UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB - 2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
(Amendment No. 2)
CHINA BAK BATTERY, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0442833
(State or other jurisdiction (IRS Employer incorporation or
of organization) identification No.)
3692
(Primary Standard Industrial
Classification Code Number)
BAK Industrial Park, No. 1 BAK Street
Kuichong Town, Longgang District
Shenzhen
People's Republic Of China
Ph: (86-755) 8977-0093
--------------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Nevada Agency and Trust Company
50 West Liberty Street, Suite 880
Reno, Nevada 89501
Ph: (775) 322-5623
--------------------------------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copy to:
George L. Diamond
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Ph: (214) 953-6000
Facsimile: (214) 953-5822
Approximate date of commencement 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, 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, 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 Proposed Maximum Proposed Amount of
of Securities Amount to be Offering Price Maximum Aggregate Registration
to be registered Registered per share (1) Offering Price Fee
---------------- ------------- ---------------- ----------------- ------------
Common Stock 9,934,762 $3.71 $36,857,967 $4,338.18(1)
-------------------------------------
(1) Amount previously paid.
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 Securities and Exchange Commission, acting
pursuant to said section 8(a), may determine.
SUBJECT TO COMPLETION DATED JUNE 27, 2005
EXPLANATORY NOTE
THIS AMENDMENT TO THE REGISTRATION STATEMENT IS BEING FILED FOR THE SOLE PURPOSE
OF REFLECTING CHANGES BETWEEN THE COMPANY'S REGISTRATION STATEMENT FILED WITH
THE COMMISSION ON JANUARY 21, 2005 AND AMENDMENT NO. 1 TO SUCH REGISTRATION
STATEMENT AS FILED WITH THE COMMISSION ON JUNE 22, 2005. EXCEPT FOR THIS
EXPLANATORY NOTE, THE DISCLOSURE CONTAINED IN THIS FILING IS IDENTICAL TO THAT
FOUND IN AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT.
9,934,762 Shares
CHINA BAK BATTERY, INC.
Common Stock
-----------------------
This is an offering of 9,934,762 shares of common stock by the selling
stockholders. The shares are being registered to permit public secondary trading
of the shares that are being offered by the selling stockholders named in this
prospectus. We will not receive any of the proceeds from the sale of the shares.
The selling stockholders may, but are not obligated to, offer all or
part of their shares for resale from time to time through public or private
transactions, at either prevailing market prices or at privately negotiated
prices.
Our common stock is currently quoted on the NASD's Over-the-Counter
Bulletin Board under the symbol "CBBT.OB." On June 21, 2005, the last reported
sales price on our common stock was $8.00 per share.
Investing in our common stock involves risks. See "Risk Factors"
beginning on page 4 to read about factors you should consider before buying
shares of our common stock.
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 this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______________.
----------------------------------
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this document or
any other document to which we refer you. Neither we nor the selling
stockholders have authorized anyone to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. Neither we nor the selling stockholders are making an offer to
sell these securities in a jurisdiction where the offer or sale is not
permitted. The information contained in this document is current only as of its
date, regardless of the time of delivery of this prospectus or of any sales of
shares of common stock. Our business, financial condition, results of operations
and prospects may have changed since that date.
The information in this prospectus is not complete and may be changed.
The selling stockholders may not sell the securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
THE OFFERING...................................................................3
RISK FACTORS...................................................................4
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................12
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND DIVIDEND POLICY....12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION.....................14
BUSINESS......................................................................27
DIRECTORS AND EXECUTIVE OFFICERS..............................................33
PRINCIPAL STOCKHOLDERS........................................................36
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS..........................37
DESCRIPTION OF OUR CAPITAL STOCK..............................................37
SELLING STOCKHOLDERS..........................................................38
SHARES ELIGIBLE FOR FUTURE SALE...............................................43
PLAN OF DISTRIBUTION..........................................................43
INDEPENDENT PUBLIC ACCOUNTANTS................................................44
LEGAL MATTERS.................................................................44
EXPERTS.......................................................................44
INTERESTS OF NAMED EXPERTS AND COUNSEL........................................45
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES............................................................45
WHERE YOU CAN FIND MORE INFORMATION...........................................45
i
PROSPECTUS SUMMARY
This summary highlights selected information about us and the offering
that is contained elsewhere in this prospectus. You should read the entire
prospectus before making an investment decision, especially the information
presented under the heading "Risk Factors" on page 4 and the financial
statements and related notes included elsewhere in this prospectus, as well as
the other documents to which we refer you. Except as otherwise indicated by the
context, references in this prospectus to "we," "us," or "our" are to the
combined business of China BAK Battery, Inc. ("CBBI") and its wholly-owned
direct subsidiary, BAK International, Ltd. ("BAK International") and its
wholly-owned subsidiary, Shenzhen BAK Battery Co., Ltd. ("BAK Battery"), and in
each case do not include the selling stockholders. References to "China" or to
the "PRC" are references to the People's Republic of China.
CHINA BAK BATTERY, INC.
Our Business
China BAK Battery, Inc. is a holding company whose China-based
subsidiaries, BAK International and BAK Battery, are focused on the manufacture,
commercialization and distribution of a wide variety of standard and customized
lithium ion rechargeable batteries for use in a wide array of applications. We
also have internal research and development facilities engaged primarily in
furthering lithium ion related technologies. We believe that our technologies
allow us to offer batteries that are flexibly configured, lightweight and
generally achieve longer operating time than many competing batteries currently
available. We have focused on manufacturing a family of replacement lithium
batteries for mobile phones. We also supply rechargeable lithium ion batteries
for use in various other portable electronic applications, including high-power
handset telephones, laptop computers, digital cameras, video camcorders, MP3
players and general industrial applications. Although we have developed a
marketable prototype of our lithium polymer battery, we are continuing our
research and development efforts related to this line of products. Given the
current progress of these efforts, we are as yet unable to determine when we
will begin to offer lithium polymer batteries to the marketplace.
We manufacture three types of batteries: steel cell, aluminum cell and
cylindrical cell. We deliver our products to packing plants operated by third
parties where the bare cells are packed in accordance with specifications
established by certain manufacturers of mobile phones and other electronic
products. We operate sales and service branches in six principal coastal cities
and Beijing in the PRC. The majority of our income is generated from the sale of
steel cells. However, we believe there is growth potential for aluminum and
cylindrical cells because of their wide applications. Our current growth
strategy includes entering into the original equipment manufacture ("OEM")
battery market for top mobile phone brands and portable electronic applications
worldwide. We have developed a program for producing high power lithium ion
battery cells which may allow us inroads into additional battery markets such as
those for power tools. We have begun marketing our high power lithium ion
battery cells; however, we have not yet received any revenues from the sale of
this product.
Our recent business activities include:
o In June 2002 we began operations with initial monthly output of
approximately 220,000 units.
o We received government authorization in October 2002 to establish a
Postdoctoral Workstation, the establishment of which serves as
recognition by the PRC government of the strong capabilities of our
in-house research team. With our research and development facilities we
are focusing our research efforts on liquid lithium ion batteries, high
power lithium ion batteries, solid-polymer lithium ion batteries, and
cylindrical and rectangular lithium ion batteries.
o In March 2003 our steel case battery plant started operations with
monthly output reaching approximately 2.4 million units. Our current
monthly output of steel case batteries is approximately 7.7 million
units.
o In September 2003 we were granted International Organization for
Standardization 14001: 1996, an environmental management system
1
certification, as well as International Organization for
Standardization 9001: 2000, a quality management system certification,
by Beijing Zhonjing Quality Certification Co., Ltd, an independent
third party which issues such standardization certifications.
o As of April 2005, our total monthly capacity for all battery types was
approximately 15.0 million units and our total monthly output for all
battery types was approximately 11.8 million units. Our ability to grow
our manufacturing capacity is primarily due to the development and
expansion of semi-automated manufacturing lines requiring less labor
efforts when compared to previous more labor intensive manufacturing
processes. Following the completion of our new steel case cell
production facility located in Shenzhen, PRC in May 2005, we expect our
total monthly capacity for all battery types to rise to 24.2 million
units and our total monthly output for all battery types to increase to
21.6 million units by September 2005.
o As of September 2004, we established a sales and service network to
cover six principal coastal cities and Beijing in the PRC.
o We believe we will be able to increase our manufacturing capacity of
steel cell batteries from approximately 350,000 batteries per day to
approximately 650,000 batteries per day by September 2005 as a result
of the completion of our new steel case cell production facility
located in Shenzhen, PRC in May 2005. The opening of our new production
facility will also allow us to increase the production of aluminum cell
batteries by making available a production line currently dedicated to
steel cell batteries production. We hope to increase production of
aluminum cell batteries from 100,000 batteries to approximately 300,000
batteries per day.
Our Corporate Information
We originally began operations as a Nevada corporation known as Medina
Copy, Inc. We were incorporated in Nevada on October 4, 1999 and subsequently
changed our name to Medina Coffee, Inc. ("Medina Coffee") on October 6, 1999.
Medina Coffee commenced operations on December 1, 2002 and was considered a
development stage company. Medina Coffee was formed originally for the purpose
of building a retail specialty coffee business that sold specialty coffee and
espresso drinks through company owned and operated espresso carts. Medina Coffee
incurred operating losses since its inception and therefore looked to combine
with a privately-held company that was profitable or that management considered
to have growth potential.
On January 20, 2005 we completed a stock exchange transaction with the
stockholders of BAK International, Ltd., a Hong Kong company ("BAK
International"). The exchange was consummated under Nevada law pursuant to the
terms of a Securities Exchange Agreement dated effective as of January 20, 2005
by and among Medina Coffee, BAK International and the stockholders of BAK
International. Pursuant to the Securities Exchange Agreement, we issued
39,826,075 shares of our common stock, par value $0.001 per share, to the
stockholders of BAK International, representing approximately 97.2% of our
post-exchange issued and outstanding common stock, in exchange for 100% of the
outstanding capital stock of BAK International. Effective February 14, 2005, we
changed our name from Medina Coffee, Inc. to China BAK Battery, Inc. We
presently carry on the business of Shenzhen BAK Battery Co., Ltd., a Chinese
corporation and BAK International's wholly-owned subsidiary ("BAK Battery").
Our corporate headquarters is located at BAK Industrial Park, No. 1 BAK
Street, Kuichong Town, Longgang District, Shenzhen, People's Republic of China.
Our telephone number is (86-755) 8977-0093.
2
THE OFFERING
Common stock outstanding prior to this offering.... 40,978,533 shares
Common stock offered by us......................... 0 shares
Common stock offered by the selling stockholders... 9,934,762 shares
Total shares of common stock offered............... 9,934,762 shares
Common stock to be outstanding after the offering.. 40,978,533 shares
Risk factors....................................... See "Risk Factors" beginning
on page 4 and other
information included in this
prospectus for a discussion
of factors you should
consider before deciding to
invest in shares of our
common stock.
3
RISK FACTORS
An investment in our securities involves a high degree of risk. You
should carefully consider the following risks and the other information set
forth elsewhere in this prospectus, including our financial statements and
related notes, before you decide to purchase shares of our common stock. If any
of these risks occur, our business, financial condition and results of
operations could be adversely affected. As a result, the trading price of our
common stock could decline, perhaps significantly, and you could lose part or
all of your investment.
Risks Related to Our Business
The rechargeable battery business is highly competitive.
We are subject to competition from manufacturers of traditional
rechargeable batteries, such as nickel-cadmium batteries, from manufacturers of
rechargeable batteries of more recent technologies, such as nickel-metal hydride
and liquid electrolyte, as well as from companies engaged in the development of
batteries incorporating new technologies. Other manufacturers of lithium ion
batteries currently include Sanyo Electric Co., Sony Corp., Matsushita Electric
Industrial Co., Ltd. (Panasonic), GS Group, NEC Corporation, Hitachi Ltd., LG
Chemical Ltd., Samsung Electronics Co., Ltd., BYD Co. Ltd., Tianjin Lishen
Battery Joint-Stock Co., Ltd., Henan Huanyu Group and Harbin Coslight Technology
International Group Co., Ltd.
Many companies with substantially greater resources are developing a
variety of battery technologies, such as lithium polymer and fuel cell
batteries, which are expected to compete with our existing product lines
technology. Other companies undertaking research and development activities of
solid-polymer lithium ion batteries have developed prototypes and are
constructing commercial scale production facilities. If these companies
successfully market their batteries before the introduction of our products, we
may have a difficult time marketing and selling our products.
We depend on continued demand for our products.
Our business is entirely dependent on the continued demand for those
products that use lithium ion batteries, which in turn cause demand for our
products. Therefore, our success depends significantly upon the success of those
products in the marketplace. We are subject to many risks beyond our control
that influence the success or failure of such products.
Because of the specialized, technical nature of the business, we are highly
dependent on certain members of management, as well as our marketing,
engineering and technical staff.
The loss of the services of these individuals could have a material and
negative effect on our ability to effectively pursue our business strategy. In
addition to developing the manufacturing capacity to produce high volumes of
advanced rechargeable batteries, we must attract, recruit and retain a sizeable
workforce of technically competent employees, including additional highly
skilled and experienced managerial, marketing, engineering and technical
personnel. If we are unable to do so, our ability to effectively pursue our
business strategy could be materially and negatively affected.
Rapid growth of our battery business could fail to translate into economic
success.
If we are successful in obtaining rapid market growth of our batteries,
we will be required to deliver large volumes of quality products to customers on
a timely basis at a reasonable cost to those customers. Such demand could create
working capital issues for us because we would need increased liquidity to fund
purchases of raw materials and supplies. If our business grows rapidly, we may
not be able to expand our manufacturing and quality control activities or
satisfy our commercial scale production requirements on a timely and
cost-effective basis. Rapid growth could also impede our ability to improve our
operations, management and financial systems and controls. The failure to manage
growth effectively could result in a failure to translate that growth into
economic success.
4
Lithium ion batteries pose certain safety risks that could affect our financial
condition.
Due to the high energy density inherent in lithium batteries, our
batteries can pose certain safety risks, including the risk of fire. We
incorporate safety procedures in research, development and manufacturing
processes that are designed to minimize safety risks. However, should an
accident occur, whether at the manufacturing facilities or from the use of the
products, it could result in significant production delays or claims for damages
resulting from injuries. Due to limits imposed in our product liability
insurance policy, such losses might not be covered by our insurance policy, and
if large enough, could have a material and negative effect on our financial
condition.
National, state and local laws impose various environmental controls on
the manufacture, storage, use and disposal of lithium batteries and/or certain
chemicals used in the manufacture of lithium batteries. Any changes in those
laws and regulations could impose costly compliance requirements on us or
otherwise subject us to future liabilities.
We depend on certain suppliers, and any disruption with those suppliers could
delay product shipments and adversely affect our relationships with customers.
Certain materials used in products are available only from a limited
number of suppliers. Further, we may elect to develop relationships with a
single or limited number of suppliers for materials that are otherwise generally
available. We have volume purchase agreements with our major suppliers. Although
we believe that alternative suppliers are available to supply materials that
could replace materials currently used and that, if necessary, we would be able
to redesign our products to make use of such alternatives, any interruption in
the supply from any supplier could delay product shipments and adversely affect
our relationships with customers.
We cannot control the cost of our raw materials, which may adversely impact our
profit margin and financial position.
Our principal raw materials are liquid electrolyte and lithium cobalt
oxide. The prices for these raw materials are subject to market forces largely
beyond our control, including energy costs, organic chemical feedstocks, market
demand, and freight costs. The prices for these raw materials have varied
significantly, including a significant increase in the year ended September 30,
2004 and a significant decrease in the quarter ended December 31, 2004. Prices
have remained relatively static since January 1, 2005, but they may vary
significantly in the future. We may not be able to adjust our product prices,
especially in the short term, to recover the costs of increases in these raw
materials. Our future profitability may be adversely affected to the extent we
are unable to pass on higher raw material and energy costs to our customers.
If we experience customer concentration, we may be exposed to all of the risks
faced by our remaining material customers.
Our largest customer accounted for 14.71% of our revenues for the
fiscal year ended September 30, 2004 and 13.22% for the six months ended March
31, 2005. Unless we maintain multiple customer relationships, it is likely that
we will experience periods during which we will be highly dependent on a limited
number of customers. Dependence on a few customers could make it difficult to
negotiate attractive prices for our products and could expose us to the risk of
substantial losses if a single dominant customer stops conducting business with
us. Moreover, to the extent that we are dependent on any single customer, we are
subject to the risks faced by that customer to the extent that such risks impede
the customer's ability to stay in business and make timely payments to us.
Our business is highly dependent upon proprietary technologies.
Our success depends on the knowledge, ability, experience and
technological expertise of our employees and on the legal protection of patents
and other proprietary rights. We claim proprietary rights in various unpatented
5
technologies, know-how, trade secrets and trademarks relating to products and
manufacturing processes. If our competitors independently develop or patent
technologies that are substantially equivalent or superior to our technology,
the resulting increased competition could reduce the demand for our products.
We protect our proprietary rights in our products and operations
through contractual obligations, including nondisclosure agreements. There can
be no assurance as to the degree of protection these contractual measures may or
will afford. If these contractual measures fail to protect our proprietary
rights, any advantage those proprietary rights provided to us would be negated.
We have had patents issued and have patent applications pending in
China. If (i) our pending patent applications do not result in patents, (ii) the
claims allowed under any existing patents are not sufficiently broad to protect
our technology, or (iii) any patents issued to us are challenged, invalidated or
circumvented, then the resulting ability of third parties to utilize the subject
technology could increase the amount of competition we face and decrease the
demand for our products.
Any failure by us to obtain various necessary technology licenses could
delay product shipment or the introduction of new products, and costly attempts
to design around such patents could foreclose the development, manufacture or
sale of products.
We depend on factories to manufacture our products, which may be insufficiently
insured against damage or loss.
We have no direct business operation, other than our ownership of our
subsidiaries located in China, and our results of operations and financial
condition are currently solely dependent on our subsidiaries' factories in
China. We do not currently maintain insurance to protect against damage and loss
to our manufacturing facility, machinery and other leasehold improvements.
Therefore, any material damage to, or the loss of, any of our factories due to
fire, severe weather, flooding or other cause, would not be shared with an
insurance company, and if large enough, would have a material and negative
effect on our financial condition.
We face risks related to product warranty claims.
We typically offer warranties ranging from six to eight months against
any defects due to product malfunction. We provide for a reserve for this
potential warranty expense, which is based on an analysis of historical warranty
issues. If future warranty claims are inconsistent with past history, and if we
experience a significant increase in warranty claims, our reserves may not be
sufficient. This could have a material and negative effect on our financial
condition.
Our holding company structure creates restrictions on the payment of dividends.
We have no direct business operations, other than our ownership of our
subsidiaries. While we have no current intention of paying dividends, should we
decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiaries and other holdings and
investments. In addition, our operating subsidiaries, from time to time, may be
subject to restrictions on their ability to make distributions to us, including
as a result of restrictive covenants in loan agreements, restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions. If future dividends are paid in Renminbi, fluctuations
in the exchange rate for the conversion of Renminbi into U.S. dollars may
adversely affect the amount received by U.S. stockholders upon conversion of the
dividend payment into U.S. dollars.
Our short term debt obligations may affect our liquidity and capital resources.
As of June 8, 2005, we had approximately U.S. $61.42 million in short
term loans and notes payable maturing at or prior to April 30, 2006. If we fail
to obtain debt or equity financing to meet these debt obligations or fail to
obtain extensions of the maturity dates of these obligations, our overall
liquidity and capital resources will be adversely affected as a result of our
efforts to satisfy these obligations.
6
We have not obtained the certificate of land use right for our BAK Industrial
Park.
We have not obtained the certificate of land use right for the property
and facilities located at BAK Industrial Park, No. 1 BAK Street, Kuichong Town,
Longgang District, Shenzhen, People's Republic of China. We are negotiating with
the government regarding this matter. We have paid approximately U.S. $278,000
for construction and area preparation costs. We have, however, been granted
permission to, and have commenced construction of, our new production facility.
Although we anticipate receiving the certificate of land use right, our business
will be materially adversely affected if our application for a certificate of
land use right is not approved, because we could be obligated to vacate the
premises and relocate to new facilities.
Risks Related to Doing Business in China
Our operations are located in China and may be adversely affected by changes in
the political and economic policies of the Chinese government.
Our business operations may be adversely affected by the political
environment in the PRC. The PRC has operated as a socialist state since 1949 and
is controlled by the Communist Party of China. In recent years, however, the
government has introduced reforms aimed at creating a "socialist market economy"
and policies have been implemented to allow business enterprises greater
autonomy in their operations. Changes in the political leadership of the PRC may
have a significant effect on laws and policies related to the current economic
reforms program, other policies affecting business and the general political,
economic and social environment in the PRC, including the introduction of
measures to control inflation, changes in the rate or method of taxation, the
imposition of additional restrictions on currency conversion and remittances
abroad, and foreign investment. Moreover, economic reforms and growth in the PRC
have been more successful in certain provinces than in others, and the
continuation or increases of such disparities could affect the political or
social stability of the PRC.
Although we believe that the economic reform and the macroeconomic
measures adopted by the Chinese government have had a positive effect on the
economic development of China, the future direction of these economic reforms is
uncertain and the uncertainty may decrease the attractiveness of our company as
an investment, which may in turn have material and negative impact on the market
price of our stock. In addition, the Chinese economy differs from the economies
of most countries belonging to the Organization for Economic Cooperation and
Development ("OECD"). These differences include:
o economic structure;
o level of government involvement in the economy;
o level of development;
o level of capital reinvestment;
o control of foreign exchange;
o methods of allocating resources; and
o balance of payments position.
As a result of these differences, our business may not develop in the same way
or at the same rate as might be expected if the Chinese economy were similar to
those of the OECD member countries.
The Chinese government exerts substantial influence over the manner in which we
must conduct our business activities.
The PRC only recently has permitted provincial and local economic
autonomy and private economic activities. The government of the PRC has
exercised and continues to exercise substantial control over virtually every
sector of the Chinese economy through regulation and state ownership.
Accordingly, government actions in the future, including any decision not to
continue to support recent economic reforms and to return to a more centrally
planned economy or regional or local variations in the implementation of
economic policies, could have a significant effect on economic conditions in the
PRC or particular regions thereof, and could require us to divest ourselves of
any interest we then hold in Chinese properties or joint ventures.
7
In addition, while we do not believe it is a likely event, the Chinese
government may decide not to grant a renewal of BAK Battery's renewable
operating tenure upon its expiration on August 3, 2011. While we believe that
renewing the operating tenure is a simple administrative matter, a failure to
renew BAK Battery's renewable operating tenure could have a material adverse
effect on our ability to remain in business.
The favorable tax treatment in Shenzhen is projected to end in the near future,
which, when effective, will adversely impact our profit margin and results of
operations.
The current tax rate in Shenzhen is 15% of profits. However, Shenzhen
is an economic development zone. As such, the tax rate for foreign invested
enterprises like us is adjusted to promote development. Under the current tax
scheme, foreign invested enterprises do not owe any tax during the first two
years following the time at which they become profitable. For the following
three years, foreign invested enterprises owe 50% of the current 15% tax rate,
or 7.5%. Thereafter, foreign invested enterprises owe the full tax rate unless
they qualify and apply for other reduced tax programs. Under this format we
currently pay 7.5%. We will likely begin to pay the 15% mandated maximum on
January 1, 2007. Once this increase becomes effective, our profit margin and
results of operations will experience a concordant negative adjustment.
A downturn in the Chinese economy may slow down our growth and profitability.
The growth of the Chinese economy has been uneven across geographic
regions and economic sectors. Our profitability will decrease if expenditures
for lithium ion batteries decrease due to a downturn in the Chinese economy.
Future inflation in China may inhibit economic activity in China.
In recent years, the Chinese economy has experienced periods of rapid
expansion and high rates of inflation. During the past 10 years, the rate of
inflation in China has been as high as 20.7% and as low as -2.2%. These factors
have led to the adoption by the PRC government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. While inflation has been more moderate since 1995,
high inflation may in the future cause the PRC government to impose controls on
credit and/or prices, or to take other action, which could inhibit economic
activity in China, and thereby adversely affect the market for our products.
Any recurrence of severe acute respiratory syndrome, or SARS, or another
widespread public health problem, could adversely affect our operations.
A renewed outbreak of SARS or another widespread public health problem
in China, where all of our revenue is derived, and in Shenzhen, where our
operations are headquartered, could have a negative effect on our operations.
Our operations may be impacted by a number of health-related factors, including
the following:
o quarantines or closures of some of our offices which would
severely disrupt our operations,
o the sickness or death of our key officers and employees, and
o a general slowdown in the Chinese economy.
