UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2006
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 001-32898
China BAK Battery, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 88-0442833 | |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
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BAK Industrial Park No. 1 BAK Street Kuichong Town, Longgang District Shenzhen, People’s Republic of China |
518119 | |
| (Address of principal executive offices) | (Zip Code) | |
(86 755) 897-70093
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 16, 2006, 48,882,146 shares of China BAK Battery, Inc. common stock, par value $0.001 per share, were outstanding.
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PART I — FINANCIAL INFORMATION |
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Item 1. Financial Statements |
1 | |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 | |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
27 | |
| 27 | ||
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PART II — OTHER INFORMATION |
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Item 1. Legal Proceedings |
28 | |
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Item 1A. Risk Factors |
28 | |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
44 | |
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Item 3. Defaults Upon Senior Securities |
44 | |
| 44 | ||
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Item 5. Other Information |
44 | |
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Item 6. Exhibits |
46 | |
PART I — FINANCIAL INFORMATION
China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated balance sheets
as of September 30, 2005 and June 30, 2006
(In US$)
See accompanying notes to the condensed interim consolidated financial statements.
1
China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated balance sheets
as of September 30, 2005 and June 30, 2006 (continued)
(In US$)
See accompanying notes to the condensed interim consolidated financial statements.
2
China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of income
and comprehensive income
for the three months ended June 30, 2005 and 2006
(Unaudited)
(In US$)
See accompanying notes to the condensed interim consolidated financial statements.
3
China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of income
and comprehensive income
for the nine months ended June 30, 2005 and 2006
(Unaudited)
(In US$)
See accompanying notes to the condensed interim consolidated financial statements.
4
China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of shareholders’ equity
for the nine months ended June 30, 2005 and 2006
(In US$)
See accompanying notes to the condensed interim consolidated financial statements.
5
China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of cash flows
for the three months ended June 30, 2005 and 2006
(Unaudited)
(In US$)
See accompanying notes to the condensed interim consolidated financial statements.
6
China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of cash flows
for the three months ended June 30, 2005 and 2006 (continued)
(Unaudited)
(In US$)
See accompanying notes to the condensed interim consolidated financial statements.
7
China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of cash flows
for the nine months ended June 30, 2005 and 2006
(Unaudited)
(In US$)
See accompanying notes to the condensed interim consolidated financial statements.
8
China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of cash flows
for the nine months ended June 30, 2005 and 2006 (continued)
(Unaudited)
(In US$)
See accompanying notes to the condensed interim consolidated financial statements.
9
China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
for the nine months ended June 30, 2005 and 2006
(Unaudited)
1. Principal Activities, Basis of Presentation and Organization
Principal Activities
China BAK Battery, Inc. (the “Company” or “China BAK”) was incorporated in the State of Nevada on October 4, 1999 as a limited liability company, as Medina Copy, Inc. The Company changed its name to Medina Coffee, Inc. (“Medina Coffee”) on October 6, 1999 and subsequently changed its name to China BAK Battery, Inc. on February 14, 2005. The Company and its subsidiaries (hereinafter, collectively referred to as the “Group”) are principally engaged in the manufacture, commercialization and distribution of a wide variety of standard and customized lithium ion (known as “Li-ion” or “Li-ion cell”) rechargeable battery cells for use in cellular telephones, as well as various other portable electronic applications, including high-power handset telephones, laptop computers, power tools, digital cameras, video camcorders, MP3 players, electric bicycles, hybrid/electric motors, and general industrial applications.
Since May 31, 2006, the Company’s common stock has been listed on the Nasdaq Global Market under the symbol “CBAK.” Prior to that date, the Company’s common stock has been quoted on the Over-the-Counter Electronic Bulletin Board under the symbol “CBBT.OB.”
Basis of Presentation and Organization
As of June 30, 2006, the Company’s subsidiaries consisted of: i) BAK International Limited (“BAK International”), a wholly owned limited liability company incorporated in Hong Kong on December 29, 2003 as BATCO International Limited and subsequently changed its name to BAK International Limited on November 3, 2004; ii) Shenzhen BAK Battery Co., Ltd. (“Shenzhen BAK”), a wholly owned limited liability company established on August 3, 2001 in the People’s Republic of China (“PRC”); and iii) BAK Electronic (Shenzhen) Co., Ltd. (“BAK Electronic”), a wholly owned limited liability company established by BAK International and commenced operation in August 2005 in the PRC.
