EXHIBIT 10.4
SUBSCRIPTION AGREEMENT
BAK International, Ltd.
BAK Industrial Zone
Atou Village
Xxx Xxxxx Town
Lunggang District
Shenzhen, China 518119
Attention: Xx Xxxxx Qian, President
Ladies and Gentlemen:
The undersigned subscriber ("Subscriber") hereby tenders this
Subscription Agreement (this "Agreement") in accordance with and subject to the
terms and conditions set forth herein:
1. Subscription.
1.1 Subscriber hereby subscribes for and agrees to purchase the number
of shares (the "Shares") of common stock (the "Common Shares"), of BAK
International, Ltd., a Hong Kong corporation (the "Company"), indicated on the
signature page attached hereto at the purchase price set forth on such signature
page (the "Purchase Price"). Subscriber has made payment by wire transfer of
funds in accordance with instructions from the Company in the full amount of the
Purchase Price of the Common Shares for which Subscriber is subscribing (the
"Payment").
1.2 This Agreement is part of an offering of Common Shares being
conducted by the Company (the "Offering"). Under the terms of the Offering, the
Company seeks to raise a minimum of $8 million (USD) (the "Minimum Offering") up
to a maximum of $17 million (USD) (the "Maximum Offering") ( proceeds from the
Minimum and Maximum Offerings being collectively referred to herein as the
"Gross Proceeds Amount") based on an Offering price of $___ per share. The
Company agrees that it shall not undertake any other financings (other than
acquisitions utilizing capital stock of the Company or the Public company, as
hereinafter defined) involving its Equity Common Shares (as defined below) on
terms more favorable than those in the Offering until thirty (30) days after the
effectiveness of the Registration Statement (as that term is defined below)
covering all of the Common Shares, without the prior written approval of the
holders of a majority of the Common Shares subscribed for in this Offering. The
term "Equity Common Shares" as used herein shall mean all capital stock of the
Company or the Public Company (as hereinafter defined), plus all rights,
warrants, options, convertible Common Shares or Public Company common shares or
indebtedness, exchangeable Common Shares or Public Company common shares or
indebtedness, or other rights, exercisable for or convertible into, directly or
indirectly, capital stock of the Company or the Public Company. Notwithstanding
the above, "Equity Common Shares" shall not include any Common Shares of the
Company or common shares of the Public Company issued pursuant to any incentive
or stock option plan of the Company or the Public Company approved by the
shareholders or the board of directors of the Company or the Public Company.
1.3 Subscriber understands that it will not earn interest on any funds
held by the Company prior to the date of closing of the Offering. The funds will
be held in escrow pending the closing of the Offering. Attached as Exhibit "A"
hereto is the form of Escrow Agreement (the "Escrow Agreement") that will govern
the maintenance of funds until the sooner of the closing of the Offering or the
expiration thereof. The Closing Date of the Offering is referred to as the
"Closing Date." The Closing shall occur on or before December 28, 2004. The
Company shall have the right to a one time 45 day extension of the Closing Date.
If the Offering is not closed by said date all Gross Offering Proceeds then in
escrow shall be returned to the Subscriber. The closing shall occur upon the
satisfaction of the following conditions and in the following sequence: (a)
confirmation from the Escrow Agent, as identified in the Escrow Agreement, that
the proceeds from the Minimum Offering are on deposit; (b) participation by the
each of the subscribers to the Offering in that certain exchange transaction
(the "Exchange"), whereby each subscriber and all other shareholders of the
Company will exchange their Common Shares for the identical number of shares
(the "Public Company Shares") of a corporation domiciled in the United States of
America which has common equity securities eligible for quotation on the
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Over-the-Counter Bulletin Board (the "Public Company"); and (c) the Public
Company files a registration statement on a suitable form (the "Registration
Statement") with the U.S. Securities and Exchange Commission to register the
Public Company Shares held by the subscribers to the Offering. Gross Offering
Proceeds will not be released to either the Company or the Public Company until
such time as each of the forgoing has been completed. Certificates will be
issued in the name of each such subscriber, and the name of such subscriber will
be registered on the stock transfer books of the Public Company as the record
owner of Public Company Shares. The Public Company will promptly thereafter
issue to each subscriber a stock certificate for the Public Company Shares to
which it is entitled.
1.4 Subscriber hereby agrees to be bound hereby upon (i) execution and
delivery to the Company of the signature page to this Agreement and (ii) written
acceptance on the Closing Date by the Company of Subscriber's subscription,
which shall be confirmed by faxing to the Subscriber the signature page to this
Agreement that has been executed by the Company (the "Subscription").
2. Offering Material.
Subscriber represents and warrants that it is in receipt of and that it
has carefully read the following items:
(a) The Company's business plan , the form of which is attached hereto
(the "Business Plan");
(b) The audited financial statement of Shenzhen BAK Battery Co., Ltd.,
the Company's wholly-owned subsidiary ("BAK") for the fiscal years ended
September 30, 2003 and 2004.
(c) The Exchange Agreement;
(d) The Escrow Agreement; and
(e) A draft of the Registration Statement.
The documents listed in this Section 2 shall be referred to herein as
the "Disclosure Documents."
3. Conditions to Subscriber's Obligations.
3.1 The obligation of Subscriber to close the transaction contemplated
by this Agreement (the "Transaction") is subject to the satisfaction on or prior
to the Closing Date of the following conditions set forth in Sections 3.2
through 3.5 hereof.
3.2 The Company shall have executed this Agreement.
3.3 The Board of Directors of the Company shall have adopted
resolutions consistent with Section 4.1(d) below.
3.4 Subscriber shall have received copies of all documents and
information which it may have reasonably requested in connection with the
Offering.
3.5 The Exchange shall have been simultaneously consummated.
3.6 The Registration Statement shall have been filed with the SEC.
3.7 The representations and warranties of the Company shall be true and
correct on and as of the Closing Date as though made on and as of such date.
3.8 If so requested by Subscriber, the Company shall have delivered to
the custodian for the Subscriber duly executed certificate(s), registered in the
name of Subscriber's nominee, representing the Public Company Shares.
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4. Representations and Warranties; Covenants; Survival.
4.1 The Company represents and warrants to Subscriber that, at the date
of this Agreement and as of the Closing Date:
(a) The Company and each of its subsidiaries are corporations duly
organized, validly existing and in good standing under the laws of their
jurisdiction of incorporation, with all requisite corporate power and authority
to carry on the business in which they are engaged and to own the properties
they own, and the Company has all requisite power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The Company and each of its subsidiaries are duly qualified and licensed to do
business and are in good standing in all jurisdictions where the nature of their
business makes such qualification necessary, except where the failure to be
qualified or licensed would not have a material adverse effect on the business
of the Company and its subsidiaries, taken as a whole.
(b) Except as otherwise described in the Disclosure Documents, there
are no legal actions or administrative proceedings or investigations instituted,
or to the best knowledge of the Company threatened, against the Company, that
could reasonably be expected to have a material adverse effect on the Company or
any subsidiary, any of the Common Shares, or the business of the Company and its
subsidiaries, or which concerns the transactions contemplated by this Agreement.
(c) The audited financial statements of BAK as of September 30, 2003
and 2004 including the notes contained therein, fairly present the financial
position of BAK at the respective dates thereof and the results of its
operations for the periods purported to be covered thereby. Such financial
statements have been prepared in conformity with generally accepted accounting
principles consistently applied with prior periods subject to any comments and
notes contained therein. Since September 30, 2004, there has been no material
adverse change in the financial condition of the Company or BAK from the
financial condition stated in such financial statements.
(d) The Company, by appropriate and required corporate action, has, or
will have prior to the closing, duly authorized the execution of this Agreement
and the issuance and delivery of the Common Shares. The Common Shares are not
subject to preemptive or other rights of any stockholders of the Company and
when issued in accordance with the terms of this Agreement, the Common Shares
will be validly issued, fully paid and nonassessable and free and clear of all
pledges, liens and encumbrances.
(e) Performance of this Agreement and compliance with the provisions
hereof will not violate any provision of any applicable law or of the charter
documents of the Company, or of any of its subsidiaries, and, will not conflict
with or result in any breach of any of the terms, conditions or provisions of,
or constitute a default under, or result in the creation or imposition of any
lien, charge or encumbrance upon, any of the properties or assets of the
Company, or of any of its subsidiaries, pursuant to the terms of any indenture,
mortgage, deed of trust or other agreement or instrument binding upon the
Company, or any of its subsidiaries, other than such breaches, defaults or liens
which would not have a material adverse effect on the Company and its
subsidiaries taken as a whole. The Company is not in default under any provision
of its organizational documents or under any provision of any agreement or other
instrument to which it is a party or by which it is bound or of any law,
governmental order, rule or regulation so as to affect adversely in any material
manner its business or assets or its condition, financial or otherwise.
(f) The Disclosure Documents, taken together, do not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein to make the statements contained therein not misleading.
(g) This Agreement has been duly executed and delivered by the Company
and constitutes a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
(h) No registration, authorization, approval, qualification or consent
of any court or governmental authority or agency is necessary in connection with
the execution and delivery of this Agreement or the offering, issuance or sale
of the Common Shares under this Agreement.
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(i) The Company is not now, and after the sale of the Common Shares
under this Agreement and under all other agreements and the application of the
net proceeds from the sale of the Common Shares will not be, an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
(j) Subject to the accuracy of the Subscriber's representations and
warranties in Section 7 of this Agreement, the offer, sale, and issuance of the
Common Shares in conformity with the terms of this Agreement constitute
transactions made exempt from the registration requirements of Section 5 of the
Securities Act of 1933, as amended (the "Securities Act") and from the
registration or qualification requirements of the laws of any applicable state.
(k) Neither the Company, nor any of its affiliates, nor any person
acting on its or their behalf, has directly or indirectly made any offers or
sales in any security or solicited any offers to buy any security under
circumstances that would require registration under the Securities Act of the
issuance of the Shares to the Subscriber.
(l) Li Xiangqian, the Company's and BAK's Chief Executive Officer has
agreed that he will not sell, transfer or otherwise dispose of his holdings in
either the Company or the Public Company, upon consummation of the Going Public
Transaction, except to persons or entities who agree to be bound by the same
restrictions, for a period of twelve months following the date the Public
Company's securities become eligible for quotation on the NASDAQ Stock Market.
(m) Executive management of the Company will escrow 10% of their
holdings (the "Make Good Shares") in the Public Company following consummation
of the Going Public Transaction, so that in the event the consolidated financial
statements of the Public Company do not reflect $12 million of Net Income ("NI")
for the fiscal year ending September 30, 2005 and $27 million NI for the fiscal
year ending September 30, 2006, respectively (the "Guaranteed NI") the Make Good
Shares shall be distributed on a pro rata to the subscribers to the Offering as
follows: (i) in the event that the Guaranteed NI for fiscal 2005 is not
achieved, 50% of the Make Good Shares will be delivered to participants in the
Offering within ten (10) business days of the date the audit report for the
period is filed with the SEC; and (b) in the event that the Guaranteed NI for
fiscal 2006 is not achieved, the balance of the Make Good Shares will be
delivered to participants in the Offering within ten (10) business days of the
date the audit report for the period is filed with the SEC. If the Guaranteed NI
is achieved for a given fiscal year, holders of the Make Good Shares can
immediately take possession of the number of said shares reserved for
distribution during said period to participants in the Offering. In the event
the Make Good Shares are delivered to participants in the Offering, the holders
thereof shall be afforded demand registration rights to have the Make Good
Shares registered under the Securities Act.
4.2 The Company shall indemnify and hold harmless the Subscribers from
and against all fees, commissions or other payments owing by the Company to any
other person or firm acting on behalf of the Company hereunder.
5. Transfer and Registration Rights.
5.1 Subscriber acknowledges that it is acquiring the Common Shares for
its own account and for the purpose of investment and not with a view to any
distribution or resale thereof within the meaning of the Securities Act and any
applicable state or other securities laws ("State Acts"). Subscriber further
agrees that, except in connection with the Exchange, it will not sell, assign,
transfer or otherwise dispose of any of the Common Shares or the Public Company
Shares in violation of the Securities Act or State Acts and acknowledges that,
in taking unregistered Common Shares and ultimately Public Company Shares, it
must continue to bear economic risk in regard to its investment for an
indefinite period of time because of the fact that neither of such securities
have been registered under the Securities Act or State Acts and further realizes
that such securities cannot be sold unless subsequently registered under the
Securities Act and State Acts or an exemption from such registration is
available.
5.2 Neither the Common Shares or the Public Company Shares issued
pursuant to this Agreement may be transferred except in a transaction which is
in compliance with the Securities Act and State Acts.
6. Closing.
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6.1 The closing of the Offering shall take place at such time and at
such place as the Company shall determine, provided that the Closing shall occur
no later than December 28, 2004, unless otherwise extended for up to an
additional 45 days . If the closing of the sale of Common Shares to Subscriber
has not occurred within the time frame provided in the previous sentence, then
Subscriber may terminate this Agreement by giving written notice to the Company.
7. Subscriber Representations. Subscriber hereby represents, warrants
and acknowledges and agrees with the Company as follows:
7.1 Subscriber has been furnished with and has carefully read the
Disclosure Documents as set forth in Section 2 hereto and is familiar with the
terms of the Offering. With respect to individual or partnership tax and other
economic considerations involved in this investment, Subscriber is not relying
on the Company (or any agent or representative of any of the Company).
Subscriber has carefully considered and has, to the extent Subscriber believes
such discussion necessary, discussed with Subscriber's legal, tax, accounting
and financial advisers the suitability of an investment in the Common Shares for
Subscriber's particular tax and financial situation.
7.2 Subscriber has had an opportunity to inspect relevant documents
relating to the organization and operations of the Company. Subscriber
acknowledges that all documents, records and books pertaining to this investment
which Subscriber has requested have been made available for inspection by
Subscriber and Subscriber's attorney, accountant or other adviser(s).
