc.'s filings
28
with the SEC are also available from commercial document retrieval services.
Information contained on the Company's web site should not be considered part of
this Admission Document. You may also request a copy of its filings at no cost,
by writing, telephoning or emailing the Company at: North Part of Xinquia Road,
Yang Ling AG, High-Tech Industries Demonstration Zone, Yang Ling, China 712100,
Telephone 86-29-870749.
30. FURTHER INFORMATION
Your attention is drawn to the further information set out in Parts of this
document. You are advised to read the whole of this document rather than relying
on the summary information set out in this Part II.
29
PART III
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
1. Overview
The Company is incorporated under the laws of the state of Delaware and are
headquartered in the Shaanxi Province, People's Republic of China. The Company
engages in the business of manufacturing and marketing a brand of organic
fertilizer in China. It produces numerous proprietary product lines, from
pesticides to crop specific fertilizer. These products are then marketed and
sold to farmers throughout the 20 provinces of China. The Company conducts
research and development to further improve existing products and develop new
formulas and products.
2. Significant Accounting Policies
2.1 Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company 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.
2.2 Accounts Receivable
The Company maintains reserves for potential credit losses on accounts
receivable. It reviews the composition of accounts receivable and analyze
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Reserves are recorded primarily on a specific
identification basis.
2.3 Inventories
Inventories are valued at the lower of cost (determined on a weighted average
basis) or market. The Company compares the cost of inventories with the market
value and allowance is made for writing down the inventories to their market
value, if lower.
2.4 Property & Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to earnings as incurred; additions, renewals and betterments
are capitalized. When property and equipment are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the
respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method for substantially all assets with estimated lives of: 30 years for
building, 10 years for machinery, 5 years for office equipment and 8 years for
vehicles.
30
2.5 Intangible Assets
Intangible assets consist of rights to use land and proprietary technology
rights to fertilizers. The Company evaluates intangible assets for impairment,
at least on an annual basis and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable from its estimated
future cash flows. Recoverability of intangible assets, other long-lived assets
and, goodwill is measured by comparing their net book value to the related
projected undiscounted cash flows from these assets, considering a number of
factors including past operating results, budgets, economic projections, market
trends and product development cycles. If the net book value of the asset
exceeds the related undiscounted cash flows, the asset is considered impaired,
and a second test is performed to measure the amount of impairment loss.
Potential impairment of goodwill after July 1, 2002 is being evaluated in
accordance with SFAS No. 142. The SFAS No. 142 is applicable to the financial
statements of the Company beginning July 1, 2002.
2.6 Revenue Recognition
The Company's revenue recognition policies are in compliance with Staff
Accounting Bulletin (SAB) 104. Sales revenue is recognized at the date of
shipment to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations by the
Company exist and collectibility is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as unearned revenue.
2.7 Stock-based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS No. 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using the existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for stock issued to employees" (APB 25) and
related interpretations with proforma disclosure of what net income and earnings
per share would have been had the Company adopted the new fair value method. The
Company uses the intrinsic value method prescribed by APB 25 and have opted for
the disclosure provisions of SFAS No. 123.
2.8 Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each period end based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
According to the Provisional Regulations of the People's Republic of China on
Income Tax, the Document of Reductions and Exemptions of Income Tax for the
31
Company have been approved by the local tax bureau and the Management Regulation
of Yang Ling Agricultural High-Tech Industries Demonstration Zone. The Company
is exempted from income tax in its first two years of operations.
2.9 Foreign Currency Transactions and Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Certain statements, however, require
entities to report specific changes in assets and liabilities, such as gain or
loss on foreign currency translation, as a separate component of the equity
section of the balance sheet. Such items, along with net income, are components
of comprehensive income. Transactions occur in Chinese Renminbi. The unit of
Renminbi is in Yuan.
2.10 Recent Accounting Pronouncements
In November 2004, the FASB has issued FASB Statement No. 151, "Inventory Costs,
an Amendment of ARB No. 43, Chapter 4" ("FAS No. 151"). The amendments made by
FAS No. 151 are intended to improve financial reporting by clarifying that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and by
requiring the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities.
The guidance is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Earlier application is permitted for inventory
costs incurred during fiscal years beginning after November 23, 2004. The
provisions of FAS No. 151 will be applied prospectively. The Company does not
expect the adoption of FAS No. 151 to have a material impact on its consolidated
financial position, results of operations or cash flows.
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's second quarter of fiscal 2005.
The Company is in process of evaluating the impact of this pronouncements on its
consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Non-monetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." The EITF reached a consensus about the
criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss and how that criteria should be applied to investments
accounted for under SFAS No. 115, "Accounting In Certain Investments In Debt And
Equity Securities." EITF 03-01 also included accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
32
other-than-temporary impairments. Additionally, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards Board (FASB)
delayed the accounting provisions of EITF 03-01; however the disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company will evaluate the impact of EITF 03-01 once final guidance is issued.
3. Results of Operations Comparison of 2004 with 2003
Twelve Months Ended December 31, 2004 Compared To Twelve Months Ended December
31, 2003
3.1 Revenue. The Company generated revenues of $16,225,896 for the twelve months
ended December 31, 2004, an increase of $6,442,112 or 65.84%, compared to
$9,783,784 for the twelve months ended December 31, 2003. The growth in revenue
was primarily attributable to the increase in customer base through the
implementation of the strategy to franchise wholesale distribution to provinces
outside of Shaanxi and the building of the Bodisen brand name.
3.2 Gross profit. The Company achieved a gross profit of $6,571,931 for the
twelve months ended December 31, 2004, an increase of $3,494,229 or 113.5%,
compared to $3,077,702 for the twelve months ended December 31, 2003. Gross
margin, as a percentage of revenues, increased from 31.46% for the twelve months
ended December 31, 2003, to 40.5% for the twelve months ended December 31, 2004.
The increase in gross margin was attributable to the average 10% price increase
for the compound fertilizer line of products which constitute 60% of total
sales.
3.3 Operating expenses. The Company incurred operating expenses of $1,523,350 an
increase of $319,143 or 27%, compared to $1,204,207 for the twelve months ended
December 31, 2003. These operating expenses are related to increased sales and
marketing costs related to the 65.84% increase in sales for 2004, as well as the
hiring of 138 additional employees by the Company.
3.4 Net Income. Net income increased by 155% to $5,027,403, an increase of
$3,057,042, from $1,970,361. Earnings per share (EPS) rose to $0.33 in 2004 from
$0.13 in 2003. The increase was attributable to the substantial growth in demand
for the Company's products throughout China, increased sales of products with a
higher profit margin and the relatively low operating expenses resultant from
doing business in China.
4. Liquidity and Capital Resources
As of December 31, 2004 Bodisen Biotech, Inc. had $2,121,811 cash and cash
equivalents on hand, compared to $2,974,773 cash and cash equivalents on hand as
of December 31, 2003.
For December 31, 2004 accounts payable was $112,344 and short term loans was
$980,100. Cash outflows for investing activities increased from $1,608,837 to
$2,778,136 as a result of additions made to work in progress and acquisitions of
property and equipment. The Company's accounts receivable for the year ended
December 31, 2004, were $4,988,984. Based on past performance and current
expectations, the Directors believe its cash and cash equivalents, cash
33
generated from operations, as well as future possible cash investments, will
satisfy its working capital needs, capital expenditures and other liquidity
requirements associated with its operations. On March 16, 2005, the Company
completed a $3.0 million financing. The proceeds of the financing are intended
for acquisition of other businesses, purchase of raw materials, increased
marketing and working capital.
The majority of Bodisen Biotech, Inc. revenues and majority of the expenses in
2004 were denominated primarily in Renminbi ("RMB"), the currency of the
People's Republic of China. There is no assurance that exchange rates between
the RMB and the U.S. dollar will remain stable. A devaluation of the RMB
relative to the U.S. dollar could adversely affect the Company's business,
financial condition and results of operations. Bodisen does not engage in
currency hedging. Inflation has not had a material impact on its business.
34
PART IV
FINANCIAL INFORMATION ON BODISEN BIOTECH, INC
Summary financial information for the three years ended 31
December 2004 and the quarter ended 31 March 2005
The financial information contained in this Part IV in respect of the three
financial years ended 31 December 2004 and the quarter ended 31 March 2005 has
been extracted without material adjustment from Bodisen's published audited
financial statements for the three years ended 31 December 2004 and published
interim financial statements for the quarter ended 31 March 2005. The statements
for calendar years 2002 and 2003 relate to the period before the reverse merger
and so refer to Bodisen International, Inc. and its subsidiaries. The statements
for calendar year 2004 and any part of 2005 refer to the merged entity Bodisen
Biotech, Inc. and its subsidiaries.
CONSOLIDATED STATEMENTS OF OPERATIONS
The consolidated statements of operations of Bodisen Biotech, Inc. (formerly
Stratabid.com, Inc.) for the three years ended 31 December 2004 and quarter
ended 31 March 2005 are as follows:
Year ended Year ended Quarter
Year ended 31 31 ended
31 December December December 31 March
2002 2003 2004 2005
US$ US$ US$ US$
NET REVENUES 4,881,350 9,783,784 16,255,896 4,701,675
COST OF REVENUES 3,582,176 6,706,082 9,653,965 3,047,498
------------ ------------ ------------ ------------
Gross profit 1,299,174 3,077,702 6,571,931 1,654,178
OPERATING EXPENSES
Selling expenses 235,077 573,807 615,549 148,140
General and administrative expenses 384,067 630,401 907,801 278,470
TOTAL SELLING, GENERAL AND ADMINISTRATIVE COSTS 619,144 1,204,207 1,523,350 426,610
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 680,030 1,873,495 5,048,581 1,227,567
Net interest income (expense) (20,565) 41,359 (28,801) (14,132)
Finance charge - - - (416,703)
Other income 8,119 55,507 7,623 -
------------ ------------ ------------ ------------
NET INCOME 667,583 1,970,361 5,027,403 796,733
Other comprehensive income - - 68,855 -
------------ ------------ ------------ ------------
COMPREHENSIVE NET INCOME 667,583 1,970,361 5,096,258 796,733
============ ============ ============ ============
BASIC AND DILUTED NET EARNINGS PER SHARE US$0.04(1) US$0.13(1) US$0.33(1) US$0.05(1)
Note:
(1) The earnings per share for year end December 31, 2002 and 2003 have been
adjusted to reflect the 15,268,000 shares issued and outstanding as of December
31, 2004, to present consistent presentation of the earnings per share for the
period.
35
CONSOLIDATED BALANCE SHEETS
The consolidated balance sheets of Bodisen Biotech, Inc. (formerly
Stratabid.com, Inc.) as at the three years ended 31 December 2004 and quarter
ended 31 March 2005 are as follows:
31 31 31
December December December 31 March
2002 2003 2004 2005
US$ US$ US$ US$
ASSETS
CURRENT ASSETS
Cash and cash equivalents 233,182 2,974,773 2,121,811 2,793,132
Accounts receivable, net 2,071,927 1,822,841 4,988,984 7,881,837
Advances to suppliers 1,662,872 1,933,516 755,210 600,073
Inventory 797,270 715,732 767,344 967,597
Loan receivable - - 968,000 -
Other assets - - - 600,443
------------ ------------ ------------ ------------
Total current assets 4,765,250 7,446,862 9,601,349 12,843,081
PROPERTY & EQUIPMENT, 1,225,490 1,220,587 1,353,598 3,384,620
Capital work in progress 217,206 222,083 1,596,405 410,977
INTANGIBLE ASSETS, 949,242 2,310,148 2,199,639 2,167,169
OTHER ASSETS - - 48,736 -
------------ ------------ ------------ ------------
TOTAL ASSETS 7,157,188 11,199,680 14,799,727 18,805,847
============ ============ ============ ============
36
CONSOLIDATED BALANCE SHEETS (Continued)
The consolidated balance sheets of Bodisen Biotech, Inc. (formerly
Stratabid.com, Inc.) as at the three years ended 31 December 2004 and quarter
ended 31 March 2005 are as follows:
31
31 December 31 December December 31 March
2002 2003 2004 2005
US$ US$ US$ US$
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 1,098,978 1,634,163 112,344 286,958
Accrued expenses - 75,755 264,502 279,677
Unearned revenue 601,975 15,888 - -
Short term loans 12,000 1,092,000 980,100 968,000
Dividend payable 180,000 - -
Other payables 81,423 14,300 -
Convertible debenture, net discount due to beneficial
conversion - - - 2,542,723
------------ ------------ ------------ ------------
Total current liabilities 1,974,376 2,832,106 1,356,946 4,077,358
LONG TERM LIABILITIES
Long term loans - - - 12,100
------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.0001 per share, authorized 5,000,000
shares; none issued - - - -
Common stock, $0.001 per share - authorized 50,000,000
shares; issued and outstanding 1,500 shares as of 31
December 2002 and 2003. 1 1 - -
Common stock, $0.0001 per share - authorized 30,000,000
shares; issued and outstanding 15,268,000 shares as of
31 December 2004 and 31 March 2005 - - 1,527 1,527
Additional paid-in capital 4,799,999 6,014,399 5,991,823 6,885,401
Accumulated other comprehensive gain - - 68,855 68,855
Statutory reserve 66,758 263,795 1,017,905 1,137,415
Retained earnings 316,054 2,089,379 6,362,671 6,623,192
------------ ------------ ------------ ------------
Total stockholders' equity 5,182,813 8,367,574 13,442,781 14,716,389
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 7,157,188 11,199,680 14,799,727 18,805,847
============ ============ ============ ============
37
CONSOLIDATED STATEMENTS OF CASH FLOWS
The consolidated statements of cash flows of Bodisen Biotech, Inc. (formerly
Stratabid.com, Inc.) for the three years ended 31 December 2004 and quarter
ended 31 March 2005 are as follows:
Year ended Year ended Year ended Quarter
31 31 31 ended
December December December March
2002 2003 2004 2005
US$ US$ US$ US$
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 667,583 1,970,361 5,027,403 796,733
Adjustments to reconcile net loss to the net cash used in
operating activities:
Depreciation and amortisation 149,699 247,958 302,803 77,509
Changes in working capital:
Accounts receivable 288,218 249,086 (3,166,143) (2,892,853)
Advances to suppliers (893,393) (270,645) 1,178,306 155,137
Inventory 300,312 81,538 51,612 (200,253)
Other assets - - (48,736) (551,707)
Accounts payable (38,379) 535,186 (1,521,819) 174,614
Unearned revenue 589,812 (586,087) (15,888) -
Accrued expenses (130,252) 75,754 196,031 34,772
Other payables 3,423 (67,122) (35,350) -
----------- ----------- ----------- -----------
Net cash used in operating activities 937,023 2,236,028 1,968,219 (2,406,047)
----------- ----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Payment on loan receivable - - (968,000) -
Acquisition of property & equipment (600,666) (133,653) (435,814) (890,633)
Additions to intangible assets - (1,470,307) - -
Additions to work in progress (217,206) (4,877) (1,374,322) -
----------- ----------- ----------- -----------
Net cash used in investing activities (817,872) (1,608,837) (2,778,136) (890,633)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on loan from officers/shareholders (217,338) - - -
Proceeds from convertible debt - - - 3,000,000
Proceeds from (payments on) loan 12,000 1,080,000 (111,900) 968,000
Issuance of stock by subsidiary - 1,214,400 - -
Dividend paid - (180,000) - -
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities (205,338) 2,114,400 (111,900) 3,968,000
----------- ----------- ----------- -----------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (86,187) 2,741,591 (852,962) 671,320
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 319,369 233,182 2,974,773 2,121,811
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD 233,182 2,974,773 2,121,811 2,793,131
=========== =========== =========== ===========
38
Bodisen Biotech, Inc.
Financial Statements
March 31, 2005
(Unaudited)
39
BODISEN BIOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTH
PERIODS ENDED
March 31, 2005 March 31, 2004
----------------- -----------------
Net revenue $ 4,701,675 $ 2,186,089
Cost of revenue 3,047,498 1,313,304
----------------- -----------------
Gross profit 1,654,178 872,785
Operating expenses
Selling expenses 148,140 123,346
General and administrative expenses 278,470 226,714
----------------- -----------------
Total operating expenses 426,610 350,060
Income from operations 1,227,567 522,725
Non-operating Income (expense):
Finance charge (416,703) -
Interest expense (14,132) (27,415)
----------------- -----------------
Total non-operating income (expense) (430,835) (27,415)
----------------- -----------------
Income before income tax 796,733 495,311
Provision for income tax 74,337
----------------- -----------------
Net Income 796,733 420,974
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain - 40,575
----------------- -----------------
COMPREHENSIVE INCOME $ 796,733 $ 461,549
================= =================
Basic weighted average shares outstanding 15,268,000 15,268,000
Basic earnings per share 0.05 0.03
Diluted weighted average shares outstanding 15,529,458 15,325,760
Diluted earnings per share 0.05 0.03
The accompanying notes are an integral part of these consolidated
financial statements.
40
BODISEN BIOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
AS OF MARCH 31,
2005
-----------------
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 2,793,132
Accounts receivable, net 7,881,837
Advances to Suppliers 600,073
Inventory 967,597
Other Assets 600,443
-----------------
Total current assets $ 12,843,081
PROPERTY AND EQUIPMENT, NET 3,384,620
CAPITAL WORK IN PROGRESS 410,977
INTANGIBLE ASSETS, NET 2,167,169
-----------------
TOTAL ASSETS $ 18,805,847
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 286,958
Accrued expenses 279,677
Short term loan 968,000
Convertible debenture, net discount due to beneficial conversion 2,542,723
-----------------
Total current liabilities $ 4,077,358
LONG TERM LIABILITIES:
Long term loans 12,100
-----------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.0001 per share; authorized 5,000,000 shares;
none issued -
Common stock, $0.0001 per share; authorized 30,000,000 shares;
issued and outstanding 15,268,000 shares 1,527
Additional paid in capital 6,885,401
Accumulated other comprehensive gain 68,855
Statutory reserve 1,137,415
Retained earnings 6,623,192
-----------------
Total stockholders' equity 14,716,389
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,805,847
=================
The accompanying notes are an integral part of these consolidated
financial statements.
41
BODISEN BIOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2005 MARCH 31, 2004
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 796,733 $ 420,974
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 77,509 72,098
(Increase) / decrease in current assets:
Accounts receivable (2,892,853) (933,104)
Advances to suppliers 155,137 (677,372)
Inventory (200,253) 225,064
Other assets (551,707) 0
Increase / (decrease) in current liabilities:
Accounts payable 174,614 34,171
Unearned revenue 0 133
Other payables 0 625,756
Accrued expenses 34,772 3,992
----------------- ----------------
Net cash used in operating activities (2,406,047) (228,288)
----------------- ----------------
Effect of exchange rate on cash 47,554
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property & equipment (890,633) (72,822)
Work in Progress - (242,000)
----------------- ----------------
Net cash used in investing activities (890,633) (314,822)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Convertible Debt 3,000,000 -
Loans receivable 968,000 -
----------------- ----------------
Net cash provided by financing activities 3,968,000 -
----------------- ----------------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 671,320 (495,556)
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 2,121,811 2,974,773
----------------- ----------------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 2,793,131 $ 2,479,217
================= ================
The accompanying notes are an integral part of these consolidated
financial statements.