Any of the foregoing events or other unforeseen consequences of public
health problems could adversely affect our operations.
Restrictions on currency exchange may limit our ability to receive and use our
revenues effectively.
Because almost all of our future revenues may be in the form of
Renminbi, any future restrictions on currency exchanges may limit our ability to
use revenue generated in Renminbi to fund any future business activities outside
China or to make dividend or other payments in U.S. dollars. Although the
Chinese government introduced regulations in 1996 to allow greater
convertibility of the Renminbi for current account transactions, significant
restrictions still remain, including primarily the restriction that
foreign-invested enterprises may only buy, sell or remit foreign currencies,
after providing valid commercial documents, at those banks authorized to conduct
foreign exchange business. In addition, conversion of Renminbi for capital
8
account items, including direct investment and loans, is subject to government
approval in China, and companies are required to open and maintain separate
foreign exchange accounts for capital account items. We cannot be certain that
the Chinese regulatory authorities will not impose more stringent restrictions
on the convertibility of the Renminbi, especially with respect to foreign
exchange transactions.
The value of our securities will be affected by the foreign exchange rate
between U.S. dollars and Renminbi.
The value of our common stock will be affected by the foreign exchange
rate between U.S. dollars and Renminbi. For example, to the extent that we need
to convert U.S. dollars into Renminbi for our operational needs and should the
Renminbi appreciate against the U.S. dollar at that time, our financial position
and the price of our common stock may be adversely affected. Conversely, if we
decide to convert our Renminbi into U.S. dollars for the purpose of declaring
dividends on our common stock or for other business purposes and the U.S. dollar
appreciates against the Renminbi, the U.S. dollar equivalent of our earnings
from our subsidiaries in China would be reduced.
Until 1994, the Renminbi experienced a gradual but significant
devaluation against most major currencies, including U.S. dollars, and there was
a significant devaluation of the Renminbi on January 1, 1994 in connection with
the replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the Renminbi relative to
the U.S. Dollar has remained stable and has appreciated slightly against the
U.S. dollar. Countries, including the United States, have argued that the
Renminbi is artificially undervalued due to China's current monetary policies
and have pressured China to allow the Renminbi to float freely in world markets.
If any devaluation of the Renminbi were to occur in the future, returns
on our operations in China, which are expected to be in the form of Renminbi,
will be negatively affected upon conversion to U.S. dollars. Although we attempt
to have most future payments, mainly repayments of loans and capital
contributions, denominated in U.S. dollars, if any increase in the value of the
Renminbi were to occur in the future, our product sales in China and in other
countries may be negatively affected.
We may be unable to enforce our rights due to policies regarding the regulation
of foreign investments in China.
The PRC's legal system is a civil law system based on written statutes
in which decided legal cases have little value as precedents, unlike the common
law system prevalent in the United States. The PRC does not have a
well-developed, consolidated body of laws governing foreign investment
enterprises. As a result, the administration of laws and regulations by
government agencies may be subject to considerable discretion and variation, and
may be subject to influence by external forces unrelated to the legal merits of
a particular matter. China's regulations and policies with respect to foreign
investments are evolving. Definitive regulations and policies with respect to
such matters as the permissible percentage of foreign investment and permissible
rates of equity returns have not yet been published. Statements regarding these
evolving policies have been conflicting and any such policies, as administered,
are likely to be subject to broad interpretation and discretion and to be
modified, perhaps on a case-by-case basis. The uncertainties regarding such
regulations and policies present risks which may affect our ability to achieve
our business objectives. If we are unable to enforce any legal rights we may
have under our contracts or otherwise, our ability to compete with other
companies in our industry could be materially and negatively affected.
It may be difficult for stockholders to enforce any judgment obtained
in the United States against us, which may limit the remedies otherwise
available to our stockholders.
Substantially all of our assets are located outside the United States.
Almost all of our current operations are conducted in China. Moreover, all of
our directors and officers are nationals or residents of China. All or a
substantial portion of the assets of these persons are located outside the
United States. As a result, it may be difficult for our stockholders to effect
service of process within the United States upon these persons. In addition,
there is uncertainty as to whether the courts of China would recognize or
enforce judgments of U.S. courts obtained against us or such officers and/or
directors predicated upon the civil liability provisions of the securities law
of the United States or any state thereof, or be competent to hear original
actions brought in China against us or such persons predicated upon the
securities laws of the United States or any state thereof.
9
Risks Related to our Common Stock
The market price for our common stock may be volatile.
The market price for our common stock is likely to be highly volatile
and subject to wide fluctuations in response to factors including the following:
o actual or anticipated fluctuations in our quarterly operating
results,
o announcements of new services by us or our competitors,
o changes in financial estimates by securities analysts,
o conditions in the lithium ion battery market,
o changes in the economic performance or market valuations of
other companies involved in lithium ion battery production,
o announcements by our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments,
o additions or departures of key personnel, and
o potential litigation, or conditions in the mobile telephone
market.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are not related to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
Stockholders could experience substantial dilution.
We may issue additional shares of our capital stock to raise additional
cash for working capital. If we issue additional shares of our capital stock,
our stockholders will experience dilution in their respective percentage
ownership in us.
We have no present intention to pay dividends.
Neither during the preceding two fiscal years nor during the six month
period ended March 31, 2005 did we pay dividends or make other cash
distributions on our common stock, and we do not expect to declare or pay any
dividends in the foreseeable future. Should we decide in the future to do so, as
a holding company, our ability to pay dividends and meet other obligations
depends upon the receipt of dividends or other payments from our operating
subsidiaries and other holdings and investments. In addition, our operating
subsidiaries, from time to time, may be subject to restrictions on their ability
to make distributions to us, including as a result of restrictive covenants in
loan agreements, restrictions on the conversion of local currency into U.S.
dollars or other hard currency and other regulatory restrictions. We intend to
retain any future earnings for working capital and to finance current operations
and expansion of our business.
A large portion of our common stock is controlled by a small number of
stockholders.
51.8% of our common stock is held by Xiangqian Li, our President and
Chief Executive Officer and Chairman of our Board, and 53.2% of our common stock
is held by our directors and executive officers, collectively. As a result, our
directors and executive officers are able to influence the outcome of
stockholder votes on various matters, including the election of directors and
extraordinary corporate transactions including business combinations.
Furthermore, the current ratios of ownership of our common stock reduce the
public float and liquidity of our common stock which can in turn affect the
market price of our common stock.
Sales of substantial amounts of our common stock in the public market could
materially adversely affect the market price of our common stock.
This is an offering of 9,934,762 shares of our common stock by the
selling stockholders. The sale of this amount of common stock may result in
10
significant fluctuations in the market price of our common stock and could cause
our common stock price to fall. The sale of these shares by the selling
stockholders could also impair our ability to raise capital through sales of
additional common stock.
There is currently a limited trading market for our common stock.
Our common stock is traded in the over-the-counter market through the
Over-the-Counter Electronic Bulletin Board. There is no established trading
market for our common stock and our common stock may never be included for
trading on any stock exchange or through any other quotation system (including,
without limitation, the NASDAQ Stock Market).
We are could be subject to "penny stock" regulations.
If the trading price of our common stock falls below $5.00 per share,
the open-market trading of our common stock will be subject to the "penny stock"
rules. The "penny stock" rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received the
purchaser's written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the Securities and Exchange Commission (the "Commission") relating
to the penny stock market. The broker-dealer also must disclose the commissions
payable to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements must be sent
disclosing recent price information on the limited market in penny stocks. These
additional burdens imposed on broker-dealers may restrict the ability of
broker-dealers to sell the common stock and may affect a stockholder's ability
to resell the common stock.
Stockholders should be aware that, according to Commission Release No.
34-29093, the market for penny stocks has suffered in recent years from patterns
of fraud and abuse. Such patterns include (i) control of the market for the
security by one or a few broker-dealers that are often related to the promoter
or issuer; (ii) manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (iii) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (iv) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and (v) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated to
a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. Our management is aware of the abuses that
have occurred historically in the penny stock market. Although we do not expect
to be in a position to dictate the behavior of the market or of broker-dealers
who participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities.
We are responsible for the indemnification of our officers and directors.
Our Bylaws provide for the indemnification of our directors, officers,
employees, and agents, under certain circumstances, against attorney's fees and
other expenses incurred by them in any litigation to which they become a party
arising from their association with or activities on behalf of us. This
indemnification policy could result in substantial expenditures, which we may be
unable to recoup.
We recently adopted amendments to our Bylaws that could entrench our Board of
Directors and prevent a change in control.
Effective January 20, 2005, we adopted Amended and Restated Bylaws. The
Amended and Restated Bylaws (i) increased the percent of stockholders required
to call special meetings of stockholders from 10% to 30%, (ii) eliminated a
provision allowing stockholders to fill vacancies in the Board if such vacancies
were not filled by the Board, (iii) include a new provision providing that no
contract or transaction between us and one or more of our directors or officers
is void if certain criteria are met and (iv) allow for the amendment of our
Bylaws by the Board of Directors rather than our stockholders. Collectively,
these provisions may allow our Board of Directors to entrench the current
members and prevent a change in control of our company in situations where a
change in control would be beneficial to our stockholders.
11
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks
and uncertainties. These statements relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "could," "expect," "plan,"
"intend," "anticipate," "believe," "estimate," "predict," "potential," or
"continue," or the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks outlined in the "Risk Factors" section beginning on
page 4 in this prospectus. These factors may cause our actual results to differ
materially from any forward-looking statement.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We are under no duty to update
any of the forward-looking statements after the date of this prospectus to
conform such statements to actual results or to changes in our expectations.
MARKET FOR COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND DIVIDEND POLICY
Our common stock is traded on the NASD's Over-the-Counter Bulletin
Board under the symbol "CBBT.OB." On June 21, 2005, the last reported sales
price for our common stock was $8.00 per share.
The following table sets forth, for the quarters indicated, the range
of closing high and low bid prices of our common stock as reported by the NASD
Over-the-Counter Bulletin Board, as adjusted for all previously effected stock
splits. These prices do not include retail markup, markdown or commission and
may not represent actual transactions.
Common Stock
----------------
By Quarter Ended High Low
---------------- ------ ------
Fiscal 2003
March 31, 2003........................................... $ .39 $ .37
June 30, 2003............................................ $ .60 $ .60
September 30, 2003....................................... $1.01 $1.01
December 31, 2003........................................ $1.01 $1.01
Fiscal 2004
March 31, 2004........................................... $1.01 $1.01
June 30, 2004............................................ $1.01 $1.01
September 30, 2004....................................... $1.45 $1.02
December 31, 2004........................................ $3.50 $1.25
Fiscal 2005
March 31, 2005........................................... $7.30 $2.80
June 30, 2005 (through June 15, 2005).................... $8.00 $5.00
12
As of June 15, 2005, there were 40,978,533 shares of our common stock
outstanding held by approximately 118 stockholders of record.
We have never paid any cash dividends on our common stock. We do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Should we decide in the future to do so, as a holding company, our
ability to pay dividends and meet other obligations depends upon the receipt of
dividends or other payments from our operating subsidiaries and other holdings
and investments. In addition, our operating subsidiaries, from time to time, may
be subject to restrictions on their ability to make distributions to us,
including as a result of restrictive covenants in loan agreements, restrictions
on the conversion of local currency into U.S. dollars or other hard currency and
other regulatory restrictions. We currently intend to retain future earnings, if
any, to finance operations and the expansion of our business.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this document. In addition to historical
information, the following discussion and other parts of this document contain
certain forward-looking information. Our financial statements are prepared in
U.S. dollars and are in accordance with accounting principles generally accepted
in the United States. When used in this discussion, the words "believes,"
"anticipates," "expects," and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected due to a number of factors beyond our control. We do not undertake to
publicly update or revise any of the forward-looking statements even if
experience or future changes show that the indicated results or events will not
be realized. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. You are also
urged to carefully review and consider our discussions regarding the various
factors, which affect our business, included in this section and elsewhere in
this report. In evaluating our business, you should carefully consider the
information provided under the caption "Risk Factors" beginning on page 4 in
this prospectus.
Factors that might cause actual results, performance or achievements to
differ materially from those projected or implied in such forward-looking
statements include, among other things: (i) the impact of competitive products;
(ii) changes in law and regulations; (iii) adequacy and availability of
insurance coverage; (iv) limitations on future financing; (v) increases in the
cost of borrowings and unavailability of debt or equity capital; (vi) the effect
of adverse publicity regarding our products; (vii) our inability to gain and/or
hold market share; (viii) exposure to and expense of resolving and defending
product liability claims and other litigation; (ix) consumer acceptance of our
products; (x) managing and maintaining growth; (xi) customer demands; (xii)
market and industry conditions including pricing and demand for products, (xiii)
the success of product development and new product introductions into the
marketplace; (xiv) the departure of key members of management; (xv) our ability
to efficiently market our products; as well as other risks and uncertainties
that are described from time to time in our filings with the Securities and
Exchange Commission.
Net income does not reflect certain annual appropriations to reserve
funds in accordance with PRC regulations. These appropriations are reflected in
the statement of retained earnings as a reduction in retained earnings.
Except as otherwise indicated by the context, references in this
prospectus to "we," "us," or "our" are to the combined business of China BAK
Battery, Inc. ("CBBI") and its wholly-owned direct subsidiary, BAK
International, Ltd. ("BAK International"), and its wholly-owned subsidiary,
Shenzhen BAK Battery Co., Ltd. ("BAK Battery"), and in each case do not include
the selling stockholders. Because CBBI and BAK International are holding
companies, the operating information contained in this Management's Discussion
and Analysis relates to BAK Battery, the operating wholly-owned subsidiary of
BAK International. BAK Battery's fiscal year ends September 30. References to
"China" or to the "PRC" are references to the People's Republic of China.
Overview
On January 20, 2005, we completed a stock exchange transaction with the
stockholders of BAK International. Pursuant to the terms of the exchange, we
issued 39,826,075 shares of our common stock to the stockholders of BAK
International, representing approximately 97.2% of our post-exchange issued and
outstanding common stock, in exchange for 100% of the outstanding capital stock
of BAK International. As a result of this transaction, we currently operate as a
holding company for our China-based subsidiaries, BAK International and BAK
Battery. We are presently focused on the manufacture, commercialization and
distribution of a wide variety of standard and customized lithium ion
rechargeable batteries for use in a wide array of applications. We also have
internal research and development facilities engaged primarily in furthering
lithium ion and lithium polymer related technologies. We believe that our
technologies allow us to offer batteries that are flexibly configured,
lightweight and generally achieve longer operating time than many competing
batteries currently available. We have focused on manufacturing a family of
replacement lithium batteries for mobile phones. We also supply rechargeable
lithium ion batteries for use in various other portable electronic applications,
including high-power handset telephones, laptop computers, digital cameras,
video camcorders, MP3 players and general industrial applications.
14
We manufacture three types of batteries: steel cell, aluminum cell and
cylindrical cell. We deliver our products to packing plants operated by third
parties where the bare cells are packed in accordance with specifications
established by certain manufacturers of mobile phones and other electronic
products. We operate sales and service branches in six principal coastal cities
and Beijing in the PRC. The majority of our income is generated from the sale of
steel cells. However, we believe there is growth potential for aluminum and
cylindrical cells because of their wide applications. Our current growth
strategy includes entering into the original equipment manufacture ("OEM")
battery market for top mobile phone brands and portable electronic applications
worldwide. We have developed a program for producing high power lithium ion
battery cells which may allow us inroads into additional battery markets such as
those for power tools. We have begun marketing our high power lithium ion
battery cells; however, we have not yet received any revenues from the sale of
this product.
Our recent business activities include:
o In June 2002 we began operations with initial monthly output of
approximately 220,000 units.
o We received government authorization in October 2002 to establish a
Postdoctoral Workstation, the establishment of which serves as
recognition by the PRC government of the strong capabilities of our
in-house research team. With our research and development facilities we
are focusing our research efforts on liquid lithium ion batteries, high
power lithium ion batteries, solid-polymer lithium ion batteries, and
cylindrical and rectangular lithium ion batteries.
o In March 2003 our steel case battery plant started operations with
monthly output reaching approximately 2.4 million units. Our current
monthly output of steel case batteries is approximately 7.7 million
units.
o In September 2003 we were granted International Organization for
Standardization 14001: 1996, an environmental management system
certification, as well as International Organization for
Standardization 9001: 2000, a quality management system certification,
by Beijing Zhonjing Quality Certification Co., Ltd., an independent
third party which issues such standardization certifications.
o As of April 2005, our total monthly capacity for all battery types was
approximately 15.0 million units and our total monthly output for all
battery types was approximately 11.8 million units. Our ability to grow
our manufacturing capacity is primarily due to the development and
expansion of semi-automated manufacturing lines requiring less labor
efforts when compared to previous more labor intensive manufacturing
processes. Following the completion of our new steel case cell
production facility located in Shenzhen, PRC in May 2005, we expect our
total monthly capacity for all battery types to rise to 24.2 million
units and our total monthly output for all battery types to increase to
21.6 million units by September 2005.
o As of September 2004, we established a sales and service network to
cover six principal coastal cities and Beijing in the PRC.
o We believe we will be able to increase our manufacturing capacity of
steel cell batteries from approximately 350,000 batteries per day to
approximately 650,000 batteries per day by September 2005 as a result
of the completion of our new steel case cell production facility
located in Shenzhen, PRC in May 2005. The opening of our new production
facility will also allow us to increase the production of aluminum cell
batteries by making available a production line currently dedicated to
steel cell batteries production. We hope to increase production of
aluminum cell batteries from 100,000 batteries to approximately 300,000
batteries per day.
15
Results of Operations
Results of operations for the six months ended March 31, 2005 as compared to the
six months ended March 31, 2004.
Revenues
Revenues increased to approximately $51 million for the six months
ended March 31, 2005 as compared to approximately $32 million for same period of
the prior year, an increase of approximately $19 million or 59%. Our revenues
increased during the period as a result of inroads made into the aluminum case
cell market where revenues increased to approximately $13.39 million for the
period as compared to approximately $4.25 in the prior year period, an increase
of $9.14 million. Revenues relating to steel case batteries increased to
approximately $25.54 million from approximately $23.67 million in the prior year
period, an increase of approximately $1.87 million or 7.9%. Our customers
continued to demand price concessions during the second quarter of fiscal 2005,
while simultaneously raising the bar with respect to quality and service
requirements. In response to these conditions, we relied on the time-tested
approach of cost containment and price reductions. Despite continued pricing
pressure resulting in selling price reductions during the year in the steel case
market, we were able to gain market share both domestically and internationally
during the period because, in our belief, our production volume and
technological advantage gives us an advantage over our competitors with regard
to supply ability and cost.
Gross Profit
Gross profit for the six months ended March 31, 2005 was approximately
$11.3 million or 22% of revenues as compared to gross profit of approximately
$7.5 million or 24% of revenues for the same period of the prior year.
The decrease in gross profit, as a percentage of revenues, resulted
from a combination of increased unit selling prices, primarily in the aluminum
market and increased unit manufacturing costs stemming from an increase in
prices for most raw materials used in the manufacturing process. Steel case cell
battery selling prices decreased by 4.3% during the period, while cost of steel
case cell units increased by about 1.5%, resulting in an overall decrease in
gross profit from 23% to 19% of revenues. In the aluminum case cell market,
price increases averaged 12% and unit costs increased by 33%, thereby reducing
gross profit. As such, gross profits in aluminum case segment decreased from 28%
to 16% of revenues. We did, however, gain market share due in part to our
decision to maintain low pricing, the improved quality of our products and the
improvements we made in manufacturing efficiencies. Prior to 2004, we sold our
products primarily in the replacement battery market (as opposed to the OEM
market). Products in the replacement market face lower prices and, consequently,
lower gross profit margins. Our profit margins should increase as we move into
the OEM market.
Continued vertical integration of the manufacturing process, increasing
production efficiencies, and low labor costs collectively served to contain
costs and we anticipate that these activities will position us to maintain gross
profit margins at or near the 22% range during our current fiscal year. Cost
savings realized from the above initiatives will help to offset potential raw
material and other price increases during 2005 and beyond. Management continues
to focus on cost containment and savings realized based on increased economies
of scale in order to maintain gross profit margins near 2004 levels.
Some entities include all costs associated with their distribution
system in cost of goods sold while other companies may record a portion of their
distribution costs in selling expenses. Because of this disparity in financial
reporting, gross margins between our company and other companies may not be
comparable. With the exception of transportation and freight charges which we
include under selling expenses, we believe we include most other costs of our
distribution system.
Selling Expenses
Selling expenses increased to approximately $1.7 million for the six
month period ended March 31, 2005 as compared to approximately $836,000 for the
same period of the prior year, an increase of approximately $837,000 or about
100%.
16
Salaries related to selling efforts increased to approximately $1.28
million from approximately $523,000 for the same period of the prior year, an
increase of approximately $757,000. More sales and marketing efforts were
required to continue gaining market share and to grow revenues. We had 76
employees engaged in sales and marketing as of March 31, 2005 as compared to 63
as of March 31, 2004. In connection with the introduction of a formal and
coordinated marketing campaign, marketing expenses increased to approximately
$1.82 million from approximately $840,000 incurred in the same period of the
prior year, an increase of approximately $980,000. Transportation, filing fees,
promotion, trademarks, and other related selling and marketing expenses
accounted for the majority of the increase.
Marketing or advertising costs consist primarily of promoting ourselves
and our products through printed advertisements in trade publications and
displaying our products through attendance and industry trade exhibitions. We do
not pay slotting fees, engage in cooperative advertising programs, participate
in buydown programs or similar arrangements. No material estimates are required
to determine our marketing or advertising costs.
General and Administrative Expenses
General and administrative expenses decreased to approximately $1.80
million for the six months ended March 31, 2005 as compared to approximately
$1.92 million for the same period of the prior year, a decrease of approximately
$120,000 or 6.25%. As a percentage of revenues, general and administrative
expenses were 3.5% and 6% as of March 31, 2005 and March 31, 2004, respectively.
Despite efforts related to increasing manufacturing facilities, general and
administrative expenses remained manageable relative to revenues.
Salaries and benefits, including training, increased to approximately
$4.41 million for the six month period ended March 31, 2005 from approximately
$3.25 million for the six month period ended March 31, 2004, an increase of
approximately $1.16 million or 35%. We had 152 employees in machinery and
engineering positions as of March 31, 2005, as compared to 32 employees as of
the same period for the prior year. Increases in office expenses, insurance,
professional fees, maintenance, recruitment, and other administrative expenses
accounted for the remainder of the increase in this category.
Research and Development Expenses
Research and development expenses decreased to approximately $186,000
for the six months ended March 31, 2005 as compared to approximately $206,000
for the same period of the prior year, a decrease of approximately $20,000 or
10%. The Company engaged in less patent applications in the first quarter of
fiscal 2005 and enacted it's new initiatives, such as rechargeable lithium
polymer batteries research and development, during the second quarter of fiscal
2005.
Bad Debts
Bad debt expense totaled approximately $345,000 for the six months
ended March 31, 2005 as compared to approximately $108,000 for the same period
of the prior year, a increase of $237,000 or 219%. As a percentage of revenues,
bad debts were approximately 0.7% and 0.3% for the six months ended March 31,
2005 and 2004, respectively. We believe that the reserve for bad debts as of
March 31, 2005 is adequate and will adjust future reserves as we gain more
experience with our customers.
Depreciation and Amortization
Depreciation and amortization totaled approximately $1.5 million for
the six months ended March 31, 2005 as compared to approximately $594,000 for
the same period of the prior year, an increase of approximately $906,000 or
153%. The increase in depreciation and amortization principally reflects our
expansion of manufacturing facilities and related acquisitions.
17
Operating Income
Operating income totaled approximately $5.71 million for the six months
ended March 31, 2005 as compared to operating income of approximately $3.81
million for the same period of the prior year, an increase of approximately
$1.90 million or 49%.
As a percentage of revenues, operating income was 11.2% for the six
months ended March 31, 2005 as compared to 12.0% for the same period of the
prior year. The reduction in operating income as a percentage of revenues was
substantially due to the increase in selling expense and depreciation /
amortization.
Finance Costs
Finance costs increased to approximately $961,000 for the six month
period ended March 31, 2005 as compared to approximately $158,000 for the same
period of the prior year, an increase of approximately $803,000 or 508%.
We had approximately $54 million in short term loans and notes payable
as of March 31, 2005 as compared to approximately $20.7 million outstanding as
of March 31, 2004. Short term loans and notes payable are comprised of various
short term bank loans and promissory notes, with interest ranging from 4.75 % to
5.84 %, and maturities of generally less than twelve months. The increase in
interest bearing debt caused the increase in finance costs. The funds were used
for working capital purposes based on the increase in revenues.
