SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form SB - 2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
MEDINA COFFEE, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0442833
(State or other jurisdiction (IRS Employer incorporation or
of organization) identification No.)
3692
(Primary Standard Industrial
Classification Code Number)
BAK Industrial Park, No. 1 BAK Street
Kuichong Town, Longgang District
Shenzhen
People's Republic of China
Ph: (86-755) 8977-0093
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Nevada Agency and Trust Company
50 West Liberty Street, Suite 880
Reno, Nevada 89501
Ph: (775) 322-5623
--------------------------------------------------------
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With copy to:
George L. Diamond
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Phone: (214) 953-6000
Facsimile: (214) 953-5822
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement. [_]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [_]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
CALCULATION OF REGISTRATION FEE
Title of each
Class Proposed Maximum Proposed Amount of
of Securities Amount to be Offering Price Maximum Aggregate Registration
to be registered Registered per share (1) Offering Price Fee
---------------- ------------- ---------------- ----------------- ------------
Common Stock 9,934,762 $3.71 $36,857,967 $4,338.18
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said section 8(a), may determine.
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933. On January 18,
2004, the average of the high and low sales price for the common stock
as reported on the OTC Bulletin Board was $3.71.
SUBJECT TO COMPLETION DATED JANUARY 21, 2005
9,934,762 Shares
MEDINA COFFEE, INC.
Common Stock
---------------------------
This is an offering of 9,934,762 shares of common stock by the selling
stockholders. The shares are being registered to permit public secondary trading
of the shares that are being offered by the selling stockholders named in this
prospectus. We will not receive any of the proceeds from the sale of the shares.
The selling stockholders may, but are not obligated to, offer all or
part of their shares for resale from time to time through public or private
transactions, at either prevailing market prices or at privately negotiated
prices.
Our common stock is currently quoted on the NASD's Over-the-Counter
Bulletin Board under the symbol "MCFF." On January 19, 2005, the last reported
sales price on our common stock was $5.00 per share.
Investing in our common stock involves risks. See "Risk Factors"
beginning on page 7 to read about factors you should consider before buying
shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ________________.
---------------------------
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this document or
any other document to which we refer you. Neither we nor the selling
stockholders have authorized anyone to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. Neither we nor the selling stockholders are making an offer to
sell these securities in a jurisdiction where the offer or sale is not
permitted. The information contained in this document is current only as of its
date, regardless of the time of delivery of this prospectus or of any sales of
shares of common stock. Our business, financial condition, results of operations
and prospects may have changed since that date.
The information in this prospectus is not complete and may be changed.
The selling stockholders may not sell the securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS..............................3
PROSPECTUS SUMMARY.............................................................4
MEDINA COFFEE, INC.............................................................4
THE OFFERING...................................................................6
RISK FACTORS...................................................................7
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND DIVIDEND POLICY.....16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION.....................17
BUSINESS......................................................................26
DIRECTORS AND EXECUTIVE OFFICERS..............................................32
PRINCIPAL STOCKHOLDERS........................................................34
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS..........................35
DESCRIPTION OF OUR CAPITAL STOCK..............................................35
SELLING STOCKHOLDERS..........................................................36
SHARES ELIGIBLE FOR FUTURE SALE...............................................38
PLAN OF DISTRIBUTION..........................................................39
INDEPENDENT PUBLIC ACCOUNTANTS................................................40
LEGAL MATTERS.................................................................40
EXPERTS.......................................................................40
INTERESTS OF NAMED EXPERTS AND COUNSEL........................................40
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES.................................................................40
WHERE YOU CAN FIND MORE INFORMATION...........................................40
PART II.....................................................................II-1
INFORMATION NOT REQUIRED IN PROSPECTUS......................................II-1
RECENT SALES OF UNREGISTERED SECURITIES.....................................II-1
EXHIBITS....................................................................II-2
UNDERTAKINGS................................................................II-4
SIGNATURES..................................................................II-5
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks
and uncertainties. These statements relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "could," "expect," "plan,"
"intend," "anticipate," "believe," "estimate," "predict," "potential," or
"continue," or the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks outlined in the "Risk Factors" section beginning on
page 7 in this prospectus. These factors may cause our actual results to differ
materially from any forward-looking statement.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We are under no duty to update
any of the forward-looking statements after the date of this prospectus to
conform such statements to actual results or to changes in our expectations.
3
PROSPECTUS SUMMARY
This summary highlights selected information about us and the offering
that is contained elsewhere in this prospectus. You should read the entire
prospectus before making an investment decision, especially the information
presented under the heading "Risk Factors" on page 7 and the financial
statements and related notes included elsewhere in this prospectus, as well as
the other documents to which we refer you. Except as otherwise indicated by the
context, references in this prospectus to "we," "us," or "our" are to the
combined business of Medina Coffee, Inc. ("Medina") and its wholly-owned direct
subsidiary, BAK International, Ltd. ("BAK International") and its wholly-owned
subsidiary, Shenzhen BAK Battery Co., Ltd. ("BAK Battery") and in each case do
not include the selling stockholders. References to "China" or to the "PRC" are
references to the People's Republic of China.
MEDINA COFFEE, INC.
Our Business
Medina Coffee, Inc. is a holding company whose China-based
subsidiaries, BAK International and BAK Battery, are focused on the manufacture,
commercialization and distribution of a wide variety of standard and customized
lithium ion rechargeable batteries for use in a wide array of applications. We
also have internal research and development facilities engaged primarily in
furthering lithium ion related technologies. We believe that our technologies
allow us to offer batteries that are flexibly configured, lightweight and
generally achieve longer operating time than many competing batteries currently
available. We have focused on manufacturing a family of replacement lithium
batteries for mobile phones. We also supply rechargeable lithium ion batteries,
and expect to begin supplying lithium polymer batteries in February 2005, for
use in various other portable electronic applications, including high-power
handset telephones, laptop computers, digital cameras and video camcorders,
MP3's, electric bicycles and general industrial applications.
We manufacture three types of batteries: steel cell, aluminum cell and
cylindrical cell. We deliver our products to packing plants operated by third
parties where the bare cells are packed in accordance with specifications
established by certain manufacturers of mobile phones and other electronic
products. We operate sales and service branches in six principal coastal cities
and Beijing in the PRC. The majority of our income is generated from the sale of
steel cells. However, we believe there is growth potential for aluminum and
cylindrical cells because of their wide applications. Our current growth
strategy includes entering into the original equipment manufacture, or OEM,
battery market for top mobile phone brands, portable electronic appliances and
electric bicycles worldwide. We are also developing a program for producing
lithium polymer battery cells, which we expect to roll out in February 2005, as
well as high power lithium ion battery cells, which will allow us inroads into
additional battery markets such as those for electric bicycles, power tools and
hybrid electric vehicles.
Our recent business activities include:
o In June 2002 we began operations with initial monthly output of
approximately 220,000 units.
o We received government authorization in October 2002 to establish a
Postdoctoral Workstation, the establishment of which serves as
recognition by the PRC government of the strong capabilities of our
in-house research team. With our research and development facilities we
are focusing our research efforts on liquid lithium ion batteries, high
power lithium ion batteries, solid polymer lithium ion batteries, and
cylindrical and rectangular lithium ion batteries.
o In March 2003 our steel case battery plant started operations with
monthly output reaching approximately 2.4 million units. Our current
monthly output of steel case batteries is approximately 7.7 million
units.
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o In September 2003 we were granted International Organization for
Standardization 14001: 1996, an environmental management system
certification, as well as International Organization for
Standardization 9001: 2000, a quality management system certification,
by Beijing Zhonjing Quality Certification Co., Ltd, an independent
third pary which issues such standardization certificions.
o As of September 2004, our total monthly capacity for all battery types
was approximately 11.8 million units. Our ability to grow our
manufacturing capacity is primarily due to the development and
expansion of semi-automated manufacturing lines requiring less labor
efforts when compared to previous more labor intensive manufacturing
processes.
o As of September 2004, we established a sales and service network to
cover six principal coastal cities and Beijing in the PRC.
Our Corporate Information
We originally began operations as a Nevada corporation known as Medina
Copy, Inc. We were incorporated in Nevada on October 4, 1999 and subsequently
changed our name to Medina Coffee, Inc., or Medina, on October 6, 1999. Medina
commenced operations on December 1, 2002 and was considered a development stage
company. Medina was formed originally for the purpose of building a retail
specialty coffee business that sold specialty coffee and espresso drinks through
company owned and operated espresso carts. Medina incurred operating losses
since its inception and therefore looked to combine with a privately-held
company that was profitable or that management considered to have growth
potential.
On January 20, 2005 we completed a stock exchange transaction with the
stockholders of BAK International, Ltd., a Hong Kong company, or BAK
International. The exchange was consummated under Nevada law pursuant to the
terms of a Securities Exchange Agreement dated effective as of January 20, 2005
by and among Medina, BAK International and the stockholders of BAK
International. Pursuant to the Securities Exchange Agreement, we issued
39,826,075 shares of our common stock, par value $0.001 per share, to the
stockholders of BAK International, representing approximately 97.2% of our
post-exchange issued and outstanding common stock, in exchange for 100% of the
outstanding capital stock of BAK International. We presently carry on the
business of Shenzhen BAK Battery Co., Ltd., a Chinese corporation and BAK
International's wholly-owned subsidiary ("BAK Battery").
Our corporate headquarters is located at BAK Industrial Park, No. 1 BAK
Street, Kuichong Town, Longgang District, Shenzhen, People's Republic of China.
Our telephone number is (86-755) 8977-0093.
5
THE OFFERING
Common stock outstanding prior to this offering........... 40,978,533 shares
Common stock offered by us................................ 0 shares
Common stock offered by the selling stockholders.......... 9,934,762 shares
Total shares of common stock offered...................... 9,934,762 shares
Common stock to be outstanding after the offering......... 40,978,533 shares
Risk factors.............................................. See "Risk Factors"
and other
information included
in this prospectus
for a discussion of
factors you should
consider before
deciding to invest
in shares of our
common stock.
6
RISK FACTORS
An investment in our securities involves a high degree of risk. You
should carefully consider the following risks and the other information set
forth elsewhere in this prospectus, including our financial statements and
related notes, before you decide to purchase shares of our common stock. If any
of these risks occur, our business, financial condition and results of
operations could be adversely affected. As a result, the trading price of our
common stock could decline, perhaps significantly, and you could lose part or
all of your investment.
Risks Related to Our Business
The rechargeable battery business is highly competitive.
We are subject to competition from manufacturers of traditional
rechargeable batteries, such as nickel-cadmium batteries, from manufacturers of
rechargeable batteries of more recent technologies, such as nickel-metal hydride
and liquid electrolyte, as well as from companies engaged in the development of
batteries incorporating new technologies. Other manufacturers of lithium ion
batteries currently include Sanyo Electric Co., Sony Corp., Matsushita Electric
Industrial Co., Ltd. (Panasonic), GS Group, NEC Corporation, Hitachi Ltd., LG
Chemical Ltd., Samsung Electronics Co., Ltd., BYD Co. Ltd., Tianjin Lishen
Battery Joint-Stock Co., Ltd., Henan Huanyu Group and Harbin Coslight Technology
International Group Co., Ltd.
Many companies with substantially greater resources are developing a
variety of battery technologies, such as lithium polymer and fuel cell
batteries, which are expected to compete with our existing product lines
technology. Other companies undertaking research and development activities of
solid-polymer batteries have already developed prototypes and are constructing
commercial scale production facilities. If these companies successfully market
their batteries before the introduction of our products, there could be a
material adverse effect on our business, financial condition and results of
operations.
We depend on continued demand for our products.
A substantial portion of our business depends on the continued demand
for those products that use lithium ion batteries, which in turn cause demand
for our products. Therefore, our success depends significantly upon the success
of those products in the marketplace. We are subject to many risks beyond our
control that influence the success or failure of such products.
Because of the specialized, technical nature of the business, we are highly
dependent on certain members of management, marketing, engineering and technical
staff.
The loss of these services or these members could have a material
adverse effect on our business, financial condition and results of operations.
In addition to developing the manufacturing capacity to produce high volumes of
advanced rechargeable batteries, we must attract, recruit and retain a sizeable
workforce of technically competent employees. Our ability to pursue effectively
our business strategy will depend upon, among other factors, the successful
recruitment and retention of additional highly skilled and experienced
managerial, marketing, engineering and technical personnel. We cannot assure
that we will be able to retain this type of personnel.
Rapid growth of our battery business could significantly strain management,
operations and technical resources.
If we are successful in obtaining rapid market growth of our batteries,
we will be required to deliver large volumes of quality products to customers on
a timely basis at a reasonable cost to those customers. Such demand can also
7
create working capital issues for us, as we need increased liquidity to fund
purchases of raw materials and supplies. We cannot assure, however, that
business will rapidly grow or that our efforts to expand manufacturing and
quality control activities will be successful or that we will be able to satisfy
commercial scale production requirements on a timely and cost-effective basis.
We will also be required to continue to improve our operations, management and
financial systems and controls. The failure to manage growth effectively could
have an adverse effect on our business, financial condition and results of
operations.
Lithium ion batteries pose certain safety risks that could affect our business.
Due to the high energy density inherent in lithium batteries, our
batteries can pose certain safety risks, including the risk of fire. Although we
incorporate safety procedures in research, development and manufacturing
processes that are designed to minimize safety risks, we cannot assure that
accidents will not occur. Any accident, whether at the manufacturing facilities
or from the use of the products, may result in significant production delays or
claims for damages resulting from injuries. Due to the fact that we have no
product liability insurance, these types of losses could have a material adverse
effect on our business, financial condition and results of operations.
National, state and local laws impose various environmental controls on
the manufacture, storage, use and disposal of lithium batteries and/or of
certain chemicals used in the manufacture of lithium batteries. Although we
believe that our operations are in substantial compliance with current
environmental regulations and that, except as noted below, there are no
environmental conditions that will require material expenditures for clean-up at
the present or former facilities or at facilities to which we send waste for
disposal, there can be no assurance that changes in such laws and regulations
will not impose costly compliance requirements on us or otherwise subject us to
future liabilities. There can be no assurance that additional or modified
regulations relating to the manufacture, transportation, storage, use and
disposal of materials used to manufacture our batteries or restricting disposal
of batteries will not be imposed or how these regulations will affect us or our
customers.
We depend on certain suppliers, and any disruption with those suppliers could
have an adverse affect on our business.
Certain materials used in products are available only from a limited
number of suppliers. Additionally, we may elect to develop relationships with a
single or limited number of suppliers for materials that are otherwise generally
available. We have volume purchase agreements with our major suppliers. Although
we believe that alternative suppliers are available to supply materials that
could replace materials currently used and that, if necessary, we would be able
to redesign our products to make use of such alternatives, any interruption in
the supply from any supplier could delay product shipments and adversely effect
our relationships with our customers.
We cannot control the cost of our raw materials, which may adversely impact our
profit margin and financial position.
Our principal raw materials are liquid electrolyte and lithium cobalt
oxide. The prices for these raw materials are subject to market forces largely
beyond our control, including energy costs, organic chemical feedstocks, market
demand, and freight costs. The prices for these raw materials have varied
significantly, including a significant increase in the year ended September 30,
2004, and may vary significantly in the future. We may not be able to adjust our
product prices, especially in the short term, to recover the costs of increases
in these raw materials. Our future profitability may be adversely affected to
the extent we are unable to pass on higher raw material and energy costs to our
customers.
If we experience customer concentration, we may be exposed to all of the risks
faced by our remaining material customers.
Our largest customer accounts for 13.62% of our revenues for the nine
months ended September 30, 2004. Unless we maintain multiple customer
relationships, it is likely that we will experience periods during which we will
8
be highly dependent on a limited number of customers. Dependence on a few
customers could make it difficult to negotiate attractive prices for our
products and could expose us to the risk of substantial losses if a single
dominant customer stops conducting business with us. Moreover, to the extent
that we are dependent on any single customer, we are subject to the risks faced
by that customer to the extent that such risks impede the customer's ability to
stay in business and make timely payments to us.
Our business is highly dependent upon proprietary technologies.
Our success depends on the knowledge, ability, experience and
technological expertise of our employees and on the legal protection of patents
and other proprietary rights. We claim proprietary rights in various unpatented
technologies, know-how, trade secrets and trademarks relating to products and
manufacturing processes. We cannot guarantee the degree of protection these
various claims may or will afford, or that competitors will not independently
develop or patent technologies that are substantially equivalent or superior to
our technology. We protect our proprietary rights in our products and operations
through contractual obligations, including nondisclosure agreements. There can
be no assurance as to the degree of protection these contractual measures may or
will afford. We have had patents issued and have patent applications pending in
China. We cannot assure (i) that patents will be issued from any pending
applications, or that the claims allowed under any patents will be sufficiently
broad to protect our technology, (ii) that any patents issued to us will not be
challenged, invalidated or circumvented, or (iii) as to the degree or adequacy
of protection any patents or patent applications may or will afford. If we are
found to be infringing third party patents, there can be no assurance that we
will be able to obtain licenses with respect to such patents on acceptable
terms, if at all. The failure to obtain necessary licenses could delay product
shipment or the introduction of new products, and costly attempts to design
around such patents could foreclose the development, manufacture or sale of
products.
We depend on factories to manufacture our products, which may be insufficiently
insured against damage or loss.
We have no direct business operation, other than our ownership of our
subsidiaries located in China, and our results of operations and financial
condition are currently solely dependent on our subsidiaries' factories in
China. We do not currently maintain insurance to protect against damage and loss
to our manufacturing facility, machinery and other leasehold improvements.
Therefore, any material damage to, or the loss of, any of our factories due to
fire, severe weather, flooding or other cause, and such damage or loss would
have a material adverse effect on our financial condition, business and
prospects.
We face risks related to product warranty claims.
We typically offer warranties ranging from six to eight months against
any defects due to product malfunction. We provide for a reserve for this
potential warranty expense, which is based on an analysis of historical warranty
issues. There is no assurance that future warranty claims will be consistent
with past history, and in the event we experience a significant increase in
warranty claims, there is no assurance that the reserves are sufficient. This
could have a material adverse effect on our business, financial condition and
results of operations.