BAK International, a non-operating holding company that had substantially the same shareholders as Shenzhen BAK, entered into a share swap transaction with Shenzhen BAK on November 6, 2004 for the purpose of the subsequent reverse acquisition of the interest of China BAK as described below. Pursuant to the terms of the transaction, the parties exchanged all outstanding shares of their capital stock for $11.5 million in cash, and as a result, BAK International became the parent company of Shenzhen BAK. Certain shareholders of Shenzhen BAK, representing ownership interests of approximately 1.85%, elected not to acquire shares in BAK International. The non-participating shareholders of Shenzhen BAK sold their right to acquire their proportional ownership interests in BAK International for cash, and the proportionate interests in BAK International to which the non-participating shareholders were entitled were acquired by the transferees. After the share swap transaction between BAK International and the shareholders of Shenzhen BAK was complete, there were 31,225,642 shares of BAK International stock outstanding, exactly the same as the number of shares of capital stock of Shenzhen BAK outstanding immediately prior to the share swap, and the shareholders of BAK International were substantially the same as the shareholders of Shenzhen BAK prior to the share purchases. Consequently, the share purchases between BAK International and the shareholders of Shenzhen BAK have been accounted for as a reverse acquisition of Shenzhen BAK with no adjustment to the historical basis of the assets and liabilities of Shenzhen BAK, and the operations were consolidated as though the transactions occurred as of the beginning of the first accounting period presented in the accompanying condensed interim consolidated financial statements.
On January 20, 2005, BAK International executed a private placement of its common stock with unrelated investors whereby it issued an aggregate of 8,600,433 shares of common stock for gross proceeds of $17,000,000. In conjunction with this financing, Mr. Li Xiangqian, the Chairman and Chief Executive Officer of the Company agreed to place 2,179,550 shares of 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 of the Group for the fiscal year ended September 30, 2005 is not at least $12,000,000, and the remaining 50% are to be released to investors in the private placement if audited net income of the Group for the fiscal year ending September 30, 2006 is not at least $27,000,000. If the audited net income of the Group for the fiscal years ended September 30, 2005 and 2006 reached the above-mentioned targets, the 2,179,550 shares would be released to Mr. Li Xiangqian (the “Escrow Arrangement”).
This escrow arrangement constitutes a compensatory plan to Mr. Li Xiangqian in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123R”). A compensation charge would be recorded in the financial statements of the Company should the performance threshold be achieved and these shares be released to Mr. Li Xiangqian. However, as the Company determined that it would not meet the performance threshold for fiscal year ending September 30, 2006 after consideration of the compensation charge, the shares are not deemed to be earned and no compensation charge has been recognized during the interim periods.
Also on January 20, 2005, the Company completed a share swap transaction with the shareholders of BAK International. The swap was consummated under Nevada law pursuant to the terms of a Securities Exchange Agreement entered by and among China BAK, BAK International and the shareholders of BAK International
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on January 20, 2005. Pursuant to the Agreement, the Company issued 39,826,075 shares of common stock, par value $0.001 per share, to the shareholders of BAK International (including 31,225,642 shares to the original shareholders and 8,600,433 shares to new investors), representing approximately 97.2% of the Company’s post-exchange issued and outstanding common stock, in exchange for 100% of the outstanding capital stock of BAK International.
The share swap transaction has been accounted for as a capital-raising transaction of the Company whereby the historical financial statements and operations of Shenzhen BAK are consolidated using historical carrying amounts. The 1,152,458 shares of China BAK outstanding prior to the stock exchange transaction were accounted for at the net book value at the time of the transaction, which was a deficit of $1,672. The accompanying condensed interim consolidated financial statements reflect the capital-raising transaction of the Company as if the transaction occurred as of the beginning of the first period presented.
The Company’s condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).
The interim results of operations are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2006. The Company’s consolidated balance sheet at September 30, 2005 has been taken from the Company’s audited balance sheet as of the date. All other financial statements contained herein are unaudited and, in the opinion of management, contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows for the period presented. The Company’s accounting policies and certain other disclosure are set forth in the notes to the consolidated financial statements contained in the Company’s Annual Report on Form 10-KSB/A for the year ended September 30, 2005. These financial statement should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Company’s principal subsidiaries, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC (“PRC GAAP”) or in Hong Kong, the accounting standards used in the places of their domicile. The accompanying condensed interim consolidated financial statements reflect necessary adjustments not recorded in the books of account of the Company’s subsidiaries to present them in conformity with US GAAP.