Net Income
Primarily as a result of increased sales during the period, we
increased our net income to approximately $4.36 million as compared to
approximately $3.54 million for the same period of the prior year, an increase
of approximately $82,000 or about 23.3%.
Dividends
We have not paid out any dividends to date. In determining our dividend
policy, our Board of Directors considers current and long term profitability,
committed and potential cash requirements, and our overall financial condition.
We do not anticipate the payment of any dividends in the future based on the
present financial requirements for expansion. Should we decide in the future to
pay dividends, as a holding company, our ability to do so and meet other
obligations depends upon the receipt of dividends or other payments from our
operating subsidiaries and other holdings and investments. In addition, our
operating subsidiaries, from time to time, may be subject to restrictions on
their ability to make distributions to us, including as a result of restrictive
covenants in loan agreements, restrictions on the conversion of local currency
into U.S. dollars or other hard currency and other regulatory restrictions.
Results of operations for the year ended September 30, 2004 as compared to the
year ended September 30, 2003
Revenues
Revenues increased to approximately $63.74 million for the year ended
September 30, 2004 as compared to approximately $20.05 million for the prior
year, an increase of approximately $43.69 million or 218%. Our revenues
increased during the period as a result of inroads made into the aluminum case
cell market where revenues increased to approximately $13.08 million for the
year ended September 30, 2004 as compared to approximately $280,000 in the prior
year, an increase of $12.8 million. Revenues relating to steel case batteries
increased to approximately $50.41 million from approximately $19.68 million in
the prior year, an increase of approximately $30.73 million or 156%. In fiscal
year 2004, our customers continued to demand price concessions, while
simultaneously raising the bar with respect to quality and service requirements.
In response to these conditions, we relied on the time-tested approach of cost
containment and price reductions. Despite continued pricing pressure resulting
18
in selling price reductions during the year in both aluminum case and steel case
markets, we were able to gain market share both domestically and internationally
because, in our belief, our production volume and technological advantage gives
us an advantage over our competitors with regard to supply ability and cost.
Gross Profit
Gross profit for the year ended September 30, 2004 was approximately
$15.46 million or 24.3% of revenues as compared to gross profit of approximately
$5.87 million or 29.3% of revenues for the prior year.
The reduction in gross profit, as a percentage of revenues, resulted
from a combination of reduced unit selling prices and increased unit
manufacturing costs stemming from an increase in prices for most raw materials
used in the manufacturing process. Steel case cell battery selling prices
decreased by 12.4% during fiscal 2004, while cost of steel case cell units
decreased by only about 5.5%, resulting in an overall decrease in gross profit
from 28% to 22.8% of revenues. In the aluminum case cell market, price
reductions averaged 21.9% and unit costs increased by 10.6%, thereby reducing
gross profit. As such, gross profits in aluminum case segment decreased from
45.2% to 22.4% of revenues. We did, however, gain market share due in part to
our decision to maintain low pricing, the improved quality of our products and
the improvements we made in manufacturing efficiencies. Prior to 2004, we sold
our products primarily into the replacement battery market (as opposed to the
OEM market). Products in the replacement market face lower prices and,
consequently, lower gross profit margins. Our profit margins should increase as
we move into the OEM segment.
Continued vertical integration of the manufacturing process, increasing
production efficiencies, and low labor costs collectively served to contain
costs and we anticipate that these activities will position us to maintain gross
profit margins at or near the 22% range during our current fiscal year. Cost
savings realized from the above initiatives will help to offset potential raw
material and other price increases during 2005 and beyond. Management continues
to focus on cost containment and savings realized based on increased economies
of scale in order to maintain gross profit margins near 2004 levels.
Some entities include all costs associated with their distribution
system in cost of goods sold while other companies may record a portion of their
distribution costs in selling expense. Because of this disparity in financial
reporting, gross margins between our company and other companies may not be
comparable. With the exception of transportation and freight charges which we
include under selling expenses, we believe we include most other costs of our
distribution system.
Selling Expenses
Selling expenses increased to approximately $1.87 million for the year
ended September 30, 2004 as compared to approximately $442,000 for the prior
year, an increase of approximately $1.43 million or about 325%.
Salaries related to selling efforts increased to approximately $740,000
from approximately $80,000 for the prior year, an increase of approximately
$660,000. More sales and marketing efforts were required to continue gaining
market share and to grow revenues. We had 67 employees engaged in sales and
marketing as of September 30, 2004 as compared to 51 as of September 30, 2003.
In connection with the introduction of a formal and coordinated marketing
campaign, marketing expenses increased to approximately $610,000 from
approximately $230,000 incurred in the prior year, an increase of approximately
$380,000. Transportation, filing fees, promotion, trademarks, and other related
selling and marketing expenses increased to approximately $520,000 from
approximately $132,000 for the prior year, an increase of approximately
$388,000.
Marketing or advertising costs consist primarily of promoting ourselves
and our products through printed advertisements in trade publications and
displaying our products through attendance and industry trade exhibitions. We do
not pay slotting fees, engage in cooperative advertising programs, participate
in buydown programs or similar arrangements. No material estimates are required
to determine our marketing or advertising costs.
19
General and Administrative Expenses
General and administrative expenses grew to approximately $3.05 million
for the year ended September 30, 2004 as compared to approximately $786,000 for
the prior year, an increase of approximately $2.26 million or 288%. As a
percentage of revenues, general and administrative expenses were 4.8% and 3.9%
in 2004 and 2003, respectively. Despite efforts related to increasing
manufacturing facilities, general and administrative expenses remained
manageable relative to revenues.
Salaries and benefits, including training, increased to approximately
$1.27 million from approximately $260,000 as compared to the prior year, an
increase of approximately $1.01 million or 388%. We had 5,428 employees in
machinery and engineering positions as of September 30, 2004, as compared to
2,637 employees as of the prior year end. Increases in office expenses,
insurance, professional fees, maintenance, recruitment, and other administrative
expenses accounted for the remainder of the increase in this category.
Research and Development Expenses
Research and development expenses increased to approximately $329,000
for the year ended September 30, 2004 as compared to approximately $117,000 for
the prior year, an increase of approximately $212,000 or 182%. Increase in
research and development staff to 107 as of September 30, 2004 from 58 as of the
prior year end was the primary factor accounting for the increase in this
category. New initiatives, such as rechargeable lithium polymer batteries
research and development, and an increase in patent applications and maintenance
required incremental staff hiring contributed to the increase.
Bad Debts
Bad debt expense totaled approximately $327,000 for the year ended
September 30, 2004 as compared to approximately $448,000 for the prior year, a
decrease of $121,000 or 27%. As a percentage of revenues, bad debts were
approximately 1/2% and 2.2% for 2004 and 2003, respectively. We believe that the
reserve for bad debts as of September 30, 2004 is adequate and will adjust
future reserves as we gain more experience with our customers.
Depreciation and Amortization
Depreciation and amortization totaled approximately $1.73 million for
the year ended September 30, 2004 as compared to approximately $380,000 for the
prior year, an increase of approximately $1.35 million or 357%. The increase in
depreciation and amortization principally reflects our expansion or
manufacturing facilities and related acquisitions.
Operating Income
Operating income totaled approximately $8.15 million for the year ended
September 30, 2004 as compared to operating income of approximately $3.70
million for the year ended September 30, 2003, an increase of approximately
$4.45 million or 120%.
As a percentage of revenues, operating income was 12.8% in 2004 as
compared to 18.5% for the prior year. The reduction in operating income as a
percentage of revenues was substantially due to the reduction in gross profit.
Finance Costs
Finance costs increased to approximately $1.01 million for the year
ended September 30, 2004 as compared to approximately $123,000 for the prior
year, an increase of approximately $887,000 or 721%.
We had approximately $49.89 million in short term loans and notes
payable as of September 30, 2004 as compared to approximately $9.58 million
outstanding as of September 30, 2003. Short term loans and notes payable are
comprised of various short term bank loans and promissory notes, with interest
ranging from 4.54% to 5.84%, and maturities of generally less than twelve
20
months. The increase in interest bearing debt caused the increase in finance
costs. The funds obtained were used to construct new manufacturing facilities
and purchase associated equipment, which resulted in approximately $40.31
million in capital costs. The remaining funds were used for working capital
purposes based on the increase in revenues.
Provision for Income Taxes
We enjoy a temporary favorable tax treatment as a result of locating
our main production facilities in the Shenzhen Special Enterprise Zone. We
anticipate a tax rate of 7.5% of profits for the next two fiscal years before
reverting to the anticipated standard corporate rate of 15%.
Taxes increased to approximately $394,000 for the year ended September
30, 2004 as compared to no taxes for the previous year. We commenced paying
taxes at the annual rate of 7.5% in 2004; however, because these taxes are based
on a calendar year we only paid taxes for the final nine months of fiscal 2004,
resulting in an effective rate of 5.5%.
Net Income
Primarily as a result of increased sales during fiscal 2004, we
increased our net income to approximately $6.75 million as compared to
approximately $3.58 million for the prior year, an increase of approximately
$3.17 million or about 89%.
Results of operations for the year ended September 30, 2003 as compared to the
year ended September 30, 2002
Revenues
Revenues increased to approximately $20.05 million for the year ended
September 30, 2003 as compared to approximately $3.05 million for the prior
year, an increase of approximately $17.0 million or 557%.
We completed our first full year of sales in fiscal 2003 as compared to
four months of sales in fiscal 2002. Also, during 2003 we commenced our
semi-automated manufacturing process as compared to a primarily labor intensive
manufacturing processes in 2002.
Gross Profit
Gross profit for the year ended September 30, 2003 was approximately
$5.87 million or 29.3% of revenues as compared to approximately $801,000 or
26.2% of revenues for the prior year.
The increase in gross profit as a percentage of revenues was due to
commencement of semi-automated manufacturing processes during 2003 leading to
manufacturing efficiencies. Also, based on increased volume of raw material
purchases during 2003 we were able to reduce the unit cost of production by
approximately 32% when compared to the prior year. Finally, we commenced sales
of aluminum case cells and cylindrical cells during fiscal 2003. Both of these
segments experienced higher gross profits than steel case cells, contributing to
an overall increase in gross profit.
Other Income
Other income for the year ended September 30, 2003 was $0 as compared
to other income of approximately $412,000 for the year ended September 30, 2002.
During 2002, we provided engineering technical support consisting of assembling
and adjusting a lithium ion battery testing and aging machine, resulting in this
income.
21
Selling Expenses
Selling expenses increased to approximately $442,000 for the year ended
September 30, 2003 as compared to approximately $16,000 for the prior year, an
increase of approximately $426,000.
We commenced selling and marketing activities during fiscal 2003. We
had 51 employees in sales as of September 30, 2003 as compared to 12 as of
September 30, 2002. We incurred approximately $230,000 in marketing expenditures
during fiscal 2003 as compared to $0 in fiscal 2002.
General and Administrative Expenses
General and administrative expenses grew to approximately $786,000 for
the year ended September 30, 2003 as compared to approximately $167,000 for the
prior year, an increase of approximately $619,000 or 370%. As a percentage of
revenues, general and administrative expenses were 3.9% and 5.5% for 2003 and
2002, respectively.
Research and Development Expenses
Research and development expenses increased to approximately $117,000
for the year ended September 30, 2003 as compared to approximately $30,000 for
the prior year, an increase of approximately $87,000 or 290%. Whereas in fiscal
2002 we were primarily engaged in setting up operations, during fiscal 2003 we
commenced ancillary activities including research and development.
Bad Debts
Bad debt expense totaled approximately $448,000 for the year ended
September 30, 2003 as compared to approximately $47,000 for the prior year, an
increase of approximately $401,000 or 853%. As a percentage of revenues, bad
debts were approximately 2.2% and 1.5% for 2003 and 2002 respectively. We
believe that the reserve for bad debts as of September 30, 2003 is adequate and
we will adjust future reserves as we gain more experience with our customers.
Depreciation and Amortization
Depreciation and amortization totaled approximately $380,000 for the
year ended September 30, 2003 as compared to approximately $264,000 for the
prior year, an increase of approximately $116,000 or 44%. The increase in
depreciation and amortization principally reflects our increased acquisition of
manufacturing equipment during fiscal 2003 when compared to the prior year.
Operating Income
Operating income totaled approximately $3.70 million for fiscal 2003 as
compared to approximately $718,000 for fiscal 2002, an increase of approximately
$2.98 million or 415%. As a percentage of revenues, operating income was 18.5%
for fiscal 2003 and 23.5% for fiscal 2002. The reduction in operating income was
primarily due to generating no other income as compared to generating other
income of approximately $412,000 during fiscal 2002.
Finance Costs
We incurred approximately $123,000 in finance costs for the year ended
September 30, 2003 as compared to approximately ($1,000) income for the prior
year. Interest earned on cash deposits exceeded interest paid on short term
borrowings during fiscal 2002.
We had approximately $9.58 million in outstanding short term loans and
notes payable as of September 30, 2003 as compared to approximately $363,000 as
of September 30, 2002. Short term loans and notes payable are comprised of
various short term bank loans and promissory notes, with interest ranging from
22
4.54% to 5.84%, and maturities of generally less than twelve months. The
increase in interest bearing debt was the primary reason for the increase in
finance costs when compared to the prior year. We increased our borrowings in
order to acquire equipment necessary for the expansion of our manufacturing
operations and for working capital purposes.
Net Income
Net income for the year ended September 30, 2003 was approximately
$3.58 million as compared to approximately $720,000 for the year ended September
30, 2002. The increase is primarily attributable to increased sales and the
corresponding increase in gross profit for the year ended September 30, 2003 as
compared to the prior year.
Liquidity and Capital Resources
We have historically financed our liquidity requirements from a variety
of sources, including short term borrowings under bank credit agreements,
promissory notes and issuance of capital stock. As of March 31, 2005 we had cash
and cash equivalents in the amount of approximately $21.44 million as compared
to approximately $10.33 million as of September 30, 2004. Included in cash and
cash equivalents are cash deposits that are pledged to banks in the amount of
approximately $10.55 million and $7.12 million at March 31, 2005 and September
30, 2004, respectively. Typically, banks will require borrowers to maintain
deposits of approximately 20% to 30% of the outstanding loan balances. The
individual bank loans have maturities ranging from 5 to 12 months which
coincides with the periods the cash remains pledged to the banks.
There was a working capital deficiency of approximately $15.63 million
as of March 31, 2005 as compared to a working capital deficiency of
approximately $26.23 million as of September 30, 2004, a decrease of $10.6
million. The decrease in working capital deficiency was primarily attributable
to the increase in cash and accounts receivable and the decrease in accounts
payable and inventories. We had short term borrowings, maturing in less than one
year, of approximately $54.10 million as of March 31, 2005 as compared to
approximately $49.89 million for the year ended September 30, 2004, or an
increase of approximately $4.2 million. Our short term borrowings, maturing in
less than one year, had increased to $61.42 million as of June 8, 2005.
Our principal raw materials are liquid electrolyte and lithium cobalt
oxide. The prices for these raw materials are subject to market forces largely
beyond our control, including energy costs, organic chemical feedstocks, market
demand, and freight costs. The prices for these raw materials have varied
significantly, including a significant increase in the year ended September 30,
2004 and a significant decrease in the quarter ended December 31, 2004. Prices
have remained relatively static since January 1, 2005, but they may vary
significantly in the future. We may not be able to adjust our product prices,
especially in the short term, to recover the costs of increases in these raw
materials. Our future profitability may be adversely affected to the extent we
are unable to pass on higher raw material and energy costs to our customers.
We are currently constructing a new production facility at our BAK
Industrial Park. The facility encompasses 174,784 square meters with an
estimated construction cost of $35 million. We have paid approximately 88% of
the cost of construction, with the balance to be paid prior to the expected
completion date of June 2005. Upon completion, our new facility will give us the
ability to manufacture approximately 24.2 million units per month, which in turn
may allow us to significantly increase our revenues. As we complete construction
on our BAK Industrial Park, we anticipate being able to extend the maturity of
some or all of our short term debt during fiscal 2005. We are also seeking
additional capital from other sources in order to meet our capital requirements
for expansion and ongoing liquidity needs, although at the present time we have
not entered into any definitive agreement, or understanding for such financing.
23
As of March 31, 2005, principal and interest payments due under our
contractual obligations were as follows:
Payments Due
(In thousands)
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
--------- --------- --------- --------- ---------
Term debt ........... $ 28,877 $ 28,877 -- -- --
Lines of Credit...... $ 25,223 $ 25,223 -- -- --
Operating Leases..... $ 129 $ 61 $ 68 -- --
Capital Leases....... -- -- -- -- --
As of March 31, 2005, we had the following principal amounts
outstanding under our credit facilities and other debt agreements:
Maximum
Amount Available Amount Borrowed
-----------------------------------
March 31, 2005
(In thousands)
Comprehensive Credit Facility - Agricultural Bank of China ............. $ 24,165 $ 22,918
Comprehensive Credit Facility - Shenzhen Development Bank .............. $ 18,123 $ 17,435
Comprehensive Credit Facility - Shuibei Branch, Shenzhen Commercial Bank $ 6,041 $ 2,011
Comprehensive Credit Facility - Binhai Branch and Shenzhen Branch,
China Minsheng Bank ................................................... $ 4,833 $ 4,833
-----------------------------------
Total for Credit Facilities.................................... $ 53,162 $ 47,197
===================================
Other borrowings from Agricultural Bank of China ......................................... $ 6,903(1)
================
Total Outstanding................................................................ $ 54,100
================
-----------------------
(1) This amount was borrowed outside of the Comprehensive Credit Facility
with Agricultural Bank of China and therefore is not reflected in the
amounts borrowed thereunder.
We refinanced our short term debt throughout the early part of 2005. As
of June 8, 2005 and as a result of the refinancing, our short term debt
obligations had increased from $54.10 million to $61.42 million, principally
owing to the debt with Shenzhen Development Bank and Shenzhen Commercial Bank.
The refinanced debt arrangements bear interest at rates ranging from 5.022% to
6.138% and have maturity dates ranging from six to twelve months. These debt
arrangements are generally guaranteed by BAK Battery, BAK International,
Xiangqian Li, our director, Chairman of the Board, President, and Chief
Executive Officer, and Jilin Provincial Huaruan Technology Company Limited by
Shares, a PRC company ("Huaruan Technology"). Pursuant to the refinancing, we
deposited approximately $6.04 million of restricted cash and pledged
approximately 6.16 million battery cells in inventory and all of our equipment
and machinery as security for our Comprehensive Credit Facility with Shenzhen
Development Bank. In addition, Mr. Li pledged 19,053,887 of his shares of our
common stock to guarantee our obligations under the Comprehensive Credit
Facility with Shenzhen Development Bank. Furthermore, if at any point during the
term of the Comprehensive Credit Facility with Shenzhen Development Bank (i) our
liabilities exceed 70% of our assets, (ii) our sales revenue declines by 10% or
(iii) our net asset value declines by 10% compared to the same point during
previous year, all outstanding debt including interest and penalties due
thereunder will accelerate and become immediately due and payable. We are
currently and we believe we will continue to be in compliance with these
financial tests. The indebtedness to Shenzhen Commercial Bank is guaranteed by
Mr. Li and by an unaffiliated third party guarantor. If we fail to obtain debt
or equity
24
financing to meet our debt obligations or fail to obtain extensions of maturity
dates of these obligations as they become due, our overall liquidity and capital
resources will be adversely affected as a result of our efforts to satisfy these
obligations.
On September 30, 2004 BAK Battery borrowed approximately $1.81 million
from Changzhou Lihai Investment Consulting Co., Ltd., an unaffiliated party.
This transaction constituted a violation of applicable PRC law prohibiting loans
between PRC companies and was therefore fully repaid during the three months
ended December 31, 2004. Due to the repayment, we do not believe we will become
subject to any actions or proceedings that would have adverse consequences on
our business operations in the PRC.
On January 18, 2005, BAK International completed a private offering of
its securities. The offering resulted in the issuance of an aggregate of
8,600,433 shares of BAK International's common stock for gross offering proceeds
of $17 million, or an offering price of $1.98 per share. Investors in the
offering participated in the exchange transaction with CBBI and received an
aggregate of 8,600,433 restricted shares of our common stock, along with
attendant registration rights. Net proceeds from the financing have been and are
anticipated to be used as follows: approximately $4.25 million to expand
production facilities; approximately $1.8 million for the enhancement of
existing products and for research and development of new product offerings; and
approximately $9.65 million for working capital purposes.
We anticipate that during the course of the current fiscal year the
cash needed for implementation of our growth strategy and related working
capital requirements will be derived from the proceeds of BAK International's
recently completed private offering, the refinancing of short-term indebtedness
and cash generated from operating activities. There is no assurance that we will
be able to obtain the same terms for any refinancing of short term debt or
renewal of credit facilities or that we will be able to obtain refinancing at
all.
We are presently undergoing certification as an OEM manufacturer for
Motorola, Inc. To date, we have expended approximately $2 million in the
certification process. Most of the certification process is complete and we
expect certification by August 2005. We anticipate that upon certification we
will be required to spend an additional $2 million for production equipment to
enable us to fill anticipated orders. We estimate that we will receive orders
from Motorola commencing in September 2005, with our first OEM revenues to be
received by October 2005. An additional 2,000 employees are anticipated to be
employed to satisfy the production demands from Motorola, Inc. We will need to
finance the expenditures related to providing OEM services through available
working capital, debt or equity financing. At the present time, we have no
agreements regarding any future debt or equity financing.
The forecast of the period of time through which our financial
resources will be adequate to support operations is a forward-looking statement
that involves risks and uncertainties. Our actual funding requirements may
differ materially from those presently anticipated as a result of unforeseen
factors or circumstances.
Critical Accounting Policies
In preparing its consolidated financial statements in conformity with
accounting principles generally accepted in the United States, we use
statistical analysis, estimates and projections that affect the reported amounts
and related disclosures and may vary from actual results. We consider the
following accounting policies to be both those that are most important to the
portrayal of our financial condition and that require the most subjective
judgment. If actual results differ significantly from management's estimates and
projections, there could be an effect on our financial statements.
Revenue Recognition, Returns and Warranties
-------------------------------------------
Revenue from sales of our products is recognized upon shipment or
delivery, depending on the sales order, provided that persuasive evidence of a
sales arrangement exists, title and risk of loss have transferred to the
customer, the sales amount is fixed and determinable, sales and value-added tax
laws have been complied with, and collection of the revenue is reasonably
assured.
25
We reduce revenue based upon estimates of future credits to be granted
to customers. Credits are granted for reasons such as product returns due to
quality issues including product warranties claims, volume-based incentives, and
other special pricing arrangements. Management utilizes our historical
experience to estimate the allowance for product returns and warranty claims and
revises those estimates periodically based on changes in actual experience,
market conditions and contract terms.
In addition, management monitors collectibility of accounts receivable
primarily through review of the accounts receivable aging. When facts and
circumstances indicate the collection of specific amounts or from specific
customers is at risk, we assess the impact on amounts recorded for bad debts
and, if necessary, will record a charge in the period such determination is
made.
Inventory Valuation Allowances
------------------------------
Inventory is values net of allowances for unsaleable or obsolete raw
materials, work-in-process and finished goods. Allowances are determined
quarterly by comparing inventory levels of individual materials and parts to
historical usage rates, current backlog and estimated future sales and by
analyzing the age of inventory, in order to identify specific components of
inventory that are judged unlikely to be sold. In addition to this specific
identification process, statistical allowances are calculated for remaining
inventory based on historical write-offs of inventory for salability and
obsolescence reasons. Inventory is written-off in the period in which the
disposal occurs. Actual future write-offs of inventory for salability and
obsolescence reasons may differ from estimates and calculations used to
determine valuation allowances due to changes in customer demand, customer
negotiations, technology shifts and other factors.
Changes in Accounting Standards
In December 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," which will become effective for us
beginning October 1, 2005. This standard clarifies that abnormal amounts of idle
facility expense, freight, handling costs and wasted material should be expenses
as incurred and not included in overhead. In addition, this standard requires
that the allocation of fixed production overhead costs to inventory be based on
the normal capacity of the production facilities. We are currently evaluating
the potential impact of this issue on its financial position and results of
operations, but management does not believe the impact of the change will be
material.
26
BUSINESS
General
Our current operations were originally a business division of our
affiliate, BAK Battery, which was originally formed as a Chinese limited
liability company in August 2001. As of January 17, 2005, all legal procedures
of BAK International's acquisition of 100% of the equity shares in BAK Battery
were completed. Thereafter, we entered into a stock exchange transaction on
January 20, 2005 with the shareholders of BAK International, pursuant to which
we acquired from them all of the issued and outstanding common capital stock of
BAK International in exchange for 39,826,075 shares of our common stock. As a
result of this exchange transaction, we succeeded to the operations of BAK
International and BAK Battery.