Our holding company structure creates restrictions on the payment of dividends.
We have no direct business operations, other than our ownership of our
subsidiaries. While we have no current intention of paying dividends, should we
decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiaries and other holdings and
investments. In addition, our operating subsidiaries, from time to time, may be
subject to restrictions on their ability to make distributions to us, including
as a result of restrictive covenants in loan agreements, restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
9
regulatory restrictions. If future dividends are paid in Renminbi, fluctuations
in the exchange rate for the conversion of Renminbi into U.S. dollars may
adversely affect the amount received by U.S. stockholders upon conversion of the
dividend payment into U.S. dollars.
Our short term debt obligations may affect our liquidity and capital resources.
As of September 30, 2004 we had approximately U.S. $50 million in short
term loans and notes payable maturing at or prior to September 30, 2005. If we
fail to obtain extensions of the maturity dates of these obligations, our
overall liquidity and capital resources will be adversely affected as a result
of our efforts to satisfy these obligations.
We have not obtained the certificate of land use right for our BAK Industrial
Park.
We have not obtained the certificate of land use right for the property
and facilities located at BAK Industrial Park, No. 1 BAK Street, Kuichong Town,
Longgang District, Shenzhen, People's Republic of China. We are negotiating with
the government regarding this matter. We have paid approximately U.S. $278,000
for construction and area preparation costs. We have, however, been granted
permission to, and have commenced construction of, our new production facility.
Although we anticipate receiving the certificate of land use right, our business
will be materially adversely affected if our application for a certificate of
land use right is not approved, because we could be obligated to vacate the
premises and relocate to new facilities.
Risks Related to Doing Business in China
Our operations are located in China and may be adversely affected by changes in
the political and economic policies of the Chinese
government.
Our business operations may be adversely affected by the political
environment in the PRC. The PRC has operated as a socialist state since 1949 and
is controlled by the Communist Party of China. In recent years, however, the
government has introduced reforms aimed at creating a "socialist market economy"
and policies have been implemented to allow business enterprises greater
autonomy in their operations. Changes in the political leadership of the PRC may
have a significant effect on laws and policies related to the current economic
reforms program, other policies affecting business and the general political,
economic and social environment in the PRC, including the introduction of
measures to control inflation, changes in the rate or method of taxation, the
imposition of additional restrictions on currency conversion and remittances
abroad, and foreign investment. These effects could substantially impair our
business, profits or prospects in China. Moreover, economic reforms and growth
in the PRC have been more successful in certain provinces than in others, and
the continuation or increases of such disparities could affect the political or
social stability of the PRC.
Although we believe that the economic reform and the macroeconomic
measures adopted by the Chinese government have had a positive effect on the
economic development of China, 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, or 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.
10
As a result of these differences, our business may not develop in the same way
or at the same rate as might be expected if the Chinese economy were similar to
those of the OECD member countries.
The Chinese government exerts substantial influence over the manner in which we
must conduct our business activities.
The PRC only recently has permitted provincial and local economic
autonomy and private economic activities. The government of the PRC has
exercised and continues to exercise substantial control over virtually every
sector of the Chinese economy through regulation and state ownership.
Accordingly, government actions in the future, including any decision not to
continue to support recent economic reforms and to return to a more centrally
planned economy or regional or local variations in the implementation of
economic policies, could have a significant effect on economic conditions in the
PRC or particular regions thereof, and could require us to divest ourselves of
any interest we then hold in Chinese properties or joint ventures. Any such
developments could have a material adverse effect on our business, operations,
financial condition and prospects.
In addition, while we do not believe it is a likely event, the Chinese
government may decide not to grant a renewal of BAK Battery's renewable
operating tenure upon its expiration on August 3, 2011. While we believe that
renewing the operating tenure is a simple administrative matter, a failure to
renew BAK Battery's renewable operating tenure could have a material adverse
effect on our business, operations, financial condition and prospects.
The favorable tax treatment in Shenzhen is projected to end in the near future,
which, when effective, will adversely impact our profit margin and results of
operations.
The current tax rate in Shenzhen is 15% of profits. However, Shenzhen
is an economic development zone. As such, the tax rate for foreign invested
enterprises like us is adjusted to promote development. Under the current tax
scheme, foreign invested enterprises do not owe any tax during the first two
years following the time at which they become profitable. For the next following
three years, foreign invested enterprises owe 50% of the current tax rate, or
7.5%. Thereafter, foreign invested enterprises owe the full tax rate, unless
they qualify and apply for other reduced tax programs. Under this format, we
currently pay 7.5%. We will likely begin to pay the 15% mandated maximum on
January 1, 2007. Once this increase becomes effective, our profit margin and
financial position will experience a concordant negative adjustment.
A downturn in the Chinese economy may slow down our growth and profitability.
The growth of the Chinese economy has been uneven across geographic
regions and economic sectors. 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
lithium ion batteries decrease due to a downturn in the Chinese economy.
Future inflation in China may inhibit economic activity in China and adversely
affect our operations.
In recent years, the Chinese economy has experienced periods of rapid
expansion and high rates of inflation which have led to the adoption by the PRC
government, from time to time, of various corrective measures designed to
restrict the availability of credit or regulate growth and contain inflation.
While inflation has moderated since 1995, high inflation may in the future cause
the PRC government to impose controls on credit and/or prices, or to take other
action, which could inhibit economic activity in China, and thereby adversely
affect our business operations and prospects in the PRC.
11
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 Shanghai, where our
operations are headquartered, could have a negative effect on our operations.
Our operations may be impacted by a number of health-related factors, including
the following:
o quarantines or closures of some of our offices which would
severely disrupt our operations,
o the sickness or death of our key officers and employees, and
o a general slowdown in the Chinese economy.
Any of the foregoing events or other unforeseen consequences of public
health problems could adversely affect our business and results of operations.
Restrictions on currency exchange may limit our ability to receive and use our
revenues effectively.
Because almost all of our future revenues may be in the form of
Renminbi, any future restrictions on currency exchanges may limit our ability to
use revenue generated in Renminbi to fund any future business activities outside
China or to make dividend or other payments in U.S. dollars. Although the
Chinese government introduced regulations in 1996 to allow greater
convertibility of the Renminbi for current account transactions, significant
restrictions still remain, including primarily the restriction that
foreign-invested enterprises may only buy, sell or remit foreign currencies,
after providing valid commercial documents, at those banks authorized to conduct
foreign exchange business. In addition, conversion of Renminbi for capital
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 stock or for other business purposes and the U.S. dollar
appreciates against the Renminbi, the U.S. dollar equivalent of our earnings
from our subsidiaries in China would be reduced.
Until 1994, the Renminbi experienced a gradual but significant
devaluation against most major currencies, including U.S. dollars, and there was
a significant devaluation of the Renminbi on January 1, 1994 in connection with
the replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the Renminbi relative to
the U.S. Dollar has remained stable and has appreciated slightly against the
U.S. dollar. Countries, including the U.S., have argued that the Renminbi is
artificially undervalued due to China's current monetary policies and have
pressured China to allow the Renminbi to float freely in world markets.
If any devaluation of the Renminbi were to occur in the future, our
returns on our operations in China, which are expected to be in the form of
Renminbi, will be negatively affected upon conversion to U.S. dollars. Although
we attempt to have most future payments, mainly repayments of loans and capital
contributions, denominated in U.S. dollars, if any increase in the value of the
Renminbi were to occur in the future, our products sales in China and in other
countries may be negatively affected.
12
We may be unable to enforce our rights due to policies regarding the regulation
of foreign investments in China.
The PRC's legal system is a civil law system based on written statutes
in which decided legal cases have little value as precedents, unlike the common
law system prevalent in the United States. The PRC does not have a
well-developed, consolidated body of laws governing foreign investment
enterprises. As a result, the administration of laws and regulations by
government agencies may be subject to considerable discretion and variation, and
may be subject to influence by external forces unrelated to the legal merits of
a particular matter. China's regulations and policies with respect to foreign
investments are evolving. Definitive regulations and policies with respect to
such matters as the permissible percentage of foreign investment and permissible
rates of equity returns have not yet been published. Statements regarding these
evolving policies have been conflicting and any such policies, as administered,
are likely to be subject to broad interpretation and discretion and to be
modified, perhaps on a case-by-case basis. The uncertainties regarding such
regulations and policies present risks which may affect our ability to achieve
our business objectives. We cannot assure you that we will be able to enforce
any legal rights we may have under our contracts or otherwise. Our failure to
enforce our legal rights may have a material adverse impact on our operations
and financial position, as well as our ability to compete with other companies
in our industry.
It may be difficult for stockholders to enforce any judgment obtained in the
United States against us, which may limit the remedies otherwise available to
our stockholders.
Substantially all of our assets are located outside the United States.
Almost all of our current operations are conducted in China. Moreover, all of
our directors and officers are nationals or residents of China. All or a
substantial portion of the assets of these persons are located outside the
United States. As a result, it may be difficult for shareholders to effect
service of process within the United States upon these persons. In addition,
there is uncertainty as to whether the courts of China would recognize or
enforce judgments of United States courts obtained against us or such officers
and/or directors predicated upon the civil liability provisions of the
securities law of the United States or any state thereof, or be competent to
hear original actions brought in China against us or such persons predicated
upon the securities laws of the United States or any state thereof.
Risks Related to our Common Stock
The market price for our common stock may be volatile.
The market price for our common stock is likely to be highly volatile
and subject to wide fluctuations in response to factors including the following:
o actual or anticipated fluctuations in our quarterly operating
results,
o announcements of new services by us or our competitors,
o changes in financial estimates by securities analysts,
o conditions in the lithium ion battery market,
o changes in the economic performance or market valuations of
other companies involved in lithium ion battery production,
o announcements by our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments,
o additions or departures of key personnel,
o potential litigation, or
o conditions in the mobile telephone market.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are not related to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
13
Stockholders could experience substantial dilution.
We may issue additional shares of our capital stock to raise additional
cash for working capital. If we issue additional shares of our capital stock,
our stockholders will experience dilution in their respective percentage
ownership in us.
We have no present intention to pay dividends.
Neither during the preceding two fiscal years nor during the nine month
period ended September 30, 2004 did we pay dividends or make other cash
distributions on our common stock, and we do not expect to declare or pay any
dividends in the foreseeable future. Should we decide in the future to do so, as
a holding company, our ability to pay dividends and meet other obligations
depends upon the receipt of dividends or other payments from our operating
subsidiaries and other holdings and investments. In addition, our operating
subsidiaries, from time to time, may be subject to restrictions on their ability
to make distributions to us, including as a result of restrictive covenants in
loan agreements, restrictions on the conversion of local currency into U.S.
dollars or other hard currency and other regulatory restrictions. We intend to
retain any future earnings for working capital and to finance current operations
and expansion of our business.
A large portion of our common stock is controlled by a small number of
stockholders.
A large portion of our common stock is held by a small number of
stockholders. As a result, these stockholders are able to influence the outcome
of stockholder votes on various matters, including the election of directors and
extraordinary corporate transactions including business combinations. In
addition, the occurrence of sales of a large number of shares of our common
stock, or the perception that these sales could occur, may affect our stock
price and could impair our ability to obtain capital through an offering of
equity securities. Furthermore, the current ratios of ownership of our common
stock reduce the public float and liquidity of our common stock which can in
turn affect the market price of our common stock.
There is currently a limited trading market for our common stock.
Our common stock is traded in the over-the-counter market through the
Over-the-Counter Electronic Bulletin Board. There is currently an active trading
market for our common stock; however, there can be no assurance that an active
trading market will be maintained. We cannot assure you that our common stock
will ever be included for trading on any stock exchange or through any other
quotation system (including, without limitation, the NASDAQ Stock Market).
We are likely to remain subject to "penny stock" regulations.
As long as the trading price of our common stock is below $5.00 per
share, the open-market trading of our common stock will be subject to the "penny
stock" rules. The "penny stock" rules impose additional sales practice
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities and
have received the purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the Securities and Exchange Commission relating to the
penny stock market. The broker-dealer also must disclose the commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements must be sent
disclosing recent price information on the limited market in penny stocks. These
additional burdens imposed on broker-dealers may restrict the ability of
broker-dealers to sell the common stock and may affect a stockholder's ability
to resell the common stock.
14
Stockholders should be aware that, according to Securities and Exchange
Commission Release No. 34-29093, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. Such patterns include (i) control
of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through
prearranged matching of purchases and sales and false and misleading press
releases; (iii) boiler room practices involving high-pressure sales tactics and
unrealistic price projections by inexperienced sales persons; (iv) excessive and
undisclosed bid-ask differential and markups by selling broker-dealers; and (v)
the wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along with the resulting
inevitable collapse of those prices and with consequent investor losses. Our
management is aware of the abuses that have occurred historically in the penny
stock market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our securities.
We are responsible for the indemnification of our officers and directors.
Our Bylaws provide for the indemnification of our directors, officers,
employees, and agents, under certain circumstances, against attorney's fees and
other expenses incurred by them in any litigation to which they become a party
arising from their association with or activities on behalf of us. This
indemnification policy could result in substantial expenditures, which we may be
unable to recoup.
15
MARKET FOR COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND DIVIDEND POLICY
Our common stock is traded on the NASD's Over-the-Counter Bulletin
Board under the symbol "MCFF." On January 19, 2005, the last reported sales
price for our common stock was $5.00 per share.
The following table sets forth, for the quarters indicated, the range
of closing high and low bid prices of our common stock as reported by the NASD
Over-the-Counter Bulletin Board, as adjusted for all previously effected stock
splits.
Common Stock
----------------
By Quarter Ended High Low
---------------- ------ ------
Fiscal 2003
March 31, 2003........................................... $ .39 $ .37
June 30, 2003............................................ $ .60 $ .60
September 30, 2003....................................... $1.01 $1.01
December 31, 2003........................................ $1.01 $1.01
Fiscal 2004
March 31, 2004........................................... $1.01 $1.01
June 30, 2004............................................ $1.01 $1.01
September 30, 2004....................................... $1.25 $1.45
December 31, 2004........................................ $1.25 $3.50
Fiscal 2005
March 31, 2005 (through January 19, 2005)................ $2.80 $6.00
-------------
As of January 20, 2005, there were 40,978,533 shares of our common
stock outstanding held by approximately 125 stockholders of record.
We have never paid any cash dividends on our common stock.. We do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Should we decide in the future to do so, as a holding company, our
ability to pay dividends and meet other obligations depends upon the receipt of
dividends or other payments from our operating subsidiaries and other holdings
and investments. In addition, our operating subsidiaries, from time to time, may
be subject to restrictions on their ability to make distributions to us,
including as a result of restrictive covenants in loan agreements, restrictions
on the conversion of local currency into U.S. dollars or other hard currency and
other regulatory restrictions. We currently intend to retain future earnings, if
any, to finance operations and the expansion of our business.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this document. In addition to historical
information, the following discussion and other parts of this document contain
certain forward-looking information. Our financial statements are prepared in
U.S. dollars and are in accordance with accounting principles generally accepted
in the United States. When used in this discussion, the words "believes,"
"anticipates," "expects," and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected due to a number of factors beyond our control. We do not undertake to
publicly update or revise any of the forward-looking statements even if
experience or future changes show that the indicated results or events will not
be realized. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. You are also
urged to carefully review and consider our discussions regarding the various
factors, which affect our business, included in this section and elsewhere in
this report. In evaluating our business, you should carefully consider the
information provided under the caption "Risk Factors" beginning on page 7 in
this prospectus.
Factors that might cause actual results, performance or achievements to
differ materially from those projected or implied in such forward-looking
statements include, among other things: (i) the impact of competitive products;
(ii) changes in law and regulations; (iii) adequacy and availability of
insurance coverage; (iv) limitations on future financing; (v) increases in the
cost of borrowings and unavailability of debt or equity capital; (vi) the effect
of adverse publicity regarding our products; (vii) our inability to gain and/or
hold market share; (viii) exposure to and expense of resolving and defending
product liability claims and other litigation; (ix) consumer acceptance of our
products; (x) managing and maintaining growth; (xi) customer demands; (xii)
market and industry conditions including pricing and demand for products, (xiii)
the success of product development and new product introductions into the
marketplace; (xiv) the departure of key members of management; (xv) our ability
to efficiently market our products; as well as other risks and uncertainties
that are described from time to time in our filings with the Securities and
Exchange Commission.
Net income does not reflect certain annual appropriations to reserve
funds in accordance with PRC regulations. These appropriations are reflected in
the statement of retained earnings as a reduction in retained earnings.
Except as otherwise indicated by the context, references in this
prospectus to "we," "us," or "our" are to the combined business of Medina
Coffee, Inc. or Medina, and its wholly-owned direct subsidiary, BAK
International, Ltd., or BAK International, and its wholly-owned subsidiary,
Shenzhen BAK Battery Co., Ltd., or BAK Battery, and in each case do not include
the selling stockholders. Because Medina Coffee and BAK International are
holding companies, the operating information contained in this Management's
Discussion and Analysis relates to BAK Battery, the operating wholly-owned
subsidiary of BAK International. BAK Battery's fiscal year ends September 30.
References to "China" or to the "PRC" are references to the People's Republic of
China.
Overview
On January 20, 2005, we completed a stock exchange transaction with the
stockholders of BAK International. Pursuant to the terms of the exchange, we
issued 39,826,075 shares of our common stock to the stockholders of BAK
International, representing approximately 97.2% of our post-exchange issued and
outstanding common stock, in exchange for 100% of the outstanding capital stock
of BAK International. As a result of this transaction, we currently operate as a
holding company for our China-based subsidiaries, BAK International and BAK
Battery. We are presently focused on the manufacture, commercialization and
distribution of a wide variety of standard and customized lithium ion
rechargeable batteries for use in a wide array of applications. We also have
internal research and development facilities engaged primarily in furthering
lithium ion related technologies. We believe that our technologies allow us to
17
offer batteries that are flexibly configured, lightweight and generally achieve
longer operating time than many competing batteries currently available. We have
focused on manufacturing a family of replacement lithium batteries for mobile
phones. We also supply rechargeable lithium ion batteries, and expect to begin
supplying lithium polymer batteries in February 2005, for use in various other
portable electronic applications, including high-power handset telephones,
laptop computers, digital cameras and video camcorders, MP3's, electric bicycles
and general industrial applications.