7.3 Subscriber and/or Subscriber's advisor(s) has/have had a reasonable
opportunity to ask questions of and receive answers and to request additional
relevant information from a person or persons acting on behalf of the Company
concerning the Offering.
7.4 Subscriber is not subscribing for the Common Shares as a result of
or subsequent to any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media or broadcast over
television or radio or presented at any seminar.
7.5 Subscriber is an "accredited investor," within the meaning of Rule
501(a) of Regulation D under the Securities Act ("Regulation D"). Subscriber, by
reason of Subscriber's business or financial experience or the business or
financial experience of Subscriber's professional advisers who are unaffiliated
with and who are not compensated by the Company or any affiliate, directly or
indirectly, can be reasonably assumed to have the capacity to protect
Subscriber's own interests in connection with the transaction. Subscriber
further acknowledges that he has read the written materials provided by the
Company.
7.6 Subscriber has adequate means of providing for Subscriber's current
financial needs and contingencies, is able to bear the substantial economic
risks of an investment in the Common Shares for an indefinite period of time,
has no need for liquidity in such investment and, at the present time, could
afford a complete loss of such investment.
7.7 Subscriber has such knowledge and experience in financial, tax and
business matters so as to enable Subscriber to use the information made
available to Subscriber in connection with the Offering to evaluate the merits
and risks of an investment in the Common Shares and to make an informed
investment decision with respect thereto.
7.8 Subscriber recognizes that investment in the Common Shares involves
substantial risks. Subscriber further recognizes that no Federal or state
agencies have passed upon this offering of the Common Shares or made any finding
or determination as to the fairness of this investment.
7.9 Subscriber acknowledges that each certificate representing the
Public Company Shares shall contain a legend substantially in the following
form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 (THE "SECURITIES ACT") OR UNDER APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND ANY
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APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AVAILABLE
EXEMPTIONS FROM SUCH REGISTRATION, PROVIDED THAT THE SELLER
DELIVERS TO THE COMPANY AN OPINION OF COUNSEL (WHICH OPINION
AND COUNSEL ARE SATISFACTORY TO THE COMPANY) CONFIRMING THE
AVAILABILITY OF SUCH EXEMPTION. INVESTORS SHOULD BE AWARE THAT
THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
7.10 If this Agreement is executed and delivered on behalf of a
partnership, corporation, trust or estate: (i) such partnership, corporation,
trust or estate has the full legal right and power and all authority and
approval required (a) to execute and deliver, or authorize execution and
delivery of, this Agreement and all other instruments executed and delivered by
or on behalf of such partnership, corporation, trust or estate in connection
with the purchase of the Common Shares, (b) to delegate authority pursuant to a
power of attorney and (c) to purchase and hold such Common Shares; (ii) the
signature of the party signing on behalf of such partnership, corporation, trust
or estate is binding upon such partnership, corporation, trust or estate; and
(iii) such partnership, corporation or trust has not been formed for the
specific purpose of acquiring the Common Shares, unless each beneficial owner of
such entity is qualified as an "accredited investor" within the meaning of
Regulation D and has submitted information substantiating such individual
qualification.
7.11 If Subscriber is a retirement plan or is investing on behalf of a
retirement plan, Subscriber acknowledges that investment in the Common Shares
poses risks in addition to those associated with other investments, including
the inability to use losses generated by an investment in the Common Shares to
offset taxable income.
8. Understandings.
Subscriber understands, acknowledges and agrees with the Company as
follows:
8.1 Subscriber hereby acknowledges and agrees that upon notice of
acceptance from the Company pursuant to Section 1.3, the Subscription hereunder
is irrevocable by Subscriber, that, except as required by law or as permitted
under Section 6.1 above, Subscriber is not entitled to cancel, terminate or
revoke this Agreement or any agreements of Subscriber hereunder and that this
Subscription Agreement and such other agreements shall survive the death or
disability of Subscriber and shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, executors, administrators,
successors, legal representatives and permitted assigns. If Subscriber is more
than one person, the obligations of Subscriber hereunder shall be joint and
several and the agreements, representations, warranties and acknowledgments
herein contained shall be deemed to be made by and be binding upon each such
person and his or her heirs, executors, administrators, successors, legal
representatives and permitted assigns.
8.2 No federal or state agency has made any findings or determination
as to the fairness of the terms of this Offering for investment nor any
recommendations or endorsement of the Common Shares.
8.3 The Offering is intended to be exempt from registration under the
Securities Act by virtue of Section 4(2) of the Securities Act and the
provisions of Rule 506 of Regulation D thereunder, which is in part dependent
upon the truth, completeness and accuracy of the statements made by Subscriber
herein.
8.4 It is understood that in order not to jeopardize the Offering's
exempt status under Section 4(2) of the Securities Act and Regulation D, any
transferee may, at a minimum, be required to fulfill the investor suitability
requirements thereunder.
8.5 No person or entity acting on behalf, or under the authority, of
Subscriber is or will be entitled to any broker's, finder's or similar fee or
commission in connection with this Subscription.
8.6 Subscriber acknowledges that the information furnished in this
Agreement by the Company to Subscriber or its advisers in connection with the
Offering, is confidential and nonpublic and agrees that all such written
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information which is material and not yet publicly disseminated by the Company
shall be kept in confidence by Subscriber and neither used by Subscriber for
Subscriber's personal benefit (other than in connection with this Subscription),
nor disclosed to any third party, except Subscriber's legal and other advisers
who shall be advised of the confidential nature of such information, for any
reason; provided, however, that this obligation shall not apply to any such
information that (i) is part of the public knowledge or literature and readily
accessible at the date hereof, (ii) becomes a part of the public knowledge or
literature and readily accessible by publication (except as a result of a breach
of this provision) or (iii) is received from third parties (except third parties
who disclose such information in violation of any confidentiality agreements or
obligations, including, without limitation, any subscription agreement entered
into with the Company). The representations, warranties and agreements of
Subscriber and the Company contained herein and in any other writing delivered
in connection with the Offering shall be true and correct in all material
respects on and as of the Closing Date of such Subscription as if made on and as
of the date the Company executes this Agreement and shall survive the execution
and delivery of this Agreement and the purchase of the Common Shares.
8.7 IN MAKING AN INVESTMENT DECISION, SUBSCRIBER MUST RELY ON ITS OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. THE COMMON SHARES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL
OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
9. Miscellaneous.
9.1 Except as set forth elsewhere herein, any notice or demand to be
given or served in connection herewith shall be deemed to be sufficiently given
or served for all purposes by being sent as registered or certified mail, return
receipt requested, postage prepaid, in the case of the Company, addressed to it
at the address set forth below:
BAK Industrial Zone
Atou Village
Xxx Xxxxx Town
Lunggang District
Shenzhen, China 518119
Attention: Xx Xxxxx Qian, President
and in the case of Subscriber to the address set forth below:
___________________________________
___________________________________
___________________________________
___________________________________
9.2 This Agreement shall be enforced, governed and construed in all
respects in accordance with the laws of Hong Kong, and shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns. If any provision of this Agreement is invalid or unenforceable under
any applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed to
be modified to conform with such statute or rule of law. Any provision hereof
that may prove invalid or unenforceable under any law shall not affect the
validity or enforceability of any other provision hereof.
9.3 In any action, proceeding or counterclaim brought to enforce any of
the provisions of this Agreement or to recover damages, costs and expenses in
connection with any breach of the Agreement, the prevailing party, as determined
by the finder of fact, shall be entitled to be reimbursed by the opposing party
for all of the prevailing party's reasonable outside attorneys' fees, costs and
other out-of-pocket expenses incurred in connection with such action, proceeding
or counterclaim.
9.4 This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth herein. The
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Company acknowledges that all material facts upon which it has relied in forming
its decision to enter into this Agreement are expressly set forth herein and
further acknowledges that the Subscriber has not made any representations,
express or implied, which are not set expressly set forth herein. This Agreement
supercedes all prior agreements and understandings among the parties hereto with
respect to the subject matter hereof.
9.5 The Company shall indemnify, defend and hold harmless Subscriber
and each of its agents, partners, members, officers, directors, representatives,
or affiliates (collectively, the "Subscriber Indemnities") against any and all
losses, liabilities, claims and expenses, including reasonable attorneys' fees
("Losses"), sustained by Subscriber Indemnities resulting from, arising out of,
or connected with any material inaccuracy in, breach of, or nonfulfillment of
any representation, warranty, covenant or agreement made by or other obligation
of the Company contained in this Agreement (including the Exhibits hereto) or in
any document delivered in connection herewith.
9.6 Subscriber shall indemnify, defend and hold harmless the Company
and each of its agents, partners, members, officers, directors, representatives,
or affiliates (collectively, the "Company Indemnities") against any and all
Losses sustained by the Company Indemnities resulting from, arising out of, or
connected with any material inaccuracy in, breach of, or non-fulfillment of any
representation, warranty, covenant or agreement made by or other obligation of
Subscriber contained in this Agreement (including the Exhibits hereto) or in any
document delivered in connection herewith.
9.7 The Company shall not issue any public statement or press release,
or otherwise disclose in any manner the identity of the Subscriber or that
Subscriber has purchased the Common Shares, without the prior written consent of
the Subscriber, except as may be required by applicable law; provided, however,
that the Company may disclose such information in the Registration Statement
filed with the SEC.
10. Signature. The signature page of this Agreement is contained as part of
the applicable Subscription Package, entitled "Signature Page."
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SUBSCRIPTION AGREEMENT GENERAL INSTRUCTIONS
-------------------------------------------
General Instructions
These Subscription Documents contain all documents necessary to
subscribe for Common Shares ("Common Shares"), of BAK International, Ltd., a
Hong Kong corporation (the "Company").
You may subscribe for Common Shares by completing the Subscription
Agreement in the following manner:
1. On line (a) of the signature page state the number of Common Shares you
wish to purchase.
2. On line (b) of the signature page state the total cost of the Common
Shares you wish to purchase. To obtain the cost, multiply the number of Common
Shares you desire to purchase by the purchase price per Common Share set forth
therein.
3. Sign and state your address, telephone number and social security or
other taxpayer identification number on the lines provided on the signature page
to the Subscription Agreement and deliver the completed Subscription Agreement
with payment of the entire purchase price of the Common Shares subscribed for as
set forth below. Payment should be made in United States Dollars by wire
transfer to:
___________________________________
___________________________________
___________________________________
___________________________________
The Subscription Agreement Signature Page must be completed and signed by each
investor. Send all documents to:
Securities Transfer Corporation
Attention: Xxxxx Xxxxxx
0000 Xxxxxx Xxxxxxx, Xxxxx 000
Xxxxxx, Xxxxx 00000
THE COMPLETED SUBSCRIPTION AGREEMENT SHOULD BE RETURNED IN ITS ENTIRETY
TO THE ESCROW AGENT DESIGNATED ABOVE.
Acceptance of Delivery
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of the completed Subscription Agreement will be
reasonably determined by the Company. The Company reserves the absolute right to
reject any completed Subscription Agreement, in its sole and absolute
discretion. The Company also reserves the right to waive any irregularities in,
or conditions of, the submission of completed Subscription Agreements. The
Company shall be under no duty to give any notification of irregularities in
connection with any attempted subscription for Common Shares or incur any
liability for failure to give such notification. Until such irregularities have
been cured or waived, no subscription for Common Shares shall be deemed to have
been made. Any Subscription Agreement that is not properly completed and as to
which defects have not been cured or waived will be returned by the Company to
the Subscriber as soon as practicable.
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SUBSCRIPTION AGREEMENT SIGNATURE PAGE
The undersigned investor hereby certifies that he or she (i) has
received and relied solely upon information provided by the Company, (ii) agrees
to all the terms and conditions of this Subscription Agreement, (iii) meets the
suitability standards set forth in this Subscription Agreement and (iv) is a
resident of the state indicated below.
(a) The undersigned subscribes for __________ Common Shares.
(b) The total cost of the Common Shares subscribed for, at $____
per Common Share, is $__________ (the "Purchase Price").
If other than Individual check one and indicate
_____________________________ capacity of signatory under the signature:
[_] Trust
[_] Estate
_____________________________ [_] Uniform Gifts to Minors Act of State of____
Name of Subscriber (Print) [_] Attorney-in-fact
[_] Corporation
[_] Other______________________________________
_____________________________ If Joint Ownership, check one:
Name of Joint Subscriber
(if any) (Print)
[_] Joint Tenants with Right of Survivorship
[_] Tenants in Common
_____________________________ [_] Tenants by Entirety
Signature of Subscriber [_] Community Property
_____________________________
Signature of Joint Subscriber
(if any)
_____________________________
Capacity of Signatory
(if applicable)
_____________________________ Backup Withholding Statement:
Social Security or Please check this box only if the investor
Taxpayer Identification Number is subject to:
[_] backup withholding.
_____________________________
Address Foreign Person:
Please check this box only if
the investor is a:
[_] nonresident alien, foreign corporation,
_____________________________ foreign partnership, foreign trust or
City State Zip Code foreign estate.
Telephone ( )____________________
Telecopy No. ______________________
The investor agrees to the terms of this Subscription Agreement and, as required
by the Regulations pursuant to the Internal Revenue Code, certifies under
penalty of perjury that (1) the Social Security Number or Taxpayer
Identification Number and address provided above is correct, (2) the investor is
not subject to backup withholding (unless the Backup Withholding Statement box
is checked) either because he has not been notified that he is subject to backup
withholding as a result of a failure to report all interest or dividends or
because the Internal Revenue Service has notified him that he is no longer
subject to backup withholding and (3) the investor (unless the Foreign Person
box above is checked) is not a nonresident alien, foreign partnership, foreign
trust or foreign estate.
10
THE SUBSCRIPTION FOR _____________ COMMON SHARES BAK INTERNATIONAL,
LTD. BY THE ABOVE NAMED SUBSCRIBER(S) IS ACCEPTED AS OF ________________, 2004.