2. Pledged Deposits
Pledged Deposits at September 30, 2005 and June 30, 2006 consist of the following:
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September 30,
2005 |
June 30, 2006 |
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Pledged deposits with banks for: |
||||||
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General banking facilities |
$ | 6,426,100 | $ | — | ||
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Bills payable |
12,966,180 | 18,956,943 | ||||
| $19,392,280 | $ | 18,956,943 | ||||
3. Inventories
Inventories at September 30, 2005 and June 30, 2006 consist of the following:
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September 30,
2005 |
June 30, 2006 |
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Raw materials |
$ | 9,323,864 | $ | 18,165,266 | ||
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Work-in-progress |
2,698,554 | 6,188,136 | ||||
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Finished goods |
9,673,808 | 28,256,153 | ||||
| $21,696,226 | $ | 52,609,555 | ||||
A floating charge was levied on the Company’s inventories with carrying value of $7,661,888 and $10,005,503 as of September 30, 2005 and June 30, 2006 respectively as collateral under certain loan agreements (see Note 4).
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4. Short-term Bank Loans
The Company obtained several short-term loan facilities from the financial institutions in the PRC. These facilities were secured by the Company’s assets with the following carrying values:
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September 30, 2005 |
June 30, 2006 |
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Pledged deposits |
$ | 6,426,100 | $ | — | ||
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Inventories |
7,661,888 | 10,005,503 | ||||
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Machinery and equipment, net |
8,221,587 | 7,761,337 | ||||
| $22,309,575 | $ | 17,766,840 | ||||
As of September 30, 2005 and June 30 2006, the Company had several short-term bank loans with aggregate outstanding balances of $39,545,230 and $53,154,235 respectively. The loans were primarily obtained for general working capital, carried interest rates ranging from 5.22% to 5.85%, and had maturity dates ranging from 4 to 12 months. Each loan is guaranteed by Mr. Li Xiangqian, Chairman of the Company. Mr. Li Xiangqian did not receive any compensation for acting as guarantor.
During the three and nine month periods ended June 30, 2006, interest expenses of $36,096 and $426,711 were capitalized to property, plant and equipment respectively.
Certain shares of the Company were pledged by Mr. Li Xiangqian in order to secure these short-term bank loans as at September 30, 2005 and June 30, 2006 respectively.
5. Share-based Compensation
Prior to October 1, 2005, the Company applied the intrinsic-value-based method of accounting prescribed by Accounting Principles Board Opinions No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations including Financial Accounting Standard Board (“FASB”) Interpretation (“FIN”) No. 44, Accounting for Certain Transactions involving Stock Compensation , an interpretation of APB 25, to account for its fixed-plan stock options. Under this method, compensation expense is recorded only if on the date of grant the market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by the accounting standards, the Company has elected to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS 123, as amended.
In December 2004, the FASB issued SFAS 123R, which requires companies to measure and recognize compensation expenses for all stock-based payment at grant-date fair value, with the cost recognized over the vesting period (or the requisite service period). This statement replaces SFAS 123 and supersedes APB 25.
The Company has used the “modified prospective method” for recognizing the expense over the remaining vesting period for awards that were outstanding but unvested at October 1, 2005. Under the modified prospective method, the Company has not adjusted the financial statements for periods ending prior to September 30, 2005. Under the modified prospective method, the adoption of SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after September 30, 2005, as well as to the unvested portion of awards outstanding as of October 1, 2005.
SFAS 123R also requires us to estimate forfeitures in calculating the expense related to stock-based compensation.
Compensation cost arising from stock-based awards is recognized as expense using the straight-line method over the vesting period. As of June 30, 2006, there was approximately $3,679,000 of total unrecognized compensation cost related to unvested stock-based awards, which we expect to recognize over remaining weighted average vesting terms of 2 years. For the nine months ended June 30, 2006, our total stock-based compensation expense was approximately $1,969,000. We have not recorded any income tax benefit related to stock-based compensation in either of the nine-month periods ended June 30, 2006.
The Company grants share options to officers, employees and consultants to reward for services and restricted ordinary shares to its non-employee directors.
In May 2005, the Board of Directors adopted the China BAK Battery, Inc. 2005 Stock Option Plan (the “Plan”). The Plan authorizes the issuance of up to 4,000,000 shares of the Company’s common stock. The exercise price of the options granted, pursuant to the Plan, must be at least equal to the fair market value of the Company’s ordinary shares at the date of the grant. The Plan will terminate on May 16, 2055.
Pursuant to the Plan, the Company issued 2,000,000 options with an exercise price of $6.25 per share on May 16, 2005. The exercise price equals to the market price of the Company’s shares at the date of grant. No new grant, exercise or forfeiture of current outstanding options, incurred during the nine month ended June 30, 2006.