We manufacture three types of batteries:, steel cell, aluminum cell and
cylindrical cell. We deliver our products to packing plants operated by third
parties where the bare cells are packed in accordance with specifications
established by certain manufacturers of mobile phones and other electronic
products. We operate sales and service branches in six principal coastal cities
and Beijing in the PRC. The majority of our income is generated from the sale of
steel cells. However, we believe there is growth potential for aluminum and
cylindrical cells because of their wide applications. Our current growth
strategy includes entering into the original equipment manufacture, or OEM,
battery market for top mobile phone brands, portable electronic appliances and
electric bicycles worldwide. We are also developing a program for producing
lithium polymer battery cells which we expect to roll out in February 2005, as
well as high power lithium ion battery cells, which will allow us inroads into
additional battery markets such as those for electric bicycles, power tools and
hybrid electric vehicles.
Our recent business activities include:
o In June 2002 we began operations with initial monthly output of
approximately 220,000 units.
o We received government authorization in October 2002 to establish a
Postdoctoral Workstation, the establishment of which serves as
recognition by the PRC government of the strong capabilities of our
in-house research team. With our research and development facilities we
are focusing our research efforts on liquid lithium ion batteries, high
power lithium ion batteries, solid polymer lithium ion batteries, and
cylindrical and rectangular lithium ion batteries.
o In March 2003 our steel case battery plant started operations with
monthly output reaching approximately 2.4 million units. Our current
monthly output of steel case batteries is approximately 7.7 million
units.
o In September 2003 we were granted International Organization for
Standardization 4001: 1996, an environmental management system
certification, as well as International Organization for
Standardization 9001: 2000, a quality management system certification,
by Beijing Zhonjing Quality Certification Co., Ltd., an independent
third party which issues such standardization certifications.
o As of September 2004, our total monthly capacity for all battery types
was approximately 11.8 million units. Our ability to grow our
manufacturing capacity is primarily due to the development and
expansion of semi-automated manufacturing lines requiring less labor
efforts when compared to previous more labor intensive manufacturing
processes.
o As of September 2004, we established a sales and service network to
cover six principal coastal cities and Beijing in the PRC.
18
Results of Operations
Results of operations for the year ended September 30, 2004 as compared to the
year ended September 30, 2003
Revenues
Revenues increased to approximately $63.74 million for the year ended
September 30, 2004 as compared to approximately $20.05 million for the prior
year, an increase of approximately $43.69 million or 218%. Our revenues
increased during the period as a result of inroads made into the aluminum case
cell market where revenues increased to approximately $13.08 million for the
year ended September 30, 2004 as compared to approximately $280,000 in the prior
year, an increase of $12.8 million. Revenues relating to steel case batteries
increased to approximately $50.41 million from approximately $19.68 million in
the prior year, an increase of approximately $30.73 million or 156%. In fiscal
year 2004, our customers continued to demand price concessions, while
simultaneously raising the bar with respect to quality and service requirements.
In response to these conditions, we relied on the time-tested approach of cost
containment and price reductions. Despite continued pricing pressure resulting
in selling price reductions during the year in both, aluminum case and steel
case markets, we were able to gain market share both domestically and
internationally because, in our belief, our production volume and technological
advantage gives us an advantage over our competitors with regard to supply
ability and cost.
Gross Profit
Gross profit for the year ended September 30, 2004 was approximately
$15.46 million or 24.3% of revenues as compared to gross profit of approximately
$5.87 million or 29.3% of revenues for the prior year.
The reduction in gross profit, as a percentage of revenues, resulted
from a combination of reduced unit selling prices and increased unit
manufacturing costs stemming from an increase in prices for most raw materials
used in the manufacturing process. Steel case cell battery selling prices
decreased by 12.4% during fiscal 2004, while cost of steel case cell units
decreased by only about 5.5%, resulting in an overall decrease in gross profit
from 28% to 22.8% of revenues. In the aluminum case cell market, price
reductions averaged 21.9% and unit costs increased by 10.6%, thereby reducing
gross profit. As such, gross profits in aluminum case segment decreased from
45.2% to 22.4% of revenues. We did, however, gain market share due in part to
our decision to maintain low pricing, the improved quality of our products and
the improvements we made in manufacturing efficiencies. Prior to 2004, we sold
our products primarily into the replacement battery market (as opposed to the
OEM market). Products in the replacement market face lower prices and,
consequently, lower gross profit margins. Our profit margins should increase as
we move into the OEM segment.
Continued vertical integration of the manufacturing process, increasing
production efficiencies, and low labor costs collectively served to contain
costs and we anticipate that these activities will position us to maintain gross
profit margins at or near the 22% range during our current fiscal year. Cost
savings realized from the above initiatives will help to offset potential raw
material and other price increases during 2005 and beyond. Management continues
to focus on cost containment and savings realized based on increased economies
of scale in order to maintain gross profit margins near 2004 levels.
Selling Expenses
Selling expenses increased to approximately $1.87 million for the year
ended September 30, 2004 as compared to approximately $442,000 for the prior
year, an increase of approximately $1.43 million or about 325%.
Salaries related to selling efforts increased to approximately $740,000
from approximately $80,000 for the prior year, an increase of approximately
$660,000. More sales and marketing efforts were required to continue gaining
market share and to grow revenues. We had 67 employees engaged in sales and
marketing as of September 30, 2004 as compared to 51 as of September 30, 2003.
In connection with the introduction of a formal and coordinated marketing
19
campaign, marketing expenses increased to approximately $610,000 from
approximately $230,000 incurred in the prior year, an increase of approximately
$380,000. Transportation, filing fees, promotion, trademarks, and other related
selling and marketing expenses increased to approximately $520,000 from
approximately $132,000 for the prior year, an increase of approximately
$388,000.
General and Administrative Expenses
General and administrative expenses grew to approximately $3.05 million
for the year ended September 30, 2004 as compared to approximately $786,000 for
the prior year, an increase of approximately $2.26 million or 288%. As a
percentage of revenues, general and administrative expenses were 4.8% and 3.9%
in 2004 and 2003, respectively. Despite efforts related to increasing
manufacturing facilities, general and administrative expenses remained
manageable relative to revenues.
Salaries and benefits, including training, increased to approximately
$1.27 million from approximately $260,000 as compared to the prior year, an
increase of approximately $1.01 million or 388%. We had 5,428 employees in
machinery and engineering positions as of September 30, 2004, as compared to
2,637 employees as of the prior year end. Increases in office expenses,
insurance, professional fees, maintenance, recruitment, and other administrative
expenses accounted for the remainder of the increase in this category.
Research and Development Expenses
Research and development expenses increased to approximately $329,000
for the year ended September 30, 2004 as compared to approximately $117,000 for
the prior year, an increase of approximately $212,000 or 182%. Increase in
research and development staff to 107 as of September 30, 2004 from 58 as of the
prior year end was the primary factor accounting for the increase in this
category. New initiatives, such as rechargeable lithium polymer batteries
research and development, and an increase in patent applications and maintenance
required incremental staff hiring contributed to the increase.
Bad Debts
Bad debt expense totaled approximately $327,000 for the year ended
September 30, 2004 as compared to approximately $448,000 for the prior year, a
decrease of $121,000 or 27%. As a percentage of revenues, bad debts were
approximately 1/2% and 2.2% for 2004 and 2003 respectively. We believe that the
reserve for bad debts as of September 30, 2004 is adequate and will adjust
future reserves as we gain more experience with our customers.
Depreciation and Amortization
Depreciation and amortization totaled approximately $1.73 million for
the year ended September 30, 2004 as compared to approximately $380,000 for the
prior year, an increase of approximately $1.35 million or 357%. The increase in
depreciation and amortization principally reflects our expansion or
manufacturing facilities and related acquisitions.
Operating Income
Operating income totaled approximately $8.15 million for the year ended
September 30, 2004 as compared to operating income of approximately $3.70
million for the year ended September 30, 2003, an increase of approximately
$4.45 million or 120%.
As a percentage of revenues, operating income was 12.8% in 2004 as
compared to 18.5% for the prior year. The reduction in operating income as a
percentage of revenues was substantially due to the reduction in gross profit.
20
Finance Costs
Finance costs increased to approximately $1.01 million for the year
ended September 30, 2004 as compared to approximately $123,000 for the prior
year, an increase of about approximately $887,000 or 721%.
We had approximately $49.89 million in short term loans and notes
payable as of September 30, 2004 as compared to approximately $9.58 million
outstanding as of September 30, 2003. Short term loans and notes payable are
comprised of various short term bank loans and promissory notes, with interest
ranging from 4.54% to 5.84%, and maturities of generally less than twelve
months. The increase in interest bearing debt caused the increase in finance
costs. The funds obtained were used to construct new manufacturing facilities
and purchase associated equipment, which resulted in approximately $40.31
million in capital costs. The remaining funds were used for working capital
purposes based on the increase in revenues.
Provision for Income Taxes
We enjoy a temporary favorable tax treatment as a result of locating
our main production facilities in the Shenzhen Special Enterprise Zone. We
anticipate a tax rate of 7.5% of profits for the next two fiscal years before
reverting to the anticipated standard corporate rate of 15%.
Taxes increased to approximately $394,000 for the year ended September
30, 2004 as compared to no taxes for the previous year. We commenced paying
taxes at the annual rate of 7.5% in 2004; however, because these taxes are based
on a calender year we only paid taxes for the final nine months of fiscal 2004,
resulting in an effective rate of 5.5%.
Net Income
Primarily as a result of increased sales during fiscal 2004, we
increased our net income to approximately $6.75 million as compared to
approximately $3.58 million for the prior year, an increase of approximately
$3.17 million or about 89%.
Dividends
We have not paid out any dividends to date. In determining our dividend
policy, our Board of Directors considers current and long term profitability,
committed and potential cash requirements, and our overall financial condition.
We do not anticipate the payment of any dividends in the future based on the
present financial requirements for expansion. Should we decide in the future to
pay dividends, as a holding company, our ability to do so and meet other
obligations depends upon the receipt of dividends or other payments from our
operating subsidiaries and other holdings and investments. In addition, our
operating subsidiaries, from time to time, may be subject to restrictions on
their ability to make distributions to us, including as a result of restrictive
covenants in loan agreements, restrictions on the conversion of local currency
into U.S. dollars or other hard currency and other regulatory restrictions.
Results of operations for the year ended September 30, 2003 as compared to the
year ended September 30, 2002
Revenues
Revenues increased to approximately $20.05 million for the year ended
September 30, 2003 as compared to approximately $3.05 million for the prior
year, an increase of approximately $17.0 million or 557%.
We completed our first full year of sales in fiscal 2003 as compared to
four months of sales in fiscal 2002. Also, during 2003 we commenced our
semi-automated manufacturing process as compared to a primarily labor intensive
manufacturing processes in 2002.
21
Gross Profit
Gross profit for the year ended September 30, 2003 was approximately
$5.87 million or 29.3% of revenues as compared to approximately $801,000 or
26.2% of revenues for the prior year.
The increase in gross profit as a percentage of revenues was due to
commencement of semi-automated manufacturing processes during 2003 leading to
manufacturing efficiencies. Also, based on increased volume of raw material
purchases during 2003 we were able to reduce the unit cost of production by
approximately 32% when compared to the prior year. Finally, we commenced sales
of aluminum case cells and cylindrical cells during fiscal 2003. Both of these
segments experienced higher gross profits than steel case cells, contributing to
an overall increase in gross profit.
Other Income
Other income for the year ended September 30, 2003 was $0 as compared
to other income of approximately $412,000 for the year ended September 30, 2002.
During 2002, we provided engineering technical support consisting of assembling
and adjusting a lithium ion battery testing and aging machine, resulting in this
income.
Selling Expenses
Selling expenses increased to approximately $442,000 for the year ended
September 30, 2003 as compared to approximately $16,000 for the prior year, an
increase of approximately approximately $426,000.
We commenced selling and marketing activities during fiscal 2003. We
had 51 employees in sales as of September 30, 2003 as compared to 12 as of
September 30, 2002. We incurred approximately $230,000 in marketing expenditures
during fiscal 2003 as compared to $0 in fiscal 2002.
General and Administrative Expenses
General and administrative expenses grew to approximately $786,000 for
the year ended September 30, 2003 as compared to approximately $167,000 for the
prior year, an increase of approximately $619,000 or 370%. As a percentage of
revenues, general and administrative expenses were 3.9% and 5.5% for 2003 and
2002, respectively.
Research and Development Expenses
Research and development expenses increased to approximately $117,000
for the year ended September 30, 2003 as compared to approximately $30,000 for
the prior year, an increase of approximately $87,000 or 290%. Whereas in fiscal
2002 we were primarily engaged in setting up operations, during fiscal 2003 we
commenced ancillary activities including research and development.
Bad Debts
Bad debt expense totaled approximately $448,000 for the year ended
September 30, 2003 as compared to approximately $47,000 for the prior year, an
increase of approximately $401,000 or 853%. As a percentage of revenues, bad
debts were approximately 2.2% and 1.5% for 2003 and 2002 respectively. We
believe that the reserve for bad debts as of September 30, 2003 is adequate and
we will adjust future reserves as we gain more experience with our customers.
Depreciation and Amortization
Depreciation and amortization totaled approximately $380,000 for the
year ended September 30, 2003 as compared to approximately $264,000 for the
prior year, an increase of approximately $116,000 or 44%. The increase in
depreciation and amortization principally reflects our increased acquisition of
manufacturing equipment during fiscal 2003 when compared to the prior year.
22
Operating Income
Operating income totaled approximately $3.70 million for fiscal 2003 as
compared to approximately $718,000 for fiscal 2002, an increase of approximately
$2.98 million or 415%. As a percentage of revenues, operating income was 18.5%
for fiscal 2003 and 23.5% for fiscal 2002. The reduction in operating income was
primarily due to generating no other income as compared to generating other
income of approximately $412,000 during fiscal 2002.
Finance Costs
We incurred approximately $123,000 in finance costs for the year ended
September 30, 2003 as compared to approximately ($1,000) income for the prior
year. Interest earned on cash deposits exceeded interest paid on short term
borrowings during fiscal 2002.
We had approximately $9.58 million in outstanding short term loans and
notes payable as of September 30, 2003 as compared to approximately $363,000 as
of September 30, 2002. Short term loans and notes payable are comprised of
various short term bank loans and promissory notes, with interest ranging from
4.54% to 5.84%, and maturities of generally less than twelve months. The
increase in interest bearing debt was the primary reason for the increase in
finance costs when compared to the prior year. We increased our borrowings in
order to acquire equipment necessary for the expansion of our manufacturing
operations and for working capital purposes.
Net Income
Net income for the year ended September 30, 2003 was approximately
$3.58 million as compared to approximately $720,000 for the year ended September
30, 2002. The increase is primarily attributable to increased sales and the
corresponding increase in gross profit for the year ended September 30, 2003 as
compared to the prior year.
Liquidity and Capital Resources
We have historically financed our liquidity requirements from a variety
of sources, including short term borrowings under bank credit agreements,
promissory notes and issuance of capital stock. As of September 30, 2004 we had
cash and cash equivalents in the amount of approximately $10.33 million as
compared to approximately $1.49 million as of September 30, 2003.
There was a working capital deficiency of approximately $26.23 million
as of September 30, 2004. This compares to a working capital deficiency of
approximately $333,000 as of September 30, 2003. The primary reason for this
stems from the increase in short term borrowings to finance expanded
manufacturing facilities and construction. We had short term borrowings,
maturing in less than one year, of approximately $49.89 million as of September
30, 2004 as compared to approximately $9.58 for the prior period, or an increase
of approximately $40.31 million.
As we complete construction on the various phases of our BAK Industrial
Park, we anticipate being able to extend the maturity of some or all of our
short term debt during fiscal 2005. We are also seeking additional capital from
other sources in order to meet our capital requirements for expansion and
ongoing liquidity needs.
23
As of September 30, 2004, principal and interest payments due under our
contractual obligations were as follows:
Payments Due
(In thousands)
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
--------- --------- --------- --------- ---------
Term debt ................ $ 29,116 $ 29,116 -- -- --
Lines of Credit .......... $ 20,773 $ 20,773 -- -- --
Operating Leases ......... $ 876 $ 717 $ 159 -- --
Capital Leases ........... -- -- -- -- --
As of September 30, 2004, we had the following principal amounts
outstanding under our credit and debt agreements:
Maximum
Amount Available Amount Borrowed
---------------- ---------------
September 30, 2004
------------------
(In thousands)
Comprehensive Credit Facility - Agricultural Bank of China..... $30,205 $27,531
Comprehensive Credit Facility - Shenzhen Development Bank ..... $18,123 $15,593
Comprehensive Credit Facility - China Minsheng Bank ........... $ 3,625 $ 2,537
Term loan - Industrial Bank ................................... N/A $ 2,416
Loan payable, third party...................................... N/A $ 1,812
-------
$49,889
=======
On January 18, 2005, BAK International completed a private offering of
its securities. The offering resulted in the issuance of an aggregate of
8,600,433 shares of BAK International's common stock for gross offering proceeds
of $17 million, or an offering price of $1.98 per share. Investors in the
offering participated in the exchange transaction with Medina Coffee, Inc. and
received an aggregate of 8,600,433 restricted shares of Medina's common stock,
along with attendant registration rights. Net proceeds from the financing are
anticipated to be used as follows: approximately $9.3 million to expand
production facilities; approximately $4.6 million for the enhancement of
existing products and for research and development of new product offerings; and
approximately $1.8 million for working capital purposes.
We anticipate that in the upcoming fiscal year the cash needed for
implementation of our growth strategy and related working capital requirements
will be derived from the offering proceeds of BAK International's recently
consummated private placement of securities, the refinancing of short-term
indebtedness and cash generated from operating activities. However, we are
unable to make any assurance that we will be able to refinance our short-term
indebtedness, and if we ae able, on what terms the refinancing will occur.
24
The forecast of the period of time through which our financial
resources will be adequate to support operations is a forward-looking statement
that involves risks and uncertainties. Our actual funding requirements may
differ materially from those presently anticipated as a result of unforeseen
factors and circumstances.