42
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Yang Ling Bodisen Biology Science and Technology Development Company Limited
("BBST") was founded in the People's Republic of China on August 31, 2001. BBST,
located in Yang Ling Agricultural High-Tech Industries Demonstration Zone, is
primarily engaged in developing, manufacturing and selling pesticides and
compound organic fertilizers in the People's Republic of China. Bodisen
International, Inc. ("BII"), a Delaware Corporation, was incorporated on
November 19, 2003. BII was a non-operative holding company of BBST. On December
15, 2003, BII entered in to an agreement with all the shareholders of BBST to
exchange all of the outstanding stock of BII for all the issued and outstanding
stock of BBST. After the consummation of the agreement, the former shareholders
of BBST owned 1500 shares of common stock of BII, which represented 100% of
BII's issued and outstanding shares. For U.S. Federal income tax purpose, the
transaction was intended to be qualified as a tax-free transaction under section
351 of the Internal Revenue Code of 1986, as amended.
The exchange of shares with BBST has been accounted for as a reverse acquisition
under the purchase method of accounting since the shareholders of the BBST
obtained control of the consolidated entity. Accordingly, the merger of the two
companies has been recorded as a recapitalization of BBST, with BBST being
treated as the continuing entity. The historical financial statements presented
are those of BBST. The continuing company has retained December 31 as its fiscal
year end. The financial statements of the legal acquirer are not significant;
therefore, no pro forma financial information is submitted.
On February 24, 2004, BII consummated a merger agreement with Stratabid.com,
Inc. ("Stratabid"), a Delaware corporation, to exchange 12,000,000 shares of
Stratabid to the shareholders of BII, in which BII merged into Bodisen Holdings,
Inc. ("BHI"), an acquisition subsidiary of Stratabid, with BHI being the
surviving entity. As a part of the merger, Stratabid cancelled 3,000,000 shares
of its issued and outstanding stock owned by its former president and declared a
stock dividend of three shares for each share of its common stock outstanding
for all stockholders of record as of February 27, 2004.
Stratabid was incorporated in the State of Delaware on January 14, 2000 and
before the merger, was a start-up stage Internet based commercial mortgage
origination business based in Vancouver, BC, Canada. The exchange of shares with
Stratabid has been accounted for as a reverse acquisition under the purchase
method of accounting since the shareholders of BII obtained control of
Stratabid. On March 1, 2004, Stratabid was renamed Bodisen Biotech, Inc. (the
"Company"). Accordingly, the merger of the two companies has been recorded as a
recapitalization of the Company, with the Company being treated as the
continuing entity. The financial statements of the legal acquiree are not
significant; therefore, no pro forma financial information is submitted.
43
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
2. BASIS OF PRESENTATION
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the interim periods are not necessarily
indicative of the results for any future period. These statements should be read
in conjunction with the Company's audited financial statements and notes thereto
for the fiscal year ended December 31, 2004.
Accounts receivable
The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Terms of the sales vary from COD
through a credit term up to 9 to 12 months. Reserves are recorded primarily on a
specific identification basis. Allowance for doubtful debts amounted to $216,395
at March 31, 2005. Advances to suppliers The Company advances to certain vendors
for purchase of its material. The advances to suppliers are interest free and
unsecured. The advances amounted to $600,073 at March 31, 2005.
Income taxes
The Company utilizes Statement of Financial Accounting Standard ("SFAS") No.
109, "Accounting for Income Taxes," which requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
According to the Provisional Regulations of the People's Republic of China on
Income Tax, the Document of Reductions and Exemptions of Income Tax for the
Company had been approved by the local tax bureau and the Yang Ling Agricultural
High-Tech Industries Demonstration Zone. The Company is exempted from income tax
through March 31, 2005.
Fair value of financial instruments
44
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires
the Company to disclose estimated fair values of financial instruments. The
carrying amounts reported in the statements of financial position for current
assets and current liabilities qualifying as financial instruments are a
reasonable estimate of fair value.
Foreign currency transactions and comprehensive income (loss) Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Certain statements, however, require entities to
report specific changes in assets and liabilities, such as gain or loss on
foreign currency translation, as a separate component of the equity section of
the balance sheet. Such items, along with net income, are components of
comprehensive income. The functional currency of the Company is the Chinese
Renminbi. The unit of Renminbi is in Yuan. Translation gains are classified as
an item of other comprehensive income in the stockholders' equity section of the
consolidated balance sheet. During the three month period ended March 31, 2005
comprehensive income in the consolidated statements of operation included no
translation gain and in the three month period of March 31, 2004 the
consolidated statements of operation included translation gains of $40,575.
Segment reporting The Company consists of one reportable business segment. All
revenue is from customers in People's Republic of China. All of the Company's
assets are located in People's Republic of China.
Recent Pronouncements
On May 15 2003, the Financial Accounting Standards Board ("FASB"), issued FASB
Statement No. 150 ("SFAS 150"), Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS 150 changes the
accounting for certain financial instruments that, under previous guidance,
could be classified as equity or "mezzanine" equity, by now requiring those
instruments to be classified as liabilities (or assets in some circumstances) in
the statement of financial position. Further, SFAS 150 requires disclosure
regarding the terms of those instruments and settlement alternatives. SFAS 150
affects an entity's classification of the following freestanding instruments:
(a) Mandatorily redeemable instruments (b) Financial instruments to repurchase
an entity's own equity instruments, (c) Financial instruments embodying
obligations that the issuer must or could choose to settle by issuing a variable
number of its shares or other equity instruments based solely on (i) a fixed
monetary amount known at inception or (ii) something other than changes in its
own equity instruments and (d) SFAS 150 does not apply to features embedded in a
financial instrument that is not a derivative in its entirety. The guidance in
SFAS 150 is generally effective for all financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at the beginning of the
45
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
first interim period beginning after June 15, 2003. For private companies,
mandatorily redeemable financial instruments are subject to the provisions of
SFAS 150 for the fiscal period beginning after December 15, 2003. The Company
does not expect the adoption of SFAS No. 150 to have a material impact on its
financial position or results of operations or cash flows.
In December 2003, the FASB issued a revised Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46R). FIN 46R addresses
consolidation by business enterprises of variable interest entities and
significantly changes the consolidation application of consolidation policies to
variable interest entities and, thus improves comparability between enterprises
engaged in similar activities when those activities are conducted through
variable interest entities. The Company does not hold any variable interest
entities.
3. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Bodisen Biotech, Inc. (from the merger date), its 100% wholly-owned subsidiary
"BHI" and BHI's 100% wholly-owned subsidiary Yang Ling Bodisen Biology Science
and Technology Development Company Limited. All significant inter-company
accounts and transactions have been eliminated in consolidation.
4. MAJOR VENDORS
Five vendors provided 85% of the Company's raw materials for the three month
period ended March 31, 2005 and two vendors provided 42% of the Company's raw
materials for the three month period ended March 31, 2005. The payable balance
for these parties amounted to $197,648 and $3,560 at March 31, 2005 and 2004,
respectively.
5. INTANGIBLE ASSETS
Net intangible assets at March 31, 2005 were as follows:
Rights to use land $ 1,666,920
Fertilizers proprietary technology rights 968,000
------------------
$ 2,634,920
Less Accumulated amortization (467,751)
------------------
$ 2,167,169
The Company's office and manufacturing site is located in the Yang Ling
Agricultural High-Tech Industries Demonstration Zone in the province of Shaanxi,
People's Republic of China. The Company leases land per a real estate contract
with the government of People's Republic of China for a period from November
2001 through November 2051. As set forth in the People's Republic of China's
governmental regulations, the Government owns all land.
46
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
During July 2003, the Company leased another parcel of land under a real estate
contract with the government of the People's Republic of China for a period from
July 2003 through June 2053.
The Company recognizes the amounts paid for the acquisition of the "Rights to
Use Land" as intangible assets and amortizes them over a period of fifty (50)
years.
The Company acquired Fluid and Compound Fertilizers proprietary technology
rights with a life ending December 31, 2011. The Company is amortizing
Fertilizers proprietary technology rights over a period of ten years.
Amortization expense for the Company's intangible assets for the three month
period ending March 31, 2005 and 2004 amounted to $32,470 each period.
Amortization expense for the Company's intangible assets over the next five
fiscal years is estimated to be: 2005-$130,000, 2006-$130,000, 2007-$130,000,
2008-$130,000 and 2009-$100,000.
6. SHAREHOLDERS' EQUITY
On February 24, 2004, BII entered into a merger agreement with Stratabid to
exchange 12,000,000 shares of Stratabid to the shareholders of BII (note 12). As
a part of the merger, Stratabid cancelled 3,000,000 shares of its issued and
outstanding stock owned by a majority shareholder and declared a stock dividend
of three shares for each share of its common stock outstanding for all
stockholders of record as of February 27, 2004. The Company has a total of
15,268,000 shares of common stock outstanding as of March 31, 2005.
7. CONVERTIBLE DEBENTURE
On March 16, 2005, the Company completed a private placement offering. The
Company received the sum of $3 million and issued a one year 9% debenture
convertible into shares of common stock by dividing the aggregate principal and
accrued interest by a conversion price of $4.80; a three year warrant to
purchase 187,500 shares of common stock at $4.80 per share; and a three year
warrant to purchase 40,000 shares of common stock at $6.88 per share.
This debenture was considered to have an embedded beneficial conversion feature
because the conversion price was less than the quoted market price at the time
of the issuance. Accordingly, the beneficial conversion feature was valued
separately and the intrinsic value in the amount of $476,875 was recorded as an
increase to additional pay-in capital and a corresponding amount, less the
amortized interest costs of $19,598, was recorded as a reduction of the carrying
value of the convertible debenture.
In connection with the convertible debenture, the Company issued a three year
warrant to purchase 187,500 shares of common stock at $4.80 per share and a
three year warrant to purchase 40,000 shares of common stock at $6.88 per share.
The aggregate fair value of the warrants of $416,703 was charged against net
income in the 3-month period ending March 31, 2005 and a corresponding amount
was recorded as an increase to additional pay-in capital.
47
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
8. STOCK OPTIONS AND WARRANTS
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used, on reported
results. The Statement is effective for the Companies' interim reporting period
ending January 31, 2003.
In compliance with SFAS No. 148, the Company has elected to continue to follow
the intrinsic value method in accounting for its stock-based employee
compensation plan as defined by APB No. 25 and has made the applicable
disclosures below.
Had the Company determined employee stock based compensation cost based on a
fair value model at the grant date for its stock options under SFAS 123, the
Company's net earnings per share would have been adjusted to the pro forma
amounts for the three month period ended March 31, 2005 as follows: ($ in
thousands, except per share amounts)
---------------------------------------------------------- --------------------------- ---------------------------
Three month period ended Three month period ended
March 31, 2005 March 31, 2004
---------------------------------------------------------- --------------------------- ---------------------------
Net Income - as reported $840 $421
-------------------------------------------------------- --------------------------- ---------------------------
Stock-Based employee compensation expense included in
reported net income, net of tax
-------------------------------------------------------- --------------------------- ---------------------------
Total stock-based employee compensation under (12) 0
fair-value-based method for all rewards, net of tax
-------------------------------------------------------- --------------------------- ---------------------------
Pro forma net income $828 $421
---------------------------------------------------------- --------------------------- ---------------------------
Earnings per share:
------------------------------------- ----------------------------------- -----------------------------------
Three month period ended Three month period ended
March 31, 2005 March 31, 2004
------------------------------------- ----------------------------------- -----------------------------------
Basic, as reported $0.05 $0.03
------------------------------------- ----------------------------------- -----------------------------------
Diluted, as reported $0.05 $0.03
------------------------------------- ----------------------------------- -----------------------------------
Basic, pro forma $0.05 $0.03
------------------------------------- ----------------------------------- -----------------------------------
Diluted, pro forma $0.05 $0.03
------------------------------------- ----------------------------------- -----------------------------------
48
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
In 2004 the board of directors approved the creation of the 2004 Stock Option
Plan. This plan provides for the grant of incentive stock options to employees,
directors and consultants. Options issued under this plan will expire over a
maximum term of five years from the date of grant.
Pursuant to the Stock Option Plan, the Company granted 110,000 stock options to
two Directors (55,000 options each) during the year ended December 31, 2004, of
which 100,000 stock options were granted on June 4, 2004 and the balance of the
10,000 were granted on Dec. 28, 2004.
On the first 100,000 stock options granted, 50,000 stock options vested
immediately and 50,000 stock options became vested over 8 equal quarterly
installments, with the first installment vesting at the end of the second
quarter of 2004. The 10,000 stock options granted on Dec. 28, 2004 vested on
Dec. 31, 2004.
The option exercise price was $5 for the first 100,000 stock options which was
equal to the market price of the shares at the time the options were granted.
The option exercise price was $5.80 for the second 10,000 stock options which
was the market price of the shares at the time the options were granted.
The Company did not grant any options during the three month period ended March
31, 2005.
On March 16, 2005, in connection to the convertible debenture the Company issued
three year warrants to purchase 187,500 shares of common stock at $4.80 per
share and three year warrants to purchase 40,000 shares of common stock at $6.88
per share.
As of March 31, 2005, there were a total of 110,000 stock options granted and
outstanding, and there were no stock options issued and outstanding as of March
31, 2004. As of March 31, 2005, there were a total of 227,000 warrants issued
and outstanding, and there were no warrants issued and outstanding as of March
31, 2004.
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method as
defined under the SFAS No. 95. Accordingly, the Company paid $37,794 and $27,415
for interest and $0 and $0 for income tax during the three month period ended
March 31, 2005 and 2004, respectively.
10. STATUTORY COMMON WELFARE FUND AND RESERVE
As stipulated by the Company Law of the People's Republic of China, net income
after taxation can only be distributed as dividends after appropriation has been
made for the following:
(i) Making up cumulative prior years' losses, if any;
(ii) Allocations to the "Statutory surplus reserve" of at least 10% of
income after tax, as determined under PRC accounting rules and
regulations, until the fund amounts to 50% of the Company's registered
capital;
(iii)Allocations of 5-10% of income after tax, as determined under
People's Republic of China accounting rules and regulations, to the
Company's "Statutory common welfare fund", which is established for
the purpose of providing employee facilities and other collective
benefits to the Company's employees; and
(iv) Allocations to the discretionary surplus reserve, if approved in the
shareholders' general meeting.
49
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
In accordance with the Chinese Company Law, the company has allocated 10% of its
annual net income, amounting $79,673 and $42,097 as statutory reserves for the
three month period ended March 31, 2005 and 2004, respectively.
The Company makes annual contributions of 14% of all employees' salaries to
employee welfare plan. The total expense for the above plan $20,502 and $14,669
for the three month period ended March 31, 2005 and 2004, respectively.
11. FACTORY LOCATION AND LEASE COMMITMENTS
Our principal executive offices are located at North Part of Xinquia Road, Yang
Ling Agricultural High-Tech Industries Demonstration Zone Yang Ling, Shaanxi
province, People's Republic of China, 712100. We own two factories, which
include three production lines, an office building, one warehouse, and two
research labs which are located on 10,900 square meters of land. The rent of the
office building is $121 a month from May 20, 2004 through May 20, 2005. We also
lease a warehouse in Yang Ling near the site of our factories. This warehouse is
300 square meters in area. The rent of the warehouse is $194 a month from
January 2005 through May 2005. We completed a new 609,840 square foot
manufacturing facility on March 15, 2005 and we believe that our owned and
leased property is sufficient for our current and immediately foreseeable
operating needs. Total future commitments through June 30, 2005 amount to
$1,276.
12. EARNINGS PER SHARE
Earnings per share for the three month periods ended March 31, 2005 and 2004
were determined by dividing net income for the periods by the weighted average
number of both basic and diluted shares of common stock and common stock
equivalents outstanding.
The following is an analysis of the differences between basic and diluted
earnings per common share in accordance with SFAS No. 128, "Earnings Per Share".
Three month period ended Three month period ended
March 31, 2005 March 31, 2004
----------------------------------------------------- ------------------------ -------------------------
Weighted average common shares outstanding 15,268,000 15,268,000
Effect of dilutive securities: stock options 261,458 0
Weighted average common shares outstanding 15,529,458 15,268,000
and common share equivalents
50
BODISEN BIOTECH, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
13. MERGER AGREEMENT
On February 11, 2004, Stratabid entered into an Agreement and Plan of Merger
with BHI, a wholly-owned subsidiary of Stratabid, BII and the shareholders of
BII. BII has one 100% wholly-owned subsidiary in Shaanxi, China, BBST. Under the
terms of the agreement, BHI acquired 100 percent of BII's stock in exchange for
the issuance by Stratabid of three million shares of its common stock to the
holders of BII. The new shares constitute approximately 79 percent of the
outstanding shares of Stratabid, which changed its name to Bodisen Biotech, Inc.
(the "Company"). The Agreement and Plan of Merger was closed on February 24,
2004.
BII's Chairman of the Board was appointed the Company's Chief Executive
Officer.
At the Effective Time, by virtue of the Merger and without any action on
the part of the BHI, BII or the BII Shareholders, the shares of capital stock of
each of BII and the BHI were converted as follows:
(a) Capital Stock of the BHI. Each issued and outstanding share of the BHI's
capital stock continued to be issued and outstanding and was converted into one
share of validly issued, fully paid, and non-assessable common stock of the
surviving company. Each stock certificate of the BHI evidencing ownership of any
such shares continued to evidence ownership of such shares of capital stock of
the Surviving Company.
(b) Conversion of BII Shares. Each BII Share that was issued and
outstanding at the Effective Time was automatically cancelled and extinguished
and converted, without any action on the part of the holder thereof, into the
right to receive at the time and in the amounts described in the Agreement an
amount of Acquisition Shares equal to the number of Acquisition Shares divided
by the number of BII Shares outstanding immediately prior to Closing. All such
BII Shares, so converted, were no longer outstanding and were automatically
cancelled and retired and ceased to exist, and each holder of a certificate
representing any such shares ceased to have any rights with respect thereto,
except the right to receive the Acquisition Shares paid in consideration
therefore upon the surrender of such certificate in accordance with the
Agreement.
(c) Within thirty (30) days from the Closing Date, Stratabid was required
to sell its business operations, as they exist immediately prior to the Closing,
to Derek Wasson, former president. In consideration of the sale, Mr. Wasson
returned 750,000 Common Shares to Stratabid for cancellation. In addition, Mr.