Overview
We presently serve as a holding company for our China-based
subsidiaries, BAK International and BAK Battery. Our subsidiaries are focused on
the manufacture, commercialization and distribution of a wide variety of
standard and customized lithium ion rechargeable batteries for use in a wide
array of applications. We also have internal research and development facilities
engaged primarily in furthering lithium ion related technologies. We believe
that our technologies allow us to offer batteries that are flexibly configured,
lightweight and generally achieve longer operating time than many competing
batteries currently available. We have focused on manufacturing a family of
replacement lithium batteries for mobile phones. We also supply rechargeable
lithium ion batteries for use in various other portable electronic applications,
including high-power handset telephones, laptop computers, digital cameras,
video camcorders, MP3 players and general industrial applications. Although we
have developed a marketable prototype of our lithium polymer battery, we are
continuing our research and development efforts related to this line of
products. Given the current progress of these efforts, we are as yet unable to
determine when we will begin to offer lithium polymer batteries to the
marketplace.
We manufacture three types of batteries: steel cell, aluminum cell and
cylindrical cell. We deliver our products to packing plants operated by third
parties where the bare cells are packed in accordance with specifications
established by certain manufacturers of mobile phones and other electronic
products. We operate sales and service branches in six principal coastal cities
and Beijing in the PRC. The majority of our income is generated from the sale of
steel cells. However, we believe there is growth potential for aluminum and
cylindrical cells because of their wide applications. Our current growth
strategy includes entering into the original equipment manufacture ("OEM")
battery market for top mobile phone brands and portable electronic applications
worldwide. We have developed a program for producing high power lithium ion
battery cells which will allow us inroads into additional battery markets such
as those for power tools. We have begun marketing our high power lithium ion
battery cells; however, we have not yet received any revenues from the sale of
this product.
Our Business Strategy
We seek to maintain and strengthen our position as a provider of
lithium ion batteries and related services while increasing the breadth of our
product line and improving the quality of our products. In order to achieve our
objective, we plan to pursue the key strategies described below.
o Continuing to be a cost leader in an increasingly competitive
market. We believe we can ensure competitive pricing by
integrating a labor intensive production process with
high-tech, proprietary manufacturing equipment. We believe our
experience in designing and updating key manufacturing
equipment and operating such equipment at a low cost gives us
a cost advantage over our competitors.
o Taking advantage of our ready production capacity and allowing
for increased production capacity. We believe our production
capacity makes us more reliable, flexible and responsive in
terms of fulfilling our customers' requirements than other
27
providers. As such, existing and potential competitors may
find it more difficult to compete with our production
capabilities. The completion of our new manufacturing
facility, expected in June 2005, should only enhance our
production capacity.
o Enhanced R & D activities. Upon completion of our new
facility, we will have the space to enhance our existing R&D
capabilities through the addition of state of the art
equipment and experienced personnel.
o Developing our OEM business. We believe that by entering the
OEM market for lithium ion and other types of battery cells,
we will be able to significantly increase revenues. As such,
we are currently undergoing Motorola, Inc.'s QSR certification
which will give us the right to serve as an OEM provider for
Motorola's products. The majority of the certification process
has been completed and we anticipate receiving certification
by August 2005. We estimate that we will receive orders from
Motorola commencing in September 2005, with our first OEM
revenues to be received by October 2005. We believe that
obtaining Motorola's QSR Certification will position us to
provide our batteries to other multinational corporations
whose products require such batteries. We believe that our
entry into the OEM market is important to our continued growth
because the market for replacement batteries is becoming
saturated.
o Expanding our product lines to capture new market
opportunities. We have developed high power lithium ion
battery cells that can be used in power tools. Our product
offering is currently undergoing testing by a potential
customer. We hope to begin sales of our high power lithium
battery during the third quarter of 2005. In addition, we are
seeking to produce lithium polymer battery cells that can be
used for various mobile phones, portable electronic
applications, Bluetooth technology, etc. Lithium polymer
battery cells are used for applications similar to those that
utilize lithium ion aluminum battery cells. However, lithium
polymer battery cells weigh less and are easier to shape. By
entering these markets, we believe we can achieve future
revenue growth and improved profit margins. Although we have
developed a marketable prototype of our lithium polymer
battery, we are continuing our research and development
efforts related to this line of products. Given the current
progress of these efforts, we are unable to determine when we
will begin to offer lithium polymer batteries to the
marketplace.
Principal Products and Services
Lithium Ion Battery
We produce rechargeable lithium ion batteries. Rechargeable lithium ion
batteries are used primarily for mobile telephones, digital cameras, video
camcorders, MP3 players and general industrial applications.
We began producing steel case lithium ion batteries in 2002. Our
product mix is now approximately 69% steel case battery cells, 30% aluminum
battery cells, and 1% cylindrical battery cells, and each type comes in a broad
variety of battery types.
Services
We have built a sales and service network covering six principal
coastal cities and Beijing in the PRC. Our service capabilities include a
24-hour customer response. Our other services include providing battery testing
and test reporting; providing training courses regarding quality control and
battery usage; gathering customer opinions on our products and services;
evaluating customer requirements and fulfilling appropriate requests.
28
We have two strategic policies for sales and service:
o We built a sales and service network to cover six principal
coastal cities and Beijing in China.
o Our service capabilities include 24-hour customer response.
Features
Performance standards. We believe our products meet or exceed
international standards. Our lithium ion batteries have high capacity, low
internal resistance, and a safety guarantee. Certificates or approvals we have
received include: EU's CE attestation; UL authentication; International
Organization for Standardization 9001: 2000, a quality management system
certification, and International Organization for Standardization 14001: 1996,
an environmental management system certification; and certificates from the
major cell phone manufacturers of China, including China Saibao (the CEPREI
certification body); Amoi Electronics Co., Ltd.; China Datang (Group)
Corporation; Konka Group Co., Ltd.; Tianyu Communication Technology (Kunshan)
Co., Ltd.; and Shenzhen Telsda Mobile Communication Industry Development Co.,
Ltd.
Longer usage time and higher discharge rates. We believe our battery
has a higher discharge voltage so it can provide a longer talking time for
mobile phone users. Our products have a higher discharge capacity than other
battery products. Therefore, with the same capacity, our battery can therefore
provide a longer talking time. The higher discharge capacity is especially
useful for mobile phones with color screens, which have a high demand on the
battery's continuous discharge voltage.
Performance at lower temperatures. Our lithium ion batteries perform
well from -20 Celsius to +60 Celsius. At a temperature as low as -20 Celsius the
batteries release 95% of the battery energy at 0.2C rate; and over 90% of the
battery energy can be discharged at 1.0C. This feature allows improved cell
phone battery duration, particularly in northern areas of the PRC.
Suppliers
The main components of lithium ion batteries are the cathode, anode,
separator, and electrolyte. We have built a complete supply chain, putting
together a group of material and equipment suppliers, primarily Chinese, except
for ENTEK (a separator supplier in the US), from whom we buy on a purchase order
basis.
Cathode material is primarily LiCoO2; LiMnO4 and LiCo1-xNixO2 are also
used as cathode materials. Anode material mainly consists of carbon materials
such as graphite, sourced primarily in China. The separator material is imported
from Japan and the US. There are sufficient supplies of electrolytes in China,
and we believe the quality to be very good. The table below describes the key
sources of our key materials.
As of March 31, 2005, our key material suppliers and key equipment
suppliers were as follows:
Key Material Suppliers
------ ------------------ ------------------------------------------------------
Item Materials Main Suppliers
------ ------------------ ------------------------------------------------------
1 Case and caps Roofer Group Company, Yijinli technology company
Shenzhen Tongli Precision Stamping Products Co., Ltd.
------ ------------------ ------------------------------------------------------
2 Cathode materials CITIC Guoan
------ ------------------ ------------------------------------------------------
3 Anode materials Shanghai Shan Shan, Changsha graphite
------ ------------------ ------------------------------------------------------
4 Aluminum foil Aluminum Corporation of America, Shanghai
------ ------------------ ------------------------------------------------------
5 Copper foil Huizhou United Copper Foil
------ ------------------ ------------------------------------------------------
6 Electrolyte Zhangjiagang Guotai-Huarong New Chemical Materials
Co., Ltd.
------ ------------------ ------------------------------------------------------
7 Separator Ube Industries, ENTEK, CELGARD
------ ------------------ ------------------------------------------------------
29
Key Equipment Suppliers
------ --------------------------------- ---------------------------------------
Item Instruments Suppliers
------ --------------------------------- ---------------------------------------
1 Coating machine Beijing 706 Factory
------ --------------------------------- ---------------------------------------
2 Mixer Guangzhou Hongyun Machine
------ --------------------------------- ---------------------------------------
3 Press machine SevenStar Huachuang
------ --------------------------------- ---------------------------------------
4 Ultrasonic spot welding machine Zhenjiang Tianhua Machinery and
Electrical Co., Ltd.
------ --------------------------------- ---------------------------------------
5 Laser seam welder Wuhan Chutian Laser Group
------ --------------------------------- ---------------------------------------
6 Vacuum oven Jiangshu Wujiang Songling
------ --------------------------------- ---------------------------------------
7 Electrolyte filling machine BAK (internally developed)
------ --------------------------------- ---------------------------------------
8 Aging equipment Guangzhou Qingtian Industrial Co., Ltd.
------ --------------------------------- ---------------------------------------
9 Testing and sorting equipment Guangzhou Qingtian Industrial Co., Ltd.
------ --------------------------------- ---------------------------------------
Sales and Marketing
Marketing Strategies. We have two key marketing strategies. Our first
strategy is to be a leader in the worldwide replacement battery market. We
believe we can secure and enhance our market share because of the quality of our
products and our ability to maintain high production volume with low production
cost. Our second marketing strategy is to enter the OEM market. To enter into
this market we will be required to gain the approval of a key international
manufacturer, such as Motorola, Inc., which is currently reviewing our products
as part of its QSR certification process. We expect certification from Motorola
by August 2005. We believe that obtaining Motorola's QSR certification will
position us to provide our batteries to other multinational corporations whose
products require such batteries. We believe that our entry into the OEM market
is important to our continued growth because the market for replacement
batteries is becoming saturated.
Our Current Market. We have developed a sales and service network based
in six principal coastal cities and Beijing in the PRC. Our products have also
been exported to the United States, Canada, South Africa, Japan, Singapore,
Taiwan, and Hong Kong. From 2001, our annual sales have grown from $3 million to
approximately $64 million for the year ended September 30, 2004. As of March 31,
2005, approximately 78.9% of sales were domestic, while 21.1% were made
internationally.
Competition
We face competition in the production of lithium ion batteries not only
within China but also from other parts of the world, particularly Japan and
Korea. Sony Corp. first commercialized lithium ion batteries in 1992. However,
Japan's market share of lithium ion battery production has decreased since 2000.
We believe we are currently the seventh largest lithium ion battery manufacturer
in the world, with a monthly output capacity of 15.0 million units and current
monthly production of 11.8 million units. We also believe we are the second
largest manufacturer in the Chinese market.
We believe the following are the leading global manufacturers of
lithium ion batteries::
o Japan - Sanyo Electric Co., Sony Corp., Matsushita Electric
Industrial Co., Ltd. (Panasonic), GS Group, NEC Corporation
and Hitachi Ltd.;
o Korea - LG Chemical Ltd. and Samsung Electronics Co., Ltd.;
and
o China - BYD Co. Ltd., Shenzhen BAK Battery Co., Ltd., Tianjin
Lishen Battery Joint-Stock Co., Ltd., Henan Huanyu Group and
Harbin Coslight Technology International Group Co., Ltd.
We compete with these companies by striving to provide a higher quality
product at a lower cost. We believe that by doing business in China we enjoy
competitive advantages over similar companies doing business in Japan and Korea,
including abundant labor resources, low cost raw materials and better access to
China's extensive mobile phone market.
30
Customers
Our ten largest clients, based on orders, account for 48.15% of our
sales, predominantly in China. Our 30 largest clients, based on orders, account
for 85% of our sales, predominantly in China. At present, the bulk of our sales
are in the replacement cell phone battery market. Over the past three years, we
have developed relationships with key customers, including Konka Group Co.,
Ltd., SCUD (Fujian) Electronics Co., Ltd., Desay Power Tech. Co., Ltd. and
Shenzhen Ya Litong Electronic Co., Ltd.
Research and Development
We operate a state of the art research and development center
performing proprietary research that has resulted in two issued patents in the
PRC and 40 in the application process. We also outsource certain of our research
and development matters to ChangChun Applied Chemistry Research Institute of the
China Scientific Institute, Tstinghua University, JiLin University, the
Electrochemistry Department of XiaMen University and Shenzhen University. In our
in-house facility we employ over 100 staff members, led by three government
recognized specialists. Upon the approval of the National Ministry of Personnel
in October 2002, a Postdoctoral Workstation was established. The establishment
of the Workstation serves as recognition by the PRC government of the strong
capabilities of our in-house research team. The research and development center
focuses research on projects relating to liquid lithium ion batteries, high
power lithium ion batteries, solid lithium polymer ion batteries, and
cylindrical and rectangular lithium ion batteries.
During fiscal 2004 and 2003, we expended $328,779 and $116,789,
respectively, on our research and development efforts. As of March 31, 2005 we
had expended approximately $186,000 on research and development and
approximately $1.2 million on equipment associated therewith since September 30,
2004 and we anticipate devoting an additional approximately $0.6 million to
research and development activities in fiscal 2005, bringing the total research
and development expenditures during fiscal 2005 to approximately $1.8 million.
Employees
The following table summarizes the functional distribution of our
employees as of September 30, 2004 and March 31, 2005:
Department September 2004 March 2005
Officers 10 11
Comprehensive Management 197 205
Human Resources 19 15
Marketing 67 76
PMS Department 21 17
Technical Department 47 33
Research & Development 107 108
Purchasing 29 23
Financial Department 18 19
PMC Department 45 69
After Sales Department 33 26
Quality Control 242 209
Engineering 99 152
Manufacturing 5,428 4,245
-------------------------------------------------------------------------------
TOTALS 6,362 5,217
None of our personnel are represented under collective bargaining
agreements. We consider our relations with our employees to be good.
31
Facilities
We currently lease 5,500 square meters in the aggregate for office
space and manufacturing facilities. We lease 3,000 square meters for office
space and manufacturing operations pursuant to a lease which runs from June 1,
2003 to June 10, 2008. Our rent due under that lease is $2,468 a month. We also
lease 2,500 square meters for office space and manufacturing facilities pursuant
to a lease with a term beginning December 16, 2004 and ending December 16, 2006.
We owe lease payments of $2,329 a month during the term of this second lease.
In addition, we have begun construction of manufacturing facilities,
warehousing and packaging facilities, dormitory space and administrative offices
at the BAK Industrial Park. We anticipate the completion of construction of
these facilities by June 2005. At present, we have no payment obligations
related to these facilities, however, we continue to make payments regarding the
construction of the facility as costs arise. The total area of construction at
BAK Industrial Park is 174,784 square meters. At March 31, 2005, 68,188 square
meters of the facility was in use, including two manufacturing facilities, a
warehousing and packaging facility, two dormitories and one dining hall. The
remainder of the facility, which is anticipated to include an additional
production facility, two additional manufacturing facilities, three additional
dormitories and administrative offices, is expected to be completed by June
2005.
Upon completion of the construction of the BAK Industrial Park, we will
cease to lease the 5,500 square meters that we currently lease for office space
and manufacturing facilities. We will face no material penalties when we cancel
these leases.
Legal Proceedings
We are not a party to any legal proceedings, nor are we aware of any
contemplated proceedings.
Intellectual Property and Proprietary Rights
We rely primarily on a combination of copyright laws and contractual
restrictions to establish and protect our intellectual property rights. We
currently have two issued patents in the PRC and 40 are in the application
process. We require our management and key technical personnel to enter into
agreements requiring them to keep confidential all information relating to our
customers, methods, business and trade secrets during and after their employment
with us.
We have very strict control over the core technologies for which we can
not apply for patents. Every employee who is related to these proprietary
technologies must sign "special technology non-disclosure agreement". We have
also established an internal department to protect property rights. In this
department, there are professionals including attorneys, engineers, information
managers and archives managers responsible for the application and protection of
proprietary rights. We have also developed a series of rules regarding "property
right non-disclosure", "property right archives management", "information
collection and analysis" and "innovation encouragement". While we actively take
steps to protect our proprietary rights, such steps may not be adequate to
prevent the infringement or misappropriation of our intellectual property. This
is particularly the case in China where the laws may not protect our proprietary
rights as fully as in the United States. Infringement or misappropriation of our
intellectual property could materially harm our business. BAK Battery has
registered the following Internet and WAP domain name (the English version of
our website can be found at www.bak.com.cn.en).
32
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information about our executive officers
and directors and their respective ages and positions as of March 31, 2005. The
directors listed below will serve until our next annual or special meeting of
stockholders at which directors are elected:
NAME AGE POSITION HELD
---- --- -------------
Xiangqian Li 36 Director, Chairman of the Board, President
and Chief Executive Officer
Yongbin Han 35 Chief Financial Officer and Secretary
Huanyu Mao 53 Chief Technical Officer
Xiangqian Li has served as our Director, Chairman of the Board,
President and Chief Executive Officer since January 20, 2005. Mr. Li has been
Chairman of Board of Directors and General Manager of BAK Battery since April
2001 and has also served as BAK Battery's general manager since December 2003.
Previously, Mr. Li served as (i) Chairman of the Board of Directors and General
Manager of Shenzhen BAK Li-ion Battery Co., Ltd. from December 2000 until March
2001; (ii) as Chairman of the Board of Directors and General Manager of Jilin
Province Huaruan Technology Company Limited by Stocks ("Huaruan Technology")
from March 2001 until June 2001; and (iii) as Chairman of the Board of Directors
of Huaruan Technology from January 2001 until June 2003. Prior to 2001 Mr. Li
was self employed. Mr. Li graduated from Lanzhou Railway Institute and holds a
Bachelors degree in gas engineering. He is pursuing a Doctorate of quantity
economics from Jilin University.
Yongbin Han has served as our Chief Financial Officer and Secretary
since January 20, 2005. Mr. Han is a Chinese certified public accountant and
certified tax agent. Mr. Han has been Deputy General Manager of BAK Battery
since April 2003. In that capacity he oversees the finance and accounting
department. Previously, Mr. Han served as (i) Deputy General Manager of Huaruan
Technology from January 2002 until April 2003 and (ii) Department Manager of
Zhonghongxin Jianyuan Accounting Firm from July 1995 until July 2001. Mr. Han
graduated from Changchun Tax Institute with a Bachelors degree in accounting.
Huanyu Mao has served as our Chief Technical Officer since January 20,
2005. Dr. Mao has been Chief Scientist of BAK Battery since September 2004. From
1997 until September 2004 Dr. Mao served as Chief Engineer of Tianjin Lishen
Company. Dr. Mao received a Doctorate degree in electrochemistry in conducting
polymers from Memorial University of Newfoundland, Canada.
Board Composition and Committees
The board of directors is currently composed of one member, Xiangqian
Li. All Board action requires the approval of a majority of the directors in
attendance at a meeting at which a quorum is present. We intend to expand our
board to include three "independent" directors by the end of September 2005.
We currently do not have standing audit, nominating or compensation
committees. We intend, however, to establish an audit committee and a
compensation committee of the board of directors as soon as practicable. We
envision that the audit committee will be primarily responsible for reviewing
the services performed by our independent auditors, evaluating our accounting
policies and our system of internal controls. The compensation committee will be
primarily responsible for reviewing and approving our salary and benefits
policies (including stock options), including compensation of executive
officers.
Director Compensation
At present we do not pay our directors a fee for attending scheduled
and special meetings of our board of directors. We intend to reimburse each
director for reasonable travel expenses related to such director's attendance at
33
board of directors and committee meetings. As noted above, we intend to expand
our board to include "independent" directors. It is anticipated that the
appointment of independent members of our board will require us to pay fees
comparable to those paid by other public companies in our peer group.
Indebtedness of Directors and Executive Officers
None of our directors or officers or their respective associates or
affiliates is indebted to us.
Involvement in Certain Legal Proceedings
In the normal course of business, various claims are made against us.
At this time, in the opinion of management, there are no pending claims the
outcome of which are expected to result in a material adverse effect on our
consolidated financial position or results of operations.
Family Relationships
There are no family relationships among our directors or officers.
Executive Compensation
The following Summary Compensation Table sets forth all cash
compensation paid to our chief executive officer for services rendered in all
capacities to us during the noted periods. No executive officers received total
annual salary and bonus compensation in excess of $100,000.
Summary Compensation Table
Name and
Principal Restricted Securities
Underlying Stock Underlying All Other
Positions Year Salary Bonus Awards Options Compensation
---------- ---- ------ ----- ---------- ---------- ------------
Xiangqian Li 2004 -0- -0- NA NA NA
2003 -0- -0- NA NA NA
2002 -0- -0- NA NA NA
Stock Option Plan
In May 2005, our board of directors adopted the China BAK Battery, Inc.
2005 stock option plan. We plan to submit the plan to a stockholder vote within
12 months of its adoption. The plan will be void if it is not approved by our
stockholders.
Our 2005 stock option plan provides for the grant of "nonqualified"
stock options. These nonqualified stock options may be granted to our employees,
officers, non-employee directors and advisors and those of any of our
subsidiaries or affiliates. However, advisors are only eligible to receive
awards if they render bona fide services for us or any of our subsidiaries or
affiliates. The exercise price of options granted pursuant to the plan must be
at least equal to the fair market value of our common stock on the date of the
grant. The plan authorizes the issuance of up to 4,000,000 shares of our common
stock. We granted options to purchase 2,000,000 shares to approximately 55
individuals at fair market value on May 16, 2005, including options to purchase
200,000 shares granted to each of Yongbin Han, our Chief Financial Officer and
Secretary, and Huanyu Mao, our Chief Technical Officer. We have 2,000,000 shares
of our common stock remaining available for issuance under this plan.
The plan will generally terminate on May 16, 2055. Generally, stock
options granted under this plan may not be transferred in any manner other than
by will or by the laws of descent and distribution and may be exercised during
34
the lifetime of the optionee only by the optionee. However, exceptions can be
made to this restriction. Options granted under our 2005 stock option plan
expire immediately upon the termination of the optionee's service to us or to a
subsidiary or affiliate of ours for misconduct, thirty-one days following
termination if the termination is for reasons other than death, disability or
cause, or 12 months following termination if the termination is due to death or
disability. Upon a change in control, all outstanding stock options under our
2005 stock option plan either may be assumed or substituted for by the successor
entity. If the successor entity determines not to assume or substitute for these
stock options, the vesting provisions of such stock options will be accelerated,
and the stock options will terminate upon the change of control if not
previously exercised.
35
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 15, 2005, certain
information with respect to the beneficial ownership of our common stock by (i)
each director and officer of CBBI, (ii) each person known to CBBI to be the
beneficial owner of five percent or more of the outstanding shares of common
stock of CBBI, and (iii) all directors and officers of CBBI as a group. Unless
otherwise indicated, the person or entity listed in the table is the beneficial
owner of, and has sole voting and investment power with respect to, the shares
indicated. Certain principal stockholders are selling stockholders in this
offering.
Amount and Nature of Beneficial Ownership (1)
---------------------------------------------
Number Percent of
Name of Beneficial Owner of Shares (2) Voting Stock (3)
------------------------ ------------- ----------------
Xiangqian Li 21,233,437 (4) 51.8%
Huanyu Mao 249,805 *
Yongbin Han 312,256 *
Directors and executive officers as a group (3 persons) 21,795,498 53.2%
-------------------------
*Denotes less than 1% of the outstanding shares of common stock.
(1) On June 15, 2005, there were 40,978,533 shares of common stock
outstanding and no issued and outstanding preferred stock. Each person
named above has the sole investment and voting power with respect to
all shares of common stock shown as beneficially owned by the person,
except as otherwise indicated below.
(2) Under applicable SEC rules, a person is deemed to be the "beneficial
owner" of a security with regard to which the person directly or
indirectly, has or shares (a) the voting power, which includes the
power to vote or direct the voting of the security, or (b) the
investment power, which includes the power to dispose, or direct the
disposition, of the security, in each case irrespective of the person's
economic interest in the security. Under these SEC rules, a person is
deemed to beneficially own securities which the person has the right to
acquire within 60 days through the exercise of any option or warrant or
through the conversion of another security.