As of June 30, 2006, there was unrecognized compensation cost of $3,679,737 related to non-vested share options. This cost is expected to be recognized over the next two years. The Company is expected to issue new shares to satisfy share option exercises.
Aggregate numbers of non-vested shares issued under the Plan were 1,830,000 as of June 30, 2006. No changes of non-vested shares issued under the Plan occurred for the nine months ended June 30, 2006. The weighted-average grant-date fair value of options granted during 2005 was $3.67 per share. The Company recorded non-cash share-based compensation expense of $1,969,120 for the nine months ended June 30, 2006 in respect of share options granted in 2005, which was allocated to cost of revenues, sales and marketing expenses, general and administrative expenses and research and development costs respectively.
The following table illustrates the effect on net income and net income per share for the nine months ended June 30, 2005 as if our stock-based compensation had been determined based on the fair value at the grant dates:
12
Pursuant to the Plan, the Company issued 2,000,000 options with an exercise price of $6.25 per share on May 16, 2005. In accordance with the vesting provisions of the grants, the options will become vested and exercisable under the following schedule:
| Numbers of Share | Percentage of Options Issued | Initial Vesting Date | |||
| 800,000 | 40 | % | July 1, 2007 | ||
| 600,000 | 30 | % | January 1, 2008 | ||
| 600,000 | 30 | % | July 1, 2008 | ||
| 2,000,000 | 100 | % | |||
A summary of share option plan activity for the nine months period ended June 30, 2006 is presented below:
The fair value of each option award is estimated on the date of grant using a Black-Scholes Option Valuation Model that uses the assumptions noted in the following table. The expected volatility was based on the historical volatilities of the Company’s listed common stock in the United States and other market information. The Company uses historical data to estimate share option exercises and employee departure behaviour used in the valuation model. The expected terms of share options granted is derived from the output of the option pricing model and represents the period of time hat share options granted are expected to be outstanding. Since the share options once exercised will primarily trade in the U.S. capital market, the risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant
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Expected volatility |
59.85 | % | |
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Expected dividends |
Nil | ||
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Expected terms |
6 years | ||
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Risk-free interest rate |
4.13 | % |
The fair value of share warrants granted to the company’s financial advisors and other external parties in connection with the share issuance in 2005 has been recorded within equity as a cost of the offering, and therefore, the issuance of the share warrants does not have any impact on the shareholders’ equity.
On May 12, 2006, the Board of Directors adopted the China BAK Battery, Inc. Compensation Plan for Non-employee Directors (“the Plan 2006”). The Plan 2006 authorizes the issuance of 5,000 restricted shares of the Company’s ordinary shares to each of the three eligible directors in addition to their annual retainer fee. Such restricted shares entitle the relevant non-employee directors to all rights of ordinary shares ownership except that the shares may not be sold, transferred, pledged, exchanged or otherwise disposed of during the vesting period.
On May 12, 2006, the Company granted 5,000 restricted shares to each of the three newly approved independent directors with a fair value of $11.5 per share pursuant to the Plan 2006. The eligible directors shall vest in their rights under the restricted shares according to the following schedule:
| (i) | 25% of the restricted share granted will immediately vest on the grant date; and |
| (ii) | The remaining 75% of the restricted shares will vest in three equal quarterly installments on the last day of each subsequent quarter or in three equal quarterly installments on the last day of each calendar quarter beginning on the last day of the first full calendar quarter after the grant date. |
As of June 30, 2006, the Company had unrecognized stock-based compensation of approximately $130,000 associated with these restricted shares granted to non-employee directors. The first 25% of the restricted shares were issued as fully paid ordinary shares to the three independent directors on July 19, 2006.
6. Commitments and Contingencies
(i) Capital Commitments
As of September 30, 2005 and June 30, 2006, the Company had the following capital commitments:
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September 30,
2005 |
June 30,
2006 |
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For construction of buildings |
$ | 1,062,953 | $ | 2,160,682 | ||
(ii) Land Use Rights and Property 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, needs to be obtained before construction of a building is commenced. A property ownership certificate shall be granted by the government upon application under the condition that the aforementioned certificate and government approvals are obtained.
The Company has not yet obtained the land use right certificate relating to the premises occupied by the Company, BAK Industrial Park. However, the Company is in the process of applying to obtain the land use right certificate. The local government of Kuichong Township of Longgang District of Shenzhen has, however, granted permission for Shenzhen BAK to commence the construction of the new production plant.
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Management believes that Shenzhen BAK will ultimately be granted a land use right certificate, and that there should be no legal barriers for the Company to obtain a property ownership certificate for the premises presently occupied by the Company in BAK Industrial Park. However, in the event that the Company fails to obtain the land use right certificate relating to BAK Industrial Park, there is a risk that the buildings constructed will need to be vacated as illegitimate constructions and the Company might be subject to penalties and fines. However, management believes that this possibility, while present, is remote.