25
BUSINESS
General
Our current operations were originally a business division of our
affiliate, BAK Battery, which was originally formed as a Chinese limited
liability company in August 2001. As of January 17, 2005, all legal procedures
of BAK International's acquisition of 100% of the equity shares in BAK Battery
were completed. Thereafter, we entered into a stock exchange transaction on
January 20, 2005 with the stockholders of BAK International, pursuant to which
we acquired from them all of the issued and outstanding common capital stock of
BAK International in exchange for 39,826,075 shares of our common stock. As a
result of this exchange transaction, we succeeded to the operations of BAK
International and BAK Battery.
Overview
We presently serve as a holding company whose for our China-based
subsidiaries, BAK International and BAK Battery. Our subsidiaries are focused on
the manufacture, commercialization and distribution of a wide variety of
standard and customized lithium ion rechargeable batteries for use in a wide
array of applications. We also have internal research and development facilities
engaged primarily in furthering lithium ion related technologies. We believe
that our technologies allow us to offer batteries that are flexibly configured,
lightweight and generally achieve longer operating time than many competing
batteries currently available. We have focused on manufacturing a family of
replacement lithium batteries for mobile phones. We also supply rechargeable
lithium ion and lithium polymer batteries for use in various other portable
electronic applications, including high-power handset telephones, laptop
computers, digital cameras and video camcorders, MP3's, electric bicycles and
general industrial applications.
We manufacture three types of batteries: steel cell, aluminum cell and
cylindrical cell. We deliver our products to packing plants operated by third
parties where the bare cells are packed in accordance with specifications
established by certain manufacturers of mobile phones and other electronic
products. We operate sales and service branches in six principal coastal cities
and Beijing in the PRC. The majority of our income is generated from the sale of
steel cells. However, we believe there is growth potential for aluminum and
cylindrical cells because of their wide applications. Our current growth
strategy includes entering into the original equipment manufacture, or OEM,
battery market for top mobile phone brands, portable electronic appliances and
electric bicycles worldwide. We are also developing a program for producing
lithium polymer battery cells as well as high power lithium ion battery cells,
which will allow us inroads into additional battery markets such as those for
electric bicycles, power tools and hybrid electric vehicles.
Our Business Strategy
We seek to maintain and strengthen our position as a provider of
lithium ion batteries and related services while increasing the breadth of our
product line and improving the quality of our products. In order to achieve our
objective, we plan to pursue the key strategies described below.
o Continuing to be a cost leader in an increasingly competitive
market. We believe we can ensure competitive pricing by
integrating a labor intensive production process with
high-tech, proprietary manufacturing equipment. We believe our
experience in designing and updating key manufacturing
equipment and operating such equipment at a low cost gives us
a cost advantage over our competitors.
o Taking advantage of our ready production capacity and allowing
for increased production capacity. We believe our production
capacity makes us more reliable, flexible and responsive in
terms of fulfilling our customers' requirements than other
providers. As such, existing and potential competitors may
26
find it more difficult to compete with our production
capabilities. The completion of our new manufacturing
facility, projected mid 2005, should only enhance our
production capacity.
o Enhanced R & D activities. Upon completion of our new
facility, we will have the space to enhance our existing R & D
capabilities through the addition of state of the art
equipment and experienced personnel.
o Developing our OEM business. We believe that by entering the
original equipment manufacture, or OEM, market for lithium and
other types of battery cells, we will be able to significantly
increase revenues. As such, we have been preparing for
Motorola's QSR certification which will give us the right to
serve as an OEM provider for Motorola's products. We believe
that obtaining Motorola's QSR Certification will position us
to provide lithium batteries to other multinational
corporations whose products require such batteries. We believe
that our entry into the OEM market for lithium ion batteries
is important to our continued growth because the market for
replacement batteries is becoming saturated.
o Expanding our product lines to capture new market
opportunities. We are seeking to produce lithium polymer and
high power lithium ion battery cells that can be used in
electric bicycles, power tools and hybrid electric vehicles.
By entering these markets, we believe we can achieve future
revenue growth and improved profit margins.
Principal Products and Services
Lithium Ion Battery
We produce rechargeable lithium ion batteries. Rechargeable lithium ion
batteries are used primarily for mobile telephones, camcorders, MP3 players,
digital cameras, electric bicycles and general industrial applications.
We began producing steel case lithium ion batteries in 2002. Our
product mix now consists of 69% steel case battery cells, 30% aluminum battery
cells, and 1% cylindrical battery cells, which all come in a broad variety of
battery types.
Services
We have built a sales and service network covering six principal
coastal cities and Beijing in the PRC. Our service capabilities include a
24-hour customer response. Our other services include providing battery testing
and test reporting; providing training courses regarding quality control and
battery usage; gathering customer opinions on our products and services;
evaluating customer requirements and fulfilling appropriate requests.
BAK has two strategic policies for sales and service:
o BAK has built a sales and service network to cover six
principal coastal cities in China, and also has a branch in
Beijing.
o Our service capabilities include 24-hour customer response.
Features
Performance standards. We believe our products meet or exceed
international standards. Our lithium ion batteries have high capacity, low
internal resistance, and a safety guarantee. Certificates or approvals we have
received include: EU's CE attestation; UL authentication; International
Organization for Standardization 9001: 2000, a quality management system
27
certification, and International Organization for Standardization 14001: 1996,
an environmental management system certification; and certificates from the
major cell phone manufacturers of China, including China Saibao (the CEPREI
certification body); Amoi Electronics Co., Ltd.; China Datang (Group)
Corporation; Konka Group Co., Ltd.; Tianyu Communication Technology (Kunshan)
Co., Ltd.; and Shenzhen Telsda Mobile Communication Industry Development Co.,
Ltd..
Longer usage time and higher discharge rates. We believe our battery
has a higher discharge voltage so that it can provide a longer talking time for
mobile phone users. Our products have a higher discharge capacity than other
battery products. Therefore, with the same capacity, our battery can therefore
provide a longer talking time. The higher discharge capacity is especially
useful for mobile phones with color screens, which have a high demand on the
battery's continuous discharge voltage.
Performance at lower temperatures. Our lithium ion batteries perform
well from -20 Celsius to +60 Celsius. At a temperature as low as -20 Celsius the
batteries release 95% of the battery energy at 0.2C rate; and over 90% of the
battery energy can be discharged at 1.0C. This feature allows improved cell
phone battery duration, particularly in northern areas of the PRC.
Suppliers
The main components of lithium ion batteries are the cathode, anode,
separator, and electrolyte. We have built a complete supply chain, putting
together a group of material and equipment suppliers, primarily Chinese, except
for ENTEK (a separator supplier in the US), from whom we buy on a purchase order
basis.
Cathode material is primarily LiCoO2; LiMnO4 and LiCo1-xNixO2 are also
used as cathode materials. Anode material mainly consists of carbon materials
such as graphite, sourced primarily in China. The separator material is imported
from Japan and the US. There are sufficient supplies of electrolytes in China,
and we believe the quality to be very good. The table below describes the key
sources of our key materials.
As of September 30, 2004, our key material suppliers and key equipment
suppliers were as follows:
Key Material Suppliers
------ ------------------ ------------------------------------------------------
Item Materials Main suppliers
------ ------------------ ------------------------------------------------------
1 Case and caps Roofer Group Company, Yijinli technology company
Shenzhen Tongli Precision Stamping Products Co., Ltd.,
------ ------------------ ------------------------------------------------------
2 Cathode materials CITIC Guoan
------ ------------------ ------------------------------------------------------
3 Anode materials Shanghai Shan Shan, Changsha graphite
------ ------------------ ------------------------------------------------------
4 Aluminum foil Aluminum Corporation of America, Shanghai
------ ------------------ ------------------------------------------------------
5 Copper foil Huizhou United Copper Foil
------ ------------------ ------------------------------------------------------
6 Electrolyte Zhangjiagang Guotai-Huarong New Chemical Materials
Co., Ltd
------ ------------------ ------------------------------------------------------
7 Separator Ube Industries, ENTEK, CELGARD
------ ------------------ ------------------------------------------------------
Key Equipment Suppliers
------ -------------------------------- ----------------------------------------
Item Instruments Suppliers
------ -------------------------------- ----------------------------------------
1 Coating machine Beijing 706 Factory
------ -------------------------------- ----------------------------------------
2 Mixer Guangzhou Hongyun Machine
------ -------------------------------- ----------------------------------------
3 Press machine SevenStar Huachuang
------ -------------------------------- ----------------------------------------
4 Ultrasonic spot welding machine Zhenjiang Tianhua Machinery and
Electrical Co., Ltd.
------ -------------------------------- ----------------------------------------
5 Laser seam welder Wuhan Chutian Laser Group
------ -------------------------------- ----------------------------------------
6 Vacuum oven Jiangshu Wujiang Songling
------ -------------------------------- ----------------------------------------
7 Electrolyte filling machine BAK (internally developed)
------ -------------------------------- ----------------------------------------
8 Aging equipment Guangzhou Qingtian Industrial Co., Ltd.
------ -------------------------------- ----------------------------------------
9 Testing and sorting equipment Guangzhou Qingtian Industrial Co., Ltd.
------ -------------------------------- ----------------------------------------
28
Sales and Marketing
Marketing Strategies. We have two key marketing strategies. Our first
strategy is to be a leader in the worldwide replacement battery market. We
believe we can secure and enhance our market share because of the quality of our
products and our ability to maintain high production volume with low production
cost. Our second marketing strategy is to enter the OEM market. To enter into
this market we will be required to gain approvals from key international
manufacturers, including Motorola, Inc. and NingBo Bird Co., Ltd, each of which
are currently reviewing our products. Approval from Motorola represents the
first step to entering the international OEM market.
Our Current Market. We have developed a sales and service network based
in six principal coastal cities and Beijing in the PRC. Our products have also
been exported to the United States, Canada, South Africa, Japan, Singapore,
Taiwan, and Hong Kong. From 2001 to 2003, our annual sales have grown from $3
million to approximately $64 million for the year ended September 30, 2004. As
of September 30, 2004, approximately 68% of sales were domestic, while 32% were
made internationally.
Competition
We face competition in the production of lithium ion batteries not only
within China but also from other parts of the world, particularly Japan and
Korea. Sony Corp. first commercialized lithium ion batteries in 1992. However,
Japan's market share of lithium ion battery production has decreased since 2000.
We believe we are currently the seventh largest lithium ion battery manufacturer
in the world, with a monthly output capacity of 15 million pieces and current
monthly production of 11.8 million pieces. We also believe we are the second
largest manufacturer in the Chinese market.
We believe the following are the leading global manufacturers of
lithium ion batteries:
o Japan - Sanyo Electric Co., Sony Corp., Matsushita Electric
Industrial Co., Ltd. (Panasonic), GS Group, NEC Corporation
and Hitachi Ltd.;
o Korea - LG Chemical Ltd. and Samsung Electronics Co., Ltd.;
and
o China - BYD Co. Ltd., Shenzhen BAK Battery Co., Ltd., Tianjin
Lishen Battery Joint-Stock Co., Ltd., Henan Huanyu Group and
Harbin Coslight Technology International Group Co., Ltd.
We compete with these companies by striving to provide a higher quality
product at a lower cost. We believe that by doing business in China we enjoy
competitive advantages over similar companies doing business in Japan and Korea,
including abundant labor resources, low cost raw materials and better access to
China's extensive mobile phone market.
Customers
Our ten largest clients, based on orders, account for 51% of our sales,
predominantly in China. Our 30 largest clients, based on orders, account for 85%
of our sales, predominantly in China. At present, the bulk of our sales are in
the replacement cell phone battery market. Over the past three years, we have
developed relationships with key customers, including Konka Group Co., Ltd.,
SCUD (Fujian) Electronics Co., Ltd., Desay Power Tech. Co., Ltd. and Shenzhen Ya
Litong Electronic Co., Ltd.
Research and Development
We operate a state of the art research and development center
performing proprietary research that has resulted in two issued patents in the
PRC and 40 in the application process. We also outsource certain of our research
and development matters to ChangChun Applied Chemistry Research Institute of the
China Scientific Institute, Tstinghua University, JiLin University, the
29
Electrochemistry Department of XiaMen University and Shenzhen University. In our
in-house facility we employ over 100 staff members, led by three government
recognized specialists. Upon the approval of the National Ministry of Personnel
in October 2002, a Postdoctoral Workstation was established. The establishment
of the Workstation serves as recognition by the PRC government of the strong
capabilities of our in-house research team. The research and development center
focuses research on projects relating to liquid lithium ion batteries, high
power lithium ion batteries, solid lithium polymer ion batteries, and
cylindrical and rectangular lithium ion batteries.
During fiscal 2004 and 2003, we expended $328,779 and $116,789,
respectively, on our research and development efforts. We anticipate devoting
approximately $4.6 million on research and development activities in 2005.
Employees
The following table summarizes the functional distribution of our
employees as of September 30, 2003 and 2004:
Department 2003 2004
Officers 9 10
Comprehensive Management 64 197
Human Resources 8 19
Marketing 51 67
PMS Department 14 21
Technical Department 10 46
Research & Development 58 107
Purchasing 8 29
Financial Department 8 18
PMC Department 19 45
After Sales Department 9 33
Quality Control 85 242
Engineering 27 99
Manufacturing 2637 5428
--------------------------------------------------------
TOTALS 3007 6362
None of our personnel are represented under collective bargaining
agreements. We consider our relations with our employees to be good.
Facilities
We currently lease 5,500 m2 in the aggregate for office space and
manufacturing facilities. We lease 3,000 m2 for office space and manufacturing
operations pursuant to a lease which runs from June 1, 2003 to June 10, 2008.
Our rent due under that lease is $2,468 a month. We also lease 2,500 m2 for
office space and manufacturing facilities pursuant to a lease with a term
beginning December 16, 2004 and ending December 16, 2006. We owe lease payments
of $2,329 a month during the term of this second lease.
In addition, we have begun construction of manufacturing facilities,
warehousing and packaging facilities, dormitory space and administrative offices
at the BAK Industrial Park. We anticipate the completion of construction of
these facilities by June 2005. At present, we have no payment obligations
related to these facilities, however, upon completion of construction, we will
have monthly payments due in satisfaction of our permanent construction
financing.
30
Upon completion of the construction of the BAK Industrial Park, we will
cease to lease the 5,500 m2 that we currently lease for office space and
manufacturing facilities. We will face no material penalties when we cancel
these leases.
Legal Proceedings
We are not a party to any legal proceedings, nor are we aware of any
contemplated proceedings.
Intellectual Property and Proprietary Rights
We rely primarily on a combination of copyright laws and contractual
restrictions to establish and protect our intellectual property rights. We
currently have two issued patents in the PRC and 40 are in the application
process. We require our management and key technical personnel to enter into
agreements requiring them to keep confidential all information relating to our
customers, methods, business and trade secrets during and after their employment
with us.
We have very strict control over the core technologies for which we can
not apply for patents. Every employee who is related to these proprietary
technologies must sign "special technology non-disclosure agreement". We have
also established an internal department to protect property rights. In this
department, there are professionals including attorneys, engineers, information
managers and archives managers responsible for the application and protection of
proprietary rights. We have also developed a series of rules regarding "property
right non-disclosure", "property right archives management", "information
collection and analysis" and "innovation encouragement". While we actively take
steps to protect our proprietary rights, such steps may not be adequate to
prevent the infringement or misappropriation of our intellectual property. This
is particularly the case in China where the laws may not protect our proprietary
rights as fully as in the United States. Infringement or misappropriation of our
intellectual property could materially harm our business. BAK Battery has
registered the following Internet and WAP domain name (the English version of
our website can be found at www.bak.com.cn.en).
31
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information about our executive officers
and directors and their respective ages and positions as of January 20, 2005.
The directors listed below will serve until the next annual meeting of the
Medina stockholders:
NAME AGE POSITION HELD
---- --- -------------
Xiangqian Li 36 Director, Chairman of the Board, President and
Chief Executive Officer
Yongbin Han 35 Chief Financial Officer and Secretary
Huanyu Mao 53 Chief Technical Officer
Xiangqian Li has served as our Director, Chairman of the Board,
President and Chief Executive Officer since January 20, 2005. Mr. Li has been
Chairman of Board of Directors and General Manager of BAK Battery since April
2001 and has also served as BAK Battery's general manager since December 2003.
Previously, Mr. Li served as (i) Chairman of the Board of Directors and General
Manager of Shenzhen BAK Li-ion Battery Co., Ltd. from December 2000 until March
2001; (ii) as Chairman of the Board of Directors and General Manager of Jilin
Province Huaruan Technology Company Limited by Stocks ("Huaruan") from March
2001 until June 2001; and (iii) as Chairman of the Board of Directors of Huaruan
from January 2001 until June 2003. Prior to 2001 Mr. Li was self employed. Mr.
Li graduated from Lanzhou Railway Institute and holds a Bachelors degree in gas
engineering. He is pursuing a Doctorate of quantity economics from Jilin
University.
Yongbin Han has served as our Chief Financial Officer and Secretary
since January 20, 2005. Mr. Han is a Chinese certified public accountant and
certified tax agent. Mr. Han has been Deputy General Manager of BAK Battery
since April 2003. In that capacity he oversees the finance and accounting
department. Previously, Mr. Han served as (i) Deputy General Manager of Huaruan
from January 2002 until April 2003 and (ii) Department Manager of Zhonghongxin
Jianyuan Accounting Firm from July 1995 until July 2001. Mr. Han graduated from
Changchun Tax Institute with a Bachelors degree in accounting.
Huanyu Mao has served as our Chief Technical Officer since January 20,
2005. Dr. Mao has been Chief Scientist of BAK Battery since September 2004. From
1997 until September 2004 Dr. Mao served as Chief Engineer of Tianjin Lishen
Company. Dr. Mao graduated from Memorial University of Newfoundland, Canada and
received a Doctorate degree in electrochemistry in conducting polymers.
Board Composition and Committees
The board of directors is currently composed of one member, Xiangqian
Li. All Board action requires the approval of a majority of the directors in
attendance at a meeting at which a quorum is present. We intend to expand our
board to include "independent" directors.