BAK INTERNATIONAL, LTD.
By: __________________________________________
Title:________________________________________
11
ESCROW AGREEMENT
This Escrow Agreement (the "Agreement"), dated effective as of the last
date set forth opposite the respective signatories hereto, is entered into by
and among BAK International, Ltd., a Hong Kong corporation (the "Company"), each
of the subscribers to the Company's private offering of securities identified
below (collectively, the "Subscribers"), and Securities Transfer Corporation
(hereinafter referred to as "Escrow Agent").
WHEREAS, the Company and each of the Subscribers have entered into a
Subscription Agreement (the "Subscription Agreement") pursuant to which each
Subscriber has agreed to purchase from the Company, and the Company has agreed
to sell to each Subscriber, the number of shares of the common stock of the
Company identified therein;
WHEREAS, pursuant to the Subscription Agreement, the Company and the
Subscribers have agreed to establish an escrow on the terms and conditions set
forth in this Agreement;
WHEREAS, the Escrow Agent has agreed to act as escrow agent pursuant to
the terms and conditions of this Agreement; and
WHEREAS, all capitalized terms used but not defined herein shall have
the meanings assigned them in the Subscription Agreement;
NOW, THEREFORE, in consideration of the mutual promises of the parties
and the terms and conditions hereof, the parties hereby agree as follows:
1. Appointment of Escrow Agent. The Subscribers and the Company hereby
appoint Securities Transfer Corporation as Escrow Agent to act in accordance
with the terms and conditions set forth in this Agreement, and Escrow Agent
hereby accepts such appointment and agrees to act in accordance with such terms
and conditions.
2. Establishment of Escrow. All amounts invested by the Subscribers as
identified in each accepted Subscription Agreement shall be deposited with the
Escrow Agent in immediately available funds by federal wire transfer, such funds
being referred to herein as the "Escrow Funds".
3. Segregation of Escrow Funds. The Escrow Funds shall be segregated
from the assets of Escrow Agent and held in trust for the benefit of the Company
and the Subscribers in accordance herewith.
4. Receipt and Investment of Funds.
(a) Escrow Agent agrees to place the Escrow Funds in a
non-interest bearing and Federally insured depository account. Subject to
Section 7.3 hereof, Escrow Agent shall have no liability for any loss resulting
from the deposit of the Escrow Funds.
(b) The Escrow Agent shall cause to be prepared all income and
other tax returns and reports the Escrow Agent, in its sole discretion, deems
necessary or advisable in order to comply with all tax and other laws, rules and
regulations applicable to the Escrow Funds.
5. Disbursement of the Escrow Funds.
(a) Duration. This Agreement shall terminate on the first to
occur of the following dates:
(i) on the Closing Date of the Offering, at which
time the Escrow Funds shall be delivered to the Company; or
(ii) on the termination date of the Offering, in
which event the Escrow Funds shall be returned to the Subscribers.
Either of the forgoing dates may be extended by joint
written instructions to Escrow Agent by the Company and the Subscribers
(any such date, or any later date to which any prior Termination Date
has been so extended being referred to herein as the "Termination
Date"). On the Termination Date, Escrow Agent shall disburse the Escrow
Funds it then holds in accordance with the provisions of this Agreement
and this Agreement shall terminate, whereupon all of Escrow Agent's
liabilities and obligations in connection with the Escrow Funds shall
terminate
6. Interpleader. Should any controversy arise among the parties hereto
with respect to this Agreement or with respect to the right to receive the
Escrow Funds, Escrow Agent shall have the right to consult counsel and/or to
institute an appropriate interpleader action to determine the rights of the
parties. Escrow Agent is also hereby authorized to institute an appropriate
interpleader action upon receipt of a written letter of direction executed by
the parties so directing Escrow Agent. If Escrow Agent is directed to institute
an appropriate interpleader action, it shall institute such action not prior to
thirty (30) days after receipt of such letter of direction and not later than
sixty (60) days after such date. Any interpleader action instituted in
accordance with this Section 6 shall be filed in any court of competent
jurisdiction in Dallas County, Texas, and the portion of the Escrow Funds in
dispute shall be deposited with the court and in such event Escrow Agent shall
be relieved of and discharged from any and all obligations and liabilities under
and pursuant to this Agreement with respect to that portion of the Escrow Funds.
7. Exculpation and Indemnification of Escrow Agent.
(a) Escrow Agent is not a party to, and is not bound by or
charged with notice of any agreement out of which this escrow may arise. Escrow
Agent acts under this Agreement as a depositary only and is not responsible or
liable in any manner whatsoever for the sufficiency, correctness, genuineness or
validity of the subject matter of the escrow, or any part thereof, or for the
form or execution of any notice given by any other party hereunder, or for the
identity or authority of any person executing any such notice or depositing the
Escrow Funds. Escrow Agent will have no duties or responsibilities other than
those expressly set forth herein. Escrow Agent will be under no liability to
anyone by reason of any failure on the part of any party hereto (other than
Escrow Agent) or any maker, endorser or other signatory of any document to
perform such person's or entity's obligations hereunder or under any such
document. Except for this Agreement and instructions to Escrow Agent pursuant to
the terms of this Agreement, Escrow Agent will not be obligated to recognize any
agreement between or among any or all of the persons or entities referred to
herein, notwithstanding its knowledge thereof.
(b) Escrow Agent will not be liable for any action taken or
omitted by it, or any action suffered by it to be taken or omitted, in good
faith and in the exercise of its own best judgment, and may rely conclusively
on, and will be protected in acting upon, any order, notice, demand,
certificate, or opinion or advice of counsel (including counsel chosen by Escrow
Agent), statement, instrument, report or other paper or document (not only as to
its due execution and the validity and effectiveness of its provisions, but also
as to the truth and acceptability of any information therein contained) which is
reasonably believed by Escrow Agent to be genuine and to be signed or presented
by the proper person or persons. The duties and responsibilities of the Escrow
Agent hereunder shall be determined solely by the express provisions of this
Agreement and no other or further duties or responsibilities shall be implied,
including, but not limited to, any obligation under or imposed by any laws of
the State of Texas upon fiduciaries.
(c) Escrow Agent will be indemnified and held harmless,
jointly and severally, by the Company and the Subscribers from and against any
expenses, including reasonable attorneys' fees and disbursements, damages or
losses suffered by Escrow Agent in connection with any claim or demand, which,
in any way, directly or indirectly, arises out of or relates to this Agreement
or the services of Escrow Agent hereunder; except, that if Escrow Agent is
guilty of willful misconduct, fraud or gross negligence under this Agreement,
then Escrow Agent will bear all losses, damages and expenses arising as a result
of such willful misconduct, fraud or gross negligence. Promptly after the
receipt by Escrow Agent of notice of any such demand or claim or the
commencement of any action, suit or proceeding relating to such demand or claim,
Escrow Agent will notify the other parties hereto in writing. For the purposes
hereof, the terms "expense" and "loss" will include all amounts paid or payable
to satisfy any such claim or demand, or in settlement of any such claim, demand,
action, suit or proceeding settled with the express written consent of the
parties hereto, and all costs and expenses, including, but not limited to,
reasonable attorneys' fees and disbursements, paid or incurred in investigating
or defending against any such claim, demand, action, suit or proceeding. The
provisions of this Section 7 shall survive the termination of this Agreement.
8. Compensation of Escrow Agent. The Company will pay Escrow Agent an
amount equal to Escrow Agent's standard fee schedule rate for all services
rendered by Escrow Agent hereunder.
9. Resignation of Escrow Agent. At any time, upon ten (10) days'
written notice to the Company, Escrow Agent may resign and be discharged from
its duties as Escrow Agent hereunder. As soon as practicable after its
resignation, Escrow Agent will promptly turn over to a successor escrow agent
appointed by the Company all monies and property held hereunder upon
presentation of a document appointing the new escrow agent and evidencing its
acceptance thereof. If, by the end of the 10-day period following the giving of
notice of resignation by Escrow Agent, the Company shall have failed to appoint
a successor escrow agent, Escrow Agent may interplead the Escrow Funds into the
registry of any court having jurisdiction.
10. Method of Distribution by Escrow Agent. All disbursements by Escrow
Agent to a party to this Agreement will be made by wire transfer of immediately
available funds to an account designated in writing by the party to receive any
such payment.
11. Records. Escrow Agent shall maintain accurate records of all
transactions hereunder. Promptly after the termination of this Agreement or as
may reasonably be requested by the parties hereto from time to time before such
termination, Escrow Agent shall provide the parties hereto, as the case may be,
with a complete copy of such records, certified by Escrow Agent to be a complete
and accurate account of all such transactions. The authorized representatives of
each of the parties hereto shall have access to such books and records at all
reasonable times during normal business hours upon reasonable notice to Escrow
Agent.
12. Notice. All notices, communications and instructions required or
desired to be given under this Agreement must be in writing and shall be deemed
to be duly given if sent by registered or certified mail, return receipt
requested, or overnight courier to the following addresses:
If to Escrow Agent: Securities Transfer Corporation
0000 Xxxxxx Xxxxxxx, Xxxxx 000
Xxxxxx, Xxxxx 00000
Attention: Xxxxx Xxxxxx
If to the Company: BAK Industrial Zone
Atou Village
Xxx Xxxxx Town
Lunggang District
Shenzhen, China 518119
Attention: Xx Xxxxx Qian, President
If to the Subscribers: Addresses noted in their respective
Subscription Agreements
or to such other address and to the attention of such other person as any of the
above may have furnished to the other parties in writing and delivered in
accordance with the provisions set forth above.
13. Execution in Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14. Assignment and Modification. This Agreement and the rights and
obligations hereunder of any of the parties hereto may not be assigned without
the prior written consent of the other parties hereto. Subject to the foregoing,
this Agreement will be binding upon and inure to the benefit of each of the
parties hereto and their respective successors and permitted assigns. No other
person will acquire or have any rights under, or by virtue of, this Agreement.
No portion of the Escrow Funds shall be subject to interference or control by
any creditor of any party hereto, or be subject to being taken or reached by any
legal or equitable process in satisfaction of any debt or other liability of any
such party hereto prior to the disbursement thereof to such party hereto in
accordance with the provisions of this Agreement. This Agreement may be changed
or modified only in writing signed by all of the parties hereto.
15. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE
AND TO BE PERFORMED THEREIN, EXCEPT THAT THE PORTIONS OF THE TEXAS TRUST CODE,
SECTION 111.001, ET SEQ. OF THE TEXAS PROPERTY CODE, CONCERNING FIDUCIARY DUTIES
AND LIABILITIES OF TRUSTEES SHALL NOT APPLY TO THIS AGREEMENT. THE PARTIES
EXPRESSLY WAIVE SUCH DUTIES AND LIABILITIES, IT BEING THEIR INTENT TO CREATE
SOLELY AN AGENCY RELATIONSHIP AND HOLD THE ESCROW AGENT LIABLE ONLY IN THE EVENT
OF ITS WILLFUL MISCONDUCT, FRAUD, OR GROSS NEGLIGENCE. ANY LITIGATION CONCERNING
THE SUBJECT MATTER OF THIS AGREEMENT SHALL BE EXCLUSIVELY PROSECUTED IN THE
COURTS OF DALLAS COUNTY, TEXAS, AND ALL PARTIES CONSENT TO THE EXCLUSIVE
JURISDICTION AND VENUE OF THOSE COURTS.
16. Headings. The headings contained in this Agreement are for
convenience of reference only and shall not affect the construction of this
Agreement.
17. Attorneys' Fees. If any action at law or in equity, including an
action for declaratory relief, is brought to enforce or interpret the provisions
of this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees from the other party (unless such other party is the Escrow
Agent), which fees may be set by the court in the trial of such action or may be
enforced in a separate action brought for that purpose, and which fees shall be
in addition to any other relief that may be awarded.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date set forth opposite their respective names.
BAK International, Ltd.
By: ______________________________
Its: ______________________________
Dated: ______________________________
SECURITIES TRANSFER CORPORATION
By: ______________________________
Its: ______________________________
Dated: ______________________________
SUBSCRIBERS:
_____________________________________
--------------------------------------------------------------------------------
BAK
CONFIDENTIAL BUSINESS PLAN
SHENZHEN BAK BATTERY CO, LTD.
November 2004
Confidential Treatment Requested
--------------------------------
Confidential Material in this document has been redacted and
------------------------------------------------------------
filed separately with the Commission.
-------------------------------------
----------------
[*****]Confidential Material redacted and filed separately with the Commission.
CONFIDENTIAL TREATMENT
DISCLAIMER
IMPORTANT NOTICE TO RECIPIENTS OF THIS
CONFIDENTIAL BUSINESS PLAN
This Confidential Business Plan (the "Business Plan 2004") and its contents are
the property of Shenzhen BAK Battery Co., Ltd ("BAK"). By accepting delivery of
this Business Plan 2004, the recipient agrees to return this Business Plan 2004
and all related documents, if any, to BAK, upon request. The recipient agrees
that neither it nor its agents, representatives, directors, or employees will
copy, reproduce, or distribute this Business Plan, in whole or in part. The
recipient agrees not to disclose the contents of this Business Plan 2004 to any
party other than the recipient's business or tax advisors, for investment
consideration only.
Information contained in this Business Plan 2004 has been obtained from BAK, and
from other sources deemed reliable, as of the date of its publishing, but no
representation or warranty is made as to its accuracy or completeness. No person
has been authorized in connection with this Business Plan 2004 to give any
information or to make any representations other than those contained herein
and, if given or made, must not be relied upon as having been authorized. Only
those representations and warranties, which may be made by BAK, in a definitive
written agreement, when and if one is executed, will have any legal effect.