(3) In determining the percent of voting stock owned by a person on June
15, 2005, (a) the numerator is the number of shares of common stock
beneficially owned by the person, including shares the beneficial
ownership of which may be acquired within 60 days upon the exercise of
options or warrants or conversion of convertible securities, and (b)
the denominator is the total of (i) the 40,978,533 shares in the
aggregate of common stock outstanding on June 15, 2005, and (ii) any
shares of common stock which the person has the right to acquire within
60 days upon the exercise of options or warrants or conversion of
convertible securities. Neither the numerator nor the denominator
includes shares which may be issued upon the exercise of any other
options or warrants or the conversion of any other convertible
securities.
(4) Mr. Li is a party to an Escrow Agreement pursuant to which he has
agreed to place 2,179,550 shares of his common stock into escrow for
the benefit of the selling stockholders in the event we fail to satisfy
certain "performance thresholds", as defined in the Escrow Agreement,
which Escrow Agreement is incorporated by reference as a material
exhibit to this registration statement. Mr. Li is also a party to a
Lock-up Agreement pursuant to which he has agreed, except for
distributions of his shares of common stock required under the Escrow
Agreement, not to transfer his common stock for a period commencing
January 20, 2005 and ending 12 months after the date our common stock
is listed on either the Nasdaq Stock Market or another national stock
exchange or quotation medium. The Lock-up Agreement is incorporated by
reference as a material exhibit to this registration statement. Mr. Li
36
is also a party to a Pledge Agreement pursuant to which he has agreed
to pledge 19,053,887 shares of his common stock to Shenzhen Development
Bank (Longgang Branch) as security for a comprehensive credit facility
of the Company.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
BAK Battery has several outstanding short term bank notes payable to
(i) Agricultural Bank of China (Longgang Branch) (ii) Shenzhen Commercial Bank
(Shuibei Branch) (iii) Shenzhen Development Bank (Longgang Branch) and China
Minsheng Bank (Binhai/Shenzhen Branches) respectively, the proceeds of which
were used primarily to fund the operations of our manufacturing facility located
at the BAK Industrial Park and for general working capital requirements. At June
8, 2005, we had aggregate amounts due and payable under these debt arrangements
of approximately $61.42 million. The debt arrangements bear interest at rates
ranging from 5.022% to 6.138% and have maturity dates ranging from six to twelve
months. This indebtedness is generally guaranteed by BAK International,
Xiangqian Li, our director, Chairman of the Board, President and Chief Executive
Officer, and Jilin Provincial Huaruan Technology Company Limited by Shares, a
PRC company ("Huaruan Technology"). Mr. Li has also pledged 19,053,887 of his
21,233,437 shares of our common stock to secure certain of our indebtedness. Mr.
Li is the controlling shareholder and an executive officer of Huaruan
Technology. The indebtedness to Shenzhen Commercial Bank is guaranteed by Mr. Li
and by an unaffiliated third party guarantor. None of Mr. Li, Huaruan Technology
or the third party guarantor received or is entitled to receive any
consideration for the above referenced guarantees.
On October 18, 2003, we acquired intangible assets, including a patent
and other patent rights, from Huaruan Technology, an entity controlled by
Xiangqian Li, our President and Chief Executive Officer. The total consideration
paid to Huaruan Technology was $3.86 million. The consideration paid to Huaruan
Technology was recorded at fair market value.
On September 30, 2004, BAK Battery entered into a Financial Advisory
Agreement with HFG International, Ltd., a Hong Kong corporation, pursuant to
which HFG International agreed to provide BAK Battery with consulting help in
implementing an organizational structure that would facilitate accessing the
capital markets of the United States. In consideration for these services, HFG
International was paid a fee of $400,000 in conjunction with the consummation of
BAK Battery's private placement. Timothy P. Halter, our former Chief Executive
Officer, is the principal shareholder and an executive officer of HFG
International. We believe the agreement was on terms at least as favorable to
BAK Battery as those that could have been negotiated with an unaffiliated party
providing similar services.
On June 10, 2004, we issued 99,858 shares of our $ 0.001 par value
common stock in full settlement of debt, in the amount of $49,929, owed to Harry
Miller, our former President and Chief Executive Officer. The price of the
transaction was $0.50 per share.
DESCRIPTION OF OUR CAPITAL STOCK
The following is a summary of the material terms of our capital stock.
This summary is subject to and qualified in its entirety by our Articles of
Incorporation, as amended, and Bylaws, and by the applicable provisions of
Nevada law.
Our authorized capital stock consists of 100,000,000 shares of common
stock, having a par value of $0.001 per share.
Common Stock. Each outstanding share of common stock entitles the
holder thereof to one vote per share on all matters. The Articles of
Incorporation do not permit cumulative voting for the election of directors,
which means that the holders of more than 50% of such outstanding shares voting
for the election of directors can elect all of the directors to be elected, if
they so choose; in such event, the holders of the remaining shares will not be
able to elect any of our directors. Stockholders do not have preemptive rights
to purchase shares in any future issuance of our common stock.
37
The holders of shares of our common stock are entitled to dividends out
of funds legally available when and as declared by our board of directors. Our
board of directors has never declared a dividend and does not anticipate
declaring a dividend in the foreseeable future. Should we decide in the future
to pay dividends, as a holding company, our ability to do so and meet other
obligations depends upon the receipt of dividends or other payments from our
operating subsidiaries and other holdings and investments. In addition, our
operating subsidiaries, from time to time, may be subject to restrictions on
their ability to make distributions to us, including as a result of restrictive
covenants in loan agreements, restrictions on the conversion of local currency
into U.S. dollars or other hard currency and other regulatory restrictions. In
the event of our liquidation, dissolution or winding up, holders of our common
stock are entitled to receive, ratably, the net assets available to stockholders
after payment of all creditors.
All of the issued and outstanding shares of our common stock are duly
authorized, validly issued, fully paid and non-assessable. To the extent that
additional shares of our common stock are issued, the relative interests of
existing stockholders will be diluted.
Transfer Agent and Registrar. Our transfer agent is Securities Transfer
Corporation, 2591 Dallas Parkway, Suite 102, Frisco, Texas 75034.
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders
and for each selling stockholder the number of shares of common stock
beneficially owned as of June 15, 2005, and the number of shares being
registered. Except as otherwise indicated in the footnotes to the below table,
each selling stockholder acquired its securities in BAK Battery's private
placement of securities completed on January 20, 2005. Furthermore, except as
set forth in the footnotes below, none of the selling stockholders has held a
position as an officer or director of the company, nor has any selling
stockholder had a material relationship of any kind with the company. All
information with respect to share ownership has been furnished by the selling
stockholders. The shares being offered are being registered to permit public
secondary trading of the shares and each selling stockholder may offer all or
part of the shares owned for resale from time to time. A selling stockholder is
under no obligation, however, to sell any shares immediately pursuant to this
prospectus, nor is a selling stockholder obligated to sell all or any portion of
the shares at any time. Therefore, no estimate can be given as to the number of
shares of common stock that will be sold pursuant to this prospectus or the
number of shares that will be owned by the selling stockholders upon termination
of the offering made hereby. We will file a supplement to this prospectus to
name successors to any named selling stockholders who are able to use this
prospectus to resell the securities registered hereby.
Percent of
Shares of Percent of Shares of Common Stock
Common Stock Common Stock Common Stock After Completion
Selling Stockholders (2) Owned (1) (3) to be Registered of Offering (3)
The Pinnacle Fund, L.P. (4) 2,109,636 5.1% 2,109,636 0%
Ying Wang 911,545 2.4% 911,545 0%
Gary Evans 758,862 1.9% 758,862 0%
Halter Financial Group, Inc.(5) 587,754 1.4% 587,754 0%
Chinamerica Fund, LP(6) 505,908 1.2% 505,908 0%
Westpark Capital L.P.(7) 505,908 1.2% 505,908 0%
Lake Street Fund, LP(8) 478,083 1.1% 478,083 0%
Xuechun Zhang 379,673 * 379,673 0%
Xin An 288,367 * 288,367 0%
38
Percent of
Shares of Percent of Shares of Common Stock
Common Stock Common Stock Common Stock After Completion
Selling Stockholders (2) Owned (1) (3) to be Registered of Offering (3)
Wanpei Chen 252,954 * 252,954 0%
Jayhawk China Fund(9) 252,954 * 252,954 0%
Xiaohui Wang 224,825 * 224,825 0%
Leong Sing Lye 217,540 * 217,540 0%
Fred Astman 164,420 * 164,420 0%
MidSouth Investor Fund, L.P.(10) 164,420 * 164,420 0%
Steve Kircher 151,772 * 151,772 0%
Kevin Halter, Jr. 134,062 * 134,062 0%
Stephen S. Taylor, Jr. 126,477 * 126,477 0%
Bellfield Capital Partners LP(11) 101,182 * 101,182 0%
Incline Capital, L.P.(12) 101,182 * 101,182 0%
David Moy 80,945 * 80,945 0%
Yuxin Zhang 74,942 * 74,942 0%
Feng Li 67,135 * 67,135 0%
Chongying Gong 64,857 * 64,857 0%
Merry Lee Carnall 50,591 * 50,591 0%
Ray Chapman 50,591 * 50,591 0%
Lighthouse Capital Insurance Company(13) 50,591 * 50,591 0%
David Ofman 50,591 * 50,591 0%
David A. Spinney 50,591 * 50,591 0%
Si Zhang 50,591 * 50,591 0%
G. Marshall Abbott 37,943 * 37,943 0%
Scott Hood 37,943 * 37,943 0%
Bob Schiesser(14) 37,943 * 37,943 0%
Mark DeSalvo 32,884 * 32,884 0%
BOT Holdings, Inc.(15) 25,295 * 25,295 0%
Michael Columbos 25,295 * 25,295 0%
David L. Ebershoff 25,295 * 25,295 0%
Harold E. Gear 25,295 * 25,295 0%
William H. & Sandra L. Hedden 25,295 * 25,295 0%
Larry Kelley(16) 25,295 * 25,295 0%
Robert Kirkland 25,295 * 25,295 0%
Robert O. McDonald(17) 25,295 * 25,295 0%
39
Percent of
Shares of Percent of Shares of Common Stock
Common Stock Common Stock Common Stock After Completion
Selling Stockholders (2) Owned (1) (3) to be Registered of Offering (3)
Moldow Family Trust(18) 25,295 * 25,295 0%
William Rosen 25,295 * 25,295 0%
Stephen S. Taylor, Sr. 25,295 * 25,295 0%
Harry Gabel 22,766 * 22,766 0%
264646 Alberta Ltd.(19) 17,707 * 17,707 0%
Yarek Bartos 17,707 * 17,707 0%
Earl Fawcett 17,707 * 17,707 0%
Kelly Fraser 17,707 * 17,707 0%
Andrew Goodacre 17,707 * 17,707 0%
Richard Macdermott 15,177 * 15,177 0%
783036 Alberta Ltd.(20) 12,648 * 12,648 0%
Dennis B. Bleackley 12,648 * 12,648 0%
Luciano M. Bruno 12,648 * 12,648 0%
Chapel Rock Holdings Ltd.(21) 12,648 * 12,648 0%
Stephen Sun Chiao 12,648 * 12,648 0%
Trevor Colby 12,648 * 12,648 0%
Trevor & Dylan Colby (22) 12,648 * 12,648 0%
Donna H. Dodson 12,648 * 12,648 0%
James Gilkison 12,648 * 12,648 0%
WN Gray 12,648 * 12,648 0%
Terral D. Hagman 12,648 * 12,648 0%
J.M.C. Investments Ltd.(23) 12,648 * 12,648 0%
John Mackay 12,648 * 12,648 0%
Steven Perry 12,648 * 12,648 0%
Paul Plowman 12,648 * 12,648 0%
John B. Trescot 12,648 * 12,648 0%
John H. Trescot, Jr. 12,648 * 12,648 0%
Jack Coldwell 10,118 * 10,118 0%
Richard Dahl 10,118 * 10,118 0%
Danich Investments Ltd.(24) 10,118 * 10,118 0%
Fabmar Investments Ltd.(25) 10,118 * 10,118 0%
Robert Geddes 10,118 * 10,118 0%
Dwight L. McLennan 10,118 * 10,118 0%
40
Percent of
Shares of Percent of Shares of Common Stock
Common Stock Common Stock Common Stock After Completion
Selling Stockholders (2) Owned (1) (3) to be Registered of Offering (3)
Sandeep G. Aggarwal/Prof. Corp.(26) 10,118 * 10,118 0%
Ken Bell 7,589 * 7,589 0%
Imtiaz Bhiman 7,589 * 7,589 0%
Adam Carpenter 7,589 * 7,589 0%
Gary Allard 5,059 * 5,059 0%
A. J. Charbonneau 5,059 * 5,059 0%
G-Mac Welding Ltd.(27) 5,059 * 5,059 0%
Calvin Gabel 5,059 * 5,059 0%
Steve Horth 5,059 * 5,059 0%
Don A. Leeb 5,059 * 5,059 0%
Eric Pedersen 5,059 * 5,059 0%
Robert G. & Judith T. Rader(28) 5,059 * 5,059 0%
Doug Riopelle and Linda Benham-Riopelle 5,059 * 5,059 0%
Gerald Slamko 5,059 * 5,059 0%
Steve Tobias 5,059 * 5,059 0%
William Tobman 5,059 * 5,059 0%
Ann T. Garrett 2,530 * 2,530 0%
James B. & Pauline Lisle 2,530 * 2,530 0%
Total 9,934,762 24.2% 9,934,762 0%
--------------------
*Denotes less than 1% of the outstanding shares of common stock.
(1) On June 15, 2005, there were 40,978,533 shares of common stock
outstanding and no issued and outstanding preferred stock. All of the
shares of common stock being registered pursuant to this registration
statement are being registered on behalf of the selling stockholders
and were outstanding prior to the filing of this registration
statement. Following the offering, there will be 40,978,533 shares of
common stock outstanding and no issued and outstanding preferred stock.
(2) Each person named in the selling stockholder above has the sole
investment and voting power with respect to all shares of common stock
shown as beneficially owned by the person, except as otherwise
indicated below. Under applicable SEC rules, a person is deemed to be
the "beneficial owner" of a security with regard to which the person
directly or indirectly, has or shares (a) the voting power, which
includes the power to vote or direct the voting of the security, or (b)
the investment power, which includes the power to dispose, or direct
the disposition, of the security, in each case irrespective of the
person's economic interest in the security. Under these SEC rules, a
person is deemed to beneficially own securities which the person has
the right to acquire within 60 days through the exercise of any option
or warrant or through the conversion of another security. None of the
selling stockholders who are not natural persons are reporting
companies under the Securities Exchange Act of 1934.
41
(3) In determining the percent of common stock owned by a person on June
15, 2005, (a) the numerator is the number of shares of common stock
beneficially owned by the person, including shares the beneficial
ownership of which may be acquired within 60 days upon the exercise of
options or warrants or conversion of convertible securities, and (b)
the denominator is the total of (i) the 40,978,533 shares in the
aggregate of common stock outstanding on June 15, 2005, and (ii) any
shares of common stock which the person has the right to acquire within
60 days upon the exercise of options or warrants or conversion of
convertible securities. Neither the numerator nor the denominator
includes shares which may be issued upon the exercise of any other
options or warrants or the conversion of any other convertible
securities. For purposes of this selling stockholders table, the
calculation for determining the percent of common stock owned by a
person after completion of the offering is the same, and assumes that
no new shares of common stock will be issued by us prior to the
completion of the offering.
(4) Barry Kitt has sole voting and investment control over the securities
held by The Pinnacle Fund, L.P.
(5) The shares hereby Halter Financial Group, Inc. were acquired in June
2004 in a private purchase transaction with Harry Miller, the former
controlling stockholder of the company. Timothy P. Halter, the sole
officer and director of Halter Financial Group, Inc., served as our
sole officer and director from June 2004 through January 20, 2005. Mr.
Halter also exercises sole investment and voting control over the
securities held by Halter Financial Group.
(6) Beau Johnson and Christopher Efird have shared voting and investment
control over the securities held by Chinamerica Fund, LP.
(7) Patrick Brosnahan has sole voting and investment control over the
securities held by Westpark Capital L.P.
(8) Scott Hood and Fred Astman have shared voting and investment control
over the securities held by Lake Street Fund, LP.
(9) Kent C. McCarthy has sole voting and investment control over the
securities held by Jayhawk China Fund.
(10) Buzz Heidtke has sole voting and investment control over the securities
held by MidSouth Investor Fund, L.P.
(11) Dave Brigante has sole voting and investment control over the
securities held by Bellfield Capital Partners LP.
(12) Mark Hood has sole voting and investment control over the securities
held by Incline Capital, L.P.
(13) David E. Richardson has sole voting and investment control over the
securities held by Lighthouse Capital Insurance Company.
(14) Mr. Schiesser is an affiliate of Canaccord Capital Corporation, a
licensed broker/dealer in Canada. Mr. Schiesser purchased the
securities to be registered in the ordinary course of business and had
no agreements or understandings, directly or indirectly, with any
person to distribute his securities at the time of purchase.
(15) Tom Brinkerhoff has sole voting and investment control over the
securities held by BOT Holdings, Inc.
(16) Held as trustee for the Kelley Revocable Trust.
(17) Mr. McDonald is an affiliate of Capital West Securities, a licensed
broker/dealer. Mr. McDonald purchased the securities to be registered
in the ordinary course of business and had no agreements or
understandings, directly or indirectly, with any person to distribute
his securities at the time of purchase.
(18) Charles Moldow has sole voting and investment control over the
securities held by Moldow Family Trust.
42
(19) Victor Walls has sole voting and investment control over the securities
held by 264646 Alberta Ltd.
(20) Ralph Miller has sole voting and investment control over the securities
held by 783036 Alberta Ltd.
(21) Wayne Hucik and Susan Hucik have shared voting and investment control
over the securities held by Chapel Rock Holdings Ltd.
(22) Held as joint tenants with right of survivorship.
(23) Brian Carpenter and Jeanne Carpenter have shared voting and investment
control over the securities held by JMC Investments Ltd.
(24) Dan Remenda has sole voting and investment control over the securities
held by Danich Investments Ltd.
(25) Eugene Fabro and Adrienne Fabro have shared voting and investment
control over the securities held by Fabmar Investments Ltd.
(26) Sandeep G. Aggarwal has sole voting and investment control over the
securities held by Sandeep G. Aggarwal/Prof. Corp.
(27) Grant McNaughton and Donna McNaughton have shared voting and investment
control over the securities held by G-Mac Welding Ltd.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 40,978,533 shares of
common stock outstanding. A current stockholder who is our "affiliate," defined
in Rule 144 as a person who directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
us, will be required to comply with the resale limitations of Rule 144.
Purchasers of shares in the offering, other than affiliates, may resell
their shares immediately. Sales by affiliates will be subject to the volume and
other limitations of Rule 144, including certain restrictions regarding the
manner of sale, notice requirements, and the availability of current public
information about us. The volume limitations generally permit an affiliate to
sell, within any three month period, a number of shares that does not exceed the
greater of one percent of the outstanding shares of common stock or the average
weekly trading volume during the four calendar weeks preceding his sale. A
person who ceases to be an affiliate at least three months before the sale of
restricted securities beneficially owned for at least two years may sell the
restricted securities under Rule 144 without regard to any of the Rule 144
limitations.
PLAN OF DISTRIBUTION
The 9,934,762 shares being offered by the selling stockholders may be
sold or distributed from time to time by the selling stockholders or their
transferees directly to one or more purchasers or through brokers, dealers, or
underwriters who may act solely as agents or may acquire shares as principals.
Such sales or distributions may be made at prevailing market prices, at prices
related to such prevailing market prices, or at variable prices negotiated
between the sellers and purchasers that may vary. The distribution of the shares
may be effected in one or more of the following methods:
o ordinary brokerage transactions, including long or short
sales,
o transactions involving cross or block trades, or otherwise on
the OTC Bulletin Board,
o purchases by brokers, dealers, or underwriters as principals
and subsequent resale by the purchasers for their own accounts
pursuant to this prospectus,
o sales "at the market" to, or through, market makers or into an
existing market for the shares,
43
o sales not involving market makers or established trading
markets, including direct sales to purchasers or sales
effected through agents,
o transactions involving options, swaps, or other derivatives,
whether exchange-listed or otherwise, or
o transactions involving any combination of the foregoing or any
other legally available means.
In addition, a selling stockholder may enter into hedging transactions
with one or more broker-dealers who may engage in short sales of shares in the
course of hedging the positions they assume with the selling stockholder. A
selling stockholder may also enter into options or other transactions with one
or more broker-dealers requiring the delivery of the shares by such
broker-dealers with the possibility that such shares may be resold thereafter
pursuant to this prospectus.
A broker, dealer, underwriter, or agent participating in the
distribution of the shares may receive compensation in the form of discounts,
concessions, or commissions from the selling stockholders and/or purchasers of
the shares for whom such person may act as an agent, to whom such person may
sell as principal, or both; and such compensation as to a particular person may
be in excess of customary commissions. The selling stockholders and any
broker-dealers acting in connection with the sale of the shares being registered
may be deemed to be underwriters within the meaning of Section 2(11) of the
Securities Act of 1933, as amended, or the Securities Act, and any profit
realized by them on the resale of shares as principals may be deemed
underwriting compensation under the Securities Act. We know of no existing
arrangements between any of the selling stockholders and any other stockholder,
broker, dealer, underwriter, or agent relating to the sale or distribution of
the shares, nor can we presently estimate the amount, if any, of such
compensation.
Although we will receive no proceeds from the sale of shares pursuant
to this prospectus, we have agreed to bear the costs and expenses of the
registration of the shares, including legal and accounting fees, and such costs
and expenses are estimated to be approximately $213,000.
We have informed the selling stockholders that while they are engaged
in a distribution of the shares included in this prospectus they will be
required to comply with certain anti-manipulative rules contained in Regulation
M under the Exchange Act. With certain exceptions, Regulation M prohibits any
selling stockholder, any affiliated purchaser, and any broker-dealer or other
person who participates in such distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase, any security that is the
subject of the distribution until the entire distribution is complete.
Regulation M also prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security.
INDEPENDENT PUBLIC ACCOUNTANTS
There have been no changes in and/or disagreements with Schwartz
Levitsky Feldman L.L.P., independent registered public accounting firm, on
accounting and financial disclosure matters.
LEGAL MATTERS
Certain legal matters in this offering, including the legality of the
common stock offered pursuant to this prospectus, will be passed upon for us and
the selling stockholders by Jackson Walker L.L.P., 901 Main Street, Suite 6000,
Dallas, Texas 75202.
EXPERTS
Our financial statements included in this prospectus have been audited
by Schwartz Levitsky Feldman L.L.P., independent registered public accounting
firm, as stated in the opinion, which has been rendered upon the authority of
said firm as experts in accounting and auditing.
44
INTERESTS OF NAMED EXPERTS AND COUNSEL
No "Expert" or "Counsel" as defined by Item 509 of Regulation S-B
promulgated pursuant to the Securities Act, whose services were used in the
preparation of this Form SB-2, was hired on a contingent basis or will receive a
direct or indirect interest in us.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our Amended and Restated Bylaws, filed as Exhibit 3.3 hereto, provide
that we must indemnify our directors to the fullest extent permitted under
Nevada law and may indemnify, if so authorized by our board of directors, our
officers and any other person whom we have the power to indemnify against
liability, reasonable expense or other matter whatsoever. The effect of these
provisions is potentially to indemnify our directors and officers from all costs
and expenses of liability incurred by them in connection with any action, suit
or proceeding in which they are involved by reason of their affiliation with us.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer 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.
Our Amended and Restated Bylaws also permit us to maintain insurance on
behalf of our company and any person whom we have the power to indemnify.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form SB-2 with the Securities
and Exchange Commission under the Securities Act of 1933 with respect to the
shares of common stock offered in this offering prospectus. This prospectus,
which is a part of the registration statement, does not contain all of the
information set forth in the registration statement, or the exhibits which are
part of the registration statement. You should refer to the registration
statement and its exhibits for additional information that is not contained in
this prospectus. Whenever we make reference in this prospectus to any of our
contracts, agreements or other documents, you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and we are required to file reports, any proxy
statements and other information with the Securities and Exchange Commission.
You can read our Securities and Exchange Commission files, including this
registration statement, over the Internet at the Securities and Exchange
Commission's web site at http://www.sec.gov. You may also read and copy any
documents we file with the Securities and Exchange Commission at its public
reference facility at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
also obtain copies of the documents at prescribed rates by writing to the Public
Reference Section of the Securities and Exchange Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information on the operation of the public
reference facilities.
45
CHINA BAK BATTERY, INC.
(Formerly known as Medina Coffee, Inc.)