As of June 30, 2006, the Company had unpaid land lease fee amounting to $3.0 million, which the Company expects to pay upon grant of government approval.
The Company is not able to insure its manufacturing facilities since it has not yet received its land use right certificate. The Company intends to procure such insurance once it has received the certificate.
(iii) Guarantee
In order to secure the supplies of certain raw materials and upon the request of suppliers, the Company has guaranteed bank debt of certain suppliers which are summarized as follows:
Management has assessed the fair value of the obligation arising from the above financial guarantees and considered it is immaterial to the consolidated financial statements. Therefore, no obligation in respect of the above guarantee were recognized as of September 30, 2005 and June 30, 2006.
(iv) Outstanding Discounted Bills
From time to time, the Company factors bills receivable to banks. At the time of the factoring, all rights and privileges of holding the receivables are transferred to the banks. The Company removes the asset from its books and records a corresponding expense for the amount of the discount. The Company remains contingently liable on the amount outstanding in the event the bill issuer defaults.
The Company’s outstanding discounted bills at September 30, 2005 and June 30, 2006 are summarized as follows:
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September 30,
2005 |
June 30,
2006 |
|||||
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Bank acceptance bills |
$ | 3,287,140 | $ | 5,292,114 | ||
|
Commercial acceptance bills |
741,473 | 3,300,851 | ||||
| $ | 4,028,613 | $ | 8,592,965 | |||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the condensed interim consolidated financial statements and notes included in Item 1 of Part I of this report on Form 10-Q. Except for the historical information contained herein, this report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated by such forward-looking statements.
Overview
We are one of the largest manufacturers of lithium-ion battery cells in China and the world, as measured by production output. Our battery cells are the principal component of rechargeable lithium-based batteries used to power the following applications:
| • | cellular phones - customer segments include both the OEM and replacement battery manufacturers; |
| • | notebook computers; |
| • | cordless power tools; and |
| • | portable consumer electronics, such as digital media devices, portable media players, portable audio players, portable gaming devices and PDAs. |
Our products are packed into batteries by third-party battery pack manufacturers in accordance with the specifications of manufacturers of portable electronic end applications. We conduct all of our operations in China, in close proximity to China’s electronics manufacturing base and its rapidly growing market.
Historically, we have primarily manufactured prismatic lithium-ion cells for the cellular phone replacement battery market and OEM market. Our products are packed into batteries by third-party battery pack manufacturers in accordance with the specifications of manufacturers of portable electronic applications.
At the request of our customers that order prismatic battery packs, we also engage pack battery manufacturers to assemble our prismatic cells into batteries for a fee and then sell battery packs to these customers both for the cellular phone battery replacement market and OEM markets. We expect that sales of prismatic battery packs in such a manner will represent a decreasing percentage of our revenues going forward.
We have recently expanded our product offerings by adding two new product lines:
| • | High-power, lithium-phosphate cells for use in cordless power tools. We began commercial production of lithium-phosphate cells during the fourth quarter of calendar year 2005 for use in cordless power tools manufactured by DeWalt, a subsidiary of Black & Decker, Inc., a leading power tools manufacturer. |
| • | Lithium polymer cells for use in ultra-portable electronic devices, such as high-end cellular phones, Bluetooth headsets, digital medial players and digital audio players. We began commercial production of lithium polymer cells in September 2005. |
Demand for Lithium-Based Batteries
All of our products are lithium-based rechargeable battery cells. Rechargeable lithium-based battery cells, compared to other types of rechargeable battery cells based on nickel cadmium or nickel metal hydride chemistries, have a higher energy density, meaning a greater energy capacity relative to a given battery cell’s weight and size. As a result, use of lithium-based batteries has risen significantly in portable electronic products. As the cost/power ratio of lithium-based batteries continues to improve, it is expected that its usage will also extend into other applications. End-product applications that are driving the demand for rechargeable lithium-based batteries include cellular phones, notebook computers, cordless power tools and portable consumer electronics.