This Business Plan 2004 contains forward-looking statements concerning plans,
intentions, strategies, expectations, predictions, financial projections and
beliefs of BAK, in regard to future activities and results of operations and
other future events or conditions. Actual results, events, or conditions could
differ materially from those projected by BAK, due to a variety of factors, some
of which are beyond the control of BAK. BAK disclaims any obligations to update
any such factors or to publicly announce the results of any revisions to any of
the forward-looking statements contained herein to reflect future results,
events or developments.
This Business Plan 2004 is not, and should not be construed as, an offer to sell
or a solicitation of an offer to buy securities of BAK and is for information
purposes only.
--------------------------------------------------------------------------------
Table of Contents
1. Executive Summary
2. Industry Information
2.1 Industry introduction
2.2 World Li-ion industry trends
2.3 Chinese Li-ion industry trends
2.4 Li-ion industry segmentation and trends
3. The Company
3.1 History
3.2 Company organization framework
3.3 Employees and management
3.4 Facilities
3.5 R&D Center
3.6 Corporate culture and management model
4. Products and Services
4.1 Product lines
4.2 Proprietary technology
4.3 Post-sale service
4.4 Suppliers
5. Sales and Marketing
5.1 Marketing strategies
5.2 BAK's current market
5.3 Customers
5.4 Potential market opportunities
6. Strategic Analysis
6.1 SWOT analysis
6.2 Competitive analysis
6.3 Strategic Plan
6.4 Risks related to doing business in China
7. Proposed Equity Plan
7.1 The transaction
7.2 Financing and restructuring plan
7.3 Use of funds
7.4 Timetable
8. Historical Financial Information
9. Projected Financial Information
Exhibits
Photos of Facilities
--------------------------------------------------------------------------------
PART 1: EXECUTIVE SUMMARY
Founded in 2001, Shenzhen BAK Battery Co., Ltd. ("BAK" or the "Company") is a
China-based company specializing in lithium ion(as "Li-ion" or "Li-ion cell")
battery cell production, primarily for cell phones. It has achieved high levels
of growth over the past four years and has become the seventh largest Lithium
battery cell manufacturer in terms of production capacity worldwide.
Lithium Ion ("Li-ion") battery unit production has increased 30 times over the
past 10 years (1994-2004). At the beginning of 1990's, the Li-ion battery
industry was pioneered in Japan as a new and more efficient type of energy
storage than previous technologies. Li-ion batteries rapidly became the
batteries of choice for the rapid developing of mobile phone industry. In
addition, due to development of electronic products like high-power handset
phones, laptop computers, digital cameras and video camcorders, the compound
annual worldwide growth rate of Li-ion battery production is estimated at 23.2%
during the years 2003-2006 (according to the Chinese Battery Association Annual
Report 2004,4). Longer term estimates through 2010 project similar growth rates.
The annual growth rate of Li-ion battery's production has been more than 140% in
China since 2001, and China's share of the worldwide market is rapidly growing.
In 2002, the production of Li-ion batteries in China was 270 million pieces,
which was more than 20% of global market share. Unit production reached 500
million in 2003, which was almost 30% of global market share. The newest report
from the Association of Chemical and Physical Industry of China indicates that
the annual growth rate will exceed 30% per year over the next several years.
China has become Japan's biggest competitor in Li-ion battery production. Japan
had a 93.9% global market share through 2000. However, Japan's share decreased
to 69.4% in 2002, and 58.2% in 2003. Industry estimates are that by 2005 Japan's
market share will drop to less than 50%. Japan has lost market share primarily
to Chinese companies. One of the key reasons is that China is the biggest market
for mobile phones. Another reason is lower prices from Chinese companies;
China's lower labor and infrastructure costs result in a reduced product cost.
The pressure from Chinese companies is the most important factor in decreasing
Li-ion battery prices in the world market. The third reason is that China has
established strong vertical integration of production, which results in
significant production advantages. China is by far the biggest competitor for
Japan in this market.
Massive capacity, low manufacturing cost, high quality and the right marketing
strategy are the major elements of company's core competitive edge. BAK's
monthly output capacity is 15 million pieces and actual current production is
11.8 million which makes BAK the seventh largest Li-ion manufacturer in the
world. BAK's specialty is the production of Li-ion battery cells, offering three
major types divided into 90 different models, including steel case, aluminum
case and cylindrical Li-ion rechargeable batteries. The battery cells are the
core components of Li-ion rechargeable battery packs. Chinese battery
manufacturers have historically imported battery cells from foreign countries to
produce Li-ion rechargeable battery. With BAK's large Li-ion cell manufacturing
capacity, discounted prices, and sophisticated market positioning, Chinese
Li-ion battery packing companies (which combine the cells into battery packs)
now have a lower cost domestic supplier and are able to gain market share.
[*****]. BAK has enlarged its production capacity rapidly over the past year to
become the second largest manufacturer in the Chinese market, with an output of
11.8 million pieces per month and a current capacity for 15 million pieces.
[*****].
BAK is moving into the Original Equipment Manufacturing (OEM) Market. [*****],
BAK is now moving into the OEM market. [*****].
BAK's management team and organizational structure meets the top standards of a
US public company. BAK's management team is energetic, knowledgeable and
professional. Xx. Xxxxxxxxx Xx, CEO, has many years of experience in the capital
markets in China. He founded the company in 2001, and successfully grew it to
its current size through low cost manufacturing and Li-ion research in the
battery industry. CFO Xx. Xxxxxxx Xxx, CPA, has many years of experience in
various financial fields. In BAK's technical team, the company has two
world-class Li-ion battery experts. The first, Xx. Xxxxxx Xxx, BAK's Chief
Technology Officer is a PhD, with over 13 years of working experience in
developing battery cells for laptop use and is widely recognized as one of the
leading authorities in the world within this field. He assisted in starting
Lishen (the third largest lithium-ion battery manufacture in China) and
supervised Lishen's successful completion of Motorola's certification process.
Xx. Xxx is also well known in the Li-ion battery industry for his research with
Polymer cells and HEV Batteries. In 1999, Xx. Xxx won the "Friendship Award",
which is the highest award for foreign workers in China, sponsored by China's
Central Government to recognize his contribution to new technology development.
In February 2002, he won the "State Science and Technology Cooperation Award",
also given by China's Central Government, in appreciation for his contribution
to the Chinese economy. BAK's second technical expert, Xx. Xxxxxx Xxx, is also
well known in the space. Xx. Xxx has gain great success in the research of high
capacity laptop PCs batteries. The specific battery created by his team has
already obtained the European Union's ("EU's") safety certificate.
BAK has a clear short and long-term plan. During the next two years, the Company
plans to emphasize its push into the global original cellular phone battery
market ("OEM"), the electric power tools battery market, and to significantly
increase the production of laptop batteries.
[*****]. In two to three years, BAK plans to begin selling into the electric
bicycle battery market. [*****]. BAK's objective is to reduce the cost of the
Li-ion battery to the same level as that of Nickel Cadmium ("NiCd") and Nickel
Metal Hydride ("NiMH") batteries, which will among other things make BAK's
Li-ion battery a much more desirable alternative for the HEV market. BAK's R&D
center is continuing to make significant progress on Li-ion battery
manufacturing cost reductions and new technologies.
[*****].
Summary of Historical and Projected Financial Data
[*****].
As part of a proposed $17 million equity financing, existing shareholders will
escrow 10% of their BAK's stock, to be used as compensation for investors if the
Company fails to deliver the projected profit. (For a more detailed description
of the investment terms please reference section 7.1 of this business plan.)
Table 1-1: Summary of historical and projected financial information
($ in 000,8.265RMB/$1.00) FYE September 30,
------------------------------------------------------------------
2002 2003 2004 2005 2006 2007
---- ---- ---- ---- ---- ----
Revenues $3,050.2 $20,266.6 $64,088.3 **** **** ****
Gross Income $536.5 $5,694.7 $14,458.0 **** **** ****
Gross Margin (%) 17.6% 28.1% 22.6% **** **** ****
Net Income $719.7 $3,765.3 $7,226.4 **** **** ****
Total Assets $3,778.7 $23,008.9 $103,168.3 **** **** ****
Total Equity $1,929.6 $5,682.1 $23,797.8 **** **** ****
Revenue Growth NA 564% 216% **** **** ****
Net Income NA 423% 92% **** **** ****
For more detailed projections, see the projections and accompanying assumptions
in Part 9 of this business plan.
PART 2: INDUSTRY INFORMATION
2.1 Industry Introduction: The Li-ion battery industry is growing strongly.
World production of Li-ion batteries has increased 30 times in the past 10
years. Since 1992, when Sony first commercialized Li-ion batteries, the Japanese
controlled the Li-ion battery market. The market's growth has been driven
primarily by the spread of the mobile phone. (Data source: Portable Power
Conference & Expo, September 13, 2004, San Francisco.)
Li-ion batteries are the most attractive rechargeable batteries available in the
market to date. Lithium-based batteries can be categorized as non-rechargeable
and rechargeable. Nowadays, non-rechargeable Lithium batteries are typically
used in low-power consumer electronics applications such as film cameras, and
rechargeable Lithium batteries (or "Li-ion") are used in heavy power consuming
electric appliances such as cellular telephones, camcorders, digital cameras,
laptops and so on. The rechargeable Li-ion market is growing much faster than
the non-rechargeable lithium battery market.
Compared to other kinds of rechargeable batteries such as Nickel Cadmium
("NiCd") and Nickel Metal Hydride ("NiMH"), Li-ion batteries have several very
attractive features:
- a high operational voltage (normally 3.6v in market, it is 3 times more
than NiCd or NiMH batteries),
- lower self-discharge (<8% per month, 30% less than NiCd and 40% less than
NiMH),
- long cycle life (can be used thousands of times), and
- no memory effect (unlike NiCd).
Table 2-1 below outlines these differences.
Table 2-1: Comparison of NiCd, NiMH and Li-ion Batteries
----------------------------- ---------------------------- --------- -----------
Feature NiCd NiMH Li-ion
----------------------------- ---------------------------- --------- -----------
Operation voltage 1.2 1.2 3.6
----------------------------- ---------------------------- --------- -----------
Gravimetric Energy Density 00 00x000 140
Wh/kg
----------------------------- ---------------------------- --------- -----------
Volumetric Energy Density 150 200 300
Wh/L
----------------------------- ---------------------------- --------- -----------
Cycle life 500 500 1000
----------------------------- ---------------------------- --------- -----------
Self-discharge %/month 00x00 00x00 6~9
----------------------------- ---------------------------- --------- -----------
Rapid charge Not good Good Good
----------------------------- ---------------------------- --------- -----------
Over charge Fair Good Not good
----------------------------- ---------------------------- --------- -----------
Memory effect Yes No No
----------------------------- ---------------------------- --------- -----------
Environmental Issues Release of cadmium, None None
(poisonous)
----------------------------- ---------------------------- --------- -----------
Information source: World Chemist 5th issue, 2002
Li-ion is taking market share from other technologies. According to Avicenne
Development, an industry research group, the world NiCd market was $1 billion in
2003, and shrinking at an annual 10% rate. The world NiMH market was an
estimated $640 million in 2003, shrinking at a 15% annual rate. By comparison,
the Li-ion market has compound annual worldwide growth rate of 23.2% during the
years 2003-2006, and estimates through 2010 project similar growth rates. The
newest technology, Lithium polymer, has already reached $300mm in worldwide
market size and is growing 20% per annum.
Rechargeable lithium polymer batteries are a new technology to be
commercialized. The lithium salt electrolyte used in lithium polymer has many
advantages over lithium ion design. These batteries are less hazardous if
mistreated. Furthermore, since no metal battery cell casing is needed, the
battery can be lighter and it can be specifically shaped to fit the device it
will power. Because of the denser packaging without the holes between
cylindrical cells and the lack of metal casing, the energy density of Li-poly
batteries is over 20% higher than that of a classical Li-ion battery. Lithium
Polymer technology still has problems with internal resistance and life cycle.
Other challenges include longer charge times and the slower maximum discharge
rates compared to more mature technologies.
Worldwide Li-ion battery production is shared by Japan, China and Korea. As the
first county to research Li-ion battery techniques, Japanese Li-ion battery
technology has historically been the most advanced in the world, and Japan's
manufacturing equipment is mostly automatic. China and Korea imported techniques
and equipment, put their own efforts into research and production practices, and
have been making significant production improvements and research discoveries.
China has become Japan's biggest competitor by offering quality products at
lower prices. Korea is also growing quickly in this segment. Leading
manufacturers by country are listed in table 2-2 below.
Table 2-2: Leading World Li-ion Battery Manufacturers
--------------------- ----------------------------------------------------------
Country Company
--------------------- ----------------------------------------------------------
Japan Sanyo, Sony, Panasonic, GS, NEC, Hitachi
--------------------- ----------------------------------------------------------
Korea LG, Samsung,
--------------------- ----------------------------------------------------------
China BYD, BAK, Lishen, B&K, Huyo, Coslight
--------------------- ---------------------------------------------------------
The Japanese manufacturers are also less dominant in the Li-ion market.
According to Avicenne, in 2003 industry leader Sanyo controlled 40% of the NiCd
market and 55% of the NiMH market, but only 31% of the Li-ion market.
Matsushita, #2 in 2003 in both the NiCd and NiMH market share with 26% and 25%
respectively, had only 11% of the Li-ion market.
2.2 World Li-ion Industry Trends
Li-ion batteries are now replacing NiCd and NiMH battery. In recent years,
wireless electronic product manufacturers and consumers have demanded the
performance available only in Li-ion rechargeable batteries. Today in the global
rechargeable battery market, Li-ion battery market share keeps increasing, from
20% in 2001 to 38% in 2003. According to projections sourced from the Chinese
Battery Annual Report from April 2004, the Li-ion battery market is expected to
experience a 23.2% compound annual growth rate over the next three years, which
by 2006 is projected to result in a 56% share of the worldwide rechargeable
battery market.
Table 2-3: Sales of Li-ion batteries compared with total sales of all
rechargeable batteries
[GRAPHIC OMITTED]
Data source: Portable Power Conference & Expo, September 13, 2004, San
Francisco.