We currently do not have standing audit, nominating or compensation
committees. We intend, however, to establish an audit committee and a
compensation committee of the board of directors as soon as practicable. We
envision that the audit committee will be primarily responsible for reviewing
the services performed by our independent auditors, evaluating our accounting
policies and our system of internal controls. The compensation committee will be
primarily responsible for reviewing and approving our salary and benefits
policies (including stock options), including compensation of executive
officers.
32
Director Compensation
At present we do not pay our directors a fee for attending scheduled
and special meetings of our board of directors. We intend to reimburse each
director for reasonable travel expenses related to such director's attendance at
board of directors and committee meetings. As noted above, we intend to expand
our board to include "independent" directors. It is anticipated that the
appointment of independent members of our board will require us to pay fees
comparable to those paid by other public companies in our peer group.
Indebtedness of Directors and Executive Officers
None of our directors or officers or their respective associates or
affiliates is indebted to us.
Involvement in Certain Legal Proceedings
In the normal course of business, various claims are made against us.
At this time, in the opinion of management, there are no pending claims the
outcome of which are expected to result in a material adverse effect on our
consolidated financial position or results of operations.
Family Relationships
There are no family relationships among our directors or officers.
Executive Compensation
The following Summary Compensation Table sets forth all cash
compensation paid to our chief executive officer for services rendered in all
capacities to us during the noted periods. No executive officers received a
total annual salary and bonus compensation in excess of $100,000.
Summary Compensation Table
Name and
Principal Restricted Securities
Underlying Stock Underlying All Other
Positions Year Salary Bonus Awards Options Compensation
---------- ---- ------ ----- ---------- ---------- ------------
Xiangqian Li 2004 -0- -0- NA NA NA
2003 -0- -0- NA NA NA
2002 -0- -0- NA NA NA
33
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of January 20, 2005, certain
information with respect to the beneficial ownership of our common stock by (i)
each director and officer of Medina, (ii) each person known to Medina to be the
beneficial owner of five percent or more of the outstanding shares of common
stock of Medina, and (iii) all directors and officers of Medina as a group.
Unless otherwise indicated, the person or entity listed in the table is the
beneficial owner of, and has sole voting and investment power with respect to,
the shares indicated. Certain principal stockholders are selling stockholders in
this offering.
Amount and Nature of Beneficial Ownership (1)
---------------------------------------------
Number Percent of
Name of Beneficial Owner of Shares (2) Voting Stock (3)
------------------------ ------------- ----------------
Xiangqian Li 21,233,437 (4) 51.8%
Huanyu Mao 249,805 *
Yongbin Han 312,256 *
Directors and executive officers as a group (3 persons) 21,795,498 53.2%
-------------------------
*Denotes less than 1% of the outstanding shares of common stock.
(1) On January 20, 2005, there were 40,978,533 shares of common stock
outstanding and no issued and outstanding preferred stock. Each person
named above has the sole investment and voting power with respect to
all shares of common stock shown as beneficially owned by the person,
except as otherwise indicated below.
(2) Under applicable SEC rules, a person is deemed to be the "beneficial
owner" of a security with regard to which the person directly or
indirectly, has or shares (a) the voting power, which includes the
power to vote or direct the voting of the security, or (b) the
investment power, which includes the power to dispose, or direct the
disposition, of the security, in each case irrespective of the person's
economic interest in the security. Under these SEC rules, a person is
deemed to beneficially own securities which the person has the right to
acquire within 60 days through the exercise of any option or warrant or
through the conversion of another security.
(3) In determining the percent of voting stock owned by a person on January
20, 2005, (a) the numerator is the number of shares of common stock
beneficially owned by the person, including shares the beneficial
ownership of which may be acquired within 60 days upon the exercise of
options or warrants or conversion of convertible securities, and (b)
the denominator is the total of (i) the 40,978,533 shares in the
aggregate of common stock outstanding on January 20, 2005, and (ii) any
shares of common stock which the person has the right to acquire within
60 days upon the exercise of options or warrants or conversion of
convertible securities. Neither the numerator nor the denominator
includes shares which may be issued upon the exercise of any other
options or warrants or the conversion of any other convertible
securities.
(4) Mr. Li is a party to an Escrow Agreement pursuant to which he has
agreed to place 2,179,550 shares of his common stock into escrow for
the benefit of the selling stockholders in the event we fail to satisfy
certain "performance thresholds", as defined in the Escrow Agreement,
which Escrow Agreement is incorporated by reference as a material
exhibit to this registration statement. Mr. Li is also a party to a
Lock-up Agreement pursuant to which he has agreed, except for
distributions of his shares of common stock required under the Escrow
Agreement, not to transfer his common stock for a period commencing
Junuary 20, 2005 until following the listing of our common stock on a
national stock exchange or quotation meium. The Lock-up Agreement is
incorporated by reference as a material exhibit to this registration
statement.
34
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We have several outstanding short term bank notes payable to the
Agricultural Bank of China, Shenzhen branch, the Shenzhen Development Bank and
the China Minsheng Bank, Shenzhen branch, respectively, the proceeds of which
were used primarily to fund the operations of our manufacturing facility located
at the BAK Industrial Park. At September 30, 2004, we had aggregate amounts due
and payable under these debt facilities of $45,661,000. The debt facilities bear
interest at rates ranging from 4.536% to 5.841% and have maturity dates ranging
from five to twelve months. This indebtedness is guaranteed by both Xiangqian
Li, our President and Chief Executive Officer, and Julin Provincial Huaruan
Technology Company Limited by Shares, or Huaruan, a PRC company. Mr. Li is the
controlling shareholder and an executive officer of Huaruan. Except as disclosed
above, we have no other business relationships with Huaruan. Neither Mr. Li nor
Huaruan received or is entitled to receive any consideration for the above
referenced guarantees.
On October 18, 2003, we acquired intangible assets, including a patent
and other patent rights, from Huaruan, an entity controlled by Xiangqian Li, our
President and Chief Executive Officer. The total consideration paid to Huaruan
was $3.86 million. The consideration paid to Huaruan was recorded at fair market
value, as determined by an independent appraisal firm.
On September 30, 2004, BAK Battery entered into a Financial Consulting
Agreement with HFG International, Ltd., a PRC representative office, pursuant to
which HFG International agreed to provide BAK Battery with consulting help in
implementing an organizational structure that would facilitate accessing the
capital markets of the United States. In consideration for these services, HFG
International was paid a fee of $400,000 in conjunction with the consummation of
BAK Battery's private placement. Timothy P. Halter, our former Chief Executive
Officer, is the principal shareholder and an executive officer of HFG
International.
On June 10, 2004, we issued 99,858 shares of our $ 0.001 par value
common stock in full settlement of debt, in the amount of $49,929, owed to Harry
Miller, our former President and CEO. The price of the transaction was $0.50 per
share.
DESCRIPTION OF OUR CAPITAL STOCK
The following is a summary of the material terms of our capital stock.
This summary is subject to and qualified in its entirety by our Articles of
Incorporation, as amended, and Bylaws, and by the applicable provisions of
Nevada law.
Our authorized capital stock consists of 100,000,000 shares of common
stock, having a par value of $0.001 per share.
Common Stock. Each outstanding share of common stock entitles the
holder thereof to one vote per share on all matters. The Articles of
Incorporation do not permit cumulative voting for the election of directors,
which means that the holders of more than 50% of such outstanding shares voting
for the election of directors can elect all of the directors to be elected, if
they so choose; in such event, the holders of the remaining shares will not be
able to elect any of our directors. Stockholders do not have preemptive rights
to purchase shares in any future issuance of our common stock.
The holders of shares of our common stock are entitled to dividends out
of funds legally available when and as declared by our board of directors. Our
board of directors has never declared a dividend and does not anticipate
declaring a dividend in the foreseeable future. Should we decide in the future
to pay dividends, as a holding company, our ability to do so and meet other
obligations depends upon the receipt of dividends or other payments from our
operating subsidiaries and other holdings and investments. In addition, our
operating subsidiaries, from time to time, may be subject to restrictions on
their ability to make distributions to us, including as a result of restrictive
covenants in loan agreements, restrictions on the conversion of local currency
into U.S. dollars or other hard currency and other regulatory restrictions. In
the event of our liquidation, dissolution or winding up, holders of our common
stock are entitled to receive, ratably, the net assets available to stockholders
after payment of all creditors.
35
All of the issued and outstanding shares of our common stock are duly
authorized, validly issued, fully paid and non-assessable. To the extent that
additional shares of our common stock are issued, the relative interests of
existing stockholders will be diluted.
Transfer Agent and Registrar. Our transfer agent is Securities Transfer
Corporation, 2591 Dallas Parkway, Suite 102, Frisco, Texas 75034.
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders
and for each selling stockholder the number of shares of common stock
beneficially owned as of January 20, 2005, and the number of shares being
registered. All information with respect to share ownership has been furnished
by the selling stockholders. The shares being offered are being registered to
permit public secondary trading of the shares and each selling stockholder may
offer all or part of the shares owned for resale from time to time. A selling
stockholder is under no obligation, however, to sell any shares immediately
pursuant to this prospectus, nor is a selling stockholder obligated to sell all
or any portion of the shares at any time. Therefore, no estimate can be given as
to the number of shares of common stock that will be sold pursuant to this
prospectus or the number of shares that will be owned by the selling
stockholders upon termination of the offering made hereby.
Percent of
Shares of Percent of Shares of Common Stock
Common Stock Common Stock Common Stock After Completion
Selling Stockholders (2) Owned (1) (3) to be Registered of Offering (3)
The Pinnacle Fund, L.P. 2,109,636 5.1% 2,109,636 0%
Ying Wang 911,545 2.4% 911,545 0%
Gary Evans 758,862 1.9% 758,862 0%
Halter Financial Group, Inc. 587,754 1.4% 587,754 0%
Chinamerica Fund, LP 505,908 1.2% 505,908 0%
Westpark Capital L.P. 505,908 1.2% 505,908 0%
Lake Street Fund, LP 478,083 1.1% 478,083 0%
Xuechun Zhang 379,673 * 379,673 0%
Xin An 288,367 * 288,367 0%
Wanpei Chen 252,954 * 252,954 0%
Jayhawk China Fund 252,954 * 252,954 0%
Xiaohui Wang 224,825 * 224,825 0%
Leong Sing Lye 217,540 * 217,540 0%
Fred Astman 164,420 * 164,420 0%
Midsouth Investor Fund, L.P. 164,420 * 164,420 0%
Steve Kircher 151,772 * 151,772 0%
Kevin Halter, Jr. 134,062 * 134,062 0%
Stephen S. Taylor, Jr. 126,477 * 126,477 0%
Bellfield Capital Partners LP 101,182 * 101,182 0%
Incline Capital, L.P. 101,182 * 101,182 0%
David Moy 80,945 * 80,945 0%
Yuxin Zhang 74,942 * 74,942 0%
Feng Li 67,135 * 67,135 0%
Chongying Gong 64,857 * 64,857 0%
Merry Lee Carnall 50,591 * 50,591 0%
Ray Chapman 50,591 * 50,591 0%
Lighthouse Capital Insurance Company 50,591 * 50,591 0%
David Ofman 50,591 * 50,591 0%
David A. Spinney 50,591 * 50,591 0%
Si Zhang 50,591 * 50,591 0%
G. Marshall Abbott 37,943 * 37,943 0%
Scott Hood 37,943 * 37,943 0%
Bob Schiesser 37,943 * 37,943 0%
36
Percent of
Shares of Percent of Shares of Common Stock
Common Stock Common Stock Common Stock After Completion
Selling Stockholders (2) Owned (1) (3) to be Registered of Offering (3)
Mark DeSalvo 32,884 * 32,884 0%
BOT Holdings, Inc. 25,295 * 25,295 0%
Michael Columbos 25,295 * 25,295 0%
David L. Ebershoff 25,295 * 25,295 0%
Harold E. Gear 25,295 * 25,295 0%
William H. & Sandra L. Hedden 25,295 * 25,295 0%
Robert Kirkland 25,295 * 25,295 0%
Robert O. McDonald 25,295 * 25,295 0%
William Rosen 25,295 * 25,295 0%
Seminary Investments, II 25,295 * 25,295 0%
Stephen S. Taylor, Sr. 25,295 * 25,295 0%
Larry Kelley (4) 25,295 * 25,295 0%
Harry Gabel 22,766 * 22,766 0%
264646 Alberta Ltd. 17,707 * 17,707 0%
Yarek Bartos 17,707 * 17,707 0%
Earl Fawcett 17,707 * 17,707 0%
Kelly Fraser 17,707 * 17,707 0%
Andrew Goodacre 17,707 * 17,707 0%
Richard Macdermott 15,177 * 15,177 0%
783036 Alberta Ltd. 12,648 * 12,648 0%
Dennis B. Bleackley 12,648 * 12,648 0%
Luciano M. Bruno 12,648 * 12,648 0%
Chapel Rock Holdings Ltd. 12,648 * 12,648 0%
Stephen Sun Chiao 12,648 * 12,648 0%
Trevor Colby 12,648 * 12,648 0%
Trevor & Dylan Colby (5) 12,648 * 12,648 0%
Donna H. Dodson 12,648 * 12,648 0%
James Gilkison 12,648 * 12,648 0%
WN Gray 12,648 * 12,648 0%
Terral D. Hagman 12,648 * 12,648 0%
J.M.C. Investments Ltd. 12,648 * 12,648 0%
John Mackay 12,648 * 12,648 0%
Steven Perry 12,648 * 12,648 0%
Paul Plowman 12,648 * 12,648 0%
John B. Trescot 12,648 * 12,648 0%
John H. Trescot, Jr. 12,648 * 12,648 0%
Jack Coldwell 10,118 * 10,118 0%
Richard Dahl 10,118 * 10,118 0%
Danich Investments Ltd. 10,118 * 10,118 0%
Fabmar Investments Ltd. 10,118 * 10,118 0%
Robert Geddes 10,118 * 10,118 0%
Dwight L. McLennan 10,118 * 10,118 0%
Sandeep G. Aggarwal/Prof. Corp. 10,118 * 10,118 0%
Ken Bell 7,589 * 7,589 0%
Imtiaz Bhiman 7,589 * 7,589 0%
Adam Carpenter 7,589 * 7,589 0%
Gary Allard 5,059 * 5,059 0%
A. J. Charbonneau 5,059 * 5,059 0%
G-Mac Welding Ltd. 5,059 * 5,059 0%
Calvin Gabel 5,059 * 5,059 0%
Steve Horth 5,059 * 5,059 0%
Don A. Leeb 5,059 * 5,059 0%
Eric Pedersen 5,059 * 5,059 0%
Robert G. & Judith T. Rader (6) 5,059 * 5,059 0%
Doug Riopelle and Linda Benham-Riopelle 5,059 * 5,059 0%
Gerald Slamko 5,059 * 5,059 0%
37
Percent of
Shares of Percent of Shares of Common Stock
Common Stock Common Stock Common Stock After Completion
Selling Stockholders (2) Owned (1) (3) to be Registered of Offering (3)
Steve Tobias 5,059 * 5,059 0%
William Tobman 5,059 * 5,059 0%
Ann T. Garrett 2,530 * 2,530 0%
James B. & Pauline Lisle 2,530 * 2,530 0%
Total 9,934,762 24.2% 9,934,762 0%
-----------------
*Denotes less than 1% of the outstanding shares of common stock.
(1) On January 20, 2005, there were 40,978,533 shares of common stock
outstanding and no issued and outstanding preferred stock. All of the
shares of common stock being registered pursuant to this registration
statement are being registered on behalf of the selling shareholders
and were outstanding prior to the filing of this registration
statement. Following the offering, there will be 40,978,533 shares of
common stock outstanding and no issued and outstanding preferred stock.
(2) Each person named in the selling stockholder above has the sole
investment and voting power with respect to all shares of common stock
shown as beneficially owned by the person, except as otherwise
indicated below. Under applicable SEC rules, a person is deemed to be
the "beneficial owner" of a security with regard to which the person
directly or indirectly, has or shares (a) the voting power, which
includes the power to vote or direct the voting of the security, or (b)
the investment power, which includes the power to dispose, or direct
the disposition, of the security, in each case irrespective of the
person's economic interest in the security. Under these SEC rules, a
person is deemed to beneficially own securities which the person has
the right to acquire within 60 days through the exercise of any option
or warrant or through the conversion of another security.
(3) In determining the percent of common stock owned by a person on January
20, 2005, (a) the numerator is the number of shares of common stock
beneficially owned by the person, including shares the beneficial
ownership of which may be acquired within 60 days upon the exercise of
options or warrants or conversion of convertible securities, and (b)
the denominator is the total of (i) the 40,978,533 shares in the
aggregate of common stock outstanding on January 20, 2005, and (ii) any
shares of common stock which the person has the right to acquire within
60 days upon the exercise of options or warrants or conversion of
convertible securities. Neither the numerator nor the denominator
includes shares which may be issued upon the exercise of any other
options or warrants or the conversion of any other convertible
securities. For purposes of this selling stockholders table, the
calculation for determining the percent of common stock owned by a
person after completion of the offering is the same, and assumes that
no new shares of common stock will be issued by us prior to the
completion of the offering.
(4) Held as trustee for the Kelley Revocable Trust.
(5) Held as joint tenants with right of survivorship.
(6) Held as trustees for the Rader Living Trust.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 40,978,533 shares of
common stock outstanding. A current stockholder who is our "affiliate," defined
in Rule 144 as a person who directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
us, will be required to comply with the resale limitations of Rule 144.
Purchasers of shares in the offering, other than affiliates, may resell
their shares immediately. Sales by affiliates will be subject to the volume and
other limitations of Rule 144, including certain restrictions regarding the
manner of sale, notice requirements, and the availability of current public
38
information about us. The volume limitations generally permit an affiliate to
sell, within any three month period, a number of shares that does not exceed the
greater of one percent of the outstanding shares of common stock or the average
weekly trading volume during the four calendar weeks preceding his sale. A
person who ceases to be an affiliate at least three months before the sale of
restricted securities beneficially owned for at least two years may sell the
restricted securities under Rule 144 without regard to any of the Rule 144
limitations.