Wasson forgave all indebtedness owed by Stratabid to Mr. Wasson. Other than
indebtedness of BII, Stratabid had no indebtedness or other liability of any
kind or nature after the sale of the business to Mr. Wasson, save and except for
liabilities incurred in connection with the Merger.
14. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's operations are carried out in the People's Republican of China.
Accordingly, the Company's business, financial condition and results of
operations may be influenced by the political, economic and legal environments
in China and by the general state of China' economy. The Company's business may
be influenced by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
15. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the period
ended March 31, 2005 presentation.
51
Bodisen Biotech, Inc.
Financial Statements
December 31, 2004 and 2003
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors and Stockholders
Bodisen Biotech, Inc.
We have audited the accompanying consolidated balance sheet of Bodisen Biotech,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 2004 and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years ended December 31, 2004 and 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bodisen
Biotech, Inc. and subsidiaries as of December 31, 2004, and the results of its
consolidated operations and its cash flows for the years ended December 31, 2004
and 2003 in conformity with accounting principles generally accepted in the
United States of America.
/S/ KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Huntington Beach, California
March 1, 2005
52
BODISEN BIOTECH, INC.
(Formerly Stratabid.com, Inc.)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
ASSETS
------
CURRENT ASSETS:
Cash & cash equivalents $ 2,121,811
Accounts receivable, net 4,988,984
Advances to Suppliers 755,210
Inventory 767,344
Loan receivable 968,000
--------------------------
Total current asset 9,601,349
PROPERTY AND EQUIPMENT, net 1,353,598
CAPITAL WORK IN PROGRESS 1,596,405
INTANGIBLE ASSETS, net 2,199,639
OTHER ASSETS 48,736
--------------------------
TOTAL ASSETS $ 14,799,727
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 112,344
Accrued expenses 264,502
Short term loans 980,100
--------------------------
Total current liabilities 1,356,946
STOCKHOLDERS' EQUITY
Preferred stock, $0.0001 per share; authorized 5,000,000 shares;
none issued -
Common stock, $0.0001 per share; authorized 30,000,000 shares;
issued and outstanding 15,268,000 shares 1,527
Additional paid in capital 5,991,823
Accumulated other comprehensive gain 68,855
Statutory reserve 1,017,905
Retained earnings 6,362,671
--------------------------
Total stockholders' equity 13,442,781
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 14,799,727
==========================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
53
BODISEN BIOTECH, INC.
(Formerly Stratabid.com, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
--------------------- --------------------
Net revenue $ 16,225,896 9,783,784
Cost of revenue 9,653,965 6,706,082
--------------------- --------------------
Gross profit 6,571,931 3,077,702
Operating expenses
Selling expenses 615,549 573,807
General and administrative expenses 907,801 630,401
--------------------- --------------------
Total operating expenses 1,523,350 1,204,207
--------------------- --------------------
Income from operations 5,048,581 1,873,495
Non-operating Income (expense):
Other income (expense) 7,623 -
Interest income 45,338 138,225
Interest expense (74,139) (41,359)
--------------------- --------------------
Total non-operating income (expense) (21,178) 96,866
--------------------- --------------------
Net Income 5,027,403 1,970,361
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain 68,855 -
--------------------- --------------------
COMPREHENSIVE INCOME $ 5,096,258 $ 1,970,361
===================== ====================
Basic weighted average shares outstanding 15,268,000 15,268,000
===================== ====================
Basic earnings per share $ 0.33 $ 0.13
===================== ====================
Diluted weighted average shares outstanding 15,328,356 15,268,000
===================== ====================
Diluted earnings per share $ 0.33 $ 0.13
===================== ====================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
54
BODISEN BIOTECH, INC
(Formerly Stratabid.com, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Common Stock Accumulated
Additional Other Retained Total
Number of paid in Comprehensive Statutory earnings stockholders'
shares Amount capital Gain reserve (deficit) equity
------------ ------------- ------------ ------------- ----------- ------------- ----------------
Balance, January 1, 2003 1,500 $ 1 $ 6,014,399 $ - $ 66,758 $ 316,054 $ 6,397,212
Recapitalization on
reverse acquisition 15,266,500 1,526 (22,576) - - - (21,050)
------------ ------------- ------------ ------------- ----------- ------------- ----------------
Balance after
recapitalization 15,268,000 1,527 5,991,823 - 66,758 316,054 6,376,162
Net income for the year
ended December 31, 2003 - - - - 1,970,361 1,970,361
Allocation to statutory
reserve - - - 197,036 (197,036) -
------------ ------------- ------------ ------------- ----------- ------------- ----------------
Balance, December 31, 2003 15,268,000 1,527 5,991,823 - 263,794 2,089,379 8,346,523
Foreign currency translation
adjustments - - - 68,855 - - 68,855
Net income for the year ended
December 31, 2004 - - - - - 5,027,403 5,027,403
Allocation to statutory reserve - - - - 754,110 (754,110) -
------------ ------------- ------------ ------------- ----------- ------------- ----------------
Balance, December 31, 2004 15,268,000 $ 1,527 $ 5,991,823 $ 68,855 $1,017,905 $6,362,671 $ 13,442,781
============ ============= ============ ============= =========== ============= ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
55
BODISEN BIOTECH, INC.
(Formerly Stratabid.com, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
----------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,027,403 $ 1,970,361
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 302,803 247,958
(Increase)/decrease in current assets
Accounts receivable (3,166,143) 249,086
Advances to suppliers 1,178,306 (270,645)
Inventory 51,612 81,538
Other assets (48,736) -
Increase/(decrease) in current liabilities:
Accounts payable (1,521,819) 535,186
Unearned revenue (15,888) (586,087)
Other payables (35,350) (67,122)
Accrued expenses 196,031 75,753
----------------- ---------------
Net cash provided by operating activities 1,968,219 2,236,028
----------------- ---------------
Effect of exchange rate on cash 68,855
CASH FLOWS FROM INVESTING ACTIVITIES
Payment on loan receivable (968,000) -
Acquisition of property & equipment (435,814) (133,653)
Additions to intangible assets - (1,470,307)
Additions to work in progress (1,374,322) (4,877)
----------------- ---------------
Net cash used in investing activities (2,778,136) (1,608,837)
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) loan (111,900) 1,080,000
Issuance of subsidiary stock - 1,214,400
Dividend paid - (180,000)
----------------- ---------------
Net cash provided by (used in) financing activities (111,900) 2,114,400
----------------- ---------------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (852,962) 2,741,591
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 2,974,773 233,182
----------------- ---------------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 2,121,811 $ 2,974,773
================= ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
56
Notes to the Consolidated Financial Statements
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Yang Ling Bodisen Biology Science and Technology Development Company
Limited ("BBST") was founded in the People's Republic of China on August 31,
2001. BBST, located in Yang Ling Agricultural High-Tech Industries Demonstration
Zone, is primarily engaged in developing, manufacturing and selling pesticides
and compound organic fertilizers in the People's Republic of China. Bodisen
International, Inc. ("BII") is a Delaware Corporation, incorporated on November
19, 2003. BII was a non-operative holding company of BBST. On December 15, 2003,
BII entered in to an agreement with all the shareholders of BBST to exchange all
of the outstanding stock of BII for all the issued and outstanding stock of
BBST. After the consummation of the agreement, the former shareholders of BBST
own 1500 shares of common stock of BII, which represent 100% of BII's issued and
outstanding shares. For U.S. Federal income tax purpose, the transaction is
intended to be qualified as a tax-free transaction under section 351 of the
Internal Revenue Code of 1986, as amended.
The exchange of shares with BBST has been accounted for as a reverse
acquisition under the purchase method of accounting since the shareholders of
the BBST obtained control of the consolidated entity. Accordingly, the merger of
the two companies has been recorded as a recapitalization of BBST, with BBST
being treated as the continuing entity. The historical financial statements
presented are those of BBST. The continuing company has retained December 31 as
its fiscal year end. The financial statements of the legal acquirer are not
significant; therefore, no pro forma financial information is submitted.
On February 24, 2004, BII consummated a merger agreement with
Stratabid.com, Inc. ("Stratabid"), a Delaware corporation, to exchange
12,000,000 shares of Stratabid to the shareholders of BII, in which BII merged
into Bodisen Holdings, Inc. (BHI), an acquisition subsidiary of Stratabid, with
BHI being the surviving entity. As a part of the merger, Stratabid cancelled
3,000,000 shares of its issued and outstanding stock owned by its former
president and declared a stock dividend of three shares on each share of its
common stock outstanding for all stockholders on record as of February 27, 2004.
Stratabid was incorporated in the State of Delaware on January 14, 2000 and
before the merger, was a start-up stage Internet based commercial mortgage
origination business based in Vancouver, BC, Canada.
The exchange of shares with Stratabid has been accounted for as a reverse
acquisition under the purchase method of accounting since the shareholders of
BII obtained control of Stratabid. On March 1, 2004, Stratabid was renamed
Bodisen Biotech, Inc. (the "Company"). Accordingly, the merger of the two
companies has been recorded as a recapitalization of the Company, with the
Company being treated as the continuing entity. The financial statements of
legal acquiree are not significant; therefore, no pro forma financial
information is submitted.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of 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.
57
Cash and Cash Equivalents
Cash and cash equivalents include cash in hand and cash in time deposits,
certificates of deposit and all highly liquid debt instruments with original
maturities of three months or less.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Terms of the sales vary from COD
through a credit term up to 9 to 12 months. Reserves are recorded primarily on a
specific identification basis. Allowance for doubtful debts amounted to $185,301
as at December 31, 2004.
Advances to Suppliers
The Company advances to certain vendors for purchase of its material. The
advances to suppliers are interest free and unsecured. The advances to suppliers
amounted to $755,210 at December 31, 2004.
Inventories
Inventories are valued at the lower of cost (determined on a weighted
average basis) or market. The Management compares the cost of inventories with
the market value and allowance is made for writing down the inventories to their
market value, if lower.
Loan Receivable
On December 8, 2004, the Company entered in to an agreement to loan
$968,000 to an unrelated party. The loan is unsecured, payable by December 7,
2005 and carries an interest rate of 8.7% per annum.
Property & Equipment & Capital Work in Progress
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to earnings as incurred; additions, renewals and betterments
are capitalized. When property and equipment are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the
respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method for substantially all assets with estimated lives of: 30 years for
building, 10 years for machinery, 5 years for office equipment and 8 years for
vehicles.
On December 31, 2004, the Company has "Capital Work in Progress"
representing the construction in progress of the Company's manufacturing plant
amounting $1,596,405.
58
Long-lived Assets
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations for a
Disposal of a Segment of a Business." The Company periodically evaluates the
carrying value of long-lived assets to be held and used in accordance with SFAS
144. SFAS 144 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts. In that event, a loss is recognized based on the
amount by which the carrying amount exceeds the fair market value of the
long-lived assets. Loss on long-lived assets to be disposed of is determined in
a similar manner, except that fair market values are reduced for the cost of
disposal. Based on its review, the Company believes that, as of December 31,
2004 there were no significant impairments of its long-lived assets.
Intangible Assets
Intangible assets consist of Rights to use land and Fertilizers proprietary
technology rights. The Company evaluates intangible assets for impairment, at
least on an annual basis and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable from its estimated
future cash flows. Recoverability of intangible assets, other long-lived assets
and, goodwill is measured by comparing their net book value to the related
projected undiscounted cash flows from these assets, considering a number of
factors including past operating results, budgets, economic projections, market
trends and product development cycles. If the net book value of the asset
exceeds the related undiscounted cash flows, the asset is considered impaired,
and a second test is performed to measure the amount of impairment loss.
Fair Value of Financial Instruments
Statement of financial accounting standard No. 107, Disclosures about fair
value of financial instruments, requires that the Company disclose estimated
fair values of financial instruments. The carrying amounts reported in the
statements of financial position for current assets and current liabilities
qualifying as financial instruments are a reasonable estimate of fair value.
Revenue Recognition
The Company's revenue recognition policies are in compliance with Staff
accounting bulletin (SAB) 104. Sales revenue is recognized at the date of
shipment to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectibility is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as unearned revenue.
59
Advertising Costs
The Company expenses the cost of advertising as incurred or, as
appropriate, the first time the advertising takes place. Advertising costs for
the years ended December 31, 2004 and 2003 were insignificant.
Stock-based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS No. 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using the existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for stock issued to employees" (APB 25) and
related interpretations with proforma disclosure of what net income and earnings
per share would have been had the Company adopted the new fair value method. The
Company uses the intrinsic value method prescribed by APB 25 and has opted for
the disclosure provisions of SFAS No. 123.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
According to the Provisional Regulations of the People's Republic of China
on Income Tax, the Document of Reductions and Exemptions of Income Tax for the
Company had been approved by the local tax bureau and the Yang Ling Agricultural
High-Tech Industries Demonstration Zone. The Company is exempted from income tax
through December 31, 2004.
Foreign Currency Transactions and Comprehensive Income (loss)
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Certain statements, however, require
entities to report specific changes in assets and liabilities, such as gain or
loss on foreign currency translation, as a separate component of the equity
section of the balance sheet. Such items, along with net income, are components
of comprehensive income. The functional currency of the Company is Chinese
Renminbi. The unit of Renminbi is in Yuan. Translation gains of $68,855 at
December 31, 2004 are classified as an item of other comprehensive income in the
stockholders' equity section of the consolidated balance sheet. During the year
ended December 31, 2004, comprehensive income in the consolidated statements of
operation included translation gains of $68,855. The Company had insignificant
translation gain in the year ended December 31, 2003.
Basic and Diluted Net Loss Per Share
Net loss per share is calculated in accordance with the Statement of
financial accounting standards No. 128 (SFAS No. 128), "Earnings per share".
SFAS No. 128 superseded Accounting Principles Board Opinion No. 15 (APB 15). Net
loss per share for all periods presented has been restated to reflect the
adoption of SFAS No. 128. Basic net loss per share is based upon the weighted
average number of common shares outstanding. Diluted net loss per share is based
on the assumption that all dilutive convertible shares and stock options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options and warrants are assumed to be exercised at
the beginning of the period (or at the time of issuance, if later), and as if
funds obtained thereby were used to purchase common stock at the average market
price during the period.
60
Statement of Cash Flows:
In accordance with Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows," cash flows from the Company's operations is
calculated based upon the local currencies. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.
Segment Reporting
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosure About Segments of an Enterprise and Related Information" requires
use of the "management approach" model for segment reporting. The management
approach model is based on the way a company's management organizes segments
within the company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure, management structure, or any other manner in which management
disaggregates a company. SFAS 131 has no effect on the Company's consolidated
financial statements as the Company consists of one reportable business segment.
All revenue is from customers in People's Republic of China. All of the
Company's assets are located in People's Republic of China.
Recent Pronouncements
In November 2004, the FASB has issued FASB Statement No. 151, "Inventory
Costs, an Amendment of ARB No. 43, Chapter 4" ("FAS No. 151"). The amendments
made by FAS No. 151 are intended to improve financial reporting by clarifying
that abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current-period charges and
by requiring the allocation of fixed production overheads to inventory based on
the normal capacity of the production facilities.
The guidance is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Earlier application is permitted for inventory
costs incurred during fiscal years beginning after November 23, 2004. The
provisions of FAS No. 151 will be applied prospectively. The Company does not
expect the adoption of FAS No. 151 to have a material impact on its consolidated
financial position, results of operations or cash flows.
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based
Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R
requires companies to recognize in the statement of operations the grant- date
fair value of stock options and other equity-based compensation issued to
employees. FAS No. 123R is effective beginning in the Company's second quarter
of fiscal 2005. The Company is in process of evaluating the impact of this
pronouncements on its consolidated financial position, results of operations or
cash flows.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Nonmonetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.
61
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." The EITF reached a consensus about the
criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss and how that criteria should be applied to investments
accounted for under SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES." EITF 03-01 also included accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Additionally, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards Board (FASB)
delayed the accounting provisions of EITF 03-01; however the disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company will evaluate the impact of EITF 03-01 once final guidance is issued.
3. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, BII and its wholly owned
subsidiary, BBST. All significant inter-company accounts and transactions have
been eliminated in consolidation. The acquisition of BII on February 24, 2004,
has been accounted for as a purchase and treated as a reverse acquisition (note
1). The historical results for the year ended December 31, 2004 include both the
Company (from the acquisition date) and BII and BBST (for full year) while the
historical results for the year ended December 31, 2003 includes only BBST and
BII.
4. INTANGIBLE ASSETS
Net intangible assets at December 31, 2004 were as follows:
Rights to use land $ 1,666,920
Fertilizers proprietary technology rights
968,000
---------------
2,634,920
Less Accumulated amortization (435,281)
---------------
$ 2,199,639
===============
The Company's office and manufacturing site is located in Yang Ling Agricultural
High-Tech Industries Demonstration Zone in the province of Shaanxi, People's
Republic of China. The Company leases land per a real estate contract with the
government of People's Republic of China for a period from November 2001 through
November 2051. Per the People's Republic of China's governmental regulations,
the Government owns all land.
62
During July 2003, the Company leased another parcel of land per a real
estate contract with the government of the People's Republic of China for a
period from July 2003 through June 2053.
The Company has recognized the amounts paid for the acquisition of rights
to use land as intangible asset and amortizing over a period of fifty years. The
"Rights to use land" is being amortized over 50 years period.
The Company acquired Fluid and Compound Fertilizers proprietary technology
rights with a life ending December 31, 2011. The Company is amortizing
Fertilizers proprietary technology rights over a period of ten years.
Amortization expense for the Company's intangible assets for the year ended
December 31, 2004 and 2003 amounted to $130,181 and $109,401, respectively.
Amortization expense for the Company's intangible assets over the next five
fiscal years is estimated to be: 2005-$130,000, 2006-$130,000, 2007-$130,000,
2008-$130,000 and 2009-$130,000.
5. SHORT TERM LOANS
Short term loans consisted of the following at December 31, 2004:
Note payable to bank, interest rate; 6.51% per annum,
payable quarterly, maturity date; 5/30/05, secured by
assets of the Company. $ 544,500
Note payable to bank, interest rate; 6.05% per annum,
payable quarterly, maturity date; 10/28/05, secured by
assets of the Company. 423,500
Short term support loan from the Shanxi Technology
Bureau of the Government of People's Republic of
China, interest free; secured by assets of the
Company, due on demand. 12,100
--------------
$ 980,100
==============
6. SHAREHOLDERS' EQUITY
On February 24, 2004, BII entered into a merger agreement with
Stratabid.com, Inc. (Stratabid) to exchange 12,000,000 shares of Stratabid to
the shareholders of BII (note 14). As a part of the merger, Stratabid cancelled
3,000,000 shares of its issued and outstanding stock owned by a majority
shareholder and declared a stock dividend of three shares on each share of its
common stock outstanding for all stockholders on record as of February 27, 2004,
after the merger agreement. The Company has a total of 15,268,000 shares of
common stock outstanding as of December 31, 2004.