The emergence of multiple applications has driven the growth of the Li-ion
battery market. The demand for Li-ion batteries in laptops and camcorders keeps
increasing, as is demand for power mobile phone batteries. More recently, the
pocket PC and portable video games have become the new target market for Li-ion
batteries. In addition to these uses, there is a huge untapped market: the
development of power tools, electric scooters and pure electric cars and Hybrid
Electric Vehicles ("HEV"), all provide new potential applications of Li-ion
technology. All these changes have driven Li-ion battery growth. In 2003-2006,
the world Li-ion battery manufacturing compound growth rate is projected at
23.2%.
2.3 China Li-ion Industry Trends: Taking market share.
The average annual production growth rate in China has been at 140% since 2001,
well ahead of the worldwide growth rate and the result of China's huge
production capacity and low product costs. Spurred by the growth of BAK and
similar companies, Li-ion battery production volume reached 270 million pieces
in 2002, 20% of the global market share. China production volume exceeded to 500
million pieces in 2003, which was almost 30% of the global market. With the
success of BYD, BAK, B&K, Lishen, Huanyu, and Coslight, the Chinese Li-ion
battery industry is projected to grow 30% annually over the next 2-3 years.
Compared to Japan and Korea, China's production advantages can be categorized
into three main areas:
(1) Low product cost. With abundant labor resources and low materials prices,
Chinese companies can use semi-automated product lines to reduce costs and
offer lower prices. The low price marketing strategy used by Chinese
companies is the main reason that Li-ion batteries' prices have dropped
worldwide.
(2) China is the biggest consumer with the fastest growing and highest mobile
phone sales volume in the world.
(3) China has built an integrated industry chain from raw material to sales
networks for Li-ion batteries, resulting in significant production
efficiencies and lower costs.
The emergence of Chinese companies such as BAK has created competition with
market leader SANYO for market share. BAK's output grew dramatically over the
last year to its current 11.8 million pieces per month. [*****].
[*****].
The net result of these [****] factors, is a BAK cell phone battery with longer
talking time.
These differences can be seen in the specifications described in table 2-4
below.
Table 2-4: Li-ion Specifications for Chinese Companies (BAK,BYD)
Compared to Japanese Companies (Sanyo, Sony)
---------------------------------------- --------- --------- --------- ---------
Feature BAK BYD SANYO SONY
---------------------------------------- --------- --------- --------- ---------
Operating voltage (V) 3.7 3.7 3.6 3.6
Capacity (mAh) 750 750 630 630
Internal resistance (mC) <50 <60 <60 <60
Self-discharge (%/month) 10 10 10 10
Time remaining above 3.6V at discharge 00-00 00-00 00-00 00-00
(minutes)
Cycle life >500 >500 >500 >500
Safety Good Good Good Good
---------------------------------------- --------- --------- --------- ---------
[*****]. From the time of the company's formation in 2001, BAK has focused on
the replacement market as the segment where it wanted to establish a dominant
position. The replacement market is a special section of the overall Li-ion
battery market. Replacement batteries are not the original batteries that come
with the cell phone purchase. This market provides customers with a second
replacement battery or additional batteries for extended talking time and
standby time. The replacement batteries are often sold with new cellular phones
as a promotional technique, or sold to individuals who need more battery packs
through retail channels. Also there is an extremely active pre-owned cellular
phone market in China as most cellular phones in China are continuously used
until the very end of the phone's life. This market is similar to the pre-owned
car market in the US. The new types of phones are outdated in big cities in
about one or two years. Then the phones are collected and sold to smaller cities
or towns at lower prices. After another few years, these phones are collected
and sold again to some rural areas at even lower prices. However in many cases,
the phones are still functioning but the batteries are often not good enough to
power the phones. There is a need to replace the original batteries with
replacement batteries to keep the phones functional. Naturally, these batteries
have to be at a fairly low price point. BAK's products fit this competitively
priced requirement.
[*****].
In the future, BAK [*****] will also focus on increasing its market share in the
first tier OEM market through technological innovation, quality control systems
and cooperation with Motorola and other world-class companies.
2.4 Li-ion market segmentation and trends
The Li-ion market has several key applications which are experiencing strong
growth.
Mini Li-ion rechargeable batteries, used in small electronics, are the most
established and largest market application. Table 2-6 below shows the usage of
Li-ion batteries in Japan by application. Mobile phone applications remain the
largest, at 57.4%. By comparison, in China, due to the relatively low
commercialization rates of laptops and camcorders, the mobile phone market share
is even higher. These new applications provide an excellent opportunity for
growth in China.
Table 2-6: Li-ion battery usage by segment in Japan
------------------------------------------- -----------------
Equipment Percentage
------------------------------------------- -----------------
Mobile phones 57.4
------------------------------------------- -----------------
Laptop computers 31.5
------------------------------------------- -----------------
Camcorders 7.4
------------------------------------------- -----------------
Other electric products 3.7
------------------------------------------- -----------------
Information Source: Chinese Battery Association Annual Report, April 2004
2.4.1.1 Mobile phones
The Chinese consumers are the most likely to update their cell phones than any
other country in the world, according to an industry report from the Chinese
Li-ion battery industry in 2003. This report also projects mobile user growth at
30% per year. Table 2-7 below outlines these growth rates:
Table 2-7: 2003-2006 Projections of global mobile and battery market growth
----------------------------------- ----------- ------------- ------------- -------------
2003 2004 2005 2006
(Actual) (Projected) (Projected) (Projected)
----------------------------------- ----------- ------------- ------------- -------------
Mobile sales volume 519/60 635/70 762/80 900/90
Global/China(units, in millions)
----------------------------------- ----------- ------------- ------------- -------------
Battery set sales volume 934/108 1,143/126 1,372/144 1,620/162
Global/China(units, in millions)
----------------------------------- ----------- ------------- ------------- -------------
Battery replacement 259/30 317/35 381/40 450/45
Global/China(units, in millions)
----------------------------------- ----------- ------------- ------------- -------------
Total Battery need 1,194/138 1,460/161 1,753/184 2,070/207
Global/China(units, in millions)
----------------------------------- ----------- ------------- ------------- -------------
Battery set sales volume = 1.8iA Mobile sales volume
Battery replacement = 0.5iATotal mobile volume
Total battery need = Battery set sales volume + Battery replacement
Global Source: Gartner Group; China Source: Instat/MDR
2.4.1.2 Laptop computers. Along with cellular phone batteries, laptop batteries
will be a critical source of growth for battery companies. Only six companies
worldwide currently supply Li-ion battery laptop PCs cells (which are combined
into battery packs): Sony, Sanyo and Matsushita in Japan; Samsung and LG in
Korea; and E-ONE Moli Energy in Vancouver, Canada. Toshiba (Japan) recently
exited the market.
Laptop batteries are more difficult to manufacture than those for cell phones,
for several reasons:
1. Uniformity. Cell phones only use one cell, while laptops use at least six
cells, and sometimes twelve. For single cell applications, variations in
individual batteries do not have much impact on the equipment. If even one
cell is not uniform in a multiple cell application the performance of the
entire battery pack will be degraded rapidly. To assure uniformity,
companies typically utilize more automated equipment in production
2. There are high safety standards (these batteries have high energy density
per cell, about 3 times higher than cell phones). [*****]
Table 2-8: PC Forecast
[GRAPHIC OMITTED]
BAK believes there are significant opportunities to sell Li-ion laptop batteries
in China. Currently, all laptops use either Japanese batteries, or, to a lesser
extent, Korean batteries. According to presentations from the IIT Corp. Japan,
(2004 Power Conference, September 2004, San Francisco), 445 million cells
(estimated 10 cells/pack) will be sold worldwide in 2004 at an average $3-3.50
price per cell. [*****]. Battery packs are being assembled mostly in Taiwan.
[*****]. Batteries manufactured in China should have significant competitive
advantages. Despite the higher level of automation required, significant
higher-level labor such as engineers are required, and China will benefit from
lower labor costs. China also has a materials cost advantage. Overhead in China
is much lower (land, housing, building, energy); environmental controls not as
stringent in China as in Japan; and some government support is available, such
as tax breaks. Finally by buying from China instead of Japan, laptop
manufacturers will not have to pay 12% duties they pay if they import from
Japan, and China-based suppliers will allow for easier logistics.
Table 2-9(pound)(0)0000-0000 Global/China markets for Laptops and battery packs
---------------------------- ---------- ------------- ------------- ------------
(units, in millions) 2003 2004 2005 2006
(Actual) (Projected) (Projected) (Projected)
---------------------------- ---------- ------------- ------------- ------------
Laptop sales volume 38/1.3 44/1.8 51/2.5 56/3.4
Global/China
---------------------------- ---------- ------------- ------------- ------------
Total battery cell demand 380/13 440/18 510/25 560/34
Global/China
---------------------------- ---------- ------------- ------------- ------------
Total Battery Cell Demand = 10xLaptop Sales Volume
Source: IDC; China: CCW Research
2.4.1.3 Camcorders and digital cameras. A report from IIT, a premier global
market intelligence and advisory firm in the information technology of Battery
industries, indicates that the Li-ion batteries shipment for Digital cameras was
16.3 million units in 2001 growing to a projected 88 million units by 2005. The
global Li-ion battery shipment for camcorders was 47.5 million units in 2001
growing to a projected 87 million by 2005. Table 2-10 below outlines this
opportunity.
Table 2-10(pound)(0)0000-0000 global Li - Ion market demand for digital
camera/camcorder
--------------------------------------- ----------- ------------- --------------
(units, in millions) 2003 2004 2005
Actual Projected Projected
--------------------------------------- ----------- ------------- --------------
Li -Ion Batteries for digital cameras 58.6 75.1 88
--------------------------------------- ----------- ------------- --------------
Li -Ion Batteries for camcorders 73.7 70.9 87
--------------------------------------- ----------- ------------- --------------
Total battery need 132.3 146 175
--------------------------------------- ----------- ------------- --------------
Data source: Portable Power Conference & Expo, September 13, 2004, San
Francisco.
2.4.2 High power and large size Li-ion batteries High power and large size
rechargeable Li-ion batteries have 2 distinguishable differences compared to the
batteries used in cellular phones and laptops: 1) single cell capacity can be
from 10 Ah to 100 Ah or more, while the cellular phone is normally about 1 Ah or
less; and 2) the discharge power is much higher, can be as high as 10C rate
(effectively discharging all the battery's energy within 0.1 hour), compared to
0.5C rate (effectively discharging all the battery's energy within 2 hours) for
laptops. [*****]. There are a series of new applications that would be users of
high power and large size Li-ion batteries.
2.4.2.1 Pure Electric cars. The usage of Li-ion battery for pure electric cars
is increasing, and the market share of Li-ion batteries in electric cars is
projected to be 20% by 2005, particularly, as the price of these batteries
decreases. Electric car sales volume is projected to be 720 thousand sets, or
1.2% of the global car market share, in 2005, growing to 1.7 million cars by
2010, or 2.6% of the global market. However, because pure electric cars need
long recharge time, this is a hurdle to prevent it from wide use on the roads.
2.4.2.2 Electric bicycle. The technology of using Li-ion batteries in electric
bicycles has been developed and is expected to be commercialized soon. China has
400 million bicycles; if 2% of them are replaced by electric bicycles, then
there will be a market for an additional 2.4 billion Wh of battery energy. If
high power and large size Li-ion cells are made with 10 Ah (36Wh) each, there is
a need for an additional 67 million of such large and high power cells.
According to a survey conducted by the Association of Chemical and Physical
Industry of China, in the five biggest cites in China, 50% of people would like
to upgrade their bicycles to electric bicycles.
2.4.2.3 Hybrid Electric Vehicles ("HEV"). HEVs are the most practical gas
efficient vehicles running on the roads worldwide, with gas mileages as high as
65 miles per gallon. HEVs are equipped with a small gasoline engine and an
electric motor powered by rechargeable batteries. HEVs are gaining widespread
support and are expected to be a mainstream passenger car in the worldwide
automobile market. (See Figure 2-4). Current rechargeable batteries used in HEVs
are all NiMH. Li-ion batteries would have many beneficial characteristics in a
HEV application; however, at the present time they remain cost prohibitive.
[*****].
Table 2-11: HEV Six Year Market Forecast
[GRAPHIC OMITTED]
Source: IIT Corp, Japan, The 20th International Seminar & Exhibit on Primary &
Secondary Batteries, March 17, 2003, Fort Lauderdale, FL, USA
2.4.2.4 Electric scooters. High power Li-ion battery technology provides a new
opportunity in electric motor bikes. While electric motor bikes exist in the
market today, they face mileage and speed limitations. China motorcycle
manufacturers are also starting to research and develop the use of high power
Li-ion batteries.
2.4.3 Li-polymer battery. Li-polymer batteries are also called LIB Laminated
cells. As previously mentioned, the main difference between conventional Li-ion
and Li-polymer batteries is the casing material; most of the Li-polymer
batteries use soft plastic sheet to wrap up the internal part of the battery
while the conventional Li-ion batteries use solid cases made of either steel or
aluminum to contain the internal part. Li-polymer battery retains the same
chemistry, even the same internal structure as the conventional Li-ion a lithium
ion battery.
The most significant advantage of the Li-polymer is that the batteries can be
made very thin. This allows equipment such as Personal Digital Assistant (PDA,
e.g. Palm V, i-Pod) and some thin cellular phones or games to be made thinner,
as well as small electronic equipment such as Blue Tooth headsets and smart
cards. The following Table 2-12 shows the market trends of the Li-polymer
batteries:
Table 2-12 Li-polymer Battery Market Trends by Sales
[GRAPHIC OMITTED]
Data source: Portable Power Conference & Expo, September 13, 2004, San
Francisco.
BAK has this technology ready. With its advantage of low cost production, BAK
will advance a significant market share in the Li-polymer batteries.