AND SUBSIDIARY
REVISED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
Together With Report of Independent
Registered Public Accounting Firm
THREE AND SIX MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)
(Amounts expressed in US Dollars)
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm F-1
Revised Consolidated Balance Sheets as at September 30, 2004 and
March 31, 2005 F-2
Revised Consolidated Statements of Operations for the Years Ended
September 30, 2004 and 2003 and for the Three and Six Months
Ended March 31, 2005 and 2004 F-3
Revised Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended September 30, 2004 and 2003 and for the
Period Ended March 31, 2005 F-4
Revised Consolidated Statements of Cash Flows for the Years Ended
September 30, 2004 and 2003 and for the Three and Six Months
Ended March 31, 2005 and 2004 F-5 - F-7
Notes to Revised Consolidated Financial Statements F-8 - F-28
Schwartz Levitsky Feldman llp
CHARTERED ACCOUNTANTS
TORONTO, MONTREAL, OTTAWA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.)
and Subsidiary
We have audited the accompanying revised consolidated balance sheet of China BAK
Battery, Inc. (formerly known as Medina Coffee, Inc.) as of September 30, 2004,
and the related revised consolidated statements of changes in stockholders'
equity, operations and cash flows for each of the two years ended September 30,
2004 (all expressed in United States dollars). These revised consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these revised consolidated financial
statements based on our audits.
We conducted our audits in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 revised consolidated financial statements referred to above
present fairly, in all material respects, the financial position of China BAK
Battery, Inc. (formerly known as Medina Coffee, Inc.) as of September 30, 2004
and the results of its operations and its cash flows for each of the two years
ended September 30, 2004 and 2003, in conformity with accounting principles
generally accepted in the United States of America.
As described in Notes 7 and 13 the Company has not yet obtained final approval
from the relevant authorities for the acquisition of land use rights to the
property which it occupies. However, the Company has commenced construction of
its facilities on the property and has reflected the costs incurred to date as
long-term assets on the balance sheet described as "property and equipment -
building", "construction in process" and "land use rights", with the expectation
that approval will be obtained within the next fiscal year. The Company may be
at risk as more fully set out in the notes mentioned above should the
application be rejected. The accompanying revised consolidated financial
statements do not include any adjustments that might result should its
application not be approved.
Toronto, Ontario, Canada
December 30, 2004 except for notes 1 and 18,
as to which the date is January 20, 2005 and
note 19, as to which the date is March 22, 2005 Chartered Accountants
F-1
CHINA BAK BATTERY, INC.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Revised Consolidated Balance Sheets
As at March 31, 2005 and September 30, 2004
(Amounts expressed in US Dollars)
March 31, September 30,
2005 2004
(Unaudited- note 3)
$ $
Assets
------
Current Assets
Cash 10,886,298 3,212,176
Cash - Restricted 10,555,838 7,120,069
Accounts Receivable, Net 30,717,771 20,999,561
Inventories 12,125,092 29,535,985
Prepaid Expenses 1,517,750 1,330,645
Notes Receivable 244,460 18,122
Accounts Receivable - Related Party 561,989 911,093
------------------ ------------------
Total Current 66,609,198 63,127,651
3,327,393
------------------ ------------------
Long-Term Assets
Property, Plant, & Equipment 22,602,319 19,875,583
Construction in Progress 31,811,026 23,656,190
Land Use Rights 4,029,038 4,029,038
Less Accumulated Depreciation (3,868,270) (2,370,774)
------------------ ------------------
Long-Term Assets, Net 54,574,113 45,190,037
------------------ ------------------
Other Assets
Other Receivables 149,469 225,972
Intangible Assets, Net 50,056 58,362
------------------ ------------------
Total other 199,525 284,334
------------------ ------------------
Total Assets 121,382,836 108,602,022
================== ==================
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Accounts Payable 17,810,106 23,570,087
Bank Loans, Short Term 28,876,941 27,304,162
Short Term Loans -- 1,812,316
Notes Payable, Other 25,222,575 20,772,559
Land Use Rights Payable 3,751,028 3,750,756
Construction Costs Payable 2,549,304 6,347,846
Customer Deposits 208,450 369,390
Accrued Expenses 3,388,537 5,247,656
Other Liabilities 436,078 181,223
------------------ ------------------
Total Current 82,243,019 89,355,995
------------------ ------------------
CONTINGENCIES AND COMMITMENTS (NOTE 13)
Stockholders' Equity
Common Stock - $.001 Par Value; 50,000,000 Shares Authorized;
39,826,075 and 31,225,642 Shares Issued and outstanding at March
31, 2005 and September 30, 2004 respectively 39,826 31,226
Additional Paid In Capital 27,572,874 12,052,845
Accumulated Comprehensive Loss (1,669) (144)
Reserves 2,323,673 1,724,246
Retained Earnings 9,205,113 5,437,854
------------------ ------------------
39,139,817 19,246,027
------------------ ------------------
Total Liabilities and Stockholders' Equity 121,382,836 108,602,022
================== ==================
The accompanying notes are an integral part of these revised consolidated
financial statements.
F-2
CHINA BAK BATTERY, INC.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Revised Consolidated Statements of Operations
For The Years Ended September 30, 2004 and 2003 and
For The Three and Six Months Ended March 31, 2005 and 2004
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended September September
March 31, March 31, March 31, March 31, 30, 2004 30, 2003
2005 2004 2005 2004
(Unaudited - (Unaudited - (Unaudited - (Unaudited -
note 3) note 3) note 3) note 3)
$ $ $ $ $ $
Revenues, Net of Returns 25,878,407 16,166,081 51,004,672 31,750,468 63,746,202 20,045,496
Cost of Goods Sold 19,717,964 12,279,578 39,739,301 24,271,267 48,285,847 14,173,003
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit 6,160,443 3,886,503 11,265,371 7,479,201 15,460,355 5,872,493
------------ ------------ ------------ ------------ ------------ ------------
Expenses:
Selling 896,954 403,804 1,702,971 836,189 1,869,275 442,112
General and Administrative 688,599 1,433,426 1,808,196 1,924,452 3,052,992 785,612
Research and Development 165,770 114,498 185,791 206,305 328,779 116,789
Bad Debts 294,252 119,881 345,487 107,595 326,990 448,285
Depreciation and Amortization 751,078 404,107 1,505,805 593,884 1,732,707 379,551
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses 2,796,653 2,475,716 5,548,250 3,668,425 7,310,743 2,172,349
------------ ------------ ------------ ------------ ------------ ------------
Operating Income 3,363,790 1,410,787 5,717,121 3,810,776 8,149,612 3,700,144
Other Expense
Finance Costs 572,064 107,308 961,714 157,980 1,006,056 122,798
Other Expense 8,759 5,559 24,879 14,558 2,916 1,315
------------ ------------ ------------ ------------ ------------ ------------
Net Income Before Provision for 2,782,967 1,297,920 4,730,528 3,638,238 7,140,640 3,576,031
Income Tax
Provision for Income Taxes 219,776 97,394 363,842 97,394 394,333 --
------------ ------------ ------------ ------------ ------------ ------------
Net Income 2,563,191 1,200,526 4,366,686 3,540,844 6,746,307 3,576,031
============ ============ ============ ============ ============ ============
Net Profit Per Share- Basic and Diluted 0.07 0.04 0.13 0.11 0.22 0.11
============ ============ ============ ============ ============ ============
Weighted Average Shares Outstanding 38,010,428 31,225,664 34,580,756 31,225,642 31,225,642 31,225,642
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these revised consolidated
financial statements.
F-3
CHINA BAK BATTERY, INC.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Revised Consolidated Statements of Changes in Stockholders' Equity
For The Years Ended September 30, 2004 and 2003
and For The Period Ended March 31, 2005
(Amounts expressed in US Dollars)
Par
Value Additional
Number of Common Paid-In Retained
Shares Stock Capital Earnings
------------- ------------- ------------- -------------
$ $ $
Balance - September 30, 2002 31,225,642 31,226 1,176,927 598,265
Net Income -- -- -- 3,576,031
Transfer to Reserves -- -- -- (543,998)
Foreign Currency Translation -- -- -- --
----------------------------------------------------------------------------------------------------
Balance - September 30, 2003 31,225,642 31,226 1,176,927 3,630,298
Contribution of Cash by Stockholders -- -- 10,875,918 --
Net Income -- -- -- 6,746,307
Transfer to Reserves -- -- -- (1,072,663)
Deemed Distribution to Shareholder - -- -- -- --
Intangible Assets -- -- -- (3,866,088)
Foreign Currency Translation -- -- -- --
----------------------------------------------------------------------------------------------------
Balance - September 30, 2004 31,225,642 31,226 12,052,845 5,437,854
Contribution of Cash by Stockholders 8,600,433 8,600 15,520,029 --
Net Income -- -- -- 4,366,686
Transfer to Reserves -- -- -- (599,427)
Foreign Currency Translation -- -- -- --
----------------------------------------------------------------------------------------------------
Balance - March 31, 2005 39,826,075 39,826 27,572,874 9,205,113
====================================================================================================
Accumulated
Other
Comprehensive Stockholders'
Reserves Income (Loss) Equity
------------- ------------- -------------
$ $ $
Balance - September 30, 2002 107,585 -- 1,914,003
Net Income -- -- 3,576,031
Transfer to Reserves 543,998 -- --
Foreign Currency Translation -- (49) (49)
-------------------------------------------------------------------------------------
Balance - September 30, 2003 651,583 (49) 5,489,985
Contribution of Cash by Stockholders -- -- 10,875,918
Net Income -- -- 6,746,307
Transfer to Reserves 1,072,663 -- --
Deemed Distribution to Shareholder - -- -- --
Intangible Assets -- -- (3,866,088)
Foreign Currency Translation -- (95) (95)
-------------------------------------------------------------------------------------
Balance - September 30, 2004 1,724,246 (144) 19,246,027
Contribution of Cash by Stockholders -- -- 15,528,629
Net Income -- -- 4,366,686
Transfer to Reserves 599,427 -- --
Foreign Currency Translation -- (1,525) (1,525)
-------------------------------------------------------------------------------------
Balance - March 31, 2005 2,323,673 (1,669) 39,139,817
=====================================================================================
(Note 3)
The accompanying notes are an integral part of these revised consolidated
financial statements.
F-4
CHINA BAK BATTERY, INC.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Revised Consolidated Statements of Cash Flows
For The Years Ended September 30, 2004 and 2003 And
For The Three and Six Months Ended March 31, 2005 and 2004
(Amounts Expressed in US Dollars)
Three Months Three Months Six Months
Ended Ended Ended
March 31, March 31, March 31,
2005 2004 2005
(Unaudited) (Unaudited) (Unaudited)
$ $ $
Cash Flows from Operating Activities
Net Income 2,563,191 1,200,526 4,366,686
Adjustments to reconcile net income to net cash
from operating activities:
Bad Debt Expense 294,252 119,881 345,487
Amortization 2,397 166 8,306
Depreciation 748,678 399,137 1,497,496
Changes in Assets and Liabilities:
Accounts Receivable (4,000,209) (3,524,821) (9,637,817)
Inventory 7,175,667 (6,184,949) 17,410,893
Prepaid Expenses (1,108,578) (1,752,136) (187,105)
Note Receivable 211,185 (1,414) (226,338)
Accounts Payable (2,973,006) 6,290,314 (5,759,981)
Customer Deposits (23,594) (392,609) (160,940)
Accrued Expenses 804,944 3,422,900 (1,859,119)
Construction Costs Payable (4,545,101) -- (3,798,542)
Other Liabilities 254,842 (9) 254,855
Deferred Expenses -- 19,987 --
------------- ------------- -------------
Net Cash Flows from Operating Activities (595,332) (403,027) 2,253,881
------------- ------------- -------------
Cash Flows from Investing Activities
Acquisition of Property and Equipment (1,425,750) (529,714) (2,726,736)
Construction in Progress (4,784,404) (3,563,523) (8,154,836)
Investment in Intangible Assets -- -- --
------------- ------------- -------------
Net Cash Flows from Investing Activities (6,210,154) (4,093,237) (10,881,572)
------------- ------------- -------------
F-5
CHINA BAK BATTERY, INC.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Revised Consolidated Statements of Cash Flows
For The Years Ended September 30, 2004 and 2003 And
For The Three and Six Months Ended March 31, 2005 and 2004
(Amounts Expressed in US Dollars)
Six Months
Ended
March 31, September 30, September 30,
2004 2004 2003
(Unaudited)
$ $ $
Cash Flows from Operating Activities
Net Income 3,540,844 6,746,307 3,576,031
Adjustments to reconcile net income to net cash
from operating activities:
Bad Debt Expense 107,595 326,990 448,285
Amortization 460 5,549 676
Depreciation 588,620 1,727,158 378,875
Changes in Assets and Liabilities:
Accounts Receivable (7,018,989) (14,543,660) (5,786,874)
Inventory (5,195,713) (21,542,204) (6,908,083)
Prepaid Expenses (3,214,680) (605,800) (52,609)
Note Receivable (258,825) (18,122) --
Accounts Payable 9,142,301 18,405,499 4,311,720
Customer Deposits (617,508) (286,001) 593,776
Accrued Expenses 3,515,983 3,464,904 723,825
Construction Costs Payable -- 6,347,846 --
Other Liabilities 60,408 60,408 120,864
Deferred Expenses (7,373) -- --
------------- ------------- -------------
Net Cash Flows from Operating Activities 643,123 88,874 2,593,514
------------- ------------- -------------
Cash Flows from Investing Activities
Acquisition of Property and Equipment (3,335,334) (14,906,846) (4,095,998)
Construction in Progress (12,150,348) (23,379,077) (555,395)
Investment in Intangible Assets (5,685) (47,285) (17,302)
------------- ------------- -------------
Net Cash Flows from Investing Activities (15,491,367) (38,333,208) (4,668,695)
------------- ------------- -------------
F-6
CHINA BAK BATTERY, INC.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Revised Consolidated Statements of Cash Flows
For The Years Ended September 30, 2004 and 2003 And
For The Three and Six Months Ended March 31, 2005 and 2004
(Amounts Expressed in US Dollars)
Three Months Three Months Six Months
Ended Ended Ended
March 31, March 31, March 31,
2005 2004 2005
(Unaudited) (Unaudited) (Unaudited)
$ $ $
Cash Flows from Financing Activities
Proceeds from Borrowings 27,229,641 10,836,727 48,749,538
Repayment of Borrowings (25,694,732) (6,750,614) (44,539,060)
Cash Pledged To Bank (2,628,818) (1,226,900) (3,435,769)
Loans to Related Parties -- -- --
Deemed Distribution to Shareholders - Intangible Assets -- -- --
Proceeds from Issuance of Capital Stock 15,528,629 -- 15,528,629
------------- ------------- -------------
Net Cash flows from Financing Activities 14,434,720 2,859,213 16,303,338
------------- ------------- -------------
Effect of Exchange Rate Changes on Cash -- (58) (1,525)
Net Increase in Cash 7,629,234 (1,637,109) 7,674,122
Cash - Beginning of Period 3,257,064 2,511,771 3,212,176
------------- ------------- -------------
Cash - End of Period 10,886,298 874,662 10,886,298
============= ============= =============
Supplemental Cash Flow Disclosures:
Interest Paid 561,508 73,410 874,703
============= ============= =============
Income Taxes Paid 43,156 -- 138,014
============= ============= =============
Six Months
Ended
March 31, September 30, September 30,
2004 2004 2003
(Unaudited)
$ $ $
------------- ------------- -------------
Cash Flows from Financing Activities
Proceeds from Borrowings 20,843,580 57,740,719 9,722,901
Repayment of Borrowings (11,572,559) (17,429,652) (507,424)
Cash Pledged To Bank (1,226,900) (6,299,377) (820,692)
Loans to Related Parties -- (235,840) (554,614)
Deemed Distribution to Shareholders - Intangible Assets (3,866,088) (3,866,088) --
Proceeds from Issuance of Capital Stock 10,873,899 10,875,918 --
------------- ------------- -------------
Net Cash flows from Financing Activities 15,051,932 40,785,680 7,840,171
------------- ------------- -------------
Effect of Exchange Rate Changes on Cash 49 (95) (49)
Net Increase in Cash 203,737 2,541,251 577,913
Cash - Beginning of Period 670,925 670,925 93,012
------------- ------------- -------------
Cash - End of Period 874,662 3,212,176 670,925
============= ============= =============
Supplemental Cash Flow Disclosures:
Interest Paid 126,208 1,007,287 122,798
============= ============= =============
Income Taxes Paid -- -- --
============= ============= =============
The accompanying notes are an integral part of this financial statement.
F-7
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
1. RECAPITALIZATION TRANSACTION
On January 20, 2005, China BAK Battery, Inc. ("The Company" or "China BAK")
completed a stock exchange transaction with the stockholders of BAK
International Limited, a Hong Kong company, or BAK International. The
exchange was consummated under Nevada law pursuant to the terms of a
Securities Exchange Agreement dated effective as of January 3, 2005 by and
among China BAK, BAK International and the stockholders of BAK
International. Pursuant to the Securities Exchange Agreement, the Company
issued 39,826,075 shares of common stock, par value $0.001 per share, to
the stockholders of BAK International (31,225,642 Shares are original
shareholders of BAK and 8,600,433 Shares to new investors), representing
approximately 97.2% of the China BAK post-exchange issued and outstanding
common stock, in exchange for 100% of the outstanding capital stock of BAK
International. The Company presently carries on the business of Shenzhen
BAK Battery Co., Ltd., a Chinese corporation and BAK International's
wholly-owned subsidiary, or BAK Battery.
The reverse merger transaction has been accounted for as a recapitalization
of BAK International whereby the historical financial statements and
operations of BAK become the historical financial statements of the
Registrant with no adjustment to the carrying value of the assets and
liabilities. The accompanying financial statements reflect the
recapitalization of the shareholders equity as if the transaction occurred
as of the beginning of the first period presented.
2. ORGANIZATION AND PRINCIPAL ACTIVITIES
BAK International Limited was incorporated in Hong Kong on December 29,
2003 under the Companies Ordinance as BATCO International Limited and
subsequently changed its' name to BAK International Limited on November 3,
2004. BAK International Limited acquired 100% of the outstanding shares of
Shenzhen BAK Battery Co., Ltd ("BAK") for a total consideration of USD$11.5
million on November 6, 2004. Simultaneously the former shareholders of BAK
acquired 96.8% of the issued shares of BAK International Limited.
Consequently, the shareholders of BAK International Limited are
substantially the same as the former shareholders as BAK therefore the
transaction has been accounted for as a recapitalization of BAK with no
adjustment to the historical basis of the assets and liabilities of BAK and
the operations consolidated as though the transaction occurred as of the
beginning of the first accounting period presented in these financial
statements. See note 18 - Subsequent Events.
Shenzhen BAK Battery Co., Ltd. ("BAK") was founded on August 3, 2001 as a
China-based company specializing in lithium ion (known as "Li-ion" or
"Li-ion cell") battery cell production, for use in the replacement battery
market, primarily for cell phones in the Peoples Republic of China (PRC).
The Company is subject to the consideration and risks of operating in the
PRC. These include risks associated with the political and economic
environment, foreign currency exchange and the legal system in the PRC.
The economy of PRC differs significantly from the economies of the
"western" industrialized nations in such respects as structure, level of
development, gross national product, growth rate, capital reinvestment,
resource allocation, self-sufficiency, rate of inflation and balance of
payments position, among others. Only recently has the PRC government
encouraged substantial private economic activities. The Chinese economy has
experienced significant growth in the past several years, but such growth
has been uneven among various sectors of the economy and geographic
regions. Actions by the PRC government to control inflation have
significantly restrained economic expansion in the recent past. Similar
actions by the PRC government in the future could have a significant
adverse effect on economic conditions in PRC.
F-8
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
2. ORGANIZATION AND PRINCIPAL ACTIVITIES (cont'd)
Many laws and regulations dealing with economic matters in general and
foreign investment in particular have been enacted in the PRC. However, the
PRC still does not have a comprehensive system of laws, and enforcement of
existing laws may be uncertain and sporadic.
The Company's operating assets and primary sources of income and cash flows
are of interests in the PRC. The PRC economy has, for many years, been a
centrally-planned economy, operating on the basis of annual, five-year and
ten-year state plans adopted by central PRC governmental authorities, which
set out national production and development targets. The PRC government has
been pursuing economic reforms since it first adopted its "open-door"
policy in 1978. There is no assurance that the PRC government will continue
to pursue economic reforms or that there will not be any significant change
in its economic or other policies, particularly in the event of any change
in the political leadership of, or the political, economic or social
conditions in, the PRC. There is also no assurance that the Company will
not be adversely affected by any such change in governmental policies or
any unfavorable change in the political, economic or social conditions, the
laws or regulations, or the rate or method of taxation in the PRC.
As many of the economic reforms which have been or are being implemented by
the PRC government are unprecedented or experimental, they may be subject
to adjustment or refinement, which may have adverse effects on the Company.
Further, through state plans and other economic and fiscal measures, it
remains possible for the PRC government to exert significant influence on
the PRC economy.
The Company's financial instruments that are exposed to concentration of
credit risk consist primarily of cash and cash equivalents, and accounts
receivable from customers. Cash and cash equivalents are maintained with
major banks in the PRC. The Company's business activity is primarily with
customers in the PRC. The Company periodically performs credit analysis and
monitors the financial condition of its clients in order to minimize credit
risk.
Any devaluation of the Renminbi (RMB) against the United States dollar
would consequently have adverse effects on the Company's financial
performance and asset values when measured in terms of the United States
dollar. Should the RMB significantly devalue against the United States
dollar, such devaluation could have a material adverse effect on the
Company's earnings and the foreign currency equivalent of such earnings.
The Company does not hedge its RMB - United States dollar exchange rate
exposure.
On January 1, 1994, the PRC government introduced a single rate of exchange
as quoted daily by the People's Bank of China (the "Unified Exchange
Rate"). No representation is made that the RMB amounts have been, or could
be, converted into US$ at that or any rate. This quotation of exchange
rates does not imply free convertibility of RMB to other foreign
currencies. All foreign exchange transactions continue to take place either
through the Bank of China or other banks authorized to buy and sell foreign
currencies at the exchange rate quoted by the People's Bank of China.
Approval of foreign currency payments by the People's Bank of China or
other institutions requires submitting a payment application form together
with suppliers' invoices, shipping documents and signed contracts.
F-9
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
3. BASIS OF PRESENTATION
Audited Financial Statements
The revised consolidated financial statements are prepared in accordance
with generally accepted accounting principles used in the United States of
America and include the accounts of BAK International Limited and Shenzhen
BAK Battery Co, Ltd. for all periods presented.
Unaudited Interim Financial Statements
The condensed consolidated financial statements of China BAK battery, Inc.
(formerly known as Medina Coffee Inc.) and Subsidiary included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial
statements prepared in conjunction with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the
annual audited consolidated financial statements and the notes thereto
included in the Company's annual report on Form 10-KSB, and other reports
filed with the SEC.
The accompanying unaudited interim consolidated financial statements
reflect all adjustments of a normal and recurring nature which are, in the
opinion of management, necessary to present fairly the financial position,
results of operations and cash flows of the Company for the interim periods
presented. The results of operations for these periods are not necessarily
comparable to, or indicative of, results of any other interim period or for
the fiscal year taken as a whole. Factors that affect the comparability of
financial data from year to year and for comparable interim periods include
non-recurring expenses associated with the Company's registration with the
SEC, costs incurred to raise capital and stock awards.
The condensed consolidated financial statements are prepared in accordance
with generally accepted accounting principles used in the United States of
America and include the accounts of BAK International Limited and Shenzhen
BAK Battery Co, Ltd. for all periods presented. All significant
intercompany balances and transactions have been eliminated on
consolidation.
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
A. Cash And Cash Equivalents
Cash and cash equivalents include cash on hand and any other highly liquid
investments purchased with an original maturity of three months or less.
The carrying amounts approximate fair value because of the short-term
maturity of those instruments. As stated in the following Note 8, a portion
of the Company's cash is restricted cash, which has been pledged to its
bank to secure short-term bank loans. This restricted cash is not as liquid
as other cash, and has been reflected in the attached revised consolidated
financial statements.
F-10
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (cont'd)
B. Accounts Receivable
In order to determine the fair value of the Company's accounts receivable,
the Company records a provision for doubtful accounts to cover estimated
credit losses. Management reviews and adjusts this allowance periodically
based on historical experience and its evaluation of the collectibility of
outstanding accounts receivable. The Company evaluates the credit risk of
its customers utilizing historical data and estimates of future
performance.
C. Inventory
Inventories are stated at the lower of cost or net realizable value. Cost
is calculated on the moving average basis and includes all costs to acquire
and other costs incurred in bringing the inventories to their present
location and condition. The Company evaluates the net realizable value of
its inventories on a regular basis and records a provision for loss to
reduce the computed moving-average cost if it exceeds the net realizable
value.