63
7. STOCK OPTIONS
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation", 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, this Statement amends the
disclosure requirements of Statement 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. The Statement is effective for the Companies' interim reporting period
ending January 31, 2003.
In compliance with FAS No. 148, the Company has elected to continue to
follow the intrinsic value method in accounting for its stock-based employee
compensation plan as defined by APB No. 25 and has made the applicable
disclosures below.
In 2004 the board of directors approved the creation of the 2004 Stock
Option Plan. This plan provides for the grant of incentive stock options to
employees, directors and consultants. Options issued under this plan will expire
over a maximum term of five years from the date of grant.
Pursuant to the Stock Option Plan, the Company granted 110,000 stock
options to two Directors (55,000 options each) during the year ended December
31, 2004, of which 100,000 stock options was granted on June 4, 2004 and the
balance of the 10,000 was granted on Dec. 28, 2004.
On the first 100,000 stock options granted, 50,000 stock options vested
immediately and 50,000 stock options became vested over 8 equal quarterly
installments, with the first installment vesting at the end of the second
quarter of 2004. The 10,000 stock options granted on Dec. 28, 2004 vested on
Dec. 31, 2004.
The option exercise price was $5 for the first 100,000 stock options which
was the same as fair value of the shares at the time of granting of the options.
The option exercise price was $5.80 for the second 10,000 stock options which
was the same as fair value of the shares at the time of granting of the options.
Following is a summary of the stock option activity:
Outstanding at December 31, 2003
Granted 110,000
Forfeited 0
Exercised 0
Outstanding at December 31, 2004 110,000
=======
64
Following is a summary of the status of options outstanding at December 31,
2004:
Outstanding Options Exercisable Options
------------------- -------------------
Average
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Number Life Price Number Price
-------------- ------ ----------- -------- ------ --------
$ 5.00 100,000 4.42 $ 5.00 68,750 $ 5.00
$ 5.80 10,000 4.99 $ 5.80 10,000 $ 5.80
For options granted during the year ended December 31, 2004, the
weighted-average fair value of such options was $1.92.
The assumptions used in calculating the fair value of options granted using
the Black-Scholes option- pricing model are as follows:
First 100,000 stock options granted on June 4, 2004
---------------------------------------------------
Risk-free interest rate 4.0%
Expected life of the options 5.00 years
Expected volatility 35%
Expected dividend yield 0
Second 100,000 stock options granted on December 28, 2004
---------------------------------------------------------
Risk-free interest rate 4.0%
Expected life of the options 5.00 years
Expected volatility 40%
Expected dividend yield 0
Had the Company determined employee stock based compensation cost based on
a fair value model at the grant date for its stock options under SFAS 123, the
Company's net earnings per share would have been adjusted to the pro forma
amounts for the year ended December 31, 2004 as follow ($ in thousands, except
per share amounts):
Net Income - as reported $ 5,027
Stock-Based employee compensation expense included in
reported net income, net of tax -
Total stock-based employee
compensation expense determined
under fair-value-based method for all
rewards, net of tax (153)
----------------
Pro forma net income $ 4,874
================
65
Earnings per share: Year ended
December 31, 2004
-----------------
Basic, as reported $ 0.33
Diluted, as reported $ 0.33
Basic, pro forma $ 0.32
Diluted, pro forma $ 0.32
The Company did not grant any options during year ended December 31, 2003.
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method
as defined under the Financial Accounting Standard No. 95.
The Company paid $60,231 and $41,359 for interest and $0 for income tax
during the year ended December 31, 2004 and 2003, respectively.
9. EMPLOYEE WELFARE PLAN
The Company has established its own employee welfare plan in accordance with
Chinese law and regulations. The Company makes annual contributions of 14% of
all employees' salaries to employee welfare plan. The total expense for the
above plan $80,761 and $55,813 for the year ended December 31, 2004 and 2003,
respectively. The Company has recorded welfare payable of $175,758 at December
31, 2004.
10. STATUTORY COMMON WELFARE FUND
As stipulated by the Company Law of the People's Republic of China (PRC),
net income after taxation can only be distributed as dividends after
appropriation has been made for the following:
(i) Making up cumulative prior years' losses, if any;
(ii) Allocations to the "Statutory surplus reserve" of at least 10% of
income after tax, as determined under PRC accounting rules and
regulations, until the fund amounts to 50% of the Company's registered
capital;
(iii) Allocations of 5-10% of income after tax, as determined under PRC
accounting rules and regulations, to the Company's "Statutory common
welfare fund", which is established for the purpose of providing
employee facilities and other collective benefits to the Company's
employees; and
(iv) Allocations to the discretionary surplus reserve, if approved in the
shareholders' general meeting.
The Company established a reserve for the annual contribution of 5% of net
income to the welfare fund in 2004. The amount included in the statutory reserve
for the year ended December 31, 2004 amounted to $251,370.
66
11. STATUTORY RESERVE
In accordance with the Chinese Company Law, the company has allocated 10%
of its annual net income, amounting $502,740 and $197,036 as statutory reserve
for the year ended December 31, 2004 and 2003, respectively.
12. FACTORY LOCATION AND LEASE COMMITMENTS
BBST's principal executive offices are located at North Part of Xinquia
Road, Yang Ling Agricultural High-Tech Industries Demonstration Zone Yang Ling,
Shaanzi province, People's Republic of China. BBST owns two factories, which
includes three production lines, an office building, one warehouse, and two
research labs and, is located on 10,900 square meters of land. The rent of the
office building is $121 a month from May 20, 2004 through May 20, 2005. BBST
also leases warehouses in Yang Ling near the site of Bodisen's factories. The
rent of the warehouses is $194 a month from January 2005 through May 2005. Total
future commitment through June 30, 2005 amounts to $1,573.
The Company has committed to pay $18,150 to an advertising agency for an
advertising campaign, by October 2006.
13. EARNINGS PER SHARE
Earnings per share for year ended December 31, 2004 and 2003 were
determined by dividing net income for the periods by the weighted average number
of both basic and diluted shares of common stock and common stock equivalents
outstanding.
The following is an analysis of the differences between basic and diluted
earnings per common share in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share".
For the year ended
December 31,
2003 2004
------------------ ------------
Weighted average common shares outstanding 15,268,000 15,268,000
Effect of dilutive securities:
Stock options - 60,356
---------------- ------------
Weighted average common shares
outstanding and common share equivalents 15,268,000 15,328,356
================ ============
14. MERGER AGREEMENT
On February 11, 2004, Stratabid entered into an Agreement and Plan of
Merger with Bodisen Acquisition Corp., a Delaware corporation ("BAC")
wholly-owned by Stratabid, Bodisen International, Inc., a Delaware corporation
("BII") and the shareholders of BII. BII has one 100% wholly-owned subsidiary in
Shaanxi, China, Yang Ling Bodisen Biology Science and Technology Development
Company Limited ("BBST"). Under the terms of the agreement, BAC acquired 100
percent of BII's stock in exchange for the issuance by Stratabid of three
million shares of its common stock to the holders of BII. The new shares
constitute approximately 79 percent of the outstanding shares of Stratabid,
which changed its name to Bodisen Biotech, Inc. (the "Company"). The Agreement
and Plan of Merger was closed on February 24, 2004.
67
BII's Chairman of the Board was appointed the Company's Chief Executive
Officer.
At the Effective Time, by virtue of the Merger and without any action on
the part of the BAC, BII or the BII Shareholders, the shares of capital stock of
each of BII and the BAC were converted as follows:
(a) Capital Stock of the BAC. Each issued and outstanding share of the
BAC's capital stock continued to be issued and outstanding and was converted
into one share of validly issued, fully paid, and non-assessable common stock of
the Surviving Company (Bodisen Holdings, Inc.). Each stock certificate of the
BAC evidencing ownership of any such shares continued to evidence ownership of
such shares of capital stock of the Surviving Company.
(b) Conversion of BII Shares. Each BII Share that was issued and
outstanding at the Effective Time was automatically cancelled and extinguished
and converted, without any action on the part of the holder thereof, into the
right to receive at the time and in the amounts described in the Agreement an
amount of Acquisition Shares equal to the number of Acquisition Shares divided
by the number of BII Shares outstanding immediately prior to Closing. All such
BII Shares, so converted, were no longer outstanding and were automatically
cancelled and retired and ceased to exist, and each holder of a certificate
representing any such shares ceased to have any rights with respect thereto,
except the right to receive the Acquisition Shares paid in consideration
therefore upon the surrender of such certificate in accordance with the
Agreement.
(c) Within thirty (30) days from the Closing Date, Stratabid was required
to sell its business operations, as they exist immediately prior to the Closing,
to Derek Wasson, former president. In consideration of the sale, Mr. Wasson
returned 750,000 Common Shares to Stratabid for cancellation. In addition, Mr.
Wasson forgave all indebtedness owed by Stratabid to Mr. Wasson. Other than
indebtedness of BII, Stratabid had no indebtedness or other liability of any
kind or nature after the sale of the business to Mr. Wasson, save and except for
liabilities incurred in connection with the Merger.
15. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
Four vendors provided 70% of the Company's raw materials for the year ended
December 31, 2004 and three vendors provided 51% of the Company's raw materials
for the year ended December 31, 2003. The payable balance for these parties
amounted to $53,098 and $241,078 at December 31, 2004 and 2003, respectively.
The Company's operations are carried out in the PRC. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, by the
general state of the PRC's economy. The Company's business may be influenced by
changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
16. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the year
ended December 31, 2004 presentation.
68
Bodisen Biotech, Inc.
Financial Statements
December 31, 2003 and 2002
69
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Bodisen International, Inc.,
We have audited the accompanying consolidated balance sheets of Bodisen
International Inc, and subsidiary as of December 31, 2003 and 2002, and the
related consolidated statements of income, shareholders' equity, and cash flows
for the years ended December 31, 2003 and 2002. 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bodisen
International Inc, and subsidiary as of December 31, 2003 and 2002, and the
consolidated results of their operations and cash flows for the years ended
December 31, 2003 and 2002 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Kabani & Company, Inc.
--------------------------
Kabani & Company, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Fountain Valley, California
February 5, 2004
70
BODISEN INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS
2003 2002
------------- -------------
CURRENT ASSETS:
Cash & cash equivalents $ 2,974,773 $ 233,182
Accounts receivable, net 1,822,841 2,071,927
Advances to Suppliers 1,933,516 1,662,872
Inventory 715,732 797,270
------------- -------------
Total current assets 7,446,862 4,765,250
PROPERTY AND EQUIPMENT, net 1,220,587 1,225,490
CAPITAL WORK IN PROGRESS 222,083 217,206
INTANGIBLE ASSETS, net 2,310,148 949,242
------------- -------------
$ 11,199,680 $ 7,157,188
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,634,163 $ 1,098,978
Accrued expenses 75,755 -
Unearned revenue 15,888 601,975
Short term loan 1,092,000 12,000
Dividend payable - 180,000
Other payables 14,300 81,423
------------- -------------
Total current liabilities 2,832,106 1,974,376
STOCKHOLDERS' EQUITY
Common stock, $0.12 per share; authorized shares
80,000,000;
issued and outstanding 40,000,000 shares 1 1
Additional paid in capital 6,014,399 4,799,999
Statutory reserve 263,795 66,758
Retained earnings 2,089,379 316,054
------------- -------------
Total stockholders' equity 8,367,574 5,182,813
------------- -------------
$ 11,199,680 $ 7,157,188
============= =============
71
BODISEN INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
------------- -------------
Net revenue $ 9,783,784 $ 4,881,350
Cost of revenue 6,706,082 3,582,176
------------- -------------
Gross profit 3,077,702 1,299,174
Operating expenses
Selling expenses 573,807 235,077
General and administrative expenses 630,401 384,067
------------- -------------
Total operating expenses 1,204,207 619,144
------------- -------------
Income from operations 1,873,495 680,030
Non-operating Income (expense):
Other income 55,507 8,119
Interest expense 41,359 (20,565
------------- -------------
Total non-operating income (expense) 96,867 (12,446
------------- -------------
Net income 1,970,361 667,583
============= =============
Basic and diluted weighted average shares outstanding 1,500 1,500
============= =============
Basic and diluted net earning per share $ 1,313.57 $ 445.06
============= =============
72
BODISEN INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Common Stock
--------------------------- Additional Retained Total
Number of paid in Statutory earnings stockholders'
shares Amount capital reserve (deficit) equity
------------- ------------- --------------- -------------- --------------- -----------------
Balance, December 31, 2001 1,500 $ 4,800,000 $ - $ - $ (104,771) $ 4,695,229
Recapitalization on reverse
acquisition - (4,799,999) 4,799,999 - - -
------------- ------------- --------------- -------------- --------------- -----------------
Balance after recapitalization 1,500 1 4,799,999 - (104,771) 4,695,229
Net income for the year ended
December 31, 2002 - - - - 667,583 667,583
Allocation to statutory reserve - - - 66,758 (66,758) -
Dividends declared - - - - (180,000) (180,000)
------------- ------------- --------------- -------------- --------------- -----------------
Balance, December 31, 2002 1,500 1 4,799,999 66,758 316,054 5,182,813
Issuance of subsidiary's stock - - 1,214,400 - - 1,214,400
Net income for the year ended
December 31, 2003 - - - - 1,970,361 1,970,361
Allocation to statutory reserve - - - 197,036 (197,036) -
------------- ------------- --------------- -------------- --------------- -----------------
Balance, December 31, 2003 1,500 $ 1 $ 6,014,399 $ 263,794 $ 2,089,379 $ 8,367,574
============= ============= =============== ============== =============== =================
73
BODISEN INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,970,361 $ 667,583
Adjustments to reconcile net income to net cash
provided in operating activities:
Depreciation and amortization 247,958 161,587
(Increase) / decrease in current assets:
Accounts receivable 249,086 288,218
Advances to suppliers (270,645) (893,393)
Inventory 81,538 300,312
Increase / (decrease) in current liabilities:
Accounts payable 535,186 (38,379)
Unearned revenue (586,087) 589,812
Other payables (67,122) 3,423
Accrued expenses 75,754 (142,140)
-------------- -------------
Net cash provided by operating activities 2,236,028 937,023
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property & equipment (133,653) (600,666)
Acquisition of rights to use land (1,470,307) -
Capital work in process (4,877) (217,206)
-------------- -------------
Net cash used in investing activities (1,608,837) (817,872)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on loan from officers/shareholders - (217,338)
Proceeds from loan 1,080,000 12,000
Issuance of stock by subsidiary 1,214,400 -
Dividend paid (180,000) -
-------------- -------------
Net cash provided by (used in) financing activities 2,114,400 (205,338)
-------------- -------------
NET INCREASE/(DECREASE) IN CASH & CASH EQUIVALENTS 2,741,591 (86,187)
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 233,182 319,369
-------------- -------------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 2,974,773 $ 233,182
============== =============
74
BODISEN INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Bodisen International, Inc. (the "Company") is a Delaware Corporation,
incorporated on November 19, 2003. The Company is authorized to issue of
50,000,000 shares of common stock of $.001 par value and 10,000,000 shares
of preferred stock of $.001 par value. The Company is a non-operative
holding company of Yang Ling Bodisen Biology Science and Technology
Development Company Limited ("BBST"). BBST was founded in the People's
Republic of China on August 31, 2001. BBST, located in Yang Ling
Agricultural High-Tech Industries Demonstration Zone, is primarily engaged
in developing, manufacturing and selling pesticides and compound organic
fertilizers in the People's Republic of China.
On December 15, 2003, the Company entered in to an agreement with all the
shareholders of BBST to exchange all of the outstanding stock of the
Company for all the issued and outstanding stock of BBST. After the
consummation of the agreement, the former shareholders of BBST own 1500
shares of common stock of the Company, which represent 100% of the
Company's issued and outstanding shares. For U.S. Federal income tax
purpose, the transaction is intended to be qualified as a tax-free
transaction under section 351 of the Internal Revenue Code of 1986, as
amended.
The exchange of shares with BBST has been accounted for as a reverse
acquisition under the purchase method of accounting since the shareholders
of the BBST obtained control of the consolidated entity. Accordingly, the
merger of the two companies has been recorded as a recapitalization of
BBST, with BBST being treated as the continuing entity. The historical
financial statements presented are those of BBST. The continuing company
has retained December 31 as its fiscal year end. The financial statements
of the legal acquirer are not significant; therefore, no pro forma
financial information is submitted.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of 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.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, BBST. All significant
inter-company accounts and transactions have been eliminated in
consolidation. The acquisition of BBST on December 15, 2003, has been
accounted for as a purchase and treated as a reverse acquisition (note 1).
The historical results for the year ended December 31, 2003 include both
the Company (from the acquisition date) and BBST (for full year) while the
historical results for the year ended December 31, 2002 includes only BBST.
Cash and cash equivalents
Cash and cash equivalents include cash in hand and cash in time deposits,
certificates of deposit and all highly liquid debt instruments with
original maturities of three months or less.
75
BODISEN INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment
patterns to evaluate the adequacy of these reserves. Reserves are recorded
primarily on a specific identification basis. Allowance for doubtful debts
amounted to $64,080 as at December 31, 2003 and 2002.
Advances to suppliers
The Company advances to certain vendors for purchase of its material. The
advances to suppliers amounted to $1,933,516 and $1,662,872 at December 31,
2003 and 2002.
Inventories
Inventories are valued at the lower of cost (determined on a weighted
average basis) or market. The Management compares the cost of inventories
with the market value and allowance is made for writing down the
inventories to there market value, if lower.
Property & Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to earnings as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using the
straight-line method for substantially all assets with estimated lives of:
30 years for building, 10 years for machinery, 5 years for office equipment
and 8 years for vehicles.
Long-lived assets
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations for a Disposal of a Segment of a Business." The Company
periodically evaluates the carrying value of long-lived assets to be held
and used in accordance with SFAS 144. SFAS 144 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amounts. In
that event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner,
except that fair market values are reduced for the cost of disposal. Based
on its review, the Company believes that, as of December 31, 2003 and 2002,
there were no significant impairments of its long-lived assets.
Intangible Assets
Intangible assets consist of Rights to use land and Fertilizers proprietary
technology rights. The Company evaluates intangible assets for impairment,
at least on an annual basis and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable from its estimated
76
BODISEN INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
future cash flows. Recoverability of intangible assets, other long-lived
assets and, goodwill is measured by comparing their net book value to the
related projected undiscounted cash flows from these assets, considering a
number of factors including past operating results, budgets, economic
projections, market trends and product development cycles. If the net book
value of the asset exceeds the related undiscounted cash flows, the asset
is considered impaired, and a second test is performed to measure the
amount of impairment loss. Potential impairment of goodwill after July 1,
2002 is being evaluated in accordance with SFAS No. 142. The SFAS No. 142
is applicable to the financial statements of the Company beginning July 1,
2002.