Table 2-13: Li-polymer Market Prospects: Unit Growth Will Continue
(Pieces in Millions)
[GRAPHIC OMITTED]
Source: Avicenne Forecast; The Worldwide Rechargeable Battery Market Reporter of
Taiwan-Dec.2003
PART 3: THE COMPANY
3.1 History
BAK was founded on 3rd August 2001 by its current CEO, Xxxxxxxxx Xx, initially
to manufacture Li-ion batteries for cell phones. A timeline of key company
events is listed below:
August 2001 Shenzhen BAK Battery Co., Ltd established
June 2002 BAK, with headquarters in Shiyan, Shenzhen, begins operation.
Initial monthly output in 2001 is about 220,000 units
October 2002 BAK authorized to set up a postdoctoral workstation by the
National Ministry of Personnel
November 2002 BAK passes the EU CE attestation
January 2003 BAK becomes Shenzhen Hi-Tech Enterprise
February 2003 BAK passes the SaiBao attestation (cell phone manufacturer)
March 2003 BAK aluminum case battery plant starts operation, monthly
output reaches 2.4 million pieces
June 2003 BAK monthly output reaches 6.6 million pieces, quantity and
quality continue to improve
September 0000 XXX xxxxxx XXX00000: 1996 environmental management system
certification and ISO9001: 2000 Quality management system
certification October2003 BAK industrial park foundation
breaks ground in Longgang District, Shenzhen
September 2003 BAK cylindrical battery Yangguang sub-plant starts operations
December 2003 BAK total monthly capacity increases to 11 million pieces and
monthly output increases to 8.8 million pieces
December 2003 BAK receives UL designation August 2004 BAK industrial park
aluminum can battery plant starts up operations.
October 2004 BAK total monthly capacity increases to 15 million pieces and
monthly output increased to 11.8 million pieces to make BAK
one of the largest Li-ion battery manufacturers in the world.
The Company's address is:
BAK Industrial Park
No. 1 BAK Street, Kuichong Town,
Longgang District, Shenzhen, China.
The Company is registered with the Shenzhen Industrial and Commercial
Administration Bureau. There are currently 16 shareholders of the company. Table
3-1 below shows the ownership of the Company.
Table 3-1: Company Stockholders
---------------------------------------- -----------------------
Stockholder Share (%)
---------------------------------------- -----------------------
Xxxxxxxxx Xx 68%
---------------------------------------- -----------------------
Xxxxxxx Xxxx 12%
---------------------------------------- -----------------------
Fenghua Li 8%
---------------------------------------- -----------------------
Xxxxxx Xx 4.5%
---------------------------------------- -----------------------
Other 12 stock holders 7.5%
---------------------------------------- -----------------------
3.2 Company organization framework
Table 3-2: Company organization, key management
Chief
Executive
Officer
Xxxxxxxxx Xx
|
|
|
--------------------------------------------------------------------------------
| | | |
| | | |
---------------- ---------------- ---------------- ----------------
Chief Chief Chief Vice President
Financial Technology Operations Of Production
Officer Officer Officer
Xxxxxxx Xxx Huanyu Mao, PhD Baicheng Zhou, PhD Xxxxxx Xx
---------------- ---------------- ---------------- ----------------
3.3 Employees and Management
BAK currently has over 7,000 employees led by a highly qualified management
team. Table 3-3 below outlines the educational levels of the Company's senior
and middle management.
Table 3-3: Management's education qualifications
--------------------------------------------------------------------------------
Statistics
--------------------------------------------------------------------------------
PhD Master Bachelor College High/Tech School Total
--------------------------------------------------------------------------------
4 36 263 108 114 525
--------------------------------------------------------------------------------
1% 7% 49% 21% 22% 100%
--------------------------------------------------------------------------------
Last updated: July 31, 2004
--------------------------------------------------------------------------------
Senior Management. BAK's senior management team consists of five key people.
Table 3-4: Senior management
----------------------------- ----------------------------------- -------
Name Title Age
----------------------------- ----------------------------------- -------
Xxxxxxxxx Xx Chief Executive Officer 36
----------------------------- ----------------------------------- -------
Xxxxxxx Xxx Chief Financial Officer 35
----------------------------- ----------------------------------- -------
Huanyu Mao, PhD Chief Technology Officer 52
----------------------------- ----------------------------------- -------
Baicheng Zhou, PhD Chief Operations Officer 30
----------------------------- ----------------------------------- -------
Xxxxxx Xx Vice-President of Production 50
----------------------------- ----------------------------------- -------
Xx. Xxxxxxxxx Xx, Chief Executive Officer. Xx. Xxxxxxxxx Xx invested 20 million
RMB ($2.4 million USD) and founded BAK in 2001. In four years time, he has
increased monthly battery output from 200,000 to 11.8 million pieces growing
revenues from $3 million to a projected $110 million this year. He provides the
inspiration and teambuilding expertise to the Company.
Because of the strong culture he has created at BAK, no manager has left BAK
since it was established in 2001. He has managed the Company's high growth rate
while maintaining the Company's fiscal health.
Xx. Xx'x prior work experience was in the securities industry. From March 1994
to May 1995 he was trading equities and debt for his own account; From May 1995
to June 1998, he worked at China International Trust and Investment Corporation,
Jilin office, as Manager of the Credit Department. Xx. Xx was born in 1968. He
received a bachelor's degree in Lanzhou Railway Institute in1991. In 2000, he
began part-time study of quantitative economics in Jilin University, to obtain a
Doctor's degree.
Xxxxxxx Xxx, Chief Financial Officer
Xx. Xxx, is a Chinese certified public accountant and Chinese certified tax
agent. He is proficient in Chinese financial systems and has many years of audit
work experience. Xx. Xxx was born in 1969; in July 1995 he graduated from Xxxxx
Xxxx Taxation College with a bachelor's degree in accounting in the Jilin
province.
Huanyu Mao PhD, Chief Technology Officer
Xx. Xxx, a technological leader in the field of Lithium ion battery development,
has worked with the company as a consultant since the beginning of 2004 and has
been with the company full time since the second half of 2004. Previously, he
was with Tiajin Lishen Battery Joint Stock Corporation, the third largest
lithium-ion battery manufacturer in China, based in Tiajin. Xx. Xxx moved to
China in early 1997 and helped found Lishen. (xxx.xxxxxx.xxx.xx). He built the
first pilot line at Tianjin Institute of Power Sources in 1997. As the principal
engineer, he was responsible for all operational elements, including
construction, equipment specification and acquisition (primarily via Japan), raw
materials, and commercialization of the production process. From his years of
experience, Xx. Xxx has in-depth equipment, materials and production expertise
in China, Korea and Japan. He has been involved in every aspect of operations,
from production planning, worker training and quality control method settings in
every process, to error prevention, trouble shooting, spare parts, material
stock control and logistics.
While at Lishen, Xx. Xxx combined the technology and materials from different
countries and successfully developed Lishen's winding type of polymer lithium
ion cells, which have been mass-produced under his supervision. Methods of
production were developed to maximize use of existing liquid lithium ion
equipment and materials, making the manufacturing simpler and lower cost than
its Japanese counterparts.
[*****]. Motorola Energy System Group (ESG) has qualified 7 types of cylindrical
and prismatic Lithium ion batteries and 1 type of polymer cell for Lishen.
Meeting Motorola's standards for so many types of cells was one of Xx. Xxx'x key
accomplishments.
Prior to Lishen, Xx. Xxx worked at NEC Moli Energy in Canada from 1991 to 1996,
initially as a Research Scientist in Lithium ion battery research. During the 5
years with Moli, he was listed as the inventor on 7 US Patents and published
various articles on Li-ion batteries.
In 1999, Xx. Xxx won the highest award for foreign workers in China, the
"Friendship Award", sponsored by China's Central Government to recognize his
contribution to new technology development for China. In February 2002, he won
the "State Science and Technology Cooperation Award", also given by China's
Central Government, in appreciation for his contribution to the Chinese economy.
He is a Canadian citizen, with a permanent residence in Vancouver, B.C., Canada.
He earned a Ph.D. in Electrochemistry in Conducting Polymers in 1990 from
Memorial University of Newfoundland, Canada and had one year Postdoctoral work
at Xxxxx Xxxxxx University, British Columbia in Electrochemistry of Conducting
Polymers. During this time he published 6 papers in major US chemistry journals,
including Journal of the American Chemical Society.
Baicheng Zhou, PhD, Chief Operations Officer
Xx. Xxxx was born at 1974, Changchun City, Jilin Province; In 1997, he graduated
from Jilin University with a Bachelor's degree and majored in Applied
Mathematics. In 2000 he gained his Master's degree from Jilin University where
he majored in Operations Research & Cybernetics; In 2003, Xx. Xxxx gained his
Doctor's degree from Jilin University, majoring in Quantitative Economics. From
June 2001 - April 2003 he was working at Jilin Huaruan Technology Co., Ltd as
secretary of directorate. Since April 2003 Xx. Xxxx has been working at Shenzhen
BAK Company in the capacity of assistant to General Manager.
Xxxxxx Xx, Vice-President of Production
Mr., Li was born at 1954, Changchun City, Jilin Province. From 1976 to 1979, he
studied at SUN YAT-SEN University obtaining his bachelor's degree by majoring in
Economics & Political Science. Xx. Xx began working at Finance Bureau of Yushu
City, Jilin province in 1982 as a Comprehensive Management Director until 2002.
In 2002 he began working at Shenzhen BAK company in the position of
Vice-Manager, in Charge of Manufacture.
3.4 Facilities
The Company is in the process of developing additional world-class production
facilities and infrastructure in the BAK Industrial Park in Shenzhen. BAK owns
acreage of 250,000m(2) and has an option on another 100,000m(2) (about 86 acres
total) on which to complete its facilities. The total construction space is
projected to be 320,000m(2).
The construction project is divided into Phase 1 and Phase 2. Phase 1 of
construction will result in 185,000m(2) of new facilities, among which there is
15,450 m(2) of new manufacturing facilities; 19,100m(2) for warehousing and
packaging; 2,950m(2) for a dining room; and 15,800 m(2) for dormitory space.
Some of these facilities have already been put into use. The rest of the
buildings in Phase 1 are still under construction, having erected the core
structures and in the process of completing the FF&E work. These remaining Phase
1 buildings will include: 82,250m2 of manufacturing facilities; a 16,780m2 R&D
center and administrative building; a 2,950m2 dining room; a 28,460m2 dormitory
space; and some other attached facilities. Phase 1 construction should be
completed by March 2005.
Phase 2 of construction will result in 135,000m2 of new facilities. This project
is not yet under construction, and is anticipated to begin in January 2007, and
to be completed by the end of 2007. It includes an additional 66,480m(2) of
manufacturing facilities; a 6,560m2 dining room; a 23,700m2 dormitory; a
26,560m2 comprehensive usage building; an 8,400m2 conference center; a 3,000m2
training center; and many other attached facilities.
Once both phases of construction are completed, the Company's total
manufacturing facilities will exceed 183,630m(2), with capacity to build 550
million pieces per year and house 12,000 employees.
3.5 R&D center
The company has a world-class R&D center performing proprietary research, which
has resulted in more than thirty patents awarded or applied for. Based on the
technology of ChangChun Applied Chemistry Research Institute of the China
Scientific Institute, Tstinghua Unversity, JiLin University, Electrochemistry
Department of XiaMen University and Shenzhen University, BAK has gathered a team
of professionals for its R&D center. There are over 100 staff members in the
center, led by three specialists available to the Company by a government grant
to promote research and development, as well as three professors. Upon the
approval of the National Ministry of Personnel in October 2002, a Postdoctoral
Workstation was established, the only such research position in the entire
battery industry in China, and one of only two such positions in Guadong. The
R&D center focuses research on projects relating to liquid Li-ion, high power
Li-ion batteries, solid polymer Li-ion batteries, and cylindrical and
rectangular Li-ion batteries.
The R&D center's mission focuses on researching advanced technologies, advanced
battery materials, new cell development and training first-class specialists.
The Company's goal is to build an internationally known R&D facility. Table 3-5
below outlines the organizational structure of the R&D center.
Table 3-5: R&D center organizational structure
R&D Director
|
|
Vice-Director -|
|
-------------------------------------------------------------------------------------------------------------
|Physical & | Battery | Technology | Material | High | Polymer | Servicing | IPOffice | Administrative |
| Chemical | Testing | R&D | Research | Power | Battery | Dept. | | Dept. |
| Analysis | Dept. | Dept. | Dept. | Battery | Dept. | | | |
| Dept. | | | | Dept. | | | | |
-------------------------------------------------------------------------------------------------------------
3.6 Company culture and management model
BAK has developed an open, professional, and innovative culture. The company
uses various tools to help build its culture, including a company LAN, BAK
BATTERY magazine and BAK newspaper. The company believes its people are its most
precious asset
A formal performance assessment system is applied throughout the Company.
Objective management techniques focus on meeting goals, emphasizing judgment and
managing processes. The desired outcome is fairness and encouraging positive
outcomes.
PART 4: PRODUCTS
4.1 Product lines
There are three main forms of battery cells, aluminum, steel and cylinder, which
are sold in over 90 types. The Company's first key product in 2002 was a steel
case Li-ion battery. Subsequently, BAK developed more production lines, and the
Company's product mix is now 69% steel cases battery cells, 30% aluminum, and 1%
cylinder form.
Before 2003, all of BAK's products were made using a manual production line. In
2003, BAK developed the semi-automatic production lines that are utilized today.