D. Property, Plant And Equipment
Property, plant and equipment are carried at cost. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements
are capitalized.
When assets are retired or disposed of, the cost and accumulated
depreciation are removed from the accounts, and any resulting gains or
losses are included in income in the year of disposition.
The Company recognizes a scrap value of 5% of the cost basis and
depreciation is calculated on a straight-line basis over the estimated
useful life of the assets. The estimated useful lives are as follows:
Buildings 30 - 40 years
Plant and machinery 5 - 12 years
Motor vehicles 8 years
Office equipment and furnishings 5 years
Leasehold Improvements 2 - 5 years
E. Intangible Assets
Trademarks are carried at cost and are amortized using the straight-line
method over the estimated useful lives of 5 years from the date the Company
acquired the trademark. Management is of the opinion that no impairment
loss is considered necessary at year-end.
F. Fair Value Of Financial Instruments
The carrying value of financial instruments including cash, receivables,
accounts payable and accrued expenses and debt, approximates their fair
value at September 30, 2004 and 2003 due to the relatively short-term
nature of these instruments.
F-11
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (cont'd)
G. Construction In Progress
Construction in progress represents buildings, machinery and other
long-term assets under construction or installation, which is stated at
cost less any impairment losses, and is not depreciated. Cost comprises the
direct costs of purchase, construction and installation. Construction in
progress is reclassified to the appropriate category of long-term assets
when completed and ready for use. Management is of the opinion that no
impairment loss is considered necessary at year-end.
H. Income Taxes
The Company accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, which requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the revised consolidated
financial statements or tax returns. Deferred income taxes are provided
using the liability method. Under the liability method, deferred income
taxes are recognized for all significant temporary differences between the
tax and financial statement bases of assets and liabilities. In addition,
the Company is required to record all deferred tax assets, including future
tax benefits of capital losses carried forward, and to record a "valuation
allowance" for any deferred tax assets where it is more likely than not
that the asset will not be realized.
In accordance with the relevant income tax laws applicable to enterprises
operating in the Shenzhen Special Economic Zone of the PRC, the profits of
the Company are fully exempt from income tax for five years ("tax
holiday"), commencing from the first profit making year of operations,
followed by a 50% exemption for the immediate next three years ("tax
preferential period"), after which the profits of the Company will be
taxable at the full rate, currently 15%.
Had this tax holiday not been available, income tax expense would have
increased by approximately US$692,000 for the year ended September 30,
2004, and US$537,000 for the year ended September 30, 2003, respectively.
I. Government Subsidies
Subsidies from the government are recognized at their fair values when
received or there is reasonable assurance that they will be received, and
all attached conditions are complied with.
Revenue from government sponsored grants or subsidies are recognized as
research activities are performed or as development milestones are
completed under the terms of the agreement. Costs incurred in connection
with the performance of activities under these agreements are expensed as
incurred. The Company defers revenue recognition related to payments
received during the current year for research activities to be performed in
the following year.
During the year ended September 30, 2004, the Company received a repayable
grant from the Long Gang Technology and Science Bureau in the amount of
approximately $181,000. The grant was awarded to further the research of
the LiNiCo2 which is an advanced mode material in the Li-on battery cell.
The term of the grant is for a two year period with repayment of principal
together with interest at the rate of 3% per annum due on December 26,
2005. The grant is recorded as a liability in the accompanying revised
consolidated financial statements.
F-12
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (cont'd)
I. Government Subsidies (cont'd)
During the year ended September 30, 2003, the Company received a
non-repayable grant from the Shenzhen Technology and Finance Bureau in the
amount of approximately $120,000. The grant was awarded to further the
Company's research and development activities. The grant was recorded as an
offset to research and development expenses in the accompanying revised
consolidated financial statements.
J. Related Parties
Parties are considered to be related if one party has the ability, directly
or indirectly, to control the other party or exercise significant influence
over the other party in making financial and operational decisions. Parties
are also considered to be related if they are subject to common control or
common significant influence. Related parties may be individuals or
corporate entities.
K. Impairment Of Long-Term Assets
In accordance with the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", the Company's policy is to
record an impairment loss against the balance of a long-lived asset in the
period when it is determined that the carrying amount of the asset may not
be recoverable. This determination is based on an evaluation of such
factors as the occurrence of a significant event, a significant change in
the environment in which the business assets operate or if the expected
future non-discounted cash flows of the business was determined to be less
than the carrying value of the assets. If impairment is deemed to exist,
the assets will be written down to fair value. Management also evaluates
events and circumstances to determine whether revised estimates of useful
lives are warranted. As of September 30, 2004, management expects its
long-lived assets to be fully recoverable.
L. Foreign Currency Translation
The Company maintains its books and accounting records in Renminbi ("RMB"),
the PRC's currency, being the functional currency. Translation of amounts
from RMB in United States dollars ("US$") has been made at the following
exchange rates for the respective years:
September 30, 2004:
Balance Sheet - RMB 8.27670 to US$ 1
Operating Statement - RMB 8.26688 to US$ 1
September 30, 2003 -
Balance Sheet - RMB 8.27710 to US$ 1
Operating Statement - RMB 8.27699 to US$ 1
Foreign currency transactions in RMB are reflected using the temporal
method. Under this method, all monetary items are translated into the
functional currency at the rate of exchange prevailing at the balance sheet
date. Non-monetary transactions are translated at historical rates. Income
and expenses are translated at the rate in effect on the transaction dates.
Transaction gains and losses, if any, are included in the determination of
net income for the period. Transaction losses included in net income
amounted to US$6,766 and US$1,989 at September 30, 2004 and 2003,
respectively.
F-13
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (cont'd)
L. Foreign Currency Translation (cont'd)
In translating the revised consolidated financial statements of the Company
from its functional currency into its reporting currency in United States
dollars, balance sheet accounts are translated using the closing exchange
rate in effect at the balance sheet date and income and expense accounts
are translated using the average exchange rate prevailing during the
reporting period. Adjustments resulting from the translation, if any are
included in cumulative other comprehensive income (loss) in stockholder's
equity.
The RMB is not readily convertible into United States dollars or other
foreign currencies. The foreign exchange rate between the United States
dollar and the RMB has been stable at approximately 1RMB to US$.1205 for
the last few years. No representation is made that the RMB amounts could
have been or could be, converted into United States dollars or any other
currency at that rate or any other rate.
M. Use Of Estimates
The preparation of revised consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the revised consolidated financial statements and reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
N. Revenue Recognition, Returns And Warranties
BAK recognizes revenue when the significant risks and rewards of ownership
have transferred pursuant to PRC law, including factors such as when
persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed and determinable, sales and value-added tax laws have
been complied with, and collectibility is reasonably assured. BAK generally
recognizes product sales when the product is shipped. In the event goods
are returned from a customer, revenue is reduced, and the returned goods
are placed back into inventory during the period that the returned goods
are received by BAK. Concurrent with the recognition of revenue, at the end
of the fiscal year, BAK records a warranty reserve for product returns,
based upon historical experience, that are a percentage of sales during the
final month of the respective year.
The Company estimates the amount of claims made based upon the historical
experience with product returns and warranty claims. While the Company's
policy is to allow customers to return products or make warranty claims for
a period up to six to eight months after the sale, the historical
experience indicates that the vast majority of claims are made with 30
days. Hence, the Company provides for a certain percentage of its monthly
sales that it estimates will result in product returns or warranty claims.
O. Employees' Benefits And Pension Obligations
Mandatory contributions are made to the Government's health, retirement
benefit and unemployment schemes at the statutory rates in force during the
period, based on gross salary payments. The cost of these payments is
charged to the statement of income in the same period as the related salary
cost. While the Company has purchased all required insurance for management
personnel, the Company is not in compliance with the similar requirements
for other of its employees. See Note 13, Contingencies and Commitments.
F-14
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (cont'd)
O. Employees' Benefits And Pension Obligations (cont'd)
In accordance with certain regulations of the Shenzhen Municipal
Government, all enterprises established in Shenzhen are required to
contribute to a retirement insurance fund administered by the Shenzhen
Municipal Government at rates ranging from 8% to 9% of the basic salaries
or a minimum changes of RMB155 per person per month of the company's
existing PRC staff.
P. Comprehensive Income/(Loss)
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS
No. 130 establishes standards for the reporting and display of
comprehensive income, its components and accumulated balances in a full set
of general purpose revised consolidated financial statements. SFAS No. 130
defines comprehensive income (loss) to include all changes in equity except
those resulting from investments by owners and distributions to owners,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable
securities.
Q. Concentration Of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts
receivable. The Company performs ongoing credit evaluations with respect to
the financial condition of its creditors, but does not require collateral.
In order to determine the value of the Company's accounts receivable, the
Company records a provision for doubtful accounts to cover probable credit
losses. Management reviews and adjusts this allowance periodically based on
historical experience and its evaluation of the collectibility of
outstanding accounts receivable.
R. Research And Development Costs
Research and development costs are charged to operations when incurred and
are included in operating expenses. The amounts charged in 2004 and 2003
were $328,779 and $116,789, respectively.
S. Advertising Costs
Advertising costs consist primarily of promoting the Company and the
Company's products through printed advertisements in trade publications and
displaying the Company's products through attendance at industry trade
exhibitions. The Company does not pay slotting fees, engage in cooperative
advertising programs, participate in buydown programs or similar
arrangements.
Advertising costs, except for costs associated with direct-response
advertising, are charged to operations when incurred. The costs of
direct-response advertising are capitalized and amortized over the period
during which future benefits are expected to be received. The Company did
not incur any direct-response advertising costs in 2004 and 2003,
respectively. Advertising costs included in selling expenses in the
accompanying revised consolidated financial statements amounted to $201,200
and $65,900 in 2004 and 2003 respectively.
F-15
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (cont'd)
T. Shipping And Handling Costs
Shipping and handling cost represents cost incurred by the company to
transport its products. The company incurs shipping and handling costs
primarily by transporting goods using its own delivery vehicles or by
contracting with professional carriers.
The majority of goods are sold to customers in the Zhujiang Delta. For
those sales the Company uses its own delivery vehicles. Transportation and
Freight charges incurred for Company owned vehicles amounted to $57,579 and
$22,569 for 2004 and 2003, respectively. The charges incurred for
transportation by professional carriers amounted to $26,402 and $7,800 for
2004 and 2003, respectively.
For Sales made abroad the company incurs transportation charges for
delivery to the Port of Hong Kong which amounted to $18,621 and $ 6,537 for
2004 and 2003 respectively. All other transportation charges are borne by
the customer directly.
The Company does not bill the customer for any transportation charges
incurred. All transportation charges incurred by the company are recorded
as Selling Expenses in the accompanying revised consolidated financial
statements.
U. Earning Per Share
Basic and diluted earnings per share is computed by dividing net income
available by the weighted average number of common shares outstanding for
the period since the Company does not have any stock options, warrants or
other dilutive instruments. The weighted average outstanding common shares
reflect the effects of the share exchange transaction as described in Note
1.
V. Classification Of Operating Costs And Expenses
The Company records its operating costs and expenses generally with the
following classifications:
Cost of Goods Sold
------------------
Cost of goods sold consists primarily of raw materials, direct labor and
manufacturing overhead. Manufacturing overhead consists of an allocation of
purchasing and receiving costs, inspection fees, warehousing, office
expenses, utilities, supplies, factory and equipment repairs and
maintenance, safety equipment and supplies, packing materials, and loading
fees.
Selling Expenses
----------------
Selling Expenses consist primarily of transportation and freight charges,
travel and entertainment, maintenance, payroll, payroll taxes and benefits,
advertising and promotion, office expenses, telephone and utilities,
insurance, sales commissions and exports fees.
General and Administrative Expenses
-----------------------------------
General and Administrative expenses consist primarily of general office
expenses, travel and entertainment, transportation, payroll, payroll taxes
and benefits, maintenance, telephone and utilities, printing, advertising
and promotion, professional fees, continuing education, licenses and fees.
F-16
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (cont'd)
W. Recent Pronouncements
In July 2002, the FASB issued SFAS No. 146 "Accounting for Restructuring
Costs." SFAS 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts and relocating plant facilities or personnel. Under
SFAS 146, the Company will record a liability for a cost associated with an
exit or disposal activity when that liability is incurred and can be
measured at fair value. SFAS 146 will require the Company to disclose
information about its exit and disposal activities, the related costs, and
changes in those costs in the notes to the interim and annual revised
consolidated financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal
activities initiated after December 31, 2002, with earlier adoption
encouraged. Under SFAS 146, a company cannot restate its previously issued
revised consolidated financial statements and the new statement
grandfathers the accounting for liabilities that a company had previously
recorded under Emerging Issues Task Force Issue 94-3.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of SFAS Statement No.
123, "Accounting for Stock Based Compensation" which provides alternative
methods for accounting for a change by registrants to the fair value method
of accounting for stock-based compensation. Additionally, SFAS 148 amends
the disclosure requirements of SFAS 123 to require disclosure in the
significant accounting policy footnote of both annual and interim revised
consolidated financial statements of the method of accounting for stock
based-compensation and the related pro forma disclosures when the intrinsic
value method continues to be used. The statement is effective for fiscal
years beginning after December 15, 2002, and disclosures are effective for
the first fiscal quarter beginning after December 15, 2002.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities".
The changes in SFAS No. 149 improve financial reporting by requiring that
contracts with comparable characteristics are accounted for similarly. This
statement is effective for contracts entered into or modified after June
30, 2003 and all of its provisions should be applied prospectively.
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain
Financial Instruments with Characteristics of both Liabilities and Equity".
SFAS No. 150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity that, under previous
pronouncements, issuers could account for as equity. The new accounting
guidance contained in SFAS No. 150 requires that those instruments be
classified as liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatory redeemable
shares, which the issuing company is obligated to buy back in exchange for
cash or other assets. A second type includes put options and forward
purchase contracts, which involves instruments that do or may require the
issuer to buy back some of its shares in exchange for cash or other assets.
The third type of instruments that are liabilities under this SFAS is
obligations that can be settled
F-17
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (cont'd)
W. Recent Pronouncements (cont'd)
with shares, the monetary value of which is fixed, tied solely or
predominantly to a variable such as a market index, or varies inversely
with the value of the issuers' shares. SFAS No. 150 does not apply to
features embedded in a financial instrument that is not a derivative in its
entirety.
Most of the provisions of Statement 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this SFAS are consistent
with the FASB's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. This SFAS shall be effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003, except
for mandatory redeemable financial instruments of a non-public entity, as
to which the effective date is for fiscal periods beginning after December
15, 2004.
In December, 2004 the FASB issued SFAS No. 153 "Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29. The guidance in APB No. 29,
"Accounting for Non-monetary Transactions", is based on the principle that
exchanges of non-monetary assets should be measured on the fair value of
the assets exchanged. The guidance included certain exceptions to that
principle. This statement amends APB No. 29 to eliminate the exception for
non-monetary exchanges for similar productive assets and replaces it with
the general exception for exchanges of non-monetary assets that do not have
commercial substance. A non-monetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as
a result of the exchange. This statement shall be effective for
non-monetary exchanges occurring in fiscal periods beginning after June 15,
2005. The Company does not believe that the adoption of this statement will
have a material effect on its revised consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN45"). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also clarifies that at the
time a company issues a guarantee, the company must recognize an initial
liability for the fair market value of the obligations it assumes under the
guarantees and must disclose that information in its interim and annual
revised consolidated financial statements. The initial recognition and
measurement provisions of FIN 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002.
In January 2003, and as revised in December 2003, the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities"
"Interpretation No. 46"), an interpretation of Accounting Research Bulletin
("ARB") No. 51", "Revised consolidated financial statements".
Interpretation No. 46 addresses consolidation by business enterprises of
variable interest entities, which have one or both of the following
characteristics: (i) the equity investment at risk is not sufficient to
permit the entity to finance its activities without additional subordinated
support from other parties, which is provided through another interest that
will absorb some or all of the expected losses of the entity; (ii) the
equity investors lack one or more of the following essential
characteristics of a controlling financial interest: the direct or indirect
ability to make decisions about the entity's activities through voting
rights or similar rights; or the obligation to absorb the expected losses
of the entity if they occur, which makes it possible for the entity to
finance its activities; the right to receive the expected residual returns
of the entity if they occur, which is the compensation for the risk of
absorbing the expected losses.
F-18
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (cont'd)
W. Recent Pronouncements (cont'd)
Interpretation No. 46, as revised, also requires expanded disclosures by
the primary beneficiary (as defined) of a variable interest entity and by
an enterprise that holds a significant variable interest in a variable
interest entity but is not the primary beneficiary.
Interpretation No. 46, as revised, applies to small business issuers no
later than the end of the first reporting period that ends after December
15, 2004. This effective date includes those entities to which
Interpretation No. 46 had previously been applied. However, prior to the
required application of Interpretation No. 46, a public entity that is a
small business issuer shall apply Interpretation No. 46 to those entities
that are considered to be special-purpose entities no later than as of the
end of the first reporting period that ends after December 15, 2003.
Interpretation No. 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year
restated.
Management does not expect these recent pronouncements to have a material
impact on the Company's consolidated financial position or results of
operations.
5. ACCOUNTS RECEIVABLE
The Company's accounts receivable at September 30, 2004 and 2003 are
summarized as follows:
2004 2003
$ $
Accounts receivable 21,763,923 7,220,263
Less: Allowance for doubtful accounts 764,362 461,980
---------- ----------
Accounts receivable, net 20,999,561 6,758,283
========== ==========
6. INVENTORIES
The Company's inventories at September 30, 2004 and 2003 are summarized as
follows:
2004 2003
$ $
Raw materials 9,934,263 2,643,542
Work in progress 1,872,465 425,698
Finished goods 17,729,257 4,924,541
---------- ----------
Total 29,535,985 7,993,781
========== ==========
F-19
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
7. LONG-TERM ASSETS
2004 2003
$ $
Building 4,535,876 --
Machinery 14,242,696 536,088
Vehicles 486,480 342,630
Office Equipment 304,773 90,019
Leasehold improvements 305,758 --
---------- ----------
Cost 19,875,583 4,968,737
---------- ----------
Less: Accumulated Depreciation
Building 19,024 --
Machinery 2,006,717 595,103
Vehicles 79,097 26,477
Office Equipment 53,402 22,036
Leasehold improvements 212,534 --
---------- ----------
Accumulated Depreciation 2,370,774 643,616
---------- ----------
Net Book Value 17,504,809 4,325,121
Land Use Rights 4,029,038 --
Construction in Progress 23,656,190 555,395
---------- ----------
Long-Term Assets - Net 45,190,037 4,880,516
========== ==========
Total depreciation expense for the years ended September 30, 2004 and 2003
was $1,727,158 and $378,875, respectively.
Construction in Progress consists of the following at September 30:
2004 2003
$ $
Land -- 120,821
Architect and engineering -- 13,109
Construction costs 18,258,222 12,082
Construction materials 790,864 --
Capitalized research and design 143,403 --
Other indirect costs 4,463,701 409,383
---------- ----------
Total 23,656,190 555,395
========== ==========
F-20
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
7. LONG-TERM ASSETS (cont'd)
The Company has funded much of the construction costs with cash flow from
operations and as such no interest expense has been capitalized. The
Company anticipates that the construction of the industry park will be
completed and placed into service by the end of 2005.
Land Use Rights
BAK has not yet obtained the certificate of land use right. The bureau of
city planning and land resource of Shenzhen have not yet approved the
application of BAK since the original zoning for the use of the land
conflicted with the city planning for education and biology and which is
presently being resulted to business use. According to the agreement with
the local government of Kuichong Township of Longgang district of Shenzhen,
BAK had paid approximately US$279,000 for the down payment of the land use
right and US$3,750,000 is still outstanding. It is anticipated that the
outstanding balance will be paid within the next twelve months. The local
government of Kuichong Township of Longgang district of Shenzhen has
however granted permission for BAK to commence the construction of the new
production plant pending a decision from the bureau of city planning. The
Company anticipates that it will receive the approval from the bureau of
city planning in June 2005. See Note 13, Contingencies and Commitments.
8. INTANGIBLE ASSETS
2004 2003
$ $
Trademarks 63,904 17,302
Less: Accumulated amortization 5,542 676
--------- ---------
Net book value 58,362 16,626
========= =========
Amortization expense for the years ended September 30, 2004 and 2003 was US
$5,549 and US $676, respectively.
9. BANK INDEBTEDNESS AND NOTES PAYABLE
As of September 30, 2004 and 2003, the Company had several outstanding
short-term bank notes, which were used primarily to fund the construction
in progress. The notes, which had a cumulative balance of US$ 27,304,162
and US$ 3,479,480 for each respective year, carried interest rates ranging
from 4.536% to 5.841% and have maturity dates ranging from 5 to 12 months.
Each note, except for US$2,416,422, is guaranteed by Development and
Construction (Group) Company Limited By Shares ("Changchun Co.") of
Changchun Economic & Technology Development District, and/or Jilin Province
Huaruan Technology Company, Ltd. (a corporation owned by Xiangqian Li,
BAK's Chairman), related parties, and others who are not related. Neither
Huaran, nor Mr. Li, receive any compensation for acting as guarantor.
The Company is required to pledge cash in order to secure these short-term
bank loans and note payable. The amounts of those pledges, for the years
ending September 30, 2004 and 2003, are US$ 7,120,069 and US$ 820,692,
respectively. The cash pledged has been presented as "cash restricted" on
the balance sheet.
F-21
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
9. BANK INDEBTEDNESS AND NOTES PAYABLE (cont'd)
On September 30, 2004, contrary to relevant PRC laws and regulations, the
Company borrowed US$1,812,316 from Changzhou Lihai Investment Consulting
Co., Ltd. The Company subsequently repaid this loan on October 11, 2004.
Management believes that risk to the Company, due to this loan arrangement,
is very limited.
Notes payable, other represents promises to pay from customers received in
the ordinary course of business. The notes can generally be exchanged at a
discount for cash with financial institutions.
10. RESERVES
Pursuant to the accounting systems for business enterprises as promulgated
by the PRC, the profits of the BAK, which are based on their PRC statutory
financial statements, are available for distribution in the form of cash
dividends only after they have satisfied all the PRC tax liabilities,
provided for losses in previous years, and made appropriations to reserve
funds (as discussed below), as determined at the discretion of the board of
directors in accordance with the PRC accounting standards and regulations.
With the exception of the restriction on distributions and dividends
described in the preceding, the Company is not limited or otherwise
restricted in making distributions by any other agencies or indentures.
As stipulated by the relevant laws and regulations for enterprises
operating in the PRC, Company's are required to make annual appropriations
to two reserve funds, consisting of the statutory surplus and public
welfare funds. In accordance with the relevant PRC regulations and the
articles of association of the respective companies, the companies are
required to allocate a certain percentage of their profits after taxation,
as determined in accordance with the PRC accounting standards applicable to
the companies, to the statutory surplus reserve until such reserve reaches
50% of the registered capital of the companies.
Net income as reported in the US GAAP revised consolidated financial
statements differs from that as reported in the PRC statutory revised
consolidated financial statements. In accordance with the relevant laws and
regulations in the PRC, the profits available for distribution are based on
the statutory revised consolidated financial statements. If BAK has foreign
currency available after meeting its operational needs, BAK may make its
profit distributions in foreign currency to the extent foreign currency is
available. Otherwise, it is necessary to obtain approval and convert such
distributions at an authorized bank.
11. SIGNIFICANT CONCENTRATION
The Company grants credit to its customers, generally on an open account
basis.
BAK's five largest customers accounted for 38% of the sales in 2004, in
which only one customer was in excess of 10% of consolidated sales.
12. RELATED PARTY TRANSACTIONS
In October 2003, the Company acquired intangible assets from entities
controlled by its chairman and controlling shareholder. The amount due to
the chairman resulting from this transaction was effectively paid in cash,
in the amount of US$3,866,088, and was recorded at the fair market value of
the intangible asset. With respect to consideration paid by the Company in
F-22
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
12. RELATED PARTY TRANSACTIONS (cont'd)
excess of the chairman's carrying cost of the intangible, such excess has
been charged to retained earnings, as a distribution to the chairman,
resulting in the acquired intangible being recorded by the Company at the
chairman's original cost basis.
The company has made short term advances to a former shareholder in the
amount of approximately $911,000. The advance bears no interest and has no
formal repayment terms. The advance is expected to be repaid during 2005.
On September 30, 2004, BAK Battery Company entered into an agreement with
HFG International LTD, in which HFG will provide financial consulting
services to the Company substantially in the form of the following, for a
period of one year in consideration of fee of $400,000.