PLAN OF DISTRIBUTION
The 9,934,762 shares being offered by the selling stockholders may be
sold or distributed from time to time by the selling stockholders or their
transferees directly to one or more purchasers or through brokers, dealers, or
underwriters who may act solely as agents or may acquire shares as principals.
Such sales or distributions may be made at prevailing market prices, at prices
related to such prevailing market prices, or at variable prices negotiated
between the sellers and purchasers that may vary. The distribution of the shares
may be effected in one or more of the following methods:
o ordinary brokerage transactions, including long or short
sales,
o transactions involving cross or block trades, or otherwise on
the OTC Bulletin Board,
o purchases by brokers, dealers, or underwriters as principals
and subsequent resale by the purchasers for their own accounts
pursuant to this prospectus,
o sales "at the market" to, or through, market makers or into an
existing market for the shares,
o sales not involving market makers or established trading
markets, including direct sales to purchasers or sales
effected through agents,
o transactions involving options, swaps, or other derivatives,
whether exchange-listed or otherwise, or
o transactions involving any combination of the foregoing or any
other legally available means.
In addition, a selling stockholder may enter into hedging transactions
with one or more broker-dealers who may engage in short sales of shares in the
course of hedging the positions they assume with the selling stockholder. A
selling stockholder may also enter into options or other transactions with one
or more broker-dealers requiring the delivery of the shares by such
broker-dealers with the possibility that such shares may be resold thereafter
pursuant to this prospectus.
A broker, dealer, underwriter, or agent participating in the
distribution of the shares may receive compensation in the form of discounts,
concessions, or commissions from the selling stockholders and/or purchasers of
the shares for whom such person may act as an agent, to whom such person may
sell as principal, or both; and such compensation as to a particular person may
be in excess of customary commissions. The selling stockholders and any
broker-dealers acting in connection with the sale of the shares being registered
may be deemed to be underwriters within the meaning of Section 2(11) of the
Securities Act of 1933, as amended, or the Securities Act, and any profit
realized by them on the resale of shares as principals may be deemed
underwriting compensation under the Securities Act. We know of no existing
arrangements between any of the selling stockholders and any other stockholder,
broker, dealer, underwriter, or agent relating to the sale or distribution of
the shares, nor can we presently estimate the amount, if any, of such
compensation.
Although we will receive no proceeds from the sale of shares pursuant
to this prospectus, we have agreed to bear the costs and expenses of the
registration of the shares, including legal and accounting fees, and such costs
and expenses are estimated to be approximately $213,000.
We have informed the selling stockholders that while they are engaged
in a distribution of the shares included in this prospectus they will be
required to comply with certain anti-manipulative rules contained in Regulation
M under the Exchange Act. With certain exceptions, Regulation M prohibits any
selling stockholder, any affiliated purchaser, and any broker-dealer or other
person who participates in such distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase, any security that is the
subject of the distribution until the entire distribution is complete.
Regulation M also prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security.
39
INDEPENDENT PUBLIC ACCOUNTANTS
There have been no changes in and/or disagreements with Schwartz
Levitsky Feldman L.L.P., independent registered public accounting firm, on
accounting and financial disclosure matters.
LEGAL MATTERS
Certain legal matters in this offering, including the legality of the
common stock offered pursuant to this prospectus, will be passed upon for us and
the selling stockholders by Jackson Walker L.L.P.
EXPERTS
Our financial statements included in this prospectus have been audited
by Schwartz Levitsky Feldman L.L.P., independent registered public accounting
firm, as stated in the opinion, which has been rendered upon the authority of
said firm as experts in accounting and auditing.
INTERESTS OF NAMED EXPERTS AND COUNSEL
No "Expert" or "Counsel" as defined by Item 509 of Regulation S-B
promulgated pursuant to the Securities Act, whose services were used in the
preparation of this Form SB-2, was hired on a contingent basis or will receive a
direct or indirect interest in us.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our Amended and Restated Bylaws, filed as Exhibit 3.3 hereto, provide
that we must indemnify our directors to the fullest extent permitted under
Nevada law and may indemnify, if so authorized by our board of directors, our
officers and any other person whom we have the power to indemnify against
liability, reasonable expense or other matter whatsoever. The effect of these
provisions is potentially to indemnify our directors and officers from all costs
and expenses of liability incurred by them in connection with any action, suit
or proceeding in which they are involved by reason of their affiliation with us.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
Our Amended and Restated Bylaws also permit us to maintain insurance on
behalf of our company and any person whom we have the power to indemnify.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form SB-2 with the Securities
and Exchange Commission under the Securities Act of 1933 with respect to the
shares of common stock offered in this offering prospectus. This prospectus,
which is a part of the registration statement, does not contain all of the
information set forth in the registration statement, or the exhibits which are
part of the registration statement. You should refer to the registration
statement and its exhibits for additional information that is not contained in
this prospectus. Whenever we make reference in this prospectus to any of our
contracts, agreements or other documents, you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and we are required to file reports, any proxy
statements and other information with the Securities and Exchange Commission.
You can read our Securities and Exchange Commission files, including this
registration statement, over the Internet at the Securities and Exchange
Commission's web site at http://www.sec.gov. You may also read and copy any
documents we file with the Securities and Exchange Commission at its public
reference facility at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
also obtain copies of the documents at prescribed rates by writing to the Public
Reference Section of the Securities and Exchange Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information on the operation of the public
reference facilities.
40
MEDINA COFFEE, INC. AND SUBSIDIARY
---------------------------------------------
FINANCIAL REPORTS
AT
SEPTEMBER 30, 2004 and 2003
---------------------------------------------
MEDINA COFFEE, INC. AND SUBSIDIARY
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets at September 30, 2004 and 2003 F-2
Consolidated Statements of Operations for the Years Ended
September 30, 2004and 2003 F-3
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended September 30, 2004 and 2003 F-4
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2004 and 2003 F-5
Notes to Consolidated Financial Statements F-6 - F-21
Schwartz Levitsky Feldman llp
CHARTERED ACCOUNTANTS
TORONTO, MONTREAL, OTTAWA
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
To the Stockholders of
MEDINA COFFEE, INC.
We have audited the accompanying consolidated balance sheets of MEDINA COFFEE,
INC. as of September 30, 2004 and 2003, and the related consolidated statements
of changes in stockholders' equity, operations and cash flows for the years then
ended (all expressed in United States dollars). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MEDINA COFFEE, INC.
as of September 30, 2004 and 2003 and the results of its operations and its cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
As described in Notes 7 and 13 the Company has not yet obtained final approval
from the relevant authorities for the acquisition of land use rights to the
property which it occupies. However, the Company has commenced construction of
its facilities on the property and has reflected the costs incurred to date as
long-term assets on the balance sheet described as "property and equipment -
building", "construction in process" and "land use rights", with the expectation
that approval will be obtained within the next fiscal year. The Company may be
at risk as more fully set out in the notes mentioned above should the
application be rejected. The accompanying finacial statements do not include any
adjustments that might result should its application not be approved.
Toronto, Ontario, Canada
December 30, 2004 except for notes 1 and 14 /s/ Schwartz Levitsky Felman llp
as to which the date is January 20, 2005 Chartered Accountants
F-1
Medina Coffee, Inc. and Subsidiary
Consolidated Balance Sheets
As at September 30, 2004 and 2003
Assets
------
2004 2003
Current Assets
Cash US$ 3,212,176 US$ 670,925
Cash - Restricted 7,120,069 820,692
Accounts Receivable, Net 20,999,561 6,758,283
Inventories 29,535,985 7,993,781
Prepaid Expenses 1,330,645 724,845
Notes Receivable 18,122 -0-
Accounts Receivable - Related Party 911,093 -0-
------------ ------------
Total Current
63,127,651 16,968,526
------------ ------------
Long-Term Assets
Property, Plant, & Equipment 19,875,583 4,968,737
Construction in Progress 23,656,190 555,395
Land Use Rights 4,029,038 0
Less Accumulated Depreciation (2,370,774) (643,616)
------------ ------------
Long- Term Assets, Net 45,190,037 4,880,516
------------ ------------
Other Assets
Other Receivables 225,972 925,833
Intangible Assets 58,362 16,626
------------ ------------
Total other 284,334 942,459
------------ ------------
Total Assets US$ 108,602,022 US$ 22,791,501
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Accounts Payable US$ 23,570,087 US$ 5,164,588
Bank Loans, Short Term 27,304,162 3,479,480
Short Term Loans 1,812,316 0
Notes Payable, Other 20,772,559 6,098,490
Land Use Rights Payable 3,750,756 0
Construction Costs Payable 6,347,846 0
Customer Deposits 369,390 655,391
Accrued Expenses 5,247,656 1,782,752
Other Liabilities 181,223 120,815
------------ ------------
Total Current 89,355,995 17,301,516
------------ ------------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity
Common Stock - $.001 Par Value; 100,000,000 Shares
Authorized; 31,225,642 Shares Issued and Outstanding 31,226 31,226
Additional Paid In Capital 12,052,845 1,176,927
Accumulated Comprehensive Income (Loss) (144) (49)
Reserves 1,724,246 651,583
Retained Earnings 5,437,854 3,630,298
------------ ------------
19,246,027 5,489,985
------------ ------------
Total Liabilities and Shareholders' Equity US$ 108,602,022 US$ 22,791,501
============ ============
The accompanying notes are an integral part of these financial statements.
F-2
Medina Coffee, Inc. and Subsidiary
Statements of Operations
For The Years Ended September 30, 2004 and 2003
2004 2003
----------- -----------
Revenues, Net of Returns US$ 63,746,202 US$ 20,045,496
Cost of Goods Sold 48,285,847 14,173,003
----------- -----------
Gross Profit 15,460,355 5,872,493
----------- -----------
Expenses:
Selling 1,869,275 442,112
General and Administrative 3,052,992 785,612
Research and Development 328,779 116,789
Bad Debts 326,990 448,285
Depreciation and Amortization 1,732,707 379,551
----------- -----------
Total Expenses 7,310,743 2,172,349
----------- -----------
Operating Income 8,149,612 3,700,144
Other Expense
Finance Costs (1,006,056) (122,798)
Other Expense (2,916) (1,315)
----------- -----------
Net Income Before Provision for Income Taxes 7,140,640 3,576,031
Provision for Income Taxes 394,333 0
----------- -----------
Net Income US$ 6,746,307 US$ 3,576,031
=========== ===========
Net Income per Share - Basic and Diluted $ .22 $ .11
=========== ===========
Weighted Average Shares
Outstanding 31,225,642 31,225,642
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
Medina Coffee, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
For The Years Ended September 30, 2004 and 2003
Par Value Additional
Number of Common Paid-In Retained
Shares Stock Capital Earnings
------------- ------------- ------------- -------------
Balance - September 30, 2002 31,225,642 $ 31,226 $ 1,176,927 $ 598,265
Net Income 3,576,031
Transfer to Reserves (543,998)
Foreign Currency Translation
---------------------------------------------------------------
Balance - September 30, 2003 31,225,642 31,226 1,176,927 3,630,298
Capital Contributions 10,875,918
Net Income 6,746,307
Transfer to Reserves (1,072,663)
Deemed Distribution to Shareholder -
Intangible Assets (3,866,088)
Foreign Currency Translation
---------------------------------------------------------------
Balance - September 30, 2004 31,225,642 $ 31,226 $ 12,052,845 $ 5,437,854
===============================================================
Accumulated
Other
Comprehensive Shareholders'
Reserves Income (Loss) Equity
------------- ------------- -------------
Balance - September 30, 2002 $ 107,585 $ 0 $ 1,914,003
Net Income 3,576,031
Transfer to Reserves 543,998
Foreign Currency Translation (49) (49)
-----------------------------------------------
Balance - September 30, 2003 651,583 (49) 5,489,985
Capital Contributions 10,875,918
Net Income 6,746,307
Transfer to Reserves 1,072,663
Deemed Distribution to Shareholder -
Intangible Assets (3,866,088)
Foreign Currency Translation (95) (95)
-----------------------------------------------
Balance - September 30, 2004 $ 1,724,246 $ (144) $ 19,246,027
===============================================
The accompanying notes are an integral part of these financial statements.
F-4
Medina Coffee, Inc. and Subsidiary
Statements of Cash Flows
For The Years Ended September 30, 2004 and 2003
2004 2003
----------- -----------
Cash Flows from Operating Activities
Net Income US$ 6,746,307 US$ 3,576,031
Adjustments to reconcile net income to net cash
from operating activities:
Bad debt expense 326,990 448,285
Amortization 5,549 676
Depreciation 1,727,158 378,875
Changes in Assets and Liabilities:
Accounts Receivable (14,543,660) (5,786,874)
Inventory (21,542,204) (6,908,083)
Prepaid Expenses (605,800) (52,609)
Notes Receivable (18,122) 0
Accounts Payable 18,405,499 4,311,720
Customer Deposits (286,001) 593,776
Accrued Expenses 3,464,904 723,825
Construction Costs Payable 6,347,846 0
Other Liabilities 181,223 120,815
----------- -----------
Net Cash Flows from Operating Activities 209,689 (2,593,563)
----------- -----------
Cash Flows from Investing Activities
Acquisition of Property, Plant and Equipment (14,906,846) (4,095,998)
Construction in Progress (23,379,077) (555,395)
Investment in Intangible Assets (47,277) (17,302)
----------- -----------
Net Cash Flows from Investing Activities (38,333,200) (4,668,695)
----------- -----------
Cash Flows from Financing Activities
Proceeds from Borrowings 57,619,801 9,722,901
Repayment of Borrowings (17,429,652) (507,424)
Cash Pledged To Bank (6,299,377) (820,692)
Loans to Related Parties (235,840) (554,614)
Deemed Distribution to Shareholders - Intangible Assets (3,866,088) 0
----------- -----------
Capital Contributions 10,875,918 0
----------- -----------
Net Cash flows from Financing Activities 40,664,762 7,840,171
----------- -----------
Net Increase (Decrease) in Cash 2,541,251 577,913
Cash - Beginning of Year 670,925 93,012
----------- -----------
Cash - End of Year US$ 3,212,176 US$ 670,925
=========== ===========
Supplemental Cash Flow Disclosures:
Interest Paid US$ 1,007,287 US$ 122,798
=========== ===========
Income Taxes Paid 0 0
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
1. RECAPITALIZATION TRANSACTION
On January 20, 2005, Medina completed a stock exchange transaction with the
stockholders of BAK International Limited, a Hong Kong company, or BAK
International. The exchange was consummated under Nevada law pursuant to the
terms of a Securities Exchange Agreement dated effective as of January 3, 2005
by and among Medina, BAK International and the stockholders of BAK
International. Pursuant to the Securities Exchange Agreement, the Company issued
39,826,075 shares of common stock, par value $0.001 per share, to the
stockholders of BAK International (31,225,642 Shares are original shareholders
of BAK and 8,600,433 Shares to new investors), representing approximately 97.2%
of the Medina post-exchange issued and outstanding common stock, in exchange for
100% of the outstanding capital stock of BAK International. The Company
presently carries on the business of Shenzhen BAK Battery Co., Ltd., a Chinese
corporation and BAK International's wholly-owned subsidiary, or BAK Battery.
The reverse merger transaction has been accounted for as a recapitalization of
BAK International whereby the historical financial statements and operations of
BAK become the historical financial statements of the Registrant with no
adjustment to the carrying value of the assets and liabilities. The accompanying
financial statements reflect the recapitalization of the shareholders equity as
if the transaction occurred as of the beginning of the first period presented.
2. ORGANIZATION AND PRINCIPAL ACTIVITIES
BAK International Limited was incorporated in Hong Kong on December 29, 2003
under the Companies Ordinance as BATCO International Limited and subsequently
changed its' name to BAK International Limited on November 3, 2004. BAK
International Limited acquired 100% of the outstanding shares of Shenzhen BAK
Battery Co., Ltd ("BAK") for a total consideration of USD$11.5 million on
November 6, 2004. Simultaneously the former shareholders of BAK acquired 96.8%
of the issued shares of BAK International Limited. Consequently, the
shareholders of BAK International Limited are substantially the same as the
former shareholders as BAK therefore the transaction has been accounted for as a
recapitalization of BAK with no adjustment to the historical basis of the assets
and liabilities of BAK and the operations consolidated as though the transaction
occurred as of the beginning of the first accounting period presented in these
financial statements. See Footnote 14 - Subsequent Events.
Shenzhen BAK Battery Co., Ltd. ("BAK") was founded on August 3, 2001 as a
China-based company specializing in lithium ion (known as "Li-ion" or "Li-ion
cell") battery cell production, for use in the replacement battery market,
primarily for cell phones in the Peoples Republic of China (PRC).
The Company is subject to the consideration and risks of operating in the PRC.
These include risks associated with the political and economic environment,
foreign currency exchange and the legal system in the PRC.
The economy of PRC differs significantly from the economies of the "western"
industrialized nations in such respects as structure, level of development,
gross national product, growth rate, capital reinvestment, resource allocation,
self-sufficiency, rate of inflation and balance of payments position, among
others. Only recently has the PRC government encouraged substantial private
economic activities. The Chinese economy has experienced significant growth in
F-6
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
2. ORGANIZATION AND PRINCIPAL ACTIVITIES - (Cont'd)
the past several years, but such growth has been uneven among various sectors of
the economy and geographic regions. Actions by the PRC government to control
inflation have significantly restrained economic expansion in the recent past.
Similar actions by the PRC government in the future could have a significant
adverse effect on economic conditions in PRC.
Many laws and regulations dealing with economic matters in general and foreign
investment in particular have been enacted in the PRC. However, the PRC still
does not have a comprehensive system of laws, and enforcement of existing laws
may be uncertain and sporadic.
The Company's operating assets and primary sources of income and cash flows are
of interests in the PRC. The PRC economy has, for many years, been a
centrally-planned economy, operating on the basis of annual, five-year and
ten-year state plans adopted by central PRC governmental authorities, which set
out national production and development targets. The PRC government has been
pursuing economic reforms since it first adopted its "open-door" policy in 1978.