BAK's products' primary uses are mobile phones, digital cameras, digital
camcorders, MP3's, laptops, electric bicycles, and general industrial
applications. Going forward, BAK will also concentrate on development of
Li-polymer batteries, high power batteries and HEV batteries. The growing number
of product types is illustrated below:
Table 4-1: Number of BAK's products by type
[GRAPHIC OMITTED]
4.2 Proprietary Technology
BAK's products meet or exceed international standards. BAK's Li-ion batteries
have high capacity, low internal resistance, and a safety guarantee that meet or
exceed industry standards. Certificates or approvals the Company has received
include: certificate of Shenzhen Hi-tech enterprise (which lowers the Company's
income tax rate from 33% to 15%, allows for certain government grants, and
access to land for a nominal price); EU's CE attestation; UL authentication;
ISO9001: 2000 quality management system certification of the ZJQC; ISO4001: 1996
environmental management system certification of ZJQC; and certificates from the
major cell phone manufacturers of China, including China Saibao; Xiaxin; Datang;
Konka; Tianyu; and Tianshida. [*****].
BAK's battery has a higher discharge voltage so that it can provide a longer
talking time on a mobile phone. BAK's products are charged or discharged at 1.0C
(i.e., the discharge current is set to release all the battery energy in exactly
1 hour), and the discharge time is more than 48 minutes above 3.6V (the
remaining energy is released below 3.6V), much higher than the normal standard
(38-40 minutes); with the same capacity, BAK's battery can therefore provide a
longer talking time on a mobile phone.
Other key features of the Company's batteries include:
High rate capability means that BAK's batteries are capable of discharging at
high currents. 1.0c (means discharge all the energy for 1 hour) discharge
capacity can reach more than 98% that of 0.2C (discharge all the energy for 5
hours), which far surpasses the 85% Chinese National standard. Thus, BAK's
products can insure a much longer duration when making battery phone calls. This
has particular significance for cellular phones with color screens, which have a
high demand on the battery's continuous discharge voltage.
Good performance at lower temperatures(pound)(0)BAK's Li-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.
4.3 Post-sale service
BAK has three strategic policies for sales and service.
1. BAK has built a sales and service network to cover all the coastal cities in
China, and also has branches in Beijing, Shanghai, Ningbo, Huizhou, Fuzhou, and
Guangzhou.
2. BAK's service capabilities include 24-hour customer response.
3. BAK has arranged for liability coverage with AIU, a China subsidiary of the
international insurance company AIG. AIU provides coverage for BAK's products in
the areas of personal injury, death and property loss, minimizing potential
customer losses.
4.4 Suppliers
The Company has 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). The main components of Li-ion batteries are the
cathode, anode, separator, and electrolyte. 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 the quality is very good. The table below
describes the key sources of the Company's key materials. There are a few sole
suppliers for some materials.
Table 4-2: Details of 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
------ ------------------- -----------------------------------------------------
Table 4-3: Details of 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 Qiangtian Industrial
Co. ,Ltd.
------ ---------------------------------- --------------------------------------
9 Testing and sorting equipment Guangzhou Qiangtian Industrial
Co.,Ltd.
------ ---------------------------------- --------------------------------------
PART 5: SALES AND MARKETING
5.1 Marketing strategies
[*****].
5.2 BAK's current market. As discussed above, the Company has built a sales
network based on coastal cities in China. BAK products have also been exported
to US, Canada, South Africa, Japan, Singapore, Taiwan, and Hong Kong. From 2001
to 2003, BAK's annual sales have grown from $3 million to $64 million, and
[*****].
5.3 Customers. BAK's 30 major clients account for 85% of sales, predominantly in
China. At present, the bulk of sales are into the replacement cell phone battery
market.
[*****].
Table 5-2: Domestic vs. international sales mix
[GRAPHIC OMITTED]
Over the past three years, the Company has developed a close strategic alliance
with current key customers, [*****]. As noted previously, BAK has obtained the
approval from Saibao, Konka, Tianyu, Tianshida, Datang, and is seeking approval
from the top international mobile phone manufacturers [*****].
5.4 Potential market opportunities
[*****].
PART 6: STRATEGIC ANALYSIS
6.1 SWOT Analysis
[*****].
Product substitution: Worldwide, particularly Japan, companies are accelerating
research in new energy storage. A particularly hot area of research is in fuel
cells and it may impact the Li-ion battery market.
At the Portable Power Conference and Expo in San Francisco in February 2004,
Xxxxxx Xxxxx of Sony stated that if the cost of fuel cells can be reduced
further, fuel cells are expected as a next potential portable power source in
the coming 4-5 years. However, he also pointed out that the fuel cell could only
be optimally deployed in connection with a Li-ion battery. The company believes
the commercial viability of fuel cells as a replacement for Li-ion batteries is
at least 10 years away.
China government economic control slows market growth: The 3rd calendar quarter
of the year has traditionally been the best sales quarter, but the main domestic
cell phone manufacturers reduced output because of an economic slowdown caused
by the Chinese government's tightening of monetary policy. As a result, BAK
couldn't make full use of its capacity for the past six months and profits this
year been reduced as a result. Although the company's revenue grew by 216% last
year, the company believes its revenue would have been greater without the
Government's tightening policy. Prior experience leads management to believe
that the Chinese government will change its policies in the near term.
6.2 Competitive analysis
[*****].
6.3 Strategic Plan
[*****].
6.4 Risks related to doing business in China
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. There can be no assurance that growth of the Chinese economy
will be steady or that any downturn will not have a negative effect on our
business. Our profitability will decrease if expenditures for wireless
value-added services decrease due to a downturn in the Chinese economy. More
specifically, increased penetration of wireless value-added services in the less
economically developed central and western provinces of China will depend on
those provinces achieving certain income levels so that mobile phones and
related services become affordable to a significant portion of the population.
The Uncertain Legal Environment In China Could Limit The Legal Protections
Available To Investors.
The Chinese legal system is a civil law system based on written statutes. Unlike
common law systems, it is a system in which decided legal cases have little
precedential value. In the late 1970s, the Chinese government began to
promulgate a comprehensive system of laws and regulations governing economic
matters. The overall effect of legislation enacted over the past 20 years has
significantly enhanced the protections afforded to foreign invested enterprises
in China. However, these laws, regulations and legal requirements are relatively
recent and are evolving rapidly, and their interpretation and enforcement
involve uncertainties. These uncertainties could limit the legal protections
available to foreign investors, such as the right of foreign invested
enterprises to hold licenses and permits such as requisite business licenses.
Any Recurrence Of Severe Acute Respiratory Syndrome, Or SARS, Or Another
Widespread Public Health Problem, Could Adversely Affect Our Business And
Results Of 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 or factories, 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 business and results of operations.
Changes In China's Political And Economic Policies Could Harm Our Business.
The economy of China has historically been a planned economy subject to
governmental plans and quotas and has, in certain aspects, been transitioning to
a more market-oriented economy. 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, we cannot predict the future
direction of these economic reforms or the effects these measures may have on
our business, financial position or results of operations. 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.
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 account items, including direct
investment and loans, is subject to governmental 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 shares 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.
PART 7: PROPOSED EQUITY PLAN
7.1 The transaction
Before December 31, 2004, the Company plans to raise $17 million of common
stock, simultaneously close a reverse merger, and begin trading on the Over the
Counter Bulletin Board ("OTCBB"). As part of a proposed $17 million equity
financing, BAK will escrow 10% of their post merger and financing stock, to be
used as compensation for investors if the Company fails to deliver the projected
profit. The Company has guaranteed $12 million of Net Income ("NI") for fiscal
2005 (year ending September 30, 2005) and $27 million NI for fiscal 2006 (year
ending September 30, 2006) ("Guaranteed NI"). BAK agrees to put 10% of its
entire post reverse merger and financing stock position in the public company
("Penalty Pool") into escrow at the Closing to satisfy any future shortfall
between final audited numbers ("Audited NI") and the Guaranteed NI. Five
business days after annual fiscal year audits are completed for the periods
ending September 30, 2005 ("Make Good Period 1") and September 30, 2006 ("Make
Good Period 2") the audited numbers will be compared to the Guaranteed NI. In
the event that the Audited NI comes in less than the Guaranteed NI in Make Good
Period 1, 50% of the Penalty Pool will be transferred to the Investors. In the
event that the Audited NI comes in less than the Guaranteed NI in Make Good
Period 2, the remainder of the Penalty Pool (50%) will be transferred to the
Investors. If the Audited NI exceeds Guaranteed NI during each Make Good period,
BAK can immediately take possession of the Penalty Pool portion for that
respective Make Good period.
The public company, within 30 days of the closing of the reverse merger
transaction, will file a registration statement for the purpose of registering
the shares acquired by the investors. Shortly thereafter, the Company will apply
for listing to the NASDAQ and it is anticipated that the Company will list on
the NASDAQ by May 2005. The Company plans to conduct a traditional secondary
stock offering to raise at least $40 million in the second half of 2005.
7.2 Financing and post merger ownership
Upon the closing of the going public transaction and the trading of the
Company's stock on OTCBB, the current stockholders of the Company will have
control of 76.2% of the issued and outstanding common stock of the public
company, leaving 2.8% of the issued and outstanding common stock of the public
company to be held by persons other than the current stockholders of the
company, including the original shareholder of the shell company. The other
21.0% of issued and outstanding common stock of the Public Company will be held
by the new investors.
7.3 Use of funds
Net proceeds from the financing will be used as follows:
1. Invest $4.25 million to expand production capacity. The Company will
spend $4.25 million to build a production line. This line will have
capacity of 100 thousand pieces of laptop batteries per day. The funds
will primarily used to construct workshops, buy equipment and build the
new product line. Assuming a 12/31/04 closing date, the production line
could be put into place by July or August 2005. The capital will used
to buy equipment as follows:
(in mm's) (in mm's)
Item Units Cost/Unit Total
----- --------- -----
Mixer 2 $0.15 $0.30
Coating Machine 1 $1.00 $1.00
Press Machine 1 $1.00 $1.00
Cutting Machine 1 $0.30 $0.30
Rolling Machine 2 $0.32 $0.65
Assembling automated production line $1.00 $1.00
-----
Total $4.25
2. Invest $1.7 million for polymer Li-ion battery and high power battery
research and development. The Company plans to spend part of the
collected capital into the research of new products.
3. $10.05 million will used to support working capital. The increase in
production will impact company's working capital requirements.
7.4 Timetable for capital operation plan and refinancing plan
December 31, 2004: Complete a) $17 million financing b) reverse merger
to trade on OTCBB and c) Company will file a
registration statement, registering investors'
shares;
May 2005: List on NASDAQ;
September 2005: Conduct a traditional secondary stock offering to
raise $40+million.
PART 8: HISTORICAL FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This discussion contains certain "forward-looking statements" which are
inherently subject to risks and uncertainties that may cause actual events to
differ materially from those discussed herein. Factors which may cause such
differences in events include, among other things, our ability to maintain our
relationships with our significant customers; increased global competition;
increases in the prices of, or limitations on the availability of, our primary
raw materials; or a downturn in the cellular industry, upon which we currently
rely for the bulk of our sales revenue, and which is cyclical and dependent on,
among other things, consumer spending, international economic conditions and
regulations and policies regarding international trade. Many of these factors
are beyond our ability to control or predict. Readers are cautioned not to place
undue reliance on these forward-looking statements. We undertake no obligation
to publish revised forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
UNAUDITED STATEMENTS
The financial statements included in this Part 8 are unaudited. The Company has
engaged an auditor and is in the final stages of producing complete audited
statements. These audited statements will be available upon completion, which
will be prior to closing any financing.
EXCHANGE RATE
For the purposes of these discussions, an exchange rate for the Chinese Renminbi
of 8.265 per U.S. dollar was used for all three years.
RESULTS OF OPERATIONS
The past year was resulted in continued strong growth of revenues and profits at
the Company. Despite a decrease in price per unit for the third year in a row,
Revenues more than tripled for our fiscal year ending September 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 cost
reductions. As a result, our net profits still grew over 91%.
2002 2003 2004
-------- -------- --------
Revenues
Steel case cell $ 3,050 $ 19,906 $ 50,750
Aluminum case cell -- 275 13,084
Cylindrical cell -- 86 254
$ 3,050 $ 20,267 $ 64,088
Revenues overall grew 216.2% to $64.09 million in fiscal year 2004, driven
primarily by growth in the aluminum case segment, and to a lesser extent, our
traditional steel case segment. Our traditional steel case business grew 154.9%
to $50.75 million, while 2004 aluminum case revenue grew to $13.08 million, 47
times 2003 revenue. In its second year of sales, the cylindrical business
tripled in size to $254 thousand.
[****]
Following industry trends, unit prices declined across all segments, including
12.4% for steel case and 21.9% for aluminum case. The Company has been able to
more efficiently source its raw materials and also is improving production
efficiencies, especially as it now consolidates its plants into BAK industrial
park.
[****]
Gross income grew from $5.69 million to $14.46 million, a 153.9% increase. Gross
income grew slower than revenues because unit prices continued to decrease (as
discussed above) while unit costs fell for steel case cells, but rose in the
aluminum case and cylindrical cell segments. Prior to 2004, the Company sold its
products primarily into the replacement battery market (as opposed to the OEM
market). The products in the replacement market face lower prices and
consequently, lower gross profit margins. This should change as the company
moves into the OEM segment (see the notes to projections).
[****]
While steel case cell unit costs were down 5.5% in 2004, aluminum case cells
were up 10.5% and cylindrical were up 39.2%. The primary reason why the unit
cost of aluminum case cells increased in 2004 compared to 2003 was an increase
in the price of cobalt, a critical ingredient. A second, less significant impact
on prices was an increase in the price of aluminum. The Company added more
process controls in 2004 and longer term expects to reduce costs by increasing
yields and reducing materials usage.
Unit costs of cylindrical cells were up in 2004 compared to 2003, but the tiny
volume of cylindrical cells produced in 2003 does not make any changes in 2004
very meaningful.
Selling expense grew to $1.87 million in 2004, or 2.9% of revenues, up from $.44
million or 2.2% of revenues in 2003 and 0.5% of revenues in 2002. Selling
expense consists of advertising, marketing, exposition costs, sales personnel
salaries, certain employee costs and certain transportation costs. The increase
in these expenses as a percentage of revenues in the past two years is because
the Company began a formal marketing program. Prior to 2003, the Company did no
marketing or advertising.