Unearned revenue
Unearned revenue represents amounts received from the customers against
future sales of goods since the Company recognizes revenue on the shipment
of goods (see revenue recognition policy).
Fair value of financial instruments
Statement of financial accounting standard No. 107, Disclosures about fair
value of financial instruments, requires that the Company disclose
estimated fair values of financial instruments. The carrying amounts
reported in the statements of financial position for current assets and
current liabilities qualifying as financial instruments are a reasonable
estimate of fair value.
Revenue Recognition
The Company's revenue recognition policies are in compliance with Staff
accounting bulletin (SAB) 101. Sales revenue is recognized at the date of
shipment to customers when a formal arrangement exists, the price is fixed
or determinable, the delivery is completed, no other significant
obligations of the Company exist and collectibility is reasonably assured.
Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as unearned revenue.
Advertising Costs
The Company expenses the cost of advertising as incurred or, as
appropriate, the first time the advertising takes place. Advertising costs
for the years ended December 31, 2003 and 2002 were insignificant.
Stock-based compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 prescribes accounting and reporting standards
for all stock-based compensation plans, including employee stock options,
restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS No. 123 requires compensation expense to be recorded (i) using
the new fair value method or (ii) using the existing accounting rules
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
stock issued to employees" (APB 25) and related interpretations with
proforma disclosure of what net income and earnings per share would have
been had the Company adopted the new fair value method. The Company uses
the intrinsic value method prescribed by APB 25 and has opted for the
disclosure provisions of SFAS No.123. Through December 31, 2003, the
Company has not granted any stock options.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
77
BODISEN INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
According to the Provisional Regulations of the People's Republic of China
on Income Tax, the Document of Reductions and Exemptions of Income Tax for
BBST has been approved by the local tax bureau and the Management
Regulation of Yang Ling Agricultural High-Tech Industries Demonstration
Zone. BBST is exempted from income tax in its first two years of
operations.
Foreign currency transactions and comprehensive income (loss)
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Certain statements, however,
require entities to report specific changes in assets and liabilities, such
as gain or loss on foreign currency translation, as a separate component of
the equity section of the balance sheet. Such items, along with net income,
are components of comprehensive income. The functional currency of BBST is
Chinese Renminbi. The unit of Renminbi is in Yuan. Cumulative translation
adjustment amount and translation adjustment gain were insignificant at and
for the year ended December 31, 2003 and 2002.
Basic and diluted net loss per share
Net loss per share is calculated in accordance with the Statement of
financial accounting standards No. 128 (SFAS No. 128), "Earnings per
share". SFAS No. 128 superseded Accounting Principles Board Opinion No.15
(APB 15). Net loss per share for all periods presented has been restated to
reflect the adoption of SFAS No. 128. Basic net loss per share is based
upon the weighted average number of common shares outstanding. Diluted net
loss per share is based on the assumption that all dilutive convertible
shares and stock options were converted or exercised. Dilution is computed
by applying the treasury stock method. Under this method, options and
warrants are assumed to be exercised at the beginning of the period (or at
the time of issuance, if later), and as if funds obtained thereby were used
to purchase common stock at the average market price during the period.
Statement of Cash Flows:
In accordance with Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows," cash flows from the Company's operations is
calculated based upon the local currencies. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.
Segment Reporting
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosure About Segments of an Enterprise and Related Information"
requires use of the "management approach" model for segment reporting. The
management approach model is based on the way a company's management
organizes segments within the company for making operating decisions and
assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company. SFAS 131 has no effect
on the Company's consolidated financial statements as substantially all of
the Company's operations are conducted in one industry segment.
78
BODISEN INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Recent Pronouncements
In May 2002, the Board issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS 145"). SFAS 145 rescinds the automatic treatment of
gains or losses from extinguishments of debt as extraordinary unless they
meet the criteria for extraordinary items as outlined in APB 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. SFAS 145 also requires sale-leaseback
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions and makes various technical
corrections to existing pronouncements. The provisions of SFAS 145 related
to the rescission of FASB Statement 4 are effective for fiscal years
beginning after May 15, 2002, with early adoption encouraged. All other
provisions of SFAS 145 are effective for transactions occurring after May
15, 2002, with early adoption encouraged. The adoption of SFAS 145 did not
have a material effect on the earnings or financial position of the
Company.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3 a liability for an exit cost as
defined, was recognized at the date of an entity's commitment to an exit
plan. The adoption of SFAS 146 did not have a material effect on the
earnings or financial position of the Company.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No.
72 and Interpretation 9 thereto, to recognize and 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. This statement requires that those transactions be accounted for in
accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." In addition, this statement amends
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include certain financial institution-related intangible
assets. The adoption of SFAS 147 did not have a material effect on the
earnings or financial position of the Company.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December
15, 2002. The adoption of this pronouncement did not have a material effect
on the earnings or financial position of the Company.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation", 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, this
Statement amends the disclosure requirements of Statement 123 to require
79
BODISEN INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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. The Statement is effective
for the Companies' interim reporting period ending January 31, 2003. The
Company does not expect the adoption of SFAS No. 148 would have a material
impact on its financial position or results of operations or cash flows.
On April 30, 2003, the FASB issued FASB Statement No. 149 ("SFAS 149"),
"Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". FAS 149 amends and clarifies the accounting guidance on (1)
derivative instruments (including certain derivative instruments embedded
in other contracts) and (2) hedging activities that fall within the scope
of FASB Statement No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities. SFAS 149 also amends certain other
existing pronouncements, which will result in more consistent reporting of
contracts that are derivatives in their entirety or that contain embedded
derivatives that warrant separate accounting. SFAS 149 is effective (1) for
contracts entered into or modified after June 30, 2003, with certain
exceptions, and (2) for hedging relationships designated after June 30,
2003. The guidance is to be applied prospectively. The Company does not
expect the adoption of SFAS No. 149 to have a material impact on its
financial position or results of operations or cash flows.
On May 15 2003, the FASB issued FASB Statement No. 150 ("SFAS 150"),
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS 150 changes the accounting for certain
financial instruments that, under previous guidance, could be classified as
equity or "mezzanine" equity, by now requiring those instruments to be
classified as liabilities (or assets in some circumstances) in the
statement of financial position. Further, SFAS 150 requires disclosure
regarding the terms of those instruments and settlement alternatives. SFAS
150 affects an entity's classification of the following freestanding
instruments: a) Mandatorily redeemable instruments b) Financial instruments
to repurchase an entity's own equity instruments c) Financial instruments
embodying obligations that the issuer must or could choose to settle by
issuing a variable number of its shares or other equity instruments based
solely on (i) a fixed monetary amount known at inception or (ii) something
other than changes in its own equity instruments d) SFAS 150 does not apply
to features embedded in a financial instrument that is not a derivative in
its entirety. The guidance in SFAS 150 is generally effective for all
financial instruments entered into or modified after May 31, 2003, and is
otherwise effective at the beginning of the first interim period beginning
after June 15, 2003. For private companies, mandatorily redeemable
financial instruments are subject to the provisions of SFAS 150 for the
fiscal period beginning after December 15, 2003. The Company does not
expect the adoption of SFAS No. 150 to have a material impact on its
financial position or results of operations or cash flows.
3. INVENTORIES
Inventories at December 31, 2003 and 2002 were as follows:
2003 2002
-------------- -------------
Raw and packing materials $ 450,967 $ 269,353
Finished goods 429,487 678,742
880,454 948,095
Less allowance for obsolescence (164,722) (150,825)
-------------- -------------
Total $ 715,732 $ 797,270
============== =============
80
BODISEN INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT
Net property and equipment at December 31, 2003 and 2002 were as follows:
2003 2002
-------------- -------------
Building $ 946,888 $ 942,480
Machinery 328,280 233,000
Furniture and office equipment 21,265 16,828
Vehicles 147,651 118,122
-------------- -------------
1,444,084 1,310,430
Less Accumulated depreciation (223,497) (84,940)
-------------- -------------
$ 1,220,587 $ 1,225,490
============== =============
Depreciation expense for the years ended December 31, 2003 and December 31,
2002 was $ 138,557 and $50,000.
The Company depreciated its production related assets at a rate double than
the straight line rate due to its excessive usage in the year ended
December 31, 2003. This factor contributed towards the increase in
depreciation by $61,919. The change in estimate resulted in decrease in net
income by $61,919 or $41.27 per share for the year ended December 31, 2003.
5. INTANGIBLE ASSETS
Net intangible assets at December 31, 2003 and 2002 were as follows:
2003 2002
--------------- ------------
Rights to use land $ 1,655,248 $ 184,941
Fertilizers proprietary technology rights 960,000 960,000
--------------- ------------
2,615,248 1,144,941
Less Accumulated amortization (305,100) (195,699)
--------------- ------------
$ 2,310,148 $ 949,242
=============== ============
The Company's office and manufacturing site is located in Yang Ling
Agricultural High-Tech Industries Demonstration Zone in the province of
Shanxi, People's Republic of China. The Company leases land per a real
estate contract with the government of People's Republic of China for a
period from November 2001 through November 2051. Per the People's Republic
of China's governmental regulations, the Government owns all land.
During July 2003, the Company leased another parcel of land per a real
estate contract with the government of the People's Republic of China for a
period from July 2003 through June 2053.
The Company has recognized the amounts paid for the acquisition of rights
to use land as intangible asset and amortizing over a period of fifty
years. The amortization expense of "Rights to use land" for the year ended
December 31, 2003 and 2002 amounted to $13,401 and $3,699 respectively. The
accumulated amortization as at December 31, 2003 was $17,100.
81
BODISEN INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company acquired Fluid and Compound Fertilizers proprietary technology
rights with a life ending December 31, 2011. The Company is amortizing
Fertilizers proprietary technology rights over a period of ten years. The
amortization expense of "Fertilizers proprietary technology rights" for the
years ended December 31, 2003 and 2002 amounted to $96,000 and $96,000. The
Accumulated amortization as on December 31, 2003 and 2002 amounted to
$288,000 and $192,000.
Amortization expense for the Company's current amortizable intangible
assets over the next five fiscal years is estimated to be: 2004-$130,000,
2005-$130,000, 2006-$130,000, 2007-$130,000 and 2008-$130,000.
6. DIVIDEND PAYABLE
The Shareholders of the company in their meeting dated May 9, 2003 approved
a dividend of $180,000 for the year ended December 31, 2002.
7. SHORT TERM LOAN
Short term loans consisted of the following at December 31, 2003 and 2002:
2003 2002
-------------- -------------
Note payable to bank, interest rate; 6.84% per annum, $ 480,000 $ -
payable quarterly, original note; $480,000, maturity
date; 1/27/04, secured by assets of the Company.
Note payable to bank, interest rate; 6.84% per annum, 600,000 -
payable quarterly, original note; $600,000, maturity
date; 9/28/04, secured by assets of the Company.
Short term support loan from the Shanxi Technology 12,000 12,000
Bureau of the Government of People's Republic of
China, interest free; secured by assets of the Company
-------------- -------------
$ 1,092,000 $ 12.000
============== =============
8. SHAREHOLDERS' EQUITY
On December 15, 2003, the Company entered in to an agreement to exchange
1500 shares of its common stock for all the issued and outstanding stock of
BBST. After the consummation of the agreement, the former shareholders of
BBST own 1500 shares of common stock of the Company, which represent 100%
of the Company's issued and outstanding shares.
From its inception through its acquisition on December 15, 2003 (see note
1), BBST had issued 49,200,000 shares of its common stock for $6,014,400
including issuance of 9,200,000 shares to various parties for $1,214,400 in
the year ended December 31, 2003.
82
BODISEN INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. RELATED PARTY TRANSACTIONS
A loan of $217,338 from various shareholders of the Company outstanding as
at December 31, 2001 was fully repaid during the year ended December 31,
2002 along with an interest expense of $20,249.
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method
as defined under the Financial Accounting Standard No. 95.
The Company paid interest of $41,359 and $20,249 during the year ended
December 31, 2003 and 2002. The Company did not pay income tax during the
years ended December 31, 2003 and 2002.
11. EMPLOYEE WELFARE PLAN
The Company has established its own employee welfare plan in accordance
with Chinese law and regulations. The Company makes annual pre-tax
contributions of 14% of all employees' salaries. The total expense for the
above plan amounted to $55,813 and $21,000 for the years ended December 31,
2003 and 2002.
12. STATUTORY RESERVE
In accordance with the Chinese Company Law, the company has allocated 10%
of its annual net income, amounting $197,036 and $66,758, as statutory
reserve on December 31, 2003 and 2002.
83
PART V
UNAUDITED PRO FORMA STATEMENT OF NET ASSETS OF THE GROUP
Set out below is an unaudited pro forma statement of consolidated net assets of
the Group, which has been prepared for the purpose of illustrating the effects
of the Placing as if it had taken place on 31 March 2005. This statement has
been prepared on the basis set out in the notes below for illustrative purposes
only and, because of its nature, cannot give a true picture of the financial
position of the Group.
Per Part IV Adjustments Pro forma
(note 1) (note 2) $'000
$'000 $'000
ASSETS
CURRENT ASSETS
Cash and cash equivalents 2,793 17,781 20,574
Accounts receivable, net 7,882 - 7,882
Advances to suppliers 600 - 600
Inventory 968 - 968
Other assets 600 - 600
--------- --------- ---------
Total current assets 12,843 17,781 30,624
PROPERTY & EQUIPMENT, Net of accumulated depreciation 3,385 - 3,385
Capital work in progress 411 - 411
INTANGIBLE ASSETS, Net of accumulated amortization 2,167 - 2,167
--------- --------- ---------
TOTAL ASSETS 18,806 17,781 36,687
--------- --------- ---------
LIABILITIES
CURRENT LIABILITIES
Accounts payable (287) - (287)
Accrued expenses (280) - (280)
Short term loans (968) - (968)
Convertible debenture, net discount due to beneficial
conversion (2,543) 2,543 -
--------- --------- ---------
Total current liabilities (4,077) 2,543 (1,534)
LONG TERM LIABILITIES
Long term loans (12) - (12)
--------- --------- ---------
TOTAL LIABILITIES (4,089) 2,543 (1,546)
--------- --------- ---------
NET ASSETS 14,717 20,324 35,041
--------- --------- ---------
Notes
(1) The net assets of the Group as at 31 March 2005 have been extracted
without material adjustment from the financial statements in Part IV
of this document.
(2) The net proceeds of the Placing are based on the gross proceeds of
(pound)10 million without taking into account the expenses payable by
the Company for the Placing. The convertible debenture is assumed to
convert as a result of the Placing.
(3) Assumes a conversion rate of 1.7781 US Dollars to 1 British Pound, as
per the Wall Street Journal Wednesday, August 3, 2005.
84
PART VI
ADDITIONAL INFORMATION
1. Responsibility Statement Annex I, 1.1, 1.2
The Directors, whose names appear on page 23 of this document, accept
responsibility for all the information in this document including individual and
collective responsibility for compliance with the AIM Rules. To the best of the
knowledge and belief of the Directors (who have taken all reasonable care to
ensure that such is the case) the information contained in this document is in
accordance with the facts and does not omit anything likely to affect the import
of such information.
2. Incorporation and principal activities Annex I, 5.1, 7
(a) The Company was incorporated in the State of Delaware, United States,
on January 14, 2000, with number 0001178552 under the name
Stratabid.com, Inc. On February 24, 2004, Bodisen Holdings, Inc., a
wholly-owned subsidiary of Stratabid.com, Inc., merged with Bodisen
International, Inc, the parent of Yang Ling. The Company's and its
principal office is at North Part of Xinquia Road, Yang Ling AG,
High-Tech Industries Demonstration Zone, Yang Ling, China 712100. On 1
March 2004 the Company changed its name to Bodisen Biotech, Inc.
(b) The registered office of the Company is The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, Wilmington, DE 19801
Telephone number: (302) 658-7581.
(c) The liability of the members of the Company is limited.
(d) The main activity of the Company is to act as a holding company for
Bodisen Holdings Inc. and Yang Ling Bodisen Biology Science and
Technology Development Company Limited.
(e) The principal legislation under which the Company operates is the law
of the State of Delaware, United States. Yang Ling, the operating
company, operates under the law of the People's Republic of China.
(f) The Company has three subsidiaries. The first is registered in the
United States under the name Bodisen Holdings Inc., and is wholly
owned by the Company. The second is registered in The People's
Republic of China under the name Yang Ling Bodisen Agricultural
85
Technology Co. Ltd, and is also wholly owned by the Company. The third
is registered in the People's Republic of China under the name Yang
Ling Bodisen Biology Science and Technology Development Company
Limited (`Yang Ling', the sole operating subsidiary), and is 90% owned
by Yang Ling Bodisen Agricultural Technology Co. Ltd. The remaining
10% is owned by four individuals, all of whom have executed a share
trust agreement with Yang Ling Bodisen Agricultural Technology Co. Ltd
for that company to hold their shares on trust and thus to hold and
manage 100% of the shares of Yang Ling.
3. Share Capital Annex III, 4
(a) The Company's authorized capital stock consists of 30,000,000 shares
of common stock, $.0001 par value, and 5,000,000 shares of preferred
stock, $.0001 par value. As of 15 June, 2005, there were 15,289,259
shares of common stock outstanding and no preferred stock outstanding.
(b) The authorised and issued share capital of the Company at the end of
the date of this document is as follows:
Authorised Issued (fully paid)
Number Number
Common Stock of $0.0001 30,000,000 As of 15 June 2005 the number
of outstanding shares was
15,289,259.
Preferred Stock of $0.0001 5,000,000 0
(c) Immediately following Admission, the authorised and issued share
capital of the Company will be as follows:
Authorised Number Issued (fully
paid) Number
(pound) (pound)
Common Stock o o o o
Preferred Stock o o o o
86
(d) The by-laws of the Company do not impose any conditions governing
changes in share capital which are more stringent than is required by
law.
(e) The Placing Shares will rank equally in all respects with the Existing
Common Stock, including the right to receive all dividends and other
distributions declared, made or paid after Admission in respect of the
Company's ordinary share capital.
(f) Holders of Common Stock are each entitled to cast one vote for each
share held of record on all matters presented to the Company's
stockholders. Cumulative voting is not allowed; therefore, the holders
of a majority of the outstanding (or issued) common stock can elect
all directors.
(g) Holders of common stock are entitled to receive such dividends as may
be declared by the Board out of funds legally available for dividends
and, in the event of liquidation, to share pro rata in any
distribution of its assets after payment of liabilities. The Company's
board of directors is not obligated to declare a dividend. It is not
anticipated that dividends will be paid in the foreseeable future.
(h) Holders of common stock do not have pre-emptive rights to subscribe to
additional shares if issued by the Company. There are no conversion,
redemption, sinking fund or similar provisions regarding the common
stock.