Cellular Phones. Demand for batteries for cellular phones is driven by two factors. The first is the sales of new cellular phones. An OEM of cellular phones includes a battery with a new cellular phone. There is also a replacement market for cellular phone batteries. Demand in the replacement market is in turn driven by a number of factors. Often a consumer will purchase a second battery to carry as a spare. In addition, lithium-ion batteries have a finite life, so over time consumers will need to purchase a battery to replace the failed battery in their phone. As the number of active cellular phone subscribers increases, the number of replacement batteries sold increases. A market characteristic unique to the Chinese cellular phone market is that cell phones are often sold and resold during their useful life. Over time these cell phones require a replacement battery. Our customers for cellular phone battery cells fall into two segments:
OEM : The OEMs (Original Equipment Manufacturers) manufacture mobile phone handsets. They purchase batteries to support their production of new cellular phones. They also purchase batteries to serve the replacement market which they sell under their own brand name.
Independent Battery Manufacturers : These third party manufacturers compete against the OEM for a share of the replacement market. They typically sell their products under their own brand name or a private label.
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Notebook computers . Sales of notebook computers is driven by the increasing demand for mobile computing and the improved power and functionality of notebook computers. Lithium-based batteries have almost completely replaced nickel metal hydride batteries for notebook computers due to the increasing power of lithium-based batteries and demand for smaller, lighter notebook computers.
Power tools . Power tools such as drills, saws and grinders are used for both commercial and personal use. Due to high power requirements, many power tools have historically used small combustion engines, used heavier nickel metal hydride batteries or relied on external power sources. Recently, manufacturers, Milwaukee, Black & Decker, Bosch, Metabo and Ridgid have begun using lithium-ion battery technology. Recently, the DeWalt division of Black & Decker began marketing a power tool product line that uses nano lithium phosphate technology in its batteries. This technology has resulted in increased the power of the batteries to 36 volts. The market for portable high-powered power tools is rapidly growing and has prompted many users, both commercial and personal, to replace or upgrade their current power tools.
Portable consumer electronics . This category includes digital audio players (such as MP3 players), digital still cameras, digital video cameras, portable DVD players, PDAs, portable gaming systems and Bluetooth devices. There is a rapid trend to use lithium based batteries in portable consumer electronics (both rechargeable and non-rechargeable) due to a desire for smaller, longer lasting devices.
Pricing Pressure
Portable electronic devices such as cellular phones and notebook computers are subject to declines in average selling prices from time to time due to evolving technologies, industry standards and consumer preferences. As a result, manufacturers of these electronic devices expect us as suppliers to cut our costs and lower the price of our products, particularly when they place substantial orders with us. We have reduced the price of our products in the past in order to meet market demand and expect to continue to face market-driven downward pricing pressures in the future. Our ability to maintain our cost-effectiveness will be critical to our future success in an increasingly price-sensitive market. We seek to achieve this by ramping up our production capacity to give us greater economies of scale through a higher bargaining power to secure a supply of materials and equipment at a lower cost, and a larger base for spreading out our fixed cost allocation. We believe this will provide incremental long-term growth opportunities, but in the short-term, will also require us to incur substantial capital expenditures.
Seasonality of Operating Results
Historically, our revenues were not materially impacted by seasonal variations. During the first several years of our operation, manufacturing capacities fell short of customer requirements. As such, seasonality was minimal. Over the past year, we significantly increased manufacturing capacities to meet or exceed customer demand. Since we increased our manufacturing capacities, our revenues are now affected by seasonal variations in customer demand. We expect to experience seasonal lows in the demand for our products during the months of April to July, reflecting our customers’ decreased purchases. On the other hand, we will generally experience seasonal peaks during the months of September to March, primarily as a result of increased purchases from our customers in anticipation of increased demand for consumer electronics. The months of October and February tend to be seasonally low sales months due to plant closures for the Chinese New Year and national holidays in the PRC.
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Revenue
Our revenues represent the invoiced value of our products sold, net of value added taxes, or VAT, sales returns, trade discounts and allowances. We are subject to VAT, which is levied on most of our products at the rate of 17% on the invoiced value of our products. Provision for sales returns are recorded as a reduction of revenue in the same period that revenue is recognized. The provision for sales returns represents our best estimate of the amount of goods that will be returned from our customers based on historical sales returns data.
The following table sets forth the breakdown of our revenues by battery cell type for the periods indicated.
| (1) | These refer to cylindrical cells produced using primarily a manual manufacturing process that were sold for use with portable DVD players. |
Our revenues have increased significantly during the nine months ended June 30, 2006, in part because of increased shipments as we ramped up our production capacity to meet customer demands for our products.
Cost of Revenues
Cost of revenues consist primarily of material costs, employee remuneration for staff engaged in production activity, share-based compensation, depreciation and related expenses that are directly attributable to the production of products. Cost of revenues also includes write-downs of inventory to lower of cost or market.