There is no assurance that the PRC government will continue to pursue economic
reforms or that there will not be any significant change in its economic or
other policies, particularly in the event of any change in the political
leadership of, or the political, economic or social conditions in the PRC. There
is also no assurance that the Company will not be adversely affected by any such
change in governmental policies or any unfavorable change in the political,
economic or social conditions, the laws or regulations, or the rate or method of
taxation in the PRC.
As many of the economic reforms which have been or are being implemented by the
PRC government are unprecedented or experimental, they may be subject to
adjustment or refinement, which may have adverse effects on the Company.
Further, through state plans and other economic and fiscal measures, it remains
possible for the PRC government to exert significant influence on the PRC
economy.
The Company's financial instruments that are exposed to concentration of credit
risk consist primarily of cash and cash equivalents, and accounts receivable
from customers. Cash and cash equivalents are maintained with major banks in the
PRC. The Company's business activity is primarily with customers in the PRC. The
Company periodically performs credit analysis and monitors the financial
condition of its clients in order to minimize credit risk.
Any devaluation of the Renminbi (RMB) against the United States dollar would
consequently have adverse effects on the Company's financial performance and
asset values when measured in terms of the United States dollar. Should the RMB
significantly devalue against the United States dollar, such devaluation could
have a material adverse effect on the Company's earnings and the foreign
currency equivalent of such earnings. The Company does not hedge its RMB -
United States dollar exchange rate exposure.
On January 1, 1994, the PRC government introduced a single rate of exchange as
quoted daily by the People's Bank of China (the "Unified Exchange Rate"). No
representation is made that the RMB amounts have been, or could be, converted
into US$ at that or any rate. This quotation of exchange rates does not imply
free convertibility of RMB to other foreign currencies. All foreign exchange
transactions continue to take place either through the Bank of China or other
F-7
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
2. ORGANIZATION AND PRINCIPAL ACTIVITIES - (Cont'd)
banks authorized to buy and sell foreign currencies at the exchange rate quoted
by the People's Bank of China. Approval of foreign currency payments by the
People's Bank of China or other institutions requires submitting a payment
application form together with suppliers' invoices, shipping documents and
signed contracts.
3. BASIS OF PRESENTATION
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles used in the United States of America and include
the accounts of BAK International Limited and Shenzhen BAK Battery Co, Ltd. for
all periods presented.
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
A. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and any other highly liquid
investments purchased with an original maturity of three months or less.
The carrying amounts approximate fair value because of the short-term
maturity of those instruments. As stated in the following Note 9, a portion
of the Company's cash is restricted cash, which has been pledged to its
bank to secure short-term bank loans. This restricted cash is not as liquid
as other cash, and has been reflected in the attached financial statements.
B. ACCOUNTS RECEIVABLE
In order to determine the fair value of the Company's accounts receivable,
BAK records a provision for doubtful accounts to cover estimated credit
losses. Management reviews and adjusts this allowance periodically based on
historical experience and its evaluation of the collectibility of
outstanding accounts receivable. The Company evaluates the credit risk of
its customers utilizing historical data and estimates of future
performance.
C. INVENTORY
Inventories are stated at the lower of cost or net realizable value. Cost
is calculated on the moving average basis and includes all costs to acquire
and other costs incurred in bringing the inventories to their present
location and condition. The Company evaluates the net realizable value of
its inventories on a regular basis and records a provision for loss to
reduce the computed moving-average cost if it exceeds the net realizable
value.
D. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements
are capitalized.
F-8
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
D. PROPERTY, PLANT AND EQUIPMENT (cont'd)
When assets are retired or disposed of, the cost and accumulated
depreciation are removed from the accounts, and any resulting gains or
losses are included in income in the year of disposition.
The Company recognizes a scrap value of 5% of the cost basis and
depreciation is calculated on a straight-line basis over the estimated
useful life of the assets. The estimated useful lives are as follows:
Buildings 30 - 40 years
Plant and machinery 5 - 12 years
Motor vehicles 8 years
Office equipment and furnishings 5 years
Leasehold Improvements 2 - 5 years
E. INTANGIBLE ASSETS
Trademarks are carried at cost and are amortized using the straight-line
method over the estimated useful lives of 25 years from the date the
Company acquired the trademark.
F. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash, receivables,
accounts payable and accrued expenses and debt, approximates their fair
value at September 30, 2004 and 2003 due to the relatively short-term
nature of these instruments.
G. CONSTRUCTION IN PROGRESS
Construction in progress represents buildings, machinery and other
long-term assets under construction or installation, which is stated at
cost less any impairment losses, and is not depreciated. Cost comprises the
direct costs of purchase, construction and installation. Construction in
progress is reclassified to the appropriate category of long-term assets
when completed and ready for use. The management is of the opinion that no
impairment loss is considered necessary at year-end.
H. INCOME TAXES
The Company accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, which requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements
or tax returns. Deferred income taxes are provided using the liability
method. Under the liability method, deferred income taxes are recognized
for all significant temporary differences between the tax and financial
statement bases of assets and liabilities. In addition, the Company is
required to record all deferred tax assets, including future tax benefits
of capital losses carried forward, and to record a "valuation allowance"
for any deferred tax assets where it is more likely than not that the asset
will not be realized.
F-9
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
H. INCOME TAXES (cont'd)
In accordance with the relevant income tax laws applicable to enterprises
operating in the Shenzhen Special Economic Zone of the PRC, the profits of
the Company are fully exempt from income tax for five years ("tax
holiday"), commencing from the first profit making year of operating,
followed by a 50% exemption for the immediate next three years ("tax
preferential period"), after which the profits of the Company will be
taxable at the full rate, currently 15%.
Had this tax holiday not been available, income tax expense would have
increased by approximately US$692,000 for the year ended September 30,
2004, and US$537,000 for the year ended September 30, 2003, respectively.
I. GOVERNMENT SUBSIDIES
Subsidies from the government are recognized at their fair values when
received or there is reasonable assurance that they will be received, and
all attached conditions are complied with.
J. RELATED PARTIES
Parties are considered to be related if one party has the ability, directly
or indirectly, to control the other party or exercise significant influence
over the other party in making financial and operational decisions. Parties
are also considered to be related if they are subject to common control or
common significant influence. Related parties may be individuals or
corporate entities.
K. IMPAIRMENT OF LONG-TERM ASSETS
In accordance with the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", the Company's policy is to
record an impairment loss against the balance of a long-lived asset in the
period when it is determined that the carrying amount of the asset may not
be recoverable. This determination is based on an evaluation of such
factors as the occurrence of a significant event, a significant change in
the environment in which the business assets operate or if the expected
future non-discounted cash flows of the business was determined to be less
than the carrying value of the assets. If impairment is deemed to exist,
the assets will be written down to fair value. Management also evaluates
events and circumstances to determine whether revised estimates of useful
lives are warranted. As of September 30, 2004, management expects its
long-lived assets to be fully recoverable.
F-10
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
L. FOREIGN CURRENCY TRANSLATION (cont'd)
The Company maintains its books and accounting records in Renminbi ("RMB"),
the PRC's currency, being the functional currency. Translation of amounts
from RMB in United States dollars ("US$") has been made at the following
exchange rates for the respective years:
September 30, 2004:
Balance Sheet - RMB 8.27670 to US$ 1
Operating Statement - RMB 8.26688 to US$ 1
September 30, 2003 -
Balance Sheet - RMB 8.27710 to US$ 1
Operating Statement - RMB 8.27699 to US$ 1
Foreign currency transactions in RMB are reflected using the temporal
method. Under this method, all monetary items are translated into the
functional currency at the rate of exchange prevailing rate the balance
sheet date. Non-monetary transactions are translated at historical rates.
Income and expenses are translated at the rate in effect on the transaction
dates. Transaction gains and losses, if any, are included in the
determination of f net income for the period.
In translating the financial statements of the Company from its functional
currency into its reporting currency in United States dollars, balance
sheet accounts are translated using the closing exchange rate in effect at
the balance sheet date and income and expense accounts are translated using
the average exchange rate prevailing during the reporting period.
Adjustments resulting from the translation, if any are included in
cumulative other comprehensive income (loss) in stockholder's equity.
The RMB is not readily convertible into United States dollars or other
foreign currencies. The foreign exchange rate between the United States
dollar and the RMB has been stable at approximately 1RMB to US$.1205 for
the last few years. No representation is made that the RMB amounts could
have been or could be, converted into United States dollars or any other
currency at that rate or any other rate.
M. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
N. REVENUE RECOGNITION, RETURNS AND WARRANTIES
BAK recognizes revenue when the significant risks and rewards of ownership
have transferred pursuant to PRC law, including factors such as when
persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed and determinable, sales and value-added tax laws have
F-11
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
N. REVENUE RECOGNITION, RETURNS AND WARRANTIES (cont'd)
been complied with, and collectibility is reasonably assured. BAK generally
recognizes product sales when the product is shipped. In the event goods
are returned from a customer, revenue is reduced, and the returned goods
are placed back into inventory during the period that the returned goods
are received by BAK. Concurrent with the recognition of revenue, at the end
of the fiscal year, BAK records a warranty reserve for product returns,
based upon historical experience, that are a percentage of sales during the
final month of the respective year.
O. EMPLOYEES' BENEFITS AND PENSION OBLIGATIONS
Mandatory contributions are made to the Government's health, retirement
benefit and unemployment schemes at the statutory rates in force during the
period, based on gross salary payments. The cost of these payments is
charged to the statement of income in the same period as the related salary
cost. While the Company has purchased all required insurance for management
personnel, the Company is not in compliance with the similar requirements
for other of its employees. See Note 13, Commitments and Contingencies.
In accordance with certain regulations of the Shenzhen Municipal
Government, all enterprises established in Shenzhen are required to
contribute to a retirement insurance fund administered by the Shenzhen
Municipal Government at rates ranging from 8% to 9% of the basic salaries
or a minimum changes of RMB155 per person per month of the company's
existing PRC staff.
P. COMPREHENSIVE INCOME/(LOSS)
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS
No. 130 establishes standards for the reporting and display of
comprehensive income, its components and accumulated balances in a full set
of general purpose financial statements. SFAS No. 130 defines comprehensive
income (loss) to include all changes in equity except those resulting from
investments by owners and distributions to owners, including adjustments to
minimum pension liabilities, accumulated foreign currency translation, and
unrealized gains or losses on marketable securities.
Q. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts
receivable. The Company performs ongoing credit evaluations with respect to
the financial condition of its creditors, but does not require collateral.
In order to determine the value of the Company's accounts receivable, the
Company records a provision for doubtful accounts to cover probable credit
losses. Management reviews and adjusts this allowance periodically based on
historical experience and its evaluation of the collectibility of
outstanding accounts receivable.
F-12
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
R. RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations when incurred and
are included in operating expenses. The amounts charged in 2004 and 2003
were $328,779 and $116,789, respectively.
S. ADVERTISING COSTS
Advertising costs, except for costs associated with direct-response
advertising, are charged to operations when incurred. The costs of
direct-response advertising are capitalized and amortized over the period
during which future benefits are expected to be received. The Company did
not incur any direct-response advertising costs in 2004 and 2003,
respectively. Advertising costs amounted to $201,200 and $65,900 in 2004
and 2003 respectively.
T. EARNINGS PER SHARE
Basic and diluted earnings per share is computed by dividing net income
available by the weighted average number of common shares outstanding for
the period since the Company does not have any stock options, warrants or
other dilutive instruments. The weighted average outstanding common shares
reflects the effects of the share exchange transaction as described in Note
1.
U. RECENT PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146 "Accounting for Restructuring
Costs." SFAS 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts and relocating plant facilities or personnel. Under
SFAS 146, the Company will record a liability for a cost associated with an
exit or disposal activity when that liability is incurred and can be
measured at fair value. SFAS 146 will require the Company to disclose
information about its exit and disposal activities, the related costs, and
changes in those costs in the notes to the interim and annual financial
statements that include the period in which an exit activity is initiated
and in any subsequent period until the activity is completed. SFAS 146 is
effective prospectively for exit or disposal activities initiated after
December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a
company cannot restate its previously issued financial statements and the
new statement grandfathers the accounting for liabilities that a company
had previously recorded under Emerging Issues Task Force Issue 94-3. In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of SFAS Statement No.
123, "Accounting for Stock Based Compensation" which provides alternative
methods for accounting for a change by registrants to the fair value method
of accounting for stock-based compensation. Additionally, SFAS 148 amends
the disclosure requirements of SFAS 123 to require disclosure in the
significant accounting policy footnote of both annual and interim financial
statements of the method of accounting for stock based-compensation and the
F-13
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
U. RECENT PRONOUNCEMENTS (cont'd)
related pro forma disclosures when the intrinsic value method continues to
be used. The statement is effective for fiscal years beginning after
December 15, 2002, and disclosures are effective for the first fiscal
quarter beginning after December 15, 2002.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities".
The changes in SFAS No. 149 improve financial reporting by requiring that
contracts with comparable characteristics are accounted for similarly. This
statement is effective for contracts entered into or modified after June
30, 2003 and all of its provisions should be applied prospectively.
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain
Financial Instruments with Characteristics of both Liabilities and Equity".
SFAS No. 150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity that, under previous
pronouncements, issuers could account for as equity. The new accounting
guidance contained in SFAS No. 150 requires that those instruments be
classified as liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatory redeemable
shares, which the issuing company is obligated to buy back in exchange for
cash or other assets. A second type includes put options and forward
purchase contracts, which involves instruments that do or may require the
issuer to buy back some of its shares in exchange for cash or other assets.
The third type of instruments that are liabilities under this SFAS is
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index,
or varies inversely with the value of the issuers' shares. SFAS No. 150
does not apply to features embedded in a financial instrument that is not a
derivative in its entirety.
Most of the provisions of Statement 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this SFAS are consistent
with the FASB's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. This SFAS shall be effective for financial instruments entered into
or modified after May 31, 2003 and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003, except
for mandatory redeemable financial instruments of a non-public entity, as
to which the effective date is for fiscal periods beginning after December
15, 2004.
In December, 2004 the FASB issued SFAS No. 153 "Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29. The guidance in APB No. 29,
"Accounting for Non-monetary Transactions", is based on the principle that
exchanges of non-monetary assets should be measured on the fair value of
the assets exchanged. The guidance included certain exceptions to that
F-14
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (cont'd)
U. RECENT PRONOUNCEMENTS (cont'd)
principle. This statement amends APB No. 29 to eliminate the exception for
non-monetary exchanges for similar productive assets and replaces it with
the general exception for exchanges of non-monetary assets that do not have
commercial substance. A non-monetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as
a result of the exchange. This statement shall be effective for
non-monetary exchanges occurring in fiscal periods beginning after June 15,
2005. The Company does not believe that the adoption of this statement will
have a material effect on its financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN45"). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also clarifies that at the
time a company issues a guarantee, the company must recognize an initial
liability for the fair market value of the obligations it assumes under the
guarantees and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of
FIN 45 apply on a prospective basis to guarantees issued or modified after
December 31, 2002.
In January 2003, and as revised in December 2003, the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities"
"Interpretation No. 46"), an interpretation of Accounting Research Bulletin
("ARB") No. 51", "Consolidated Financial Statements". Interpretation No. 46
addresses consolidation by business enterprises of variable interest
entities, which have one or both of the following characteristics: (i) the
equity investment at risk is not sufficient to permit the entity to finance
its activities without additional subordinated support from other parties,
which is provided through another interest that will absorb some or all of
the expected losses of the entity; (ii) the equity investors lack one or
more of the following essential characteristics of a controlling financial
interest: the direct or indirect ability to make decisions about the
entity's activities through voting rights or similar rights; or the
obligation to absorb the expected losses of the entity if they occur, which
makes it possible for the entity to finance its activities; the right to
receive the expected residual returns of the entity if they occur, which is
the compensation for the risk of absorbing the expected losses.
Interpretation No. 46, as revised, also requires expanded disclosures by
the primary beneficiary (as defined) of a variable interest entity and by
an enterprise that holds a significant variable interest in a variable
interest entity but is not the primary beneficiary.
Interpretation No. 46, as revised, applies to small business issuers no
later than the end of the first reporting period that ends after December
15, 2004. This effective date includes those entities to which
Interpretation No. 46 had previously been applied. However, prior to the
required application of Interpretation No. 46, a public entity that is a
small business issuer shall apply Interpretation No. 46 to those entities
that are considered to be special-purpose entities no later than as of the
end of the first reporting period that ends after December 15, 2003.
F-15
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
4. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (cont'd)
U. RECENT PRONOUNCEMENTS (cont'd)
Interpretation No. 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year
restated.
Management does not expect these recent pronouncements to have a material
impact on the Company's consolidated financial position or results of
operations.
5. ACCOUNTS RECEIVABLE
The Company's accounts receivable at September 30, 2004 and 2003 are summarized
as follows:
2004 2003
------------ ------------
Accounts Receivable US$ 21,763,923 US$ 7,220,263
Less: Allowance for doubtful accounts 764,362 461,980
------------ ------------
Accounts Receivable, Net US$ 20,999,561 US$ 6,758,283
============ ============
6. INVENTORIES
The Company's inventories at September 30, 2004 and 2003 are summarized as
follows:
2004 2003
------------ ------------
Raw Materials US$ 9,934,263 US$ 2,643,542
Work In Progress 1,872,465 425,698
Finished Goods 17,729,257 4,924,541
------------ ------------
Total US$ 29,535,985 US$ 7,993,781
============ ============
F-16
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
7. PROPERTY, PLANT AND EQUIPMENT
2004 2003
------------ ------------
Building US$ 4,535,876 US$ 0
Machinery 14,242,696 4,536,088
Vehicles 486,480 342,630
Office Equipment 304,773 90,019
Other 305,758 0
------------ ------------
Cost 19,875,583 4,968,737
------------ ------------
Less: Accumulated Depreciation
Building 19,024 0
Machinery 2,006,717 595,103
Vehicles 79,097 26,477
Office Equipment 53,402 22,036
Other 212,534 0
------------ ------------
Accumulated Depreciation 2,370,774 643,616
------------ ------------
Net Book Value US$ 17,504,809 US$ 4,325,121
Land Use Rights 4,029,038 0
Construction in Progress 23,656,190 555,395
------------ ------------
Long-Term Assets - Net US$ 45,190,037 US$ 4,880,516
============ ============
Total depreciation expense for the years ended September 30, 2004 and 2003
was $1,727,158 and $378,875, respectively.