(i) To change the rights of stockholders, as set forth in the Company's
Certificate of Incorporation, the approval of the Company's
stockholders is required.
(j) The Company's Certificate of Incorporation and the laws of the State
of Delaware provide that the board of directors has the authority to
divide the preferred stock into series and to fix by resolution the
voting power, designations, preferences, and relative participation,
special rights, and the qualifications, limitations or restrictions of
the shares of any series so established. The relative rights and
privileges of holders of common stock may be adversely affected by the
rights of holders of any series of preferred stock which Bodisen may
issue and designate in the future.
(k) The by-laws provide that the Company may restrict either the transfer,
or the allotment or issue, of shares by giving the directors the
discretion to provide any stockholder the "first right of refusal to
purchase" provided, however, that such restriction is legended on the
stock certificate.
(l) The common stock trades on the NASD Over-The-Counter Bulletin Board
under the symbol "BBOI". The Over-The-Counter Bulletin Board is
sponsored by the National Association of Securities Dealers (NASD) and
is a network of security dealers who buy and sell stocks.
87
For the periods indicated, the following table sets forth the high and
low bid prices per share of common stock. These prices represent
inter-dealer quotations without retail markup, markdown, or commission
and may not necessarily represent actual transactions.
Period Low($) High($)
------ ------ -------
2005
First Quarter 5.05 6.30
2004
Fourth Quarter 5.60 7.31
2004
Third Quarter 6.10 8.60
2004
Second Quarter 4.40 7.62
2004
First Quarter (1) .25 13.90
(1) The Company effected a 4:1 forward split on March 3, 2004.
As of 8 June, 2005, management believes there to be approximately 476
holders of record of the Company's common stock.
Bodisen is a legal entity separate and distinct from its operating
subsidiary, Yang Ling, which is an indirect wholly-owed subsidiary of
Bodisen. Bodisen's revenues (on a parent company only basis) would be
derived entirely from dividends paid to Bodisen by Yang Ling. The
Chinese government exerts significant influence over the economy of
the People's Republic of China, and there may be regulatory
restrictions on Yang Ling's ability to make distributions of cash to
Bodisen. Further, the right of Bodisen, and consequently the right of
creditors and stockholders of Bodisen, to participate in any
distribution of the assets or earnings of Yang Ling through the
payment of such dividends or otherwise is necessarily subject to the
prior claims of creditors of Yang Ling, except to the extent that
claims of Bodisen in its capacity as a creditor may be recognized. The
Company has not paid any dividends on its common stock, nor do the
Directors currently intend to pay dividends in the future.
4. Directors
(a) The Directors are listed below, together with their respective
positions:
Wang Qiong Chairman
Chen Bo Executive Director
David Gatton Non-Executive Director
Patrick McManus Non-Executive Director
Weirui Wan Non-Executive Director
88
The business address of the Directors is North Part of Xinquia Road,
Yang Ling AG, High-Tech Industries Demonstration Zone, Yang Ling,
China 712100.
(b) Brief biographical details of each of the Directors are set out at
paragraph 13 of Part II of this Admission Document.
(c) The companies and partnerships outside the Bodisen Group of which the
Directors are directors or partners or have been at any time during
the five years prior to the date of this document are as follows:
--------------------- ----------------------------------- ---------------------
Name of Director Current directorships and Previous directorships
partnerships outside the Bodisen and partnerships
Group
--------------------- ----------------------------------- ----------------------
Wang Qiong None None
--------------------- ----------------------------------- ----------------------
Chen Bo None None
--------------------- ----------------------------------- ----------------------
David Gatton Development Initiatives, Inc.; 44th None
& King Drive Partnership; Harbor
Meadows Apts Lmtd Partnership ;
Harbin Electric, Inc.;
IMT Development Corporation
--------------------- ----------------------------------- ----------------------
Patrick McManus Harbin Electric, Inc. None
--------------------- ----------------------------------- ----------------------
Weirui Wan Advisory Bd of Yang Ling None
Agricultural Hi-Tech Ind.
Demo. Zone
--------------------- ----------------------------------- ----------------------
(d) As at the date of this document no Director:
(1) has any unspent convictions in relation to indictable offences;
(2) has been bankrupt or entered into any individual or voluntary
arrangements;
89
(3) was a director with an executive function at any company at the
time of or within 12 months preceding any receivership,
compulsory liquidation, creditors' voluntary liquidation,
administration, company voluntary arrangements or any composition
or arrangement with that company's creditors generally or with
any class of its creditors;
(4) has been a partner in a partnership at the time or within 12
months preceding any compulsory liquidation, administration or
partnership voluntary arrangement of such partnership;
(5) has had his assets the subject of any receivership or has been a
partner in a partnership at the time of or within 12 months
preceding any assets thereof being the subject of a receivership;
or
(6) has been subject to any public criticism by any statutory or
regulatory authority (including any designated professional
bodies) or has ever been disqualified by a court from acting as a
director of a company or from acting in the management or conduct
of the affairs of a company.
(e) Terms of employment / engagement
Executive Directors' Service Contracts
The Company has implemented terms and conditions that apply to each
employee and officer (including senior executives and executive
directors). These terms provide for a 6 day week with 14 days holiday
per annum and permit the Company to terminate the employment on 10
days notice. There is strict confidentiality and trade secret
provisions. The annual salaries in US$ of the executive directors are:
------------------------------ ---------------------- --------------------------
Wang Qiong Chairman $23,220
------------------------------ ---------------------- --------------------------
Chen Bo President $20,310
------------------------------ ---------------------- --------------------------
Paid by Yang Ling as salary for their executive role with Yang Ling
Non-executive Directors' Service Contracts
The Company does not have any service contracts with its non-executive
directors.
(f) Remuneration
During the fiscal year 2004, Messrs. Gatton and McManus each received $4,500 as
a cash fee for 3 months' (May, June, July) service as Directors. On December 28,
2004 they received 5,000 stock options each for five months service as Directors
(August through December), which vested on December 31, 2004. Directors are not
entitled to additional fees for serving on committees of the Board of Directors.
Pursuant to the Company's Stock Option Plan, the Company granted 110,000 stock
options to David Gatton and Patrick McManus in 2004, each a director of the
Company. Messrs. Gatton and McManus were each granted 50,000 stock options on
June 4, 2004. 25,000 vested immediately and the remaining 25,000 vest over 8
90
equal quarterly instalments; the first such instalment vested at the end of the
second quarter of 2004. The option exercise price was $5.00 for the first
100,000 stock options, which was the same as the market price of the shares at
the time of granting of the options. The option exercise price was $5.80 for the
second 10,000 stock options, which was the same as the market price of the
shares at the time of granting of the options.
The aggregate of the remuneration paid and benefits in kind (including pension
contributions) granted to the non-executive Directors in their role as directors
by the Group during the financial year ended December 31, 2004 was $9,000 plus
$1.92 per option granted (for an aggregate payment in kind for options of
$211,200). In addition, the executive directors of the Company were paid an
aggregate salary of $43,530 by Group companies. The aggregate of the
remuneration payable and benefits in kind (including pension contributions) to
be granted by the Group to the executive Directors in their role as directors
for the financial period ending December 31, 2005 under the arrangements in
force at the date of this document is estimated to be nil. The executive
directors of the Company will, however, receive an aggregate salary of
approximately $43,530 for that period from Group companies for their role as
executives of Yang Ling.
The following table contains information concerning the compensation of
Bodisen's present and previous chief executive officer for the period 2002 to
2004.
-------------- ------- ---------- --------- ----------------- ------------- ------------ ------------- ---------- -----------------
Other
Name and Restricted Restricted Securities
Principal Annual Stock Stock underlying LTIP All Other
Position Year Salary Bonus Compensation Awards ($) Awards options payouts Compensation
($) ($) ($) ($) ($)
-------------- ------- ---------- --------- ----------------- ------------- ------------ ------------- ---------- -----------------
Wang Qiong, 2004 23,220 0 23,220 N/A N/A N/A N/A N/A
CEO 2003 4,400 0 4,400 N/A N/A N/A N/A N/A
2002 $ 11,600 0 $11,600 N/A N/A N/A N/A N/A
-------------- ------- ---------- --------- ----------------- ------------- ------------ ------------- ---------- -----------------
Derek 2004 N/A N/A N/A N/A N/A N/A N/A N/A
Wasson, CEO 2003 N/A N/A N/A N/A N/A N/A N/A 32,694 (1)
2002 N/A N/A N/A N/A N/A N/A N/A 19,047 (1)
-------------- ------- ---------- --------- ----------------- ------------- ------------ ------------- ---------- -----------------
(1) Represents consulting fees paid.
5. Interests in Share Capital AIM Sch 2(h), Annex I, 17.2, 21.1
(a) As at June 30, 2005, being the latest practicable date prior to the
publication of this document, the interests of (i) management and (ii)
the Directors (and persons connected with them within the meaning of
section 346 of the Act) in the share capital of the Company which (a)
have been notified to the Company pursuant to sections 324 or 328 of
the Act; or (b) are required to be entered in the register maintained
pursuant to section 325 of the Act; or (c) are interests of a person
connected with a Director (within the meaning of section 346 of the
Act) which would, if the connected person were a director of the
Company, be required to be disclosed under (a) or (b) above, and the
existence of which is known or which could with reasonable diligence
be ascertained by that Director, were, and, on the assumptions
91
referred to below, immediately following the Admission are expected to
be, as set out below (all interests specified are beneficial unless
otherwise stated):
------------------------------ -------------------------------------------- --------------------------------------------
Name As of June 30, 2005 Number of shares of Common Stock
immediately following Admission
------------------------------ -------------------------------------------- --------------------------------------------
Number of % of issued Number of % of issued
shares of Share Capital shares of Share Capital
Common Stock (1) Common Stock
------------------------------ ---------------------- --------------------- ---------------------- ---------------------
Wang Qiong 3,748,780 24.52% [o] [o]
------------------------------ ---------------------- --------------------- ---------------------- ---------------------
Chen Bo 3,584,096 23.44% [o] [o]
------------------------------ ---------------------- --------------------- ---------------------- ---------------------
David Gatton 45,625 (2) 0% [o] [o]
------------------------------ ---------------------- --------------------- ---------------------- ---------------------
Patrick McManus 45,625 (2) 0% [o] [o]
------------------------------ ---------------------- --------------------- ---------------------- ---------------------
Weirui Wan None None [o] [o]
------------------------------ ---------------------- --------------------- ---------------------- ---------------------
Assumes date to be after June 30, 2005. McManus and Gatton reflect options vested but not exercised. Percentage is less than 1%
(1) Based on 15,289,259 shares of common stock currently outstanding.
(2) Reflects stock options vested but unexercised.
In aggregate, the Directors' interests in the Common Stock set out above, all of
which are beneficial interests unless otherwise stated, amount to 47.96 per cent
of the Company's current issued share capital and [o] per cent. of the Company's
enlarged issue share capital immediately following the Placing (assuming that no
additional Ordinary Shares are issued pursuant to any of the Company's Share
Option Schemes or otherwise).
(b) As at June 30, 2005, being the latest practicable date prior to the
publication of this document, the Directors had been granted, and had
outstanding, options as follows:
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---------------------------------- --------------------- -------------------- --------------------- --------------------
Name Number Date of Grant Expiry date Exercise Price
((pound))
---------------------------------- --------------------- -------------------- --------------------- --------------------
Wang Qiong None None None None
---------------------------------- --------------------- -------------------- --------------------- --------------------
Chen Bo None None None None
---------------------------------- --------------------- -------------------- --------------------- --------------------
David Gatton 50,000 4 June 2004 4 June 2009 US$5.00
5,000 28 December 2004 28 December 2009 US$5.80
---------------------------------- --------------------- -------------------- --------------------- --------------------
Patrick McManus 50,000 4 June 2004 4 June 2009 US$5.00
5,000 28 December 2004 28 December 2009 US$5.80
---------------------------------- --------------------- -------------------- --------------------- --------------------
Weirui Wan None None None None
---------------------------------- --------------------- -------------------- --------------------- --------------------
The exercise dates of share options granted under the Share Option
Scheme are explained in paragraph 7 of this Part VI.
(c) Other than the holdings of the Directors set out above, as at June 30,
2005, being the latest practicable date prior to the publication of
this document, the Directors were aware of the following persons who,
directly or indirectly, are, and, based on the assumptions set out
below, immediately following Admission will be interested in 3 per
cent. pursuant to Section 199 of the Act (or 5 per cent pursuant to
Section 13 of the US Securities Exchange Act of 1934) or more of the
issued share capital of the Company.
---------------------------- ----------------------------- -------------------- ------------------- --------------------
Name Number of shares of Common Percentage of Number of shares Percentage of
Stock as at the date of issued Share of Common Stock issued Share
this document Capital as at the immediately Capital
date of this following immediately
document Admission following Admission
---------------------------- ----------------------------- -------------------- ------------------- --------------------
Amulet Limited 868,750(1) 4.99%(2) [o] [o]
---------------------------- ----------------------------- -------------------- ------------------- --------------------
(1) assumes the conversion of all of the convertible debenture and exercise of
all of the warrants they are entitled to, provided, however, that the
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number of shares which could be obtained pursuant to the convertible
debenture and the warrants are subject to adjustment in certain
circumstances.
(2) pursuant to the terms of the convertible debenture and warrant agreements,
Amulet Limited agreed to limit its right to convert the debenture and exercise
the warrants so that it can acquire only up to 4.99% of the Company's
outstanding common stock unless Amulet Limited gives 60 days' notice to the
Company, in which case, Amulet Limited could acquire up to 9.99% of the
Company's outstanding Common Stock (through the conversion of the debentures and
exercise of the warrants and open market purchases).
(d) All stockholders, including the Company's major stockholders, have the
same voting rights.
(e) Save as disclosed above, the Directors are not aware of any person who
is, or who will be immediately following Admission, directly or
indirectly interested in 3 per cent. or more of the issued share
capital of the Company.
(f) Save as disclosed herein, no Director has, or has had, any interest in
any transaction which is or was unusual in its nature or conditions or
significant to the business of the Group and which was effected by the
Group in the current or immediately preceding financial year or during
an earlier financial year and which remains in any respect outstanding
or unperformed.
(g) There are no outstanding loans granted by any member of the Group to
any Directors, nor were any guarantees provided by any member of the
Group for the benefit of any Director.
(h) Save as referred to in this paragraph 5, Part VI, of this document,
the Directors are not aware of any person who directly or indirectly,
jointly or severally, exercises or could exercise control over the
Company.
6. Certificate of Incorporation and By-Laws Annex I, 21.2.
The By-Laws contain, inter alia, provisions to the following effect:
(i) Board of Directors
The Board of Directors shall manage the affairs, property, and
business of the Corporation, which shall consist of not less than one
and not more than ten directors, who shall be elected at the annual
meeting of stockholders by a plurality vote for a term of one (1)
year, and shall hold office until their successors are elected and
qualify. (ii) Director Compensation Director salaries, if any, shall
be fixed by resolution of the Board of Directors. Such compensation
may include a fixed sum and expenses of attendance at each regular or
special meeting of the Board. Members of any special or standing
committees may receive similar compensation for attending meetings.
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(iii) Stock Restrictions
The Board of Directors may restrict any stock issued by giving the
Corporation or any stockholder "first right of refusal to purchase"
the stock, by making the stock redeemable or by restricting the
transfer of the stock, under such terms and in such manner as the
directors may deem necessary and as are not inconsistent with the
Certificate of Incorporation or by statute. Any stock so restricted
must carry a stamped legend setting out the restriction or
conspicuously noting the restriction and stating where it may be found
in the records of the Corporation.
(iv) Dividends
Dividends may be declared by the directors and paid out of any funds
legally available therefor under the laws of Delaware, as may be
deemed advisable from time to time by the Board of Directors of the
Corporation.
(v) Indemnification
The Corporation shall indemnify any and all of its directors or
officers, or former directors or officers, or any person who may have
served at its request as a director or officer of another corporation
in which this Corporation owns shares of capital stock or of which it
is a creditor and the personal representatives of all such persons,
against expenses actually and necessarily incurred in connection with
the defense of any action, suit, or proceeding in which they, or any
of them, were made parties, or a party, by reason of being or having
been directors or officers or a director or officer of the
Corporation, or of such other corporation, except in relation to
matters as to which any such director or officer or person shall have
been adjudged in such action, suit, or proceeding to be liable for
negligence or misconduct in the performance of any duty owed to the
Corporation.
(vi) Shareholder Meetings
Annual Meeting
The annual meeting of the stockholders of the Corporation for the
election of directors and for the transaction of other business shall
be held each year on a date to be determined by the Board of
Directors.
Special Meeting
Special meetings of the stockholders for any purpose or purposes may
be called by the President, the Board of Directors, or the holders of
ten per cent (10%) or more of all the shares entitled to vote at such
meeting, by the giving of notice in writing.
Notice
A written notice of the meeting must state the place, if any, date and
hour of the meeting, the means of remote communications, and, in the
case of a special meeting, the purpose or purposes for which the
meeting is called. The written notice of any meeting must be given not
less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. If mailed, the
notice is deemed given when deposited in the United States mail,
postage prepaid, directed to the stockholder at the address as it
appears on the records of the corporation.
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7. The Share Option Scheme[s] Annex I, 17.3
(a) The Share Option Scheme (the "Scheme")
The Company's long term incentives are in the form of stock options granted to
directors, executives, employees and consultants under the 2004 Stock Option
Plan (the "Plan"). The objective of these awards is to advance the longer term
interests of the Company and its stockholders and complement incentives tied to
annual performance. These awards provide rewards to directors, executives and
other key employees and consultants upon the creation of incremental stockholder
value and attainment of long-term earnings goals. Stock option awards under the
Plan produce value to participants only if the price of the Company's stock
appreciates, thereby directly linking the interests of the participants with
those of the stockholders. No stock options were granted to executive officers
in 2004.
The Plan was filed with the SEC on March 31, 2005. The main features of the Plan
(which is not approved by the UK Inland Revenue) are summarised below:
(i) Eligibility
Directors, officers, employees or consultants to the Company are
eligible to receive the Options. An Optionee may hold more than one
Option. Any issuance of a Grant to an officer or director of the
Company subsequent to the first registration of any of the securities
of the Company under the Exchange Act will comply with the
requirements of Rule 16b-3.
Incentive Stock Options will only be issued to employees of the
Company. Incentive Stock Options may be granted to officers or
directors, provided they are also employees of the Company.
Incentive Stock Options will not be granted to any employee if such
Grant would, for all Incentive Stock Options granted, result in such
employee, for the first time in any one calendar year, holding the
right to exercise options in excess of $100,000. If an Incentive Stock
Option exceeds such maximum for any reason other than a failure in
good faith to value the Stock subject to such option, the excess
portion of such option shall be considered a Nonstatutory Option.