As part of the agreement HFG would provide the Company, among other things,
advice on the development and implementation of restructuring plan
resulting in an organizational structure that would facilitate the
registration of the company's securities, assist the Company in engaging
qualified professionals to assist in facilitating the Company's plan,
assist the Company in identifying potential merger candidates, supervise
and train management in preparation for the registration of its securities,
assist in the preparation of the necessary documentation and to assist the
Company with the solicitation of equity financing.
The fee is to be paid from the proceeds of the equity capital raised by HFG
on behalf of the Company. In January 2005 the Company was successful in
raising $17,000,000 from qualified investors in a private placement
offering. The fee to HFG will be recorded by the Company as a cost of
raising capital in 2005. The principal stockholder in HFG is also the
former Chief Executive Officer of Medina Coffee, Inc. The fee charged to
the Company for the services of HFG is on essentially the same terms as
those charged by HFG for financial consulting services performed for HFG's
other clients.
13. CONTINGENCIES AND COMMITMENTS
A. Contingent liabilities
1. Land Use and Ownership Certificate:
According to relevant PRC laws and regulations, a land use right
certificate, along with government approvals for land planning,
project planning, and construction need to be obtained before
construction of building is commenced. An ownership certificate
shall be granted by the government upon application under the
condition that the aforementioned certificate and government
approvals are obtained.
BAK has not yet obtained the land use right certificate and
government approvals relating to the construction of BAK
Industrial Park (the Company's operating premises). However, BAK
has applied to obtain the land use right certificate of approval.
Management believes, under the condition that BAK is granted a
land use right certificate and related approvals, there should be
no legal barriers for BAK to obtain an ownership certificate for
the premises presently under construction in BAK Industrial Park.
F-23
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
13. CONTINGENCIES AND COMMITMENTS (cont'd)
A. Contingent liabilities (cont'd)
1. Land Use and Ownership Certificate (cont'd)
However, in the event that BAK fails to obtain the land use right
certificate relating to BAK Industrial Park and/or the government
approvals required for the construction of BAK Industrial Park,
there is the risk that the buildings constructed need to be
vacated as illegitimate constructions. However, management
believes that this possibility, while present, is very remote. At
a result, no provision has been made in the revised consolidated
financial statements for this potential occurrence.
2. 2004 - US$ 1,208,153 Guaranteed for Shenzhen Tongli, a
non-related party
2004 - US$ 1,208,153 Guaranteed for Shenzhen Zhengda, a
non-related party
2004 - US$ 18,122 Notes Receivable Discounted
The Company sells notes and accounts receivable from time to time
to banks at a discount. At the time of the sale all rights and
privileges of holding the note are transferred to the banks or
suppliers. When notes are sold, the Company removes the asset
from its book with a corresponding expense for the amount of the
discount. The Company remains contingently liable on a portion of
the amount outstanding in the event the note maker defaults. The
company was contingently liable at September 30, 2004 and 2003 in
the amounts of $18,122 and $0, respectively.
No provision has been made in the revised consolidated financial
statements for these contingencies.
BAK leases various factory and office space under short term
operating leases and is obligated under those leases in the
amounts detailed below as of September 30, 2004.
3. BAK and Development and Construction (Group) Company Limited By
Shares ("Changchun Co.") of Changchun Economic & Technology
Development District, have entered into a Cross-Guaranty
Agreement, dated February 20, 2004 (the "Agreement"), pursuant to
which the parties were obligated to guaranty a specified amount
of each other's indebtedness to specifically identified lending
institutions. As of September 30, 2004, Chang Chu Jingkai had
guaranteed indebtedness of the Company to Longgang Division,
Shenzhen Branch, Agricultural Bank of China (Agricultural Bank)
in the amount of USD$ 24,164,220 (The "BAK Indebtedness"). As of
September 30, 2004, BAK has not guaranteed any indebtedness of
Changchun Co. in accordance with the Agreement. On December 22,
2004, the Company received from Changchun Co. a letter of
termination pursuant to which the Agreement was deemed terminated
by Changchun Co. and the Company was relieved of all obligations
to guaranty any indebtedness of Changchun Co. in the future. The
termination of the Agreement in no way effects Changchun Co.'s
continuing guaranty of the BAK Indebtedness.
F-24
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
13. CONTINGENCIES AND COMMITMENTS (cont'd)
A. Contingent liabilities (cont'd)
4. Social Insurance of BAK's Employees:
As described in Note 4 (O), BAK is required to cover employees
with various types of social insurance. Although all insurances
have been purchased for management employees, BAK has not fully
covered other employees. Management believes that BAK needs to
provide all employees with the required insurance.
In the event that any current employee, or former employee, files
a complaint with the government, not only will BAK be required to
purchase insurance for such employee, but BAK may be subject to
administrative fines. As the Company believes that these fines
are nominal, no provision for any potential fines has been made
in the accompanying financial statement.
B. Commitments
1. Capital Commitments
BAK has commitments under construction contracts for the
construction of factory, office, and employee residence
buildings, amounting to $6,275,000. These contracts are
contemplated to be completed at various dates up to the end of
the 2005 calendar year.
2. Lease commitment for factories: 2005 - US$ 717,127
2006 - US$ 159,273
14. CAPITAL CONTRIBUTION
During the year ended September 30, 2004 the existing stockholders
contributed cash to the Company in the amount of $10,875,918 which has been
recorded as an increase to additional paid-in capital in the accompanying
revised consolidated financial statements.
15. BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA
The Company currently operates one business segment: the replacement
battery market. We manufacture of three types of batteries: steel cell,
aluminum cell and cylindrical cell. Our products are delivered to packing
plants operated by third parties primarily for use in mobile phones and
other electronic devices. Revenues by product were as follows for 2004 and
2003:
F-25
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
15. BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA (cont'd)
Product Sales
2004 2003
----------------- -----------------
$ % $ %
(000's) (000's)
Steel Cell 50.41 79.1 19.68 98.2
Aluminum Cell 13.08 20.5 .28 1.4
Cylindrical Cell .26 .4 .09 .4
------- ------- ------- -------
Total 63.75 100.0 20.05 100.0
------- ------- ------- -------
Geographic Area Information
---------------------------
Revenues
Domestic Sales - PRC 43.36 68.0 16.37 81.7
Foreign Sales 20.39 32.0 3.68 18.3
------- ------- ------- -------
Total 63.75 100.0 20.05 100.0
------- ------- ------- -------
Property, Plant & Equipment - Net
---------------------------------
Domestic - PRC 45.19 100.0 4.88 100.0
Foreign -- -- -- --
------- ------- ------- -------
Total 45.19 100.0 4.88 100.0
------- ------- ------- -------
The above geographic area data includes trade revenues based on product
shipment destination and property, plant and equipment based on physical
location.
16. INCOME TAXES
U.S. PRC Total
------- ------- -------
$ $ $
(000's)
Income Before Provision for Taxes
---------------------------------
2004 -- 7,141 7,141
2003 -- 3,576 3,576
Provision for Taxes
-------------------
2004
----
Current -- 394 394
Deferred -- -- --
------- ------- -------
Total -- 394 394
------- ------- -------
2003
----
Current -- -- --
Deferred -- -- --
------- ------- -------
Total -- -- --
------- ------- -------
F-26
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
16. INCOME TAXES (cont'd)
Principle reconciling items from income tax computed at the statutory rates
are as follows:
2004 2003
$ $
Computed Tax at statutory rate - PRC - 15% 1,071 537
Non-Deductible Items 15 --
Tax Holiday - PRC (692) (537)
-------- --------
Total Provision for Taxes 394 --
-------- --------
As of September 30, 2004 and 2003, the Company has no deferred tax assets
or liabilities and is not liable for any taxes in the United States or any
other foreign jurisdictions outside the PRC.
17. WARRANTY RESERVES
Warranty Reserves consists of the following at September 30:
2004 2003
$ $
---------- ----------
Balance, beginning of year 95,874 --
Add: Provision for warranty claims 3,507,151 1,486,525
Less: Claims paid (3,382,522) (1,390,651)
---------- ----------
Balance, end of year 220,503 95,874
========== ==========
Warranty expense amounted to $3,507,151 and 1,486,525 for the years ended
September 30, 2004 and 2003, respectively and is included in cost of goods
sold in the accompanying revised consolidated financial statements.
18. SUBSEQUENT EVENTS
A. On November 6, 2004, BAK International Limited, a company controlled
by the chairman of BAK, purchased 30,225,642 shares of BAK from
existing shareholders for cash consideration of $11,500,000. This
resulted in BAK becoming a wholly owned subsidiary of BAK
International Limited. See Note 2.
On January 20, 2005, BAK International Limited closed a private
placement of its securities with unrelated investors whereby it issued
an aggregate of 8,600,433 shares of common stock for gross proceeds of
$17,000,000. The cash and shares of common stock will be held in
escrow until the completion of the reverse merger transaction
described in Note 1 and the filing of a registration statement with
the Securities and Exchange Commission as described in the following
paragraph.
F-27
China BAK Battery, Inc.
(Formerly known as Medina Coffee, Inc.) and Subsidiary
Notes to Revised Consolidated Financial Statements
September 30, 2004 and 2003
(Amounts expressed in US Dollars)
18. SUBSEQUENT EVENTS (cont'd)
On January 20, 2005, BAK International Limited acquired a 97.2%
controlling interest in China BAK through a share exchange agreement,
a reverse merger transaction. China BAK (formerly known as Medina
Coffee, Inc.) (a Nevada public company) issued 39,826,075 shares of
its common stock for all of the outstanding shares of BAK
International Limited. The transaction has been accounted for as a
recapitalization of BAK International Limited whereby the historical
operations of BAK International Limited and its wholly owned
subsidiary, BAK, become the historical operations of China BAK with no
adjustments to the historical basis of the assets and liabilities.
B. The company changed its year-end from December 31 to September 30
effective from September 30, 2004.
C. In February 2005, the Company changed its name from Medina Coffee,
Inc. to China BAK Battery, Inc.
19. RESTATEMENT TO CONSOLIDATED FINANCIAL STATEMENTS
Based on the comments from the Securities and Exchange Commission, the
company amended the consolidated statements of cash flows for the years
ended September 30, 2004 and 2003 and extended or modified certain notes to
the consolidated financial statements to provide additional information as
detailed below. The consolidated balance sheets, consolidated statements of
operations, consolidated statements of operations, consolidated statements
of comprehensive income and consolidated statements of stockholders' equity
remained unchanged, except for minor changes in wordings.
The following table presents the effects of the aforementioned amendments
to the consolidated statements of cash flows.
2004
----------------------------
As previously
As restated reported
Net cash provided from operating activities 88,874 209,689
Net cash provided from investing activities (38,333,208) (38,333,200)
Net cash provided from financing activities 40,785,680 40,664,762
Effects of exchange rates changes on cash
and cash equivalents (95) --
2003
----------------------------
As previously
As restated reported
Net cash provided from operating activities (2,593,514) (2,593,563)
Effects of exchange rates changes on cash
and cash equivalents (49) --
The following notes have been extended or modified to provide additional
information notes 1, 3, 4, 7, 10, 12, 13, 14, 15, 16, 17 and 18.
F-28
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification of Directors and Officers
Our Amended and Restated Bylaws, filed as Exhibit 3.3 hereto, provide
that we must indemnify our directors to the fullest extent permitted under
Nevada law and may indemnify, if so authorized by our board of directors, our
officers and any other person whom we have the power to indemnify against
liability, reasonable expense or other matter whatsoever. The effect of these
provisions is potentially to indemnify our directors and officers from all costs
and expenses of liability incurred by them in connection with any action, suit
or proceeding in which they are involved by reason of their affiliation with us.
Our Amended and Restated bylaws also permit us to maintain insurance on
behalf of our company and any person whom we have the power to indemnify.
Other Expenses of Issuance and Distribution
Expenses incurred or (expected) relating to this Registration Statement
and distribution are as follows. The amounts set forth are estimates except for
the SEC registration fee.
Amount
-----------
SEC registration fee $ 4,338.18
Printing and engraving expenses* $ 5,000.00
Professional fees and expenses* $200,000.00
Transfer agent's and registrar's fees and expenses* $ 1,500.00
Miscellaneous* $ 2,500.00
-----------
Total* $213,338.18
===========
------------
*Estimates
The Registrant will bear all of the expenses shown above.
RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is information regarding the issuance and sales of our
securities without registration for the past three (3) years from the date of
this Registration Statement. No such sales involved the use of an underwriter,
no advertising or public solicitation were involved, the securities bear a
restrictive legend and no commissions were paid in connection with the sale of
any securities.
On January 20, 2005 we completed a stock exchange transaction with the
stockholders of BAK International, Ltd., a Hong Kong company ("BAK
International"). The exchange was consummated under Nevada law pursuant to the
terms of a Securities Exchange Agreement dated effective as of January 20, 2005
by and among CBBI, BAK International and the stockholders of BAK International.
Pursuant to the Securities Exchange Agreement, we issued 39,826,075 shares of
our common stock, par value $0.001 per share, to the stockholders of BAK
International, representing approximately 97.2% of our post-exchange issued and
outstanding common stock, in exchange for 100% of the outstanding capital stock
of BAK International. We presently carry on the business of Shenzhen BAK Battery
Co., Ltd., a Chinese corporation and BAK International's wholly-owned
subsidiary, or BAK Battery.
II-1
The foregoing shares were issued in private transactions or private
placements intending to meet the requirements of one or more exemptions from
registration. In addition to any noted exemption below, we relied upon
Regulation D and Section 4(2) of the Securities Act of 1933, as amended (the
"Act"). The investors were not solicited through any form of general
solicitation or advertising, the transactions being non-public offerings, and
the sales were conducted in private transactions where the investor identified
an investment intent as to the transaction without a view to an immediate resale
of the securities; the shares were "restricted securities" in that they were
both legended with reference to Rule 144 as such and the investors identified
they were sophisticated as to the investment decision and in most cases we
reasonably believed the investors were "accredited investors" as such term is
defined under Regulation D based upon statements and information supplied to us
in writing and verbally in connection with the transactions. We never utilized
an underwriter for an offering of our securities and no sales commissions were
paid to any third party in connection with the above-referenced sales.
On June 10, 2004, we issued 99,858 shares of our $ 0.001 par value
common stock in full settlement of debt, in the amount of $49,929, owed to Harry
Miller, our former President and Chief Executive Officer. The price of the
transaction was $0.50 per share. The issuance of these shares to Mr. Miller was
not registered under the Securities Act of 1933 in reliance on the exemption
therefrom contained in Section 4(2) of such act and Regulation D as promulgated
thereunder.
Other than the securities mentioned above, we have not issued or sold
any securities without registration for the past three (3) years from the date
of this Registration Statement.
EXHIBITS
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation of the Registrant. (1)
3.2 Articles of Amendment. (1)
3.3 Amended and Restated Bylaws. (2)
3.4 Bylaws. (1)
4.1 Common Stock Specimen. (5)
5.1 Legal Opinion of Jackson Walker L.L.P. (5)
10.1 Securities and Exchange Agreement by and among BAK
International, Ltd., Medina Coffee, Inc. and the stockholders
of BAK International, Ltd. dated as of January 20, 2005. (2)
10.2 Escrow Agreement by and among Medina Coffee, Inc., the selling
stockholders, Xiangqian Li, and Securities Transfer
Corporation dated as of January 20, 2005. (2)
10.3 Lock-up Agreement by and between Medina Coffee, Inc. and
Xiangqian Li dated as of January 20, 2005. (2)
10.4 Form of Subscription Agreement. (2)
10.5 Summary of Sales Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Zhongshan Mingji Battery Co., Ltd. dated as of
October 25, 2003. (2)
10.6 Summary of Purchase Agreement by and between Shenzhen BAK
Battery Co., Ltd. and Luhua Technology (Shenzhen) Co., Ltd.
dated as of April 14, 2004. (2)
10.7 Summary of Purchase Agreement by and between Shenzhen BAK
Battery Co., Ltd. and Beijing CITIC Guoan Mengguli Electricity
Supply Ltd. Co. dated as of September 30, 2004. (2)
10.8 Summary of Revolvable Credit Facilities Agreement by and
between Shenzhen BAK Battery Co., Ltd. and Longgang Division,
Shenzhen Branch, Agricultural Bank of China dated as of June
27, 2003. (2)
II-2
10.9 Summary of Guaranty Contract of Maximum Amount by and between
Longgang Division, Shenzhen Branch, Agricultural Bank of China
and Jilin Provincial Huaruan Technology Company Limited by
Shares dated as of June 27, 2003. (2)
10.10 Summary of Comprehensive Credit Facilities Agreement of
Maximum Amount by and between Shenzhen BAK Battery Co., Ltd.
and Longgang Division, Shenzhen Branch, Agricultural Bank of
China dated as of April 5, 2004. (2)
10.11 Summary of Guaranty Contract of Maximum Amount by and among
Longgang Division, Shenzhen Branch, Agricultural Bank of
China, Development and Construction (Group) Company Limited by
Shares of Changchun Economic & Technology Development
District, Jilin Provincial Huaruan Technology Company Limited
by Shares and Xiangqian Li dated as of April 5, 2004. (2)
10.12 Summary of Comprehensive Credit Facilities Agreement by and
between Shenzhen BAK Battery Co., Ltd. and Longgang Division,
Shenzhen Development Bank dated as of April 1, 2004. (2)
10.13 Summary of Guaranty Contract of Maximum Amount by and among
Longgang Division, Shenzhen Development Bank, Development and
Construction (Group) Company Limited by Shares of Changchun
Economic & Technology Development District, Jilin Provincial
Huaruan Technology Company Limited by Shares, Xiangqian Li,
Yanlong Zou, Fenghua Li, Jimin Li, Jiajun Huang, Baicheng
Zhou, Jinghui Wang, Yongbin Han, Shuquan Zhang, Xinrong Yang,
Yunfei Li and Weiqiang Zhang dated as of April 1, 2004. (2)
10.14 Summary of Comprehensive Credit Facilities Agreement by and
between Shenzhen BAK Battery Co., Ltd. and Longgang Division,
Shenzhen Branch, China Minsheng Bank dated as of January 14,
2004. (2)
10.15 Summary of Guaranty Contract of Maximum Amount by and among
Longgang Division, Shenzhen Branch, China Minsheng Bank, Jilin
Provincial Huaruan Technology Company Limited by Shares and
Xiangqian Li dated as of November 15, 2004. (2)
10.16 Summary of Loan Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Shenzhen Branch, Industrial Bank dated as of
March 11, 2004. (2)
10.17 Summary of Guaranty Agreement by and between Shenzhen Branch,
Industrial Bank and Shenzhen High-Tech Investment Service Co.
dated as of March 10, 2004. (2)
10.18 Summary of Related Transaction Agreement by and between
Shenzhen BAK Battery Co., Ltd. and Jilin Provincial Huaruan
Technology Company Limited by Shares dated as of October 18,
2003. (2)
10.19 Summary of Loan Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Longgang Division, Shenzhen Development Bank
dated as of April 1, 2004. (2)
10.20 Financial Advisory Agreement, dated September 30, 2004, by and
between Shenzhen BAK Battery Co., Ltd. and HFG International,
Ltd. (4)
10.21 Summary of Comprehensive Credit Facility Agreement of Maximum
Amount by and between Shenzhen BAK Battery Co., Ltd. and
Longgang Branch, Agricultural Bank of China dated as of May
20, 2005. (4)
10.22 Summary of Guaranty Contract of Maximum Amount by and between
BAK International Co., Ltd. and Longgang Branch, Agricultural
Bank of China dated as of May 20, 2005. (4)
10.23 Summary of Guaranty Contract of Maximum Amount by and between
Xiangqian Li and Longgang Branch, Agricultural Bank of China
dated as of May 20, 2005. (4)
10.24 Summary of Loan Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Longgang Branch, Agricultural Bank of China
dated March 21, 2005. (4)
10.25 Summary of Loan Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Longgang Branch, Agricultural Bank of China
dated March 24, 2005. (4)
II-3
10.26 Summary of Loan Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Longgang Branch, Agricultural Bank of China
dated March 25, 2005. (4)
10.27 Summary of Loan Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Longgang Branch, Agricultural Bank of China
dated May 31, 2005. (4)
10.28 Summary of Loan Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Longgang Branch, Agricultural Bank of China
dated June 2, 2005. (4)
10.29 Summary of Comprehensive Credit Facility Agreement by and
between Shenzhen BAK Battery Co., Ltd. and Longgang Branch,
Shenzhen Development Bank dated April 7, 2005. (4)
10.30 Summary of Guaranty Contract of Maximum Amount Pledge by and
between Xiangqian Li and Longgang Branch, Shenzhen Development
Bank dated April 28, 2005. (4)
10.31 Summary of Guaranty Contract of Maximum Amount Pledge by and
between Shenzhen BAK Battery Co., Ltd. and Longgang Branch,
Shenzhen Development Bank dated April 28, 2005. (4)
10.32 Summary of Guaranty Contract of Maximum Amount Pledge by and
between Shenzhen BAK Battery Co., Ltd. and Longgang Branch,
Shenzhen Development Bank dated April 11, 2005. (4)
10.33 Summary of Maximum Amount Guarantee Contract of Maximum Amount
Pledge by and between Xiangqian Li and Longgang Branch,
Shenzhen Development Bank dated April 28, 2005. (4)
10.34 Summary of Loan Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Longgang Branch, Shenzhen Development Bank dated
April 28, 2005. (4)
10.35 Summary of Loan Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Longgang Branch, Shenzhen Development Bank dated
May 18, 2005. (4)
10.36 Summary of Loan Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Longgang Branch, Shenzhen Development Bank dated
May 27, 2005. (4)
10.37 Summary of Loan Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Longgang Branch, Shenzhen Development Bank dated
June 3, 2005. (4)
10.38 Summary of Loan Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Longgang Branch, Shenzhen Development Bank dated
May 18, 2005. (4)
10.39 Summary of Guaranty Contract of Pledge by and between Shenzhen
BAK Battery Co., Ltd. and Longgang Branch, Shenzhen
Development Bank dated May 15, 2005. (4)
10.40 Summary of Comprehensive Credit Facility Agreement of Maximum
Amount between Shenzhen BAK Battery Co., Ltd. and Shenzhen
Branch, China Minsheng Bank dated March 17, 2005. (4)
10.41 Summary of Guaranty Contract of Maximum Amount between Jilin
Provincial Huaruan Technology Company Limited by Shares and
Shenzhen Branch, China Minsheng Bank dated March 5, 2005. (4)
10.42 Summary of Loan Agreement between Shenzhen BAK Battery Co.,
Ltd. and Shenzhen Branch, China Minsheng Bank dated March 7,
2005. (4)
10.43 Summary of Comprehensive Credit Facility Agreement of Maximum
Amount between Shenzhen BAK Battery Co., Ltd. and Shuibei
Branch, Shenzhen Commercial Bank dated April 22, 2005. (4)
10.44 Summary of Individual Guaranty Contract of Maximum Amount
between Xiangqian Li and Shuibei Branch, Shenzhen Commercial
Bank dated April 20, 2005. (4)
10.45 Summary of Guaranty Contract of Maximum Amount between
Shenzhen Tongli Hi-tech Co., Ltd. and Shuibei Branch, Shenzhen
Commercial Bank dated April 21, 2005. (4)
10.46 Summary of Loan Agreement between Shenzhen BAK Battery Co.,
Ltd. and Shuibei Branch, Shenzhen Commercial Bank dated April
22, 2005. (4)
II-4
21.1 Subsidiaries of the Registrant. (3)
23.1 Consent of Independently Registered Public Accounting Firm.
(4)
-------------
(1) Previously filed as an exhibit to our Registration Statement on Form SB-1
(#333-41124) filed with the Commission on July 10, 2000.
(2) Previously filed as an exhibit to our Current Report on Form 8-K filed with
the Commission on January 21, 2005.
(3) Previously filed as an exhibit to our Annual Report on Form 10-KSB filed
with the Commission on March 31, 2005.
(4) Filed herewith.
(5) To be filed by amendment.
II-5
UNDERTAKINGS
The small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include in any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, 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 a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for the liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer 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.
II-6
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 for filing on Form SB-2 and authorizes this amendment to its
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Shenzhen, Peoples Republic of China.
China BAK Battery, Inc.
By: /s/ Xiangqian Li Date: June 27, 2005
-------------------------------------------------
Xiangqian Li, Chairman of the Board, President
and Chief Executive Officer
By: /s/ Yongbin Han Date: June 27, 2005
-------------------------------------------------
Yongbin Han, Chief Financial Officer, Secretary
and Principal Accounting Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following persons
in the capacities and on the date stated.
By: /s/ Xiangqian Li Date: June 27, 2005
-------------------------------------------------
Xiangqian Li, Chairman of the Board of Directors,
Director, President and Chief Executive Officer