General and administrative expense grew to $3.96 million in 2004, or 6.2% of
revenues, compared to $1.36 million or 6.7% of revenues in 2003, and down from
7.0% of revenues in 2002. General and administrative expense consists of
research and development costs, salaries, benefits and office expenses. Certain
redundant expenses are expected go away after the Company consolidates its six
separate factories into the new BAK Industrial Park.
Interest expense grew to $1.01 million in 2004, or 1.6% of revenues, up from
$.12 million or 0.6% of revenues in 2003 and 0.0% of revenues in 2002. Interest
expense consists primarily of interest expense, and, to a lesser extent, bank
service charges, exchange gains or losses and credit enhancement fees on the
Company's debt.
As a result, operating profit grew from $3.76 million in 2003 to $7.62 million
in 2004, despite the operating margin decreasing from [*****].
Income taxes were $.39 million in 2004, for an effective tax rate of 5.1%,
compared to $0 in 2003 and 2002. Because the Company is located in the Shenzhen
Special Enterprise Zone, it receives favorable tax treatment. The Company paid
no income tax during the first two years of operation, and then half the
standard tax, or 7.5%, during the next three years. The reason for the
difference between the 7.5% tax rate and the 5.1% reported in 2004 is that the
income tax is applied on a calendar year basis, and the company's data reported
here is on a September 30 fiscal year basis.
2004 net income was $7.23 million, up 92% from $3.76 million in 2003, which was
up from $.72 million in 2002.
DIVIDENDS
In determining to pay dividends, the Board considers current profitability, the
outlook for longer-term profitability, known and potential cash requirements and
the overall financial condition of the Company. To date, the Company has not
paid any dividends.
PROPERTY, PLANT AND EQUIPMENT
The Company's historical capital expenditures are listed in the table below:
2002 2003 2004 Total
-------- -------- -------- --------
(in $000)
Fixed Asset Expenditures
Plant -- -- 4,586.7 4,586.7
Equipment 739.6 3,662.5 10,126.3 14,528.5
Office facility 66.5 23.5 214.1 304.1
Vehicles 67.9 274.1 143.4 485.3
Total Fixed Asset Expenditures 874.0 3,960.1 15,070.6 19,904.6
Construction Expenditures -- 556.2 17,056.1 17,612.4
Depreciation expense consisted of $.265 million in 2002, $.379 million in 2003
and $1.711 million in 2004 and is included in cost of goods sold on the income
statement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's holdings in cash and cash equivalents amounted to $11.52 million
at September 30, 2004, an increase of $10.03 million compared to the end of
2003. Accounts receivable balances increased $13.33 million to $20.29 million,
reflecting the strong increase in revenues. Inventory levels at the end of
fiscal 2004 were $30.30 million, an increase of $22.24 million, which was
somewhat higher than the revenue growth rate. There is some seasonality to the
business, which the Company believes is the reason for the inventory growth in
2004. May through August is the slower period for Li-ion battery industry sales
in China, while September through March are the peak selling months. During the
slower May through August period in 2004 the Company built its inventory in
anticipation of the peak selling period.
Short Term Loans. The Company has incurred the debt primarily to support
construction of its new infrastructure and manufacturing capacity at BAK
Industrial Park. The table below outlines these borrowings. Management believes
that the maturities of these notes can be extended, and will be rolled into
longer term facilities upon completion of construction.
----------------------------- ------------- ------------------- ----------------
Amount
Institution ($mm) Interest Rate Maturity Date
----------------------------- ------------- ------------------- ----------------
China Agriculture Bank $ 2.42 4.59% 4/10/2005
----------------------------- ------------- ------------------- ----------------
China Agriculture Bank $ 2.18 4.59% 4/8/2005
----------------------------- ------------- ------------------- ----------------
China Agriculture Bank $ 1.82 4.54% 12/7/2004
----------------------------- ------------- ------------------- ----------------
China Agriculture Bank $ 0.60 4.54% 11/28/2004
----------------------------- ------------- ------------------- ----------------
China Agriculture Bank $ 1.21 4.54% 12/2/2004
----------------------------- ------------- ------------------- ----------------
China Agriculture Bank $ 1.34 4.59% 3/29/2005
----------------------------- ------------- ------------------- ----------------
China Agriculture Bank $ 2.54 4.59% 3/30/2005
----------------------------- ------------- ------------------- ----------------
Shenzhen Development Bank $ 12.10 5.84% 4/1/2005
----------------------------- ------------- ------------------- ----------------
Xingye Bank $ 2.42 5.31% 3/11/2005
----------------------------- ------------- ------------------- ----------------
Mingsheng Bank $ 2.54 5.84% 1/14/2005
----------------------------- ------------- ------------------- ----------------
Total $ 29.16
----------------------------- ------------- ------------------- ----------------
Notes Payable. These are numerous smaller notes totaling $20.80 million at
9/30/04 and are from China Agriculture Bank and Shenzhen Development Bank.
Income Statement ($)
------------------------------------------- ------------ ------------ ----------
Item FY 2004 FY 2003 FY 2002
------------------------------------------- ------------ ------------ ----------
Revenues 64,088,286 20,266,590 3,050,158
------------------------------------------- ------------ ------------ ----------
less: cost of goods sold 49,630,238 14,571,849 2,513,633
------------------------------------------- ------------ ------------ ----------
Gross Income 14,458,048 5,694,741 536,525
------------------------------------------- ------------ ------------ ----------
plus: other income - - 411,570
------------------------------------------- ------------ ------------ ----------
less: selling expense 1,871,987 442,753 15,984
------------------------------------------- ------------ ------------ ----------
general and administrative expense 3,957,232 1,362,443 214,097
------------------------------------------- ------------ ------------ ----------
interest expense 1,007,516 122,976 -637
------------------------------------------- ------------ ------------ ----------
Operating profit 7,621,313 3,766,569 718,651
------------------------------------------- ------------ ------------ ----------
plus: investment income - - -
------------------------------------------- ------------ ------------ ----------
other income - - 1,281
------------------------------------------- ------------ ------------ ----------
less: other expenses 2,919 1,318 220
------------------------------------------- ------------ ------------ ----------
Pretax Income 7,618,394 3,765,252 719,712
------------------------------------------- ------------ ------------ ----------
less: income tax 391,965 - -
------------------------------------------- ------------ ------------ ----------
Net Income 7,226,429 3,765,252 719,712
------------------------------------------- ------------ ------------ ----------
Income Statement (%)
------------------------------------------- ----------- ----------- ------------
Item FY 2004 FY 2003 FY 2002
------------------------------------------- ----------- ----------- ------------
Revenues 100.0% 100.0% 100.0%
------------------------------------------- ----------- ----------- ------------
less: cost of goods sold 77.4% 71.9% 82.4%
------------------------------------------- ----------- ----------- ------------
Gross Income 22.6% 28.1% 17.6%
------------------------------------------- ----------- ----------- ------------
plus: other income 13.5%
------------------------------------------- ----------- ----------- ------------
less: selling expense 2.9% 2.2% 0.5%
------------------------------------------- ----------- ----------- ------------
general and administrative expense 6.2% 6.7% 7.0%
------------------------------------------- ----------- ----------- ------------
interest expense 1.6% 0.6% 0.0%
------------------------------------------- ----------- ----------- ------------
Operating profit 11.9% 18.6% 23.6%
------------------------------------------- ----------- ----------- ------------
plus: investment income
------------------------------------------- ----------- ----------- ------------
other income 0.0%
------------------------------------------- ----------- ----------- ------------
less: other expenses 0.0% 0.0% 0.0%
------------------------------------------- ----------- ----------- ------------
Pretax Income 11.9% 18.6% 23.6%
------------------------------------------- ----------- ----------- ------------
less: income tax 0.6%
------------------------------------------- ----------- ----------- ------------
Net Income 11.3% 18.6% 23.6%
------------------------------------------- ----------- ----------- ------------
Balance Sheet
-------------------------------------- ---------- ----------- ------------
Assets 9/30/2002 9/30/2003 9/30/2004
-------------------------------------- ---------- ----------- ------------
Current Assets:
-------------------------------------- ---------- ----------- ------------
Cash on hand & in bank 93,148 1,493,800 11,527,192
-------------------------------------- ---------- ----------- ------------
Short term investment
-------------------------------------- ---------- ----------- ------------
Notes receivable 18,149
-------------------------------------- ---------- ----------- ------------
Interest receivable
-------------------------------------- ---------- ----------- ------------
Accounts receivable 1,346,747 6,960,192 20,291,847
-------------------------------------- ---------- ----------- ------------
Other receivable 405,166
-------------------------------------- ---------- ----------- ------------
Prepaid Expenses 211,359 725,906 1,332,593
-------------------------------------- ---------- ----------- ------------
Inventory 1,087,288 8,057,998 30,295,414
-------------------------------------- ---------- ----------- ------------
Total current assets 3,143,708 17,237,896 63,465,194
-------------------------------------- ---------- ----------- ------------
-------------------------------------- ---------- ----------- ------------
Fixed assets:
-------------------------------------- ---------- ----------- ------------
Original cost of the fixed assets 874,017 4,834,088 19,904,680
-------------------------------------- ---------- ----------- ------------
minus: Accumulated depreciation 265,129 644,558 2,374,245
-------------------------------------- ---------- ----------- ------------
Net Fixed Assets 608,888 4,189,530 17,530,436
-------------------------------------- ---------- ----------- ------------
-------------------------------------- ---------- ----------- ------------
Construction in process - 556,207 17,612,372
-------------------------------------- ---------- ----------- ------------
Disposal of fixed assets
-------------------------------------- ---------- ----------- ------------
Total fixed assets 608,888 4,745,737 35,142,808
-------------------------------------- ---------- ----------- ------------
Intangible and other assets:
-------------------------------------- ---------- ----------- ------------
Intangible assets - 16,650 3,050,545
-------------------------------------- ---------- ----------- ------------
Deposits - 141,923
-------------------------------------- ---------- ----------- ------------
Other long term assets 26,104
-------------------------------------- ---------- ----------- ------------
Accounts Receivable--Related Party 866,693 1,509,712
-------------------------------------- ---------- ----------- ------------
Total intangible and other assets 26,104 1,025,266 4,560,257
-------------------------------------- ---------- ----------- ------------
Total assets 3,778,700 23,008,899 103,168,259
-------------------------------------- ---------- ----------- ------------
-------------------------------------- ---------- ----------- ------------
Liabilities and
shareholders' equity 9/30/2002 9/30/2003 9/30/2004
-------------------------------------- ---------- ----------- ------------
Current Liabilities
-------------------------------------- ---------- ----------- ------------
Short term loan 362,976 3,484,574 29,159,105
-------------------------------------- ---------- ----------- ------------
Notes payable 6,107,418 20,802,970
-------------------------------------- ---------- ----------- ------------
Accounts payable 418,360 5,172,150 23,604,590
-------------------------------------- ---------- ----------- ------------
Salary payable
-------------------------------------- ---------- ----------- ------------
Welfare payable
-------------------------------------- ---------- ----------- ------------
Accrued expenses 1,067,731 1,785,362 5,252,400
-------------------------------------- ---------- ----------- ------------
Customer Deposits 656,350 369,931
-------------------------------------- ---------- ----------- ------------
Other fee
-------------------------------------- ---------- ----------- ------------
Other current liabilities
-------------------------------------- ---------- ----------- ------------
Total current liabilities 1,849,067 17,205,854 79,188,997
-------------------------------------- ---------- ----------- ------------
Long term liabilities:
-------------------------------------- ---------- ----------- ------------
Long term accounts payable
-------------------------------------- ---------- ----------- ------------
Notes payable, due after 1 year 120,992 181,488
-------------------------------------- ---------- ----------- ------------
Other long term liability
-------------------------------------- ---------- ----------- ------------
Total long term liability 120,992 181,488
-------------------------------------- ---------- ----------- ------------
Deferred tax:
-------------------------------------- ---------- ----------- ------------
Debit balance of deferred
tax
-------------------------------------- ---------- ----------- ------------
Total liabilities 1,849,067 17,326,846 79,370,485
-------------------------------------- ---------- ----------- ------------
-------------------------------------- ---------- ----------- ------------
Shareholders' equity:
-------------------------------------- ---------- ----------- ------------
Capital stock 1,209,921 1,209,921 12,099,214
-------------------------------------- ---------- ----------- ------------
Paid in capital
-------------------------------------- ---------- ----------- ------------
Retained earnings 719,712 4,472,132 11,698,560
-------------------------------------- ---------- ----------- ------------
Total shareholders' equity 1,929,633 5,682,053 23,797,774
-------------------------------------- ---------- ----------- ------------
Liabilities and 3,778,700 23,008,899 103,168,259
shareholders' equity
-------------------------------------- ---------- ----------- ------------
PART 9: PROJECTED FINANCIAL INFORMATION
DISCLAIMER
This document contains statements about future events and expectations which are
characterized as forward-looking statements. Forward-looking statements are
based upon management's beliefs, assumptions and expectations of the Business'
future economic performance, taking into account the information currently
available to them. These statements are not statements of historical fact.
Forward-looking statements involve risks and uncertainties that may cause actual
results, performance or financial condition to be materially different from the
expectations of future results, performance or financial condition we express or
imply in any forward-looking statements. Factors that could contribute to these
differences include those discussed in other sections of this document (See
"Forward Looking Statements" in Part 8).
The words believe, may, will, should, anticipate, estimate, expect, intends,
objective or similar words or the negatives of these words are intended to
identify forward-looking statements. Any forward-looking statements are hereby
qualified entirely by these cautionary factors.
EXCHANGE RATE
For the purposes of these discussions, an exchange rate for the Chinese Renminbi
of 8.265 per U.S. dollar was used for all years.
[*****].