(ii) Exercise Price
The exercise price will be determined by the Board, subject to the
following limitations:
(a) Any Incentive Stock Option granted to a person who at the time
the Option is granted owns (or is deemed to own pursuant to
Section 424(d) of the US Internal Revenue Code) stock possessing
more than ten percent (10%) of the total combined voting power or
value of all classes of stock of the Company ("Ten Percent
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Holder") shall have an exercise price of no less than 110% of the
Fair Market Value of the Stock as of the date of grant; and
(b) Incentive Stock Options granted to a person who at the time the
Option is granted is not a Ten Percent Holder shall have an
exercise price of no less than 100% of the Fair Market Value of
the Stock as of the date of grant.
(iii) Performance conditions
The performance standards are determined by the sole discretion of the
Board.
(iv) Issue or transfer of shares on exercise of options No Option shall be
transferable by the Optionee, except by will or by the laws of descent
and distribution of the United States. Notwithstanding anything else
in this subsection (h), the Board may in its discretion grant
Nonstatutory Stock Options that may be transferred by instrument to an
inter vivos or testamentary trust in which the Options are to be
passed to beneficiaries upon the death of the trustor (settlor) or by
gift to "Immediate Family" (as defined below), on such terms and
conditions as the Board deems appropriate. The Board may in its
discretion grant transferable Nonstatutory Stock Options pursuant to
Option Agreements specifying the manner in which such Nonstatutory
Stock Options are transferable. "Immediate Family" means any child,
stepchild, grandchild, parent, stepparent, grandparent, spouse,
sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, and shall include adoptive
relationships.
(v) Scheme Limits
Subject to adjustments, the Plan, the total number of shares of Stock
which may be purchased or granted directly by Options, Stock Awards or
Restricted Stock Purchase Offers, or purchased indirectly through
exercise of Options granted under the Plan shall not exceed One
Million (1,000,000).
The Company will not grant an Incentive Stock Option under the Plan to
any employee if such Grant would result in such employee holding the
right to exercise for the first time in any one calendar year, under
all Incentive Stock Options granted under the Plan or any other plan
maintained by the Company, with respect to shares of Stock having an
aggregate fair market value, determined as of the date of the Option
is granted, in excess of $100,000. If it is determined that an
Incentive Stock Option granted under the Plan exceeds such maximum for
any reason other than a failure in good faith to value the Stock
subject to such option, the excess portion of such option will be
considered a Nonstatutory Option. To the extent the employee holds two
97
(2) or more such Options which become exercisable for the first time
in the same calendar year, the foregoing limitation on the
exercisability of such Option as Incentive Stock Options under the
Federal tax laws will be applied on the basis of the order in which
such Options are granted. If, for any reason, an entire Option does
not qualify as an Incentive Stock Option by reason of exceeding such
maximum, such Option shall be considered a Nonstatutory Option.
(vi) Adjustments
In the event of any change in the outstanding Stock by reason of a
stock split, stock dividend, combination or reclassification of
shares, recapitalization, merger, or similar event, the Board or the
Committee may adjust proportionally (a) the number of shares of Stock
(i) reserved under the Plan, (ii) available for Incentive Stock
Options and Nonstatutory Options and (iii) covered by outstanding
Stock Awards or Restricted Stock Purchase Offers; (b) the Stock prices
related to outstanding Grants; and (c) the appropriate Fair Market
Value and other price determinations for such Grants. In the event of
any other change affecting the Stock or any distribution (other than
normal cash dividends) to holders of Stock, such adjustments as may be
deemed equitable by the Board or the Committee, including adjustments
to avoid fractional shares, shall be made to give proper effect to
such event. In the event of a corporate merger, consolidation,
acquisition of property or stock, separation, reorganization or
liquidation, the Board or the Committee shall be authorized to issue
or assume stock options, whether or not in a transaction to which
Section 424(a) of the Code applies, and other Grants by means of
substitution of new Grant Agreements for previously issued Grants or
an assumption of previously issued Grants.
(vii) Amendments
The Board may, insofar as permitted by law, from time to time, with
respect to any shares at the time not subject to outstanding Grants,
suspend or terminate the Plan or revise or amend it in any respect
whatsoever, except that without the approval of the shareholders of
the Company. No revision or amendment will (i) increase the number of
shares subject to the Plan, (ii) decrease the price at which Grants
may be granted, (iii) materially increase the benefits to
Participants, or (iv) change the class of persons eligible to receive
Grants under the Plan; provided, however, no such action shall alter
or impair the rights and obligations under any Option, or Stock Award,
or Restricted Stock Purchase Offer outstanding as of the date thereof
without the written consent of the Participant thereunder.
(viii) Benefits non-pensionable
If Optionee's status as an employee terminates for any reason other
than disability or death, then the Optionee's personal representative
or the person entitled to succeed to the Option will have the right to
98
exercise the portions of any of Optionee's Incentive Stock Options
which were exercisable as of the date of such termination, in whole or
in part, not less than 30 days nor more than three (3) months after
such termination (or, in the event of "termination for good cause" or
by the terms of the Plan or the Option Agreement or an employment
agreement, the Option shall automatically terminate as of the
termination of employment as to all shares covered by the Option).
With respect to Nonstatutory Options granted to employees, directors
or consultants, the Board may specify such period for exercise, not
less than 30 days (except that in the case of "termination for cause"
or removal of a director), the Options will automatically terminate as
of the termination of employment or services as to shares covered by
the Option, following termination of employment or services as the
Board deems reasonable and appropriate. The Option may be exercised
only with respect to installments that the Optionee could have
exercised at the date of termination of employment or services.
Nothing contained herein or in any Option granted pursuant hereto
shall be construed to affect or restrict in any way the right of the
Company to terminate the employment or services of an Optionee with or
without cause.
8. Material Contracts Annex I, 22
The following contracts, not being contracts entered into in the ordinary course
of business, have been entered into by the Company or its subsidiaries within
the period of two years immediately preceding the date of this document and are
or may be material:
(a) The Placing Agreement and the Nominated Adviser Agreement, details of
which are set out at paragraph 16 below.
(b) The Company has an oral agreement with a PRC consultancy firm, Tianjin
NYGG Investing Consulting Co. Ltd for the provision of services to
assist in improved global brand recognition, fund raising and stock
liquidity. The agreement provides for a fixed fee payable quarterly
and a success fee on AIM admission. (c) The Company has short term
Material Supply Agreements with 19 different suppliers, each on the
Company's standard terms and conditions. The Company does not consider
any of these to be material. The Company has short term Product Sale
Agreements with 157 wholesalers of its product. Again these are each
on the Company's standard terms and conditions and none of them are
considered material (the largest representing 2% of Company sales by
value).
9. Related Party Transactions Annex I, 19
The Company has no agreements or transactions with any related party.
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10. Working capital Aim Rules Sch 2(b)
The Directors are of the opinion, having made due and careful enquiry and on the
basis that the Placing has been completed, that the working capital available to
the Group is sufficient for its present requirements, that is for at least the
twelve months from the date of Admission.
11. Litigation Annex I, 20.8
There are no governmental, legal or arbitration proceedings active, pending or
threatened against, or being brought by, the Company or any member of the Group
which are having or may have a significant effect on the financial position of
the Company, nor have there been any such proceedings in the last 12 months.
12. Property
The Company's principal executive offices are located at North Part of Xinquia
Road, Yang Ling Agricultural High-Tech Industries Demonstration Zone Yang Ling,
Shaanxi province, People's Republic of China, 712100 and the telephone number is
86-29-87074957. The company owns two factories, which include three production
lines, an office building, one warehouse, and two research laboratories which
are located on 10,900 square meters of land. The rent for the office building is
$121 a month from May 20, 2004 through May 20, 2005. The Company also leases a
warehouse in Yang Ling near the site of its factories. This warehouse is 300
square meters in area. The rent of the warehouse is $194 a month from January
2005 through May 2005. The Company completed a new 609,840 square foot
manufacturing facility on March 15, 2005 and the Directors believe that its
owned and leased property is sufficient for its current and immediately
foreseeable operating needs.
13. Taxation of dividends
The following paragraphs are intended as a general guide only for stockholders
of the Company who are resident or ordinarily resident individuals or companies
in the United Kingdom for tax purposes who hold their common stock as
investments and not in the course of a trade and are based on current
legislation and Her Majesty's Revenue & Customs. Owners of Common Stock who are
in any doubt about their tax position, or who are subject to taxation in a
jurisdiction outside of the United Kingdom, should consult their own
professional independent advisor immediately.
(a) Dividends
(i) There is no United Kingdom withholding tax on dividends
100
(ii) An individual Stockholder who is resident (for tax purposes) in
the United Kingdom and who receives a dividend paid by the
Company will currently be entitled to receive a tax credit equal
to 10 per cent of the combined total of the dividend paid and the
tax credit. The individual will be taxed upon the total of the
dividend and the related tax credit which will be regarded as the
top slice of the individual's income. An individual Stockholder
who is liable to tax at the basic rate (currently 22 per cent)
will pay tax on the dividend and the related tax credit at the
dividend income ordinary rate (currently 10 per cent).
Accordingly, no actual tax charge will be suffered in practice as
the tax credit will be treated as satisfying the individual's
liability to income tax in respect of the dividend. To the extent
that the individual pays tax at the higher rate (currently 40 per
cent) the individual will be taxable at the dividend income upper
rate (currently 32.5 per cent) in respect of dividends received.
Accordingly, a Stockholder who is a higher rate taxpayer will
suffer a tax charge equivalent to 25 per cent of the net dividend
(once the dividend tax credit is taken into account). Dividend
tax credits are generally no longer repayable to Stockholders
with no tax liability.
(iii) Subject to certain limited exceptions a Stockholder which is a
company resident (for tax purposes) in the United Kingdom and
which receives a dividend paid by the Company will not be liable
to corporation tax on the dividend. Such Stockholders will not be
able to reclaim repayment of the tax credit attaching to any
dividend.
(iv) The right of a Stockholder who is not resident (for tax purposes)
in the United Kingdom to a tax credit in respect of a dividend
received will depend on the existence and terms of any double
taxation convention between the United Kingdom and the country in
which the Stockholder is resident. Stockholders who are not
resident in the United Kingdom for tax purposes should consult
their own tax advisers concerning their tax liabilities on
dividends received, whether they are entitled to claim any part
of the tax credit and, if so, the procedure for doing so.
(b) Capital gains
If a Stockholder disposes of all or any Common Stock, he, she or it
may, depending on the Stockholder's particular circumstances, incur a
liability to Capital Gains Tax or, if a company within the charge to
Corporation Tax, Corporation Tax or chargeable gains.
(c) Stamp duty and stamp duty reserve tax ("SDRT")
(assuming a Jersey Registrar is used, the Company has no UK presence
and relevant agreements are executed offshore) No stamp duty or SDRT
is payable on the issue of Common Stock by the Company to the
Stockholders.
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Any subsequent disposal or transfer on CREST of Common Stock by the
Stockholders by way of Depositary Interests will give rise to SDRT
generally at the rate of 0.5 per cent. of the amount or value of the
consideration paid.
(d) Inheritance Tax ("IHT") Relief
Unquoted ordinary shares in a qualifying trading company such as the
Company ordinarily qualify for 100 per cent IHT Business Property
Relief provided they have been held for two years prior to the event
giving rise to IHT. Shares traded on AIM are regarded as unquoted for
these purposes and are therefore in principal eligible for IHT
Business Property Relief (subject to the Company meeting all of the
relevant qualifying conditions).
(e) Material U.S. Federal Income Tax Consequences
Summarised below are the material U.S. federal income tax consequences
to our stockholders. This summary is based on existing U.S. federal
income tax law, which may change, even retroactively. This summary
also assumes that the stockholders have held and, if applicable, will
continue to hold their shares as capital assets under the Internal
Revenue Code of 1986, as amended. This summary does not discuss all
aspects of federal income taxation, including certain aspects that may
be important to stockholders in light of their individual
circumstances. Many stockholders, such as banks, financial
institutions, insurance companies, broker-dealers, tax-exempt
organizations, and securities traders that elect mark-to-market tax
accounting treatment, may be subject to special tax rules. Other
stockholders may also be subject to special tax rules, including but
not limited to: stockholders who received our Common Stock as
compensation for services or pursuant to the exercise of an employee
stock option, or stockholders who have held, or will hold, stock as
part of a straddle, hedging, or conversion transaction for federal
income tax purposes. In addition, this summary does not discuss any
state, local, foreign, or other tax considerations.
For purposes of this discussion, "U.S. person" means any of the
following:
(1) a citizen or resident of the U.S.;
(2) a corporation or other entity taxable as a corporation
created or organized under U.S. law (federal or state);
(3) an estate the income of which is subject to U.S. federal
income taxation regardless of its sources;
(4) a trust if a U.S. court is able to exercise primary
supervision over administration of the trust and one or more
U.S. persons have authority to control all substantial
decisions of the trust, or if the trust has a valid election
in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person; or
(5) any other person whose worldwide income and gain is
otherwise subject to U.S. federal income taxation on a net
basis.
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As used in this discussion, the term "U.S. Holder" means a beneficial
owner of our Common Stock that is a U.S. person, and the term
"non-U.S. Holder" means a beneficial owner of our Common Stock that is
not a U.S. person.
We urge stockholders to consult with their own tax advisor as to the
particular federal, state, local, foreign and other tax consequences,
in light of their specific circumstances. If a partnership holds our
Common Stock, the tax treatment of a partner generally will depend
upon the status of the partner and upon the activities of the
partnership. If the stockholder is a partner of a partnership holding
our Common Stock, we suggest that such stockholder consult his or her
tax advisor.
(i) Dividend Income, Capital Gain and Capital Loss
The U.S. federal income tax rate currently applicable to
dividends received from domestic corporations by an individual
taxpayer is a maximum of 15%, subject to the requirements the
individual must have held the stock with respect to which a
dividend is distributed for a minimum of 61 days during the
120-day period beginning 60 days before the stock becomes
ex-dividend. A taxpayer's holding period for these purposes is
reduced by periods during which the taxpayer's risk of loss with
respect to the stock is considered diminished by reason of the
existence of options, contracts to sell and similar transactions.
The reduced rate of tax applies to the taxable years between 2003
and 2008. Individual stockholders should consult their own
advisors as to their eligibility for the reduced rate of tax in
relation to dividends on our Common Stock.
Federal legislation also reduced the maximum U.S. federal income
tax rate applicable to net capital gain (defined generally as the
total capital gains in excess of capital losses for the year)
recognized upon the sale of capital assets that have been held
for more than 12 months to 15%. The reduced rate of tax applies
to the taxable years between 2003 and 2008. Net capital gain
recognized from the sale of capital assets that have been held
for 12 months or less will continue to be subject to tax at
ordinary income tax rates. Capital gain recognized by a corporate
taxpayer will also continue to be subject to tax at the ordinary
income tax rates applicable to corporations. For both individual
and corporate taxpayers, there are significant limitations on the
deductibility of capital losses.
(ii) Information Reporting and Backup Withholding
In general, payments of dividends with respect to our Common
Stock are subject to information reporting. Each paying agent
will be required to provide the IRS with information, including
the name, address, and taxpayer identification number of each
U.S. Holder receiving payments, and the aggregate amount of
dividends paid to such beneficial owner during the calendar year.
These reporting requirements, however, do not apply to all
beneficial owners. Specifically, corporations, securities
broker-dealers, other financial institutions, tax-exempt
organizations, qualified pension and profit sharing trusts and
103
individual retirement accounts, and non-U.S. persons satisfying
certain requirements are all excluded from reporting
requirements.
Backup withholding will apply if a U.S. Holder fails to establish
its exemption from the information reporting requirements, is
subject to the reporting requirements and fails to supply its
correct taxpayer identification number in the manner required by
applicable law, or underreports its tax liability, or if the
paying agent has been otherwise notified by the IRS to backup
withhold. The backup withholding tax rate is currently 28%. This
backup withholding tax is not an additional tax and may be
credited against a U.S. Holder's federal income tax liability if
the required information is furnished to the IRS.
(iii) (Special Rules for Non-U.S. Holders)
Except as described below under the heading "Income or Gain
Effectively Connected with the Conduct of a U.S. Trade or
Business," dividends paid on our Common Stock held by a non-U.S.
holder will be subject to U.S. federal withholding tax (but not
the federal income tax) at a rate of 30% or lower treaty rate, if
applicable. In order to claim a reduction of withholding under a
tax treaty, a non-U.S. holder generally will be required to file
IRS Form W-8BEN upon which the non-U.S. holder certifies, under
penalty of perjury, its status as a non-U.S. person and its
entitlement to the lower treaty rate with respect to such
payments. Further, a non-U.S. holder will generally not be
subject to U.S. federal income or withholding tax on gain
realized on the taxable disposition of our Common Stock. Non-U.S.
Holders resident in the United Kingdom who may benefit from the
U.S./United Kingdom Double Tax Convention (the "Treaty") should,
on the making of a successful claim under the Treaty, suffer a
reduced federal withholding tax of 15% and may in certain cases
depending on the precise circumstances of the non-U.S. Holder
concerned, suffer a further reduced federal withholding of 5% or
0%.
(iv) Income or Gain Effectively Connected with the Conduct of a
U.S. Trade or Business
If dividends paid to a non-U.S. Holder are effectively connected
with the conduct of a U.S. trade or business by the non-U.S.
Holder or, if required by a tax treaty, the dividends are
attributable to a permanent establishment maintained in the
United States by the non-U.S. Holder, us and other payors
generally are not required to withhold tax from the dividends,
provided that the non-U.S. Holder furnishes a valid IRS Form
W-8ECI certifying, under penalty of perjury, that the holder is a
non-U.S. person, and the dividends are effectively connected with
the holder's conduct of a U.S. trade or business and are
includible in the holder's gross income. Effectively connected
dividends will be subject to U.S. federal income tax on net
income that applies to U.S. persons generally (and, with respect
to corporate holders under certain circumstances, the branch
profits tax).
In the case of any gain that is effectively connected with the
conduct of a U.S. trade or business by a non-U.S. Holder (and, if
required by a tax treaty, any gain that is attributable to a
permanent establishment maintained in the United States), the
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non-U.S. Holder will generally be taxed on its net gain derived
from the disposition at the regular rates and in the manner
applicable to U.S. persons and, if the non-U.S. Holder is a
foreign corporation, the branch profits tax may also apply.
(iv) Backup Withholding and Information Reporting
We must report annually to the IRS and to each non-U.S. holder
the amount of dividends paid to that holder and the tax withheld
from such dividend payments. These reporting requirements apply
regardless of whether withholding was reduced or eliminated by
any applicable tax treaty. Copies of the information returns
reporting dividend payments and any withholding thereof may also
be made available to the tax authorities in the country in which
the non-U.S. holder is a resident under the provisions of an
applicable income tax treaty or agreement.