Land Use Rights
BAK has not yet obtained the certificate of land use right. The bureau of city
planning and land resource of Shenzhen have not yet approved the application of
BAK since the original zoning for the use of the land conflicted with the city
planning for education and biology and which is presently being resulted to
business use. According to the agreement with the local government of Kuichong
Township of Longgang district of Shenzhen, BAK had paid approximately US$279,000
for the down payment of the land use right and US$3,750,000 is still
outstanding. It is anticipated that the outstanding balance will be paid within
the next twelve months. The local government of Kuichong Township of Longgang
district of Shenzhen has however granted permission for BAK to commence the
construction of the new production plant pending a decision from the bureau of
city planning. See Note 12, Commitments and Contingencies.
F-17
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
8. INTANGIBLE ASSETS
2004 2003
------------- -------------
Trademarks US$ 63,904 US$ 17,302
Less: Accumulated Amortization 5,542 676
------------- -------------
Net Book Value US$ 58,362 US$ 16,626
============= =============
Amortization expense for the years ended September 30, 2004 and 2003 was US
$5,549 and US $676, respectively.
9. BANK INDEBTEDNESS AND NOTES PAYABLE
As of September 30, 2004 and 2003, the Company had several outstanding
short-term bank notes, which were used primarily to fund the construction in
progress. The notes, which had a cumulative balance of US$ 27,304,162 and US$
3,479,480 for each respective year, carried interest rates ranging from 4.536%
to 5.841% and have maturity dates ranging from 5 to 12 months. Each note, except
for US$2,416,422, is guaranteed by Development and Construction (Group) Company
Limited By Shares ("Changchun Co.") of Changchun Economic & Technology
Development District, and/or Jilin Province Huaruan Technology Company, Ltd. (a
corporation owned by Xiangqian Li, BAK's Chairman), related parties, and others
who are not related. Neither Huaruan, nor Mr. Li, receive any compensation for
acting as guarantor.
The Company is required to pledge cash in order to secure these short-term bank
loans and note payable. The amounts of those pledges, for the years ending
September 30, 2004 and 2003, are US$ 7,120,069 and US$ 820,692, respectively.
The pledge cash has been presented as "cash restricted" on the balance sheet.
On September 30, 2004, contrary to relevant PRC laws and regulations, the
Company borrowed US$1,812,316 from Changzhou Lihai Investment Consulting Co.,
Ltd. The Company subsequently repaid this loan on October 11, 2004. Management
believes that risk to the Company, due to this loan arrangement, is very
limited.
Notes payable, other represents promises to pay from customers received in the
ordinary course of business. The notes can generally be exchanged at a discount
for cash with financial institutions.
F-18
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
10. RESERVES
Pursuant to the accounting systems for business enterprises as promulgated by
the PRC, the profits of the BAK, which are based on their PRC statutory
financial statements, are available for distribution in the form of cash
dividends after they have satisfied all the PRC tax liabilities, provided for
losses in previous years, and made appropriations to reserve funds, as
determined at the discretion of the board of directors in accordance with the
PRC accounting standards and regulations.
As stipulated by the relevant laws and regulations for enterprises operating in
the PRC, Company's are required to make annual appropriations to two reserve
funds, consisting of the statutory surplus and public welfare funds. In
accordance with the relevant PRC regulations and the articles of association of
the respective companies, the companies are required to allocate a certain
percentage of their profits after taxation, as determined in accordance with the
PRC accounting standards applicable to the companies, to the statutory surplus
reserve until such reserve reaches 50% of the registered capital of the
companies.
Net income as reported in the US GAAP financial statements differs from that as
reported in the PRC statutory financial statements. In accordance with the
relevant laws and regulations in the PRC, the profits available for distribution
are based on the statutory financial statements. If BAK has foreign currency
available after meeting its operational needs, BAK may make its profit
distributions in foreign currency to the extent foreign currency is available.
Otherwise, it is necessary to obtain approval and convert such distributions at
an authorized bank.
11. SIGNIFICANT CONCENTRATION
The Company grants credit to its customers, generally on an open account basis.
BAK's five largest customers accounted for 38% of the sales in 2004, in which
only one customer was in excess of 10% of consolidated sales.
12. RELATED PARTY TRANSACTIONS
In October 2003, the Company acquired intangible assets from entities controlled
by its chairman and controlling shareholder. The amount due to the chairman
resulting from this transaction was effectively paid in cash, in the amount of
US$3,866,088, and was recorded at the fair market value of the intangible, as
determined by an independent appraisal firm. With respect to consideration paid
by the Company in
F-19
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
12. RELATED PARTY TRANSACTIONS (cont'd)
excess of the chairman's carrying cost of the intangible, such excess has been
charged to retained earnings, as a distribution to the chairman, resulting in
the acquired intangible being recorded by the Company at the chairman's original
cost basis.
13. CONTINGENCIES AND COMMITMENTS
A Contingent liabilities
1. Land Use and Ownership Certificate:
According to relevant PRC laws and regulations, a land use right
certificate, along with government approvals for land planning,
project planning, and construction need to be obtained before
construction of building is commenced. An ownership certificate
shall be granted by the government upon application under the
condition that the aforementioned certificate and government
approvals are obtained.
BAK has not yet obtained the land use right certificate and
government approvals relating to the construction of BAK
Industrial Park (the Company's operating premises). However, BAK
has applied to obtain the land use right certificate of approval.
In the opinion of legal counsel, under the condition that BAK is
granted a land use right certificate and related approvals, there
should be no legal barriers for BAK to obtain an ownership
certificate for the premises presently under construction in BAK
Industrial Park. However, in the event that BAK fails to obtain
the land use right certificate relating to BAK Industrial Park
and/or the government approvals required for the construction of
BAK Industrial Park, there is the risk that the buildings
constructed need to be vacated as illegitimate constructions.
However, the Company's legal counsel feels that this possibility
while present, and does exist is very small. At a result, no
provision has been made in the financial statements for this
potential occurrence.
2. 2004 - US$ 1,208,153 Guaranteed for Shenzhen Tongli, a
non-related party
2004 - US$ 1,208,153 Guaranteed for Shenzhen Zhengda, a
non-related party
2004 - US$ 18,122 Notes Receivable Discounted
BAK has factored notes receivable with its bank for customers as
of September 30, 2004 and is contingently liable in the event of
default.
No provision has been made in the financial statements for these
contingencies.
BAK leases various factory and office space under short term
operating leases and is obligated under those leases in the
amounts detailed above as of September 30, 2004.
3. BAK and Development and Construction (Group) Company Limited By
Shares ("Changchun Co.") of Changchun Economic & Technology
Development District, have entered into a Cross-Guaranty
Agreement, dated February 20, 2004 (the "Agreement"),
F-20
Medina Coffee, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
A. Contingent liabilities
3. (cont'd)
pursuant to which the parties were obligated to guaranty a
specified amount of each other's indebtedness to specifically
identified lending institutions. As of September 30, 2004,
Chang Chu Jingkai had guaranteed indebtedness of the Company to
Longgang Division,Shenzhen Branch, Agricultural Bank of China
(Agricultural Bank) in the amount of USD$ 24,164,220 (The "BAK
Indebtedness"). As of September 30, 2004, BAK has not guaranteed
any indebtedness of Changchun Co. in accordance with the
Agreement. On December 22, 2004, the Company received from
Changchun Co. a letter of termination pursuant to which the
Agreement was deemed terminated by Changchun Co. and the Company
was relieved of all obligations to guaranty any indebtedness of
Changchun Co. in the future. The termination of the Agreement in
no way effects Changchun Co.'s continuing guaranty of the BAK
Indebtedness.
4. Social Insurance of BAK's Employees:
As described in Note 3 (O), BAK is required to cover employees
with various types of social insurance. Although all insurances
have been purchased for management employees, BAK has not fully
covered other employees. It is the opinion of legal counsel that
BAK needs to provide all employees with the required insurance.
In the event that any current employee, or former employee, files
a complaint with the government, not only will BAK be required to
purchase insurance for such employee, but BAK may be subject to
administrative fines. As the Company's legal counsel has advised
that these fines are nominal, no provision for any potential
fines has been made in the accompanying financial statement.
B. Commitments
1. Capital Commitments
BAK has commitments under construction contracts for the
construction of factory, office, and employee residence
buildings, amounting to $6,275,000. These contracts are
contemplated to be completed at various dates up to the end of
the 2005 calendar year.
2. Lease commitment: 2005 - US$ 717,127
2006 - US$ 159,273
14. SUBSEQUENT EVENTS
i) On January 20, 2005, BAK International closed a private placement of its
securities with unrelated investors whereby it issued an aggregate of
8,600,433 shares of common stock for gross proceeds of $17,000,000. The
cash and shares of common stock will be held in escrow until the completion
of the reverse merger transaction described in Note 1 and the filing of a
registration statement with th Securities and Exchage Commission. In
conjunction with this financing, the Chief Executive Officer and major
shareholder of the Company agreed to place 2,179,550 shares of the
Company's common stock owned by him into an escrow account, of which 50%
are to be released to the investors in the private placement if audited net
income for the fiscal year ending September 30, 2005 is not at least
$12,000,000 and of which 50% are to be released to investors in the private
placement if audited net income for the fiscal year ending September 30,
2006 is not at least $27,000,000.
ii) The Company changed its year-end from December 31 to September 30,
effective from September 30, 2004.
F-21
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification of Directors and Officers
Our Amended and Restated Bylaws, filed as Exhibit 3.3 hereto, provide
that we must indemnify our directors to the fullest extent permitted under
Nevada law and may indemnify, if so authorized by our board of directors, our
officers and any other person whom we have the power to indemnify against
liability, reasonable expense or other matter whatsoever. The effect of these
provisions is potentially to indemnify our directors and officers from all costs
and expenses of liability incurred by them in connection with any action, suit
or proceeding in which they are involved by reason of their affiliation with us.
Our Amended and Restated bylaws also permit us to maintain insurance on
behalf of our company and any person whom we have the power to indemnify.
Other Expenses of Issuance and Distribution
Expenses incurred or (expected) relating to this Registration Statement
and distribution are as follows: The amounts set forth are estimates except for
the SEC registration fee:
Amount
--------------
SEC registration fee $ 4,338.18
Printing and engraving expenses* $ 5,000.00
Professional fees and expenses* $ 200,000.00
Transfer agent's and registrar's fees and
expenses* $ 1,500.00
Miscellaneous* $ 2,500.00
--------------
Total* $ 213,338.18
==============
------------------------
*Estimates
The Registrant will bear all of the expenses shown above.
RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is information regarding the issuance and sales of our
securities without registration for the past three (3) years from the date of
this Registration Statement. No such sales involved the use of an underwriter,
no advertising or public solicitation were involved, the securities bear a
restrictive legend and no commissions were paid in connection with the sale of
any securities.
On January 20, 2005 we completed a stock exchange transaction with the
stockholders of BAK International, Ltd., a Hong Kong company ("BAK
International"). The exchange was consummated under Nevada law pursuant to the
terms of a Securities Exchange Agreement dated effective as of January 20, 2005
by and among Medina, BAK International and the stockholders of BAK
International. Pursuant to the Securities Exchange Agreement, we issued
39,826,075 shares of our common stock, par value $0.001 per share, to the
stockholders of BAK International, representing approximately 97.2% of our
post-exchange issued and outstanding common stock, in exchange for 100% of the
outstanding capital stock of BAK International. We presently carry on the
business of Shenzhen BAK Battery Co., Ltd., a Chinese corporation and BAK
International's wholly-owned subsidiary, or BAK Battery.
II-1
The foregoing shares were issued in private transactions or private
placements intending to meet the requirements of one or more exemptions from
registration. In addition to any noted exemption below, we relied upon
Regulation D and Section 4(2) of the Securities Act of 1933, as amended (the
"Act"). The investors were not solicited through any form of general
solicitation or advertising, the transactions being non-public offerings, and
the sales were conducted in private transactions where the investor identified
an investment intent as to the transaction without a view to an immediate resale
of the securities; the shares were "restricted securities" in that they were
both legended with reference to Rule 144 as such and the investors identified
they were sophisticated as to the investment decision and in most cases we
reasonably believed the investors were "accredited investors" as such term is
defined under Regulation D based upon statements and information supplied to us
in writing and verbally in connection with the transactions. We never utilized
an underwriter for an offering of our securities and no sales commissions were
paid to any third party in connection with the above-referenced sales. Other
than the securities mentioned above, we have not issued or sold any securities.
On June 10, 2004, we issued 99,858 shares of our $ 0.001 par value
common stock in full settlement of debt, in the amount of $49,929, owed to Harry
Miller, our former President and CEO. The price of the transaction was $0.50 per
share. The issuance of these shares to Mr. Miller was not registered under the
Securities Act of 1933 in reliance on the exemption therefrom contained in
Section 4(2) of such act and Regulation D as promulgated thereunder.
EXHIBITS
Exhibit
Number Description
------- -----------
3.1* Articles of Incorporation of the Registrant.
3.2* Articles of Amendment.
3.3+ Amended and Restated Bylaws.
3.4* Bylaws.
4.1# Common Stock Specimen.
5.1# Legal Opinion of Jackson Walker L.L.P.
10.1+ Securities and Exchange Agreement by and among BAK
International, Ltd., Medina Coffee, Inc. and the stockholders
of BAK International, Ltd. dated as of January 20, 2005.
10.2+ Escrow Agreement by and among Medina Coffee, Inc., the selling
stockholders, Xiangqian Li, and Securities Transfer
Corporation dated as of January 20, 2005.
10.3+ Lock-up Agreement by and between Medina Coffee, Inc. and
Xiangqian Li dated as of January 20, 2005.
10.4+ Form of Subscription Agreement.
10.5+ Summary of Sales Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Zhongshan Mingji Battery Co., Ltd. dated as of
October 25, 2003.
10.6+ Summary of Purchase Agreement by and between Shenzhen BAK
Battery Co., Ltd. and Luhua Technology (Shenzhen) Co., Ltd.
dated as of April 14, 2004.
10.7+ Summary of Purchase Agreement by and between Shenzhen BAK
Battery Co., Ltd. and Beijing CITIC Guoan Mengguli Electricity
Supply Ltd. Co. dated as of September 30, 2004.
10.8+ Summary of Revolvable Credit Facilities Agreement by and
between Shenzhen BAK Battery Co., Ltd. and Longgang Division,
Shenzhen Branch, Agricultural Bank of China dated as of June
27, 2003.
10.9+ Summary of Guaranty Contract of Maximum Amount by and between
Longgang Division, Shenzhen Branch, Agricultural Bank of China
and Jilin Provincial Huaruan Technology Company Limited by
Shares dated as of June 27, 2003.
10.10+ Summary of Comprehensive Credit Facilities Agreement of
Maximum Amount by and between Shenzhen BAK Battery Co., Ltd.
and Longgang Division, Shenzhen Branch, Agricultural Bank of
China dated as of April 5, 2004.
10.11+ Summary of Guaranty Contract of Maximum Amount by and among
Longgang Division, Shenzhen Branch, Agricultural Bank of
China, Development and Construction (Group) Company Limited by
Shares of Changchun Economic & Technology Development
District, Jilin Provincial Huaruan Technology Company Limited
by Shares and Xiangqian Li dated as of April 5, 2004.
10.12+ Summary of Comprehensive Credit Facilities Agreement by and
between Shenzhen BAK Battery Co., Ltd. and Longgang Division,
Shenzhen Development Bank dated as of April 1, 2004.
II-2
10.13+ Summary of Guaranty Contract of Maximum Amount by and among
Longgang Division, Shenzhen Development Bank, Development and
Construction (Group) Company Limited by Shares of Changchun
Economic & Technology Development District, Jilin Provincial
Huaruan Technology Company Limited by Shares, Xiangqian Li,
Yanlong Zou, Fenghua Li, Jimin Li, Jiajun Huang, Baicheng
Zhou, Jinghui Wang, Yongbin Han, Shuquan Zhang, Xinrong Yang,
Yunfei Li and Weiqiang Zhang dated as of April 1, 2004.
10.14+ Summary of Comprehensive Credit Facilities Agreement by and
between Shenzhen BAK Battery Co., Ltd. and Longgang Division,
Shenzhen Branch, China Minsheng Bank dated as of January 14,
2004.
10.15+ Summary of Guaranty Contract of Maximum Amount by and among
Longgang Division, Shenzhen Branch, China Minsheng Bank, Jilin
Provincial Huaruan Technology Company Limited by Shares and
Xiangqian Li dated as of November 15, 2004.
10.16+ Summary of Loan Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Shenzhen Branch, Industrial Bank dated as of
March 11, 2004.
10.17+ Summary of Guaranty Agreement by and between Shenzhen Branch,
Industrial Bank and Shenzhen High-Tech Investment Service Co.
dated as of March 10, 2004.
10.18+ Summary of Related Transaction Agreement by and between
Shenzhen BAK Battery Co., Ltd. and Jilin Provincial Huaruan
Technology Company Limited by Shares dated as of October 18,
2003.
10.19+ Summary of Loan Agreement by and between Shenzhen BAK Battery
Co., Ltd. and Longgang Division, Shenzhen Development Bank
dated as of April 1, 2004.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independently Registered Public Accounting Firm.
----------------------
* Previously filed as an exhibit to Registration Statement on Form SB-1
(#333-41124) filed with the Commission on July 10, 2000.
+ Previously filed as an exhibit to Current Report on Form 8-K filed with the
Commission on January 20, 2005.
# To be filed by amendment.
II-3
UNDERTAKINGS
The undersigned registrant hereby undertakes to, insofar as
indemnification for liabilities arising under the Securities Act of 1933 (the
"Act") may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, Arizona, United States of America.
Medina Coffee, Inc.
By: /s/ Xiangqian Li Date: January 20, 2005
---------------------------------------
Xiangqian Li, President and Chief Executive Officer
By: /s/ Yongbin Han Date: January 20, 2005
---------------------------------------
Yongbin Han, Chief Financial officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date stated.
By: /s/ Xiangqian Li Date: January 20, 2005
---------------------------------------
Xiangqian Li, Director
II-5