The cost of raw materials for aluminum-case cells is generally higher than that of steel-case cells. Cost of revenues from the sales of battery packs also includes the fees we pay to pack manufacturers for assembling our prismatic cells into battery packs.
As we begin commercial production of cylindrical cells for notebook computers using a more automated manufacturing process, we expect to incur higher depreciation expenses related to the more sophisticated and expensive machinery and equipment used to produce cylindrical cells.
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Operating Expenses
Research and Development Costs . Research and development costs primarily comprise of remuneration for R&D staff, share-based compensation, depreciation and maintenance expenses relating to R&D equipment, and R&D material costs.
Sales and Marketing . Sales and marketing expenses consist primarily of remuneration for staff involved in selling and marketing efforts, including staff engaged in the packaging of goods for shipment, advertising cost, depreciation, share-based compensation and travel and entertainment expenses. We do not pay slotting fees to retail companies for displaying our products, engage in cooperative advertising program, participate in buy-down programs or similar arrangements. No material estimates are required by management to determine our actual marketing or advertising costs for any period.
General and Administrative . General and administrative expenses consist primarily of employee remuneration, share-based compensation, professional fees, insurance, payroll taxes and benefits, general office expenses, depreciation and bad debt expenses.
Finance Costs, Net. Finance costs consist primarily of interest income, interest on bank loans, net of capitalized interest, and bank charges.
Income Taxes. Under applicable income tax laws and regulations, an enterprise located in Shenzhen, including the district where our operations are located, is subject to a 15% enterprise income tax. Further, according to PRC laws and regulations, foreign invested manufacturing enterprises are entitled to, starting from their first profitable year, a two-year exemption from enterprise income tax followed by a three-year 50% reduction in its enterprise income tax rate. Our PRC subsidiaries, Shenzhen BAK and BAK Electronic, are each entitled to a two-year exemption from enterprise income tax and a reduced enterprise income tax rate of 7.5% for the following three years from its first profitable year. As such, for the first two calendar years ended December 31, 2003, Shenzhen BAK was exempted from any enterprise income tax. Between January 1, 2004 and December 31, 2006, Shenzhen BAK is subject to the enterprise income tax rate of 7.5%. BAK Electronic, established in August 2005, is eligible for the same preferential tax treatment applicable to Shenzhen BAK and currently is exempt from any enterprise income tax because of tax losses.
In addition, due to the additional capital invested in Shenzhen BAK in both 2005 and 2006, Shenzhen BAK was granted a lower income tax rate of 3.309% and 1.7% in calendar year 2005 and 2006 respectively.
Furthermore, to encourage foreign investors to introduce advanced technologies to China, the PRC government has offered additional tax incentives to enterprises that are classified as a foreign invested enterprises with advanced technologies. According to an official notice issued by the Shenzhen Municipal Trade and Industry Bureau, Shenzhen BAK received such designation in August 2005. As a result, as long as Shenzhen BAK maintains this designation, it may apply to the tax authority to extend its current reduced tax rate of 7.5% for another three years, until December 31, 2009.
Our company is subject to U.S. tax at the statutory rate of 35%. We have not made provisions for any U.S. tax because we have determined that we have no U.S. taxable income.
Our Hong Kong subsidiary, BAK International, is subject to Hong Kong profits tax at the rate of 17.5%. However, because it does not have any assessable income derived from or arising in Hong Kong, it has not paid any Hong Kong profits tax.
Results of Operations
The following sets forth certain of our income statement information for the three months and nine months ended June 30, 2005 and 2006.
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| (1) | Less than 0.1% |
Comparison of the nine months ended June 30, 2006 as compared to the nine months ended June 30, 2005.
Revenues . Revenues increased to $97.7 million for the nine months ended June 30, 2006 as compared to $75.2 million for same period of the prior year, an increase of $22.5 million or 30.0%.
| • | Revenues from the sales of steel-case cells increased to $45.5 million in the nine months ended June 30, 2006 from $40.0 million in the same period in 2005, an increase of $5.5 million or 13.8%, due to an increase in sales volume by 21.1%, offset by a decrease in average selling price by 6.1% primarily attributable to the pricing pressure in an increasingly competitive market. |
| • | Revenues from the sales of aluminum-case cells increased to $33.5 million in the nine months ended June 30, 2006 from $18.4 million in the same period in 2005, an increase of $15.1 million or 82.3%, due to an increase in sales volume by 90.4% driven by increased sales in the OEM market, offset by a decrease in the average selling price by 4.4% attributable to pricing pressure in a competitive market. |
| • | Revenues from sales of battery packs decreased to $8.2 million in the nine months ended June 30, 2006 from $15.9 million in the same period in 2005, due to both a decrease in sales volume by 20.8% and a decrease in average selling price by 53.4%. The decrease in average selling price is primarily attributable to the pricing pressure in an increasingly competitive market. |
| • | We also sold $10.0 million of high-power lithium-ion cells and $387,000 of lithium polymer cells in the nine months ended June 30, 2006, our first sales of these products. |
Cost of Revenues . Cost of revenues increased to $69.9 million for the nine months ended June 30, 2006 as compared to $58.0 million for the same period in 2005, an increase of $11.9 million or 20.5%. The increase in cost of revenue was attributable to an increase in units of products sold offset by a decrease in unit costs for prismatic cells and for battery packs. The decrease in unit manufacturing costs is primarily the result of a decrease in the cost of raw materials generally, an increase in efficiency in our use of raw materials and our manufacturing yields resulting from our improvement in process technology and an increase in sales volume giving us a larger base to spread out our fixed cost allocation. By product breakdown:
| • | unit cost of revenue for steel-case cells, decreased by 12.6%; |
| • | unit cost of revenue for aluminum-case cells, decreased by 16.1%; |
| • | unit cost of manufacturing battery packs, decreased by 37.1%. |
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As a result, gross profit for the nine months ended June 30, 2006 was $27.8 million or 28.5% of revenues as compared to gross profit of $17.2 million or 22.8% of revenues for the same period in 2005.
Research and Development Costs . Research and development costs increased to $1.4 million for the nine months ended June 30, 2006 as compared to $315,000 for the same period in 2005. Share-based compensation included in research and development expenses was $618,000 for the nine months ended June 30, 2006. We adopted SFAS 123R since the fiscal quarter ended December 31, 2005 on a modified prospective approach. Pursuant to SFAS 123R, we measured the employee share-based compensation at grant-date fair value and recognized over the vesting period. Prior to adoption of SFAS 123R, we adopted the intrinsic value method under SFAS 123 and APB 25, pursuant to which, no employee share-based compensation cost was recognized during fiscal year 2005 since the share options were issued on May 16, 2005. Depreciation expenses increased by $171,000 as we purchased more equipments for our R&D efforts. Salaries related to research increased to $445,000 from $98,000 for the same period of the prior year, an increase of $347,000, primarily due to hiring more experienced research employees.
Sales and Marketing Expenses . Sales and marketing expenses increased to $3.5 million for the nine month period ended June 30, 2006 as compared to $2.8 million for the same period in 2005, an increase of $0.7 million or 27.8%. As a percentage of revenues, sales and marketing expenses have decreased slightly to 3.6% for the nine months ended June 30, 2006, from 3.7% for the same period in 2005. Share-based compensation was $280,000 for the nine months ended June 30, 2006 due to the above-mentioned adoption of SFAS 123R on October 1, 2005. Higher sales volumes increased packaging and transportation costs by $89,000. Depreciation charges also increased by $139,000 due to the facilities expansion in the nine months ended June 30, 2006.
General and Administrative Expenses . General and administrative expenses increased to $6.2 million, or 6.3% of revenues, for the nine months ended June 30, 2006 as compared to $4.1 million, or 5.4% of revenues, for the same period in 2005, an increase of $2.1 million or 51.3%. Share-based compensation included in general and administrative expenses was $995,000 for the nine months ended June 30, 2006 due to the above-mentioned adoption of SFAS 123R on October 1, 2005. Professional fees and expenses increased $455,000 from the first half of last year, reflecting the additional costs of operating as a public company. Social insurance also increased by $211,000 due to the increase of base salary and the number of employees.
Operating Income . As a result of the above, operating income totaled $16.7 million for the nine months ended June 30, 2006 as compared to operating income of $10.0 million for the same period of the prior year, an increase of $6.7 million or 66.8%. As a percentage of revenues, operating income was 17.1% for the nine months ended June 30, 2006 as compared to 13.3% for the same period of the prior year.
Finance Costs, Net . Finance costs, net, increased to $993,000 for the nine month period ended June 30, 2006 as compared to $522,000 for the same period of the prior year, an increase of $471,000 or 90.2%. We had $53.2 million in short term loans as of June 30, 2006 as compared to $37.5 million outstanding as of June 30, 2005.
Other Expenses/gain on trading securities . Other expenses were $39,000 for the nine month period ended June 30, 2006, as compared to $54,000 for the same period of 2005. In addition, we recognized income from the sales of trading securities in the nine months ended June 30, 2006 from BAK International’s short-term investment in financial instruments during the period.
Net Income. As a result of the foregoing, we increased our net income to $15.4 million for the nine months ended June 