A non-U.S. holder will generally not be subject to additional
information reporting or to backup withholding with respect to
dividend payments on our Common Stock, or to information
reporting or backup withholding with respect to payments of
proceeds from the disposition of our Common Stock to or through a
U.S. office of any broker, as long as the holder has furnished to
the payor or broker: (i) a valid IRS Form W-8BEN certifying,
under penalties of perjury, its status as a non-U.S. person; (ii)
other documentation upon which it may rely to treat the payments
as made to a non-U.S. person in accordance with Treasury
regulations; or (iii) otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a
payment to a non-U.S. holder will be allowed as a credit against
such holder's U.S. federal income tax liability, if any, or will
otherwise be refundable, provided that the requisite procedures
are followed and the proper information is filed with the IRS on
a timely basis. Non-U.S. holders should consult their own tax
advisors regarding their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption, if
applicable.
14. Reliance on Intellectual Property [Annex I, 6.4]
Save as described elsewhere in this document, there are no patents or other
intellectual property rights, licenses, new manufacturing processes or
particular contracts which are or may be of fundamental importance to the
Company's business.
105
15. Minimum Amount Required To Be Raised
The minimum amount which, in the opinion of the Directors, must be raised under
the Placing to provide sums required in respect of the matters set out below is
[(pound)?]:
Of that amount, approximately (pound)? million will be used to fund the expenses
of the Placing and Admission and the remainder will be used for product
development, expansion into new territories and the development of OEM
manufacturing under the Bodisen brand, the addition of two new product lines for
compound fertilizers and will provide additional working capital for the
Company.
16. The Placing & Underwriting Agreements and nominated adviser agreement
[To be completed when these substantially agreed].
17. CREST
(a) Introduction
CREST is a paperless settlement system allowing securities to be
transferred from one person's CREST account to another without the
need to use share certificates or written instruments of transfer.
Securities issued by non-UK registered companies, such as the Company,
cannot be held or transferred in the CREST system. However, to enable
investors to settle such securities through CREST, a depository or
custodian can hold the relevant securities and issue dematerialised
DIs representing the underlying securities which are held on trust for
the holders of the DIs.
With effect from Admission, it will be possible for CREST members to
hold and transfer interests in Ordinary Shares within CREST pursuant
to a DI arrangement established by the Company. CREST is a voluntary
system and holders of Ordinary Shares who wish to receive and retain
share certificates will also be able to do so. No temporary documents
of title will be issued. Whether the securities are held in
certificated form or not, the securities will be in registered form.
The Ordinary Shares will not themselves be admitted to CREST. Instead
the Registrar, acting as depository, will issue DIs in respect of the
underlying Ordinary Shares. The DIs will be independent securities
constituted under English law which may be held and transferred
through CREST. DIs will have the same international security
identification number (ISIN) as the underlying Ordinary Shares and
will not require a separate listing on AIM. The DIs will be created
and issued pursuant to a deed poll (the "Deed Poll") entered into by
the Registrar, which will govern the relationship between the
Registrar, as depository, and the holders of DIs.
Application will be made for the DIs in respect of the underlying
Ordinary Shares to be admitted to CREST with effect from Admission.
Holders of Ordinary Shares in certificated form who wish to hold DIs
through the CREST system may be able to do so and should contact the
Registrar.
106
(b) Summary of the Deed Poll
As mentioned above, the DIs will be created pursuant to and issued on
the terms of the Deed Poll. The Deed Poll is executed by the
Registrar, as depository, in favour of the holders of the DIs from
time to time. Prospective holders of DIs should note that they will
have no rights against CRESTCo or its subsidiaries in respect of the
underlying Ordinary Shares or the DIs representing them.
Ordinary Shares will be transferred to an account of the Registrar or
its nominated custodian (the "Custodian") and the Registrar will issue
DIs to participating members.
Each DI will be treated as one Ordinary Share for the purposes of
determining, for example, eligibility for any dividends. The Registrar
will pass on to holders of DIs any stock or cash benefits received by
it as holder of Ordinary Shares on trust for such DI holder. DI
holders will also be able to receive from the Registrar notices of
meetings of holders of Ordinary Shares and other information to make
choices and elections issued by the Company to its shareholders.
(i) The Registrar will hold (itself or through the Custodian),
as bare trustee, the underlying securities issued by the
Company and all and any rights and other securities,
property and cash attributable to the underlying securities
for the time being held by the Registrar or Custodian
pertaining to the DIs for the benefit of the holders of the
DIs. The Registrar will re-allocate securities or
distributions allocated to the Registrar or the Custodian
pro rata to the Ordinary Shares held for the respective
accounts of the holders of DIs but will not be required to
account for fractional entitlements arising from such
re-allocation.
(ii) Holders of DIs warrant, inter alia, that the securities in
the Company transferred or issued to the Registrar or
Custodian on behalf of the Depository for the account of the
DI holder are free and clear of all liens, charges,
encumbrances or third party interests and that such
transfers or issues are not in contravention of the
Company's articles of association or any contractual
obligation, or applicable law or regulation binding or
affecting such holder.
(iii) The Registrar and any Custodian must pass on to DI holders,
or exercise on their behalf, all rights and entitlements
received by the Registrar or the Custodian in respect of the
underlying securities. Rights and entitlements to cash
distributions, to information, to make choices and elections
and to attend and vote at meetings shall, subject to the
Deed Poll, be passed on in the form which they are received
together with amendments and additional documentation
necessary to affect such passing-on, or exercised in
accordance with the Deed Poll. If arrangements are made
which allow a holder to take up rights in the Company's
securities requiring further payment, the holder must put
the Registrar in cleared funds before the relevant payment
date or other date notified by the Registrar if it wishes
the Registrar to exercise such rights.
(iv) The Registrar will be entitled to cancel DIs and treat the
holders as having requested a withdrawal of the underlying
securities in certain circumstances including where a DI
holder fails to furnish to the Registrar such certificates
or representations as to material matters of fact, including
his identity, as the Registrar deems appropriate.
(v) The Deed Poll contains provisions excluding and limiting the
Registrar's liability. For example, the Registrar shall not
be liable to any DI holder or any other person for
liabilities in connection with the performance or
non-performance of obligations under the Deed Poll or
otherwise except as may result from its negligence or wilful
default or fraud or that of any person for whom it is
vicariously liable, provided that the Registrar shall not be
liable for the negligence, wilful default or fraud of any
107
Custodian or agent which is not a member of its group unless
it has failed to exercise reasonable care in the appointment
and continued use and supervision of such Custodian or
agent. Furthermore, the Registrar's liability to a holder of
DIs will be limited to the lesser of:
(A) the value of the shares and other deposited property
properly attributable to the DIs to which the liability
relates; and
(B) that proportion of (pound)10 million which corresponds
to the portion which the amount the Registrar would
otherwise be liable to pay to the DI holder bears to
the aggregate of the amounts the Registrar would
otherwise be liable to pay to all such holders in
respect of the same act, omission, or event or, if
there are no such amounts, (pound)10 million.
(vi) The Registrar is entitled to charge holders of DIs fees and
expenses for the provision of its services under the Deed
Poll.
(vii) The holders of DIs are required to agree and acknowledge
with the Registrar that it is their responsibility to ensure
that any transfer of DIs by them which is identified by the
CREST system as exempt from stamp duty reserve tax is so
exempt, and to notify the Registrar if this is not the case,
and to pay to CRESTCo any interest, charges or penalties
arising from non-payment of stamp duty reserve tax in
respect of such transaction.
(viii) Each holder of DIs is liable to indemnify the Registrar
and any Custodian (and their agents, officers and employees)
against all liabilities arising from or incurred in
connection with, or arising from any act related to, the
Deed Poll so far as they relate to the DIs (and any property
or rights held by the Registrar or Custodian in connection
with the DIs) held by that holder, other than those
resulting from the wilful default, negligence or fraud of
108
the Registrar, or the Custodian or any agent if such
Custodian or agent is a member of the Registrar's group or
if, not being a member of the same group, the Registrar
shall have failed to exercise reasonable care in the
appointment and continued use of such Custodian or agent.
(ix) The Registrar is entitled to make deductions from any income
or capital arising from the underlying securities, or to
sell such underlying securities and make deductions from the
sale proceeds therefrom, in order to discharge the
indemnification obligations of DI holders.
(x) The Registrar may terminate the Deed Poll by giving 30 days'
notice. During such notice period holders may cancel their
DIs and withdraw their deposited property and, if any DIs
remain outstanding after termination, the Registrar must,
among other things, deliver the deposited property in
respect of the DIs to the relevant DI holders or, at its
discretion sell all or part of such deposited property. It
shall, as soon as reasonably practicable, deliver the net
proceeds of any such sale, after deducting any sums due to
the Registrar, together with any other cash held by it under
the Deed Poll pro rata to holders of DIs in respect of their
DIs.
(xi) The Registrar or the Custodian may require from any holder
information as to the capacity in which DIs are or were
owned and the identity of any other person with or
previously having any interest in such DIs and the nature of
such interest and evidence or declarations of nationality or
residence of the legal or beneficial owners of DIs and such
information as is required for the transfer of the relevant
Ordinary Shares to the holders. Holders agree to provide
such information requested and consent to the disclosure of
such information by the Registrar or Custodian to the extent
necessary or desirable to comply with their legal or
regulatory obligations. Furthermore, to the extent that the
Company's articles of association require disclosure to the
Company of, or limitations in relation to, beneficial or
other ownership of the Company's securities, the holders of
DIs are to comply with the Company's instructions with
respect thereto.
It should also be noted that holders of DIs may not have the
opportunity to exercise all of the rights and entitlements available
to holders of the Ordinary Shares including, for example, the ability
to vote on a show of hands. In relation to voting, it will be
important for holders of DIs to give prompt instructions to the
Registrar to vote the underlying shares on their behalf.
18. Other information
(a) The expenses of the Placing are estimated at approximately (pound)?,
excluding VAT, of which (pound)? (excluding VAT ) is payable by the
Company and (pound)? (excluding VAT) is payable by the Selling
Shareholders. [Annex III, 8.1]
109
(b) The Ordinary Stock is not currently admitted to dealings on a
recognised investment exchange and, other than the Company's
application for the Ordinary Stock, both issued and to be issued under
the Placing, to be admitted to trading on AIM, no applications for
such admission have been made.
(c) The financial information concerning the Group set out in this
document does not constitute statutory accounts within the meaning of
Section 240 of the Act. Kabani & Company, Inc., an independent
certified public accounting firm (a member firm of the AICPA SEC
practice section) located at 6033 West Century Blvd, Suite 810, Los
Angeles, CA 90045, USA have audited the financial statements of
Bodisen Biotech, Inc. for the period ended December 31, 2004 and have
given an unqualified audit report on the accounts of the group for
that period.
(d) Save as disclosed in the paragraph headed "Current trading and
prospects" in Part II of this document and in note [?] of the
accountants' report set out in Part IV of this document, there has
been no significant change in the financial or trading position of the
Group since 31 March 2005, the date on which the most recent interim
financial information of the Company was published. [Annex I, 20.9]
(e) Definitive share certificates (where appropriate) for the Placing
Shares are expected to be despatched by [?] and CREST member accounts
are expected to be credited by [?].
110
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Delaware law, we may indemnify our directors or officers or other
persons who were or are threatened to be made a party to an action, suit or
proceeding because the person is or was our director, officer, employee or
agent, against expenses, including attorneys' fees, judgments, fines and amounts
paid in settlement actually and reasonably incurred by them in connection with
the action, suit or proceeding if the person:
(i) acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the corporation, and
(ii) with respect to any criminal action or proceeding, had no reasonable
cause to believe the person's conduct was unlawful.
Our bylaws include indemnification provisions under which we have agreed to
indemnify our directors and officers from and against certain claims arising
from or related to future acts or omissions as our directors or officers, except
in relation to matters as to which any such director or officer was personally
involved in the situation giving rise to the injury or unless such officer or
director committed a criminal offense.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of ours
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a list of the estimated expenses to be incurred, all of
which will be paid by the Registrant, in connection with the preparation and
filing of this Registration Statement.
ITEM AMOUNT
SEC Registration Fee $ 2,091.70
Legal Fees 150,000.00
Printing and Engraving Costs 20,000.00
Accounting Fees and Expenses $ 35,000.00
Miscellaneous 3,000.00
Total $ 210,091.70
* Represents actual expenses. All other expenses are estimates.
111
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Company has sold the following securities within the past three years
that were not registered under the Securities Act of 1933:
On February 24, 2004, the Company issued 3.0 million shares of its Common
Stock to the stockholders of Bodisen International, Inc., in connection with the
acquisition of the Company's current sole operating subsidiary, Yang Ling
Bodisen Biology Science and Technology Development Company Limited. See Item 1,
"Description of Business, Introduction and Background," above. The sale was
effective pursuant to a private placement under Section 4(2) and/or Regulation D
of the Securities Act of 1933, as amended.
Pursuant to the Company's Stock Option Plan, the Company granted 110,000
stock options to David Gatton and Patrick McManus in 2004, each a director of
the Company. Messrs. Gatton and McManus were each granted 50,000 stock options
on June 4, 2004, 25,000 vested immediately and the remaining 25,000 vest over 8
equal quarterly installments, where the first instalment vested at the end of
the second quarter 2004. In addition to the 50,000 options, Messrs. Gatton and
McManus were each granted 5,000 options on December 28, 2004 which vested on
December 31, 2004. The option exercise price was $5.00 for the first 100,000
stock options, which was the same as the market price of the shares at the time
of granting of the options. The option exercise price was $5.80 for the second
10,000 stock options, which was the same as the market price of the shares at
the time of granting of the options.
Equity Compensation Plan Information
Plan category Number of securities to be Weighted-average Number of securities remaining
issued upon exercise of exercise price of available for future issuance
outstanding options, outstanding options, under equity compensation plans
warrants and rights warrants and rights (excluding securities reflected in
(a) (b) column (a)
(c)
Equity compensation plans N/A N/A N/A
approved by security holders
Equity compensation plans not 110,000 $5.07 890,000
approved by security holders
Total 110,000 890,000
112
ITEM 27. EXHIBITS
Exhibit Number Description
3.1 Certificate of Incorporation of the Company
3.2 Amendment to Certificate of Incorporation of the Company, changing
name to Bodisen Biotech, Inc.
3.3 By-Laws of the of the Company
4.1 Form of Debenture issued March 16, 2005
5.1 Opinion of Reed Smith LLP
10.1 Loan Agreement, dated as of September 28, 2003, between the Company
and Xianyang City Commercial Bank
10.2 Bodisen Biotech, Inc. 2004 Stock Option Plan
10.3 Form of Bodisen Biotech, Inc. Nonstatutory Stock Option Agreement
10.4 Securities Subscription Agreement dated March 16, 2005 between the
Company and Amulet Limited
10.5 Registration Rights Agreement dated March 16, 2005 between the Company
and Amulet Limited
10.6 Form of Common Stock Warrant issued March 16, 2005
21.1 Schedule of Subsidiaries
23.1 Consent of Karbani & Company, Inc.
23.2 Consent of Reed Smith LLP (included in Exhibit 5.1)
ITEM 28. UNDERTAKINGS
(a) We hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933.
113
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
In addition, we hereby undertake:
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
114
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the North Part of
Xinquia Road, Yang Ling AG, High-Tech Industries Demonstration Zone, Yang Ling,
China on July 22, 2005.
Bodisen Biotech, Inc.
By: /s/ Wang Qiong
---------------
Name: Wang Qiong
Title: Chief Executive Officer
By: /s/ Shuiwang Wei
------------------
Name: Shuiwang Wei
Title: Chief Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
/s/ Wang Qiong
--------------
Name: Wang Qiong
Title: Chief Executive Officer and Chairman of the Board
Date: July 22, 2005
/s/ Chen Bo
-----------
Name: Chen Bo
Title: President and Director
Date: July 22, 2005
/s/ Shuiwang Wei
----------------
Name: Shuiwang Wei
Title Chief Financial Officer
(Principal Accounting Officer)
Date: July 22, 2005
/s/ Patrick McManus
-------------------
Name: Patrick McManus
Title Director
Date: July 22, 2005
/s/ David Gatton
-----------------
Name: David Gatton
Title Director
Date: July 22, 2005
/s/ Weirui Wan
--------------
Name: Weirui Wan
Title Director
Date: July 22, 2005
115
EXHIBIT INDEX
Exhibit Number Description Method of Filing
----------------------- ---------------------------------------- -------------------------------------------------
3.1 Certificate of Incorporation of Filed as Exhibit 3.1 to the registration
the Company statement on Form SB-2 filed with the
Commission on September 3, 2002 and incorporated
herein by reference.
3.2 Amendment to Certificate of Filed as Exhibit 3.2 to the annual report on
Incorporation of the Company, Form 10-KSB filed with the Commission on March
changing name to Bodisen 30, 2004 and incorporated herein by reference.
Biotech, Inc.
3.3 By-Laws of the of the Company Filed as Exhibit 3.2 to the registration
statement on Form SB-2 filed with the
Commission on September 3, 2002 and
incorporated herein by reference.
4.1 Form of Debenture issued March Filed as Exhibit 4.1 to the registration
16, 2005 statement on Form SB-2, filed with the
Commission on May 4, 2005 and incorporated
herein by reference.
5.1 Opinion of Reed Smith LLP Filed herewith as Exhibit 5.1
10.1 Loan Agreement, dated as of Filed as Exhibit 10.2 to the annual report on
September 28, 2003, between the Form 10-KSB filed with the Commission on March
Company and Xianyang City 30, 2004.
Commercial Bank
10.2 Bodisen Biotech, Inc. 2004 Stock Filed as Exhibit 10.2 to the annual report on
Option Plan Form 10-KSB filed with the Commission on March
31, 2005.
10.3 Form of Bodisen Biotech, Inc. Filed as Exhibit 10.3 to the annual report on
Nonstatutory Stock Option Form 10-KSB filed with the Commission on March
Agreement 31, 2005.
10.4 Securities Subscription Filed as Exhibit 10.4 to the registration
Agreement dated March 16, 2005 statement on Form SB-2, filed with the
between the Company and Amulet Commission on May 4, 2005 and incorporated
Limited herein by reference.
10.5 Registration Rights Agreement Filed as Exhibit 10.5 to the registration
dated March 16, 2005 between the statement on Form SB-2, filed with the
Company and Amulet Limited Commission on May 4, 2005 and incorporated
herein by reference.
10.6 Form of Common Stock Warrant Filed as Exhibit 10.6 to the registration
issued March 16, 2005 statement on Form SB-2, filed with the
Commission on May 4, 2005 and incorporated herein
by reference.
21.1 Schedule of Subsidiaries Filed as Exhibit 21.1 to the annual report on
Form 10-KSB filed with the Commission on March
31, 2005.
23.1 Consent of Karbani & Company, Inc. Filed herewith as Exhibit 23.1
23.2 Consent of Reed Smith LLP Filed herewith as Exhibit 5.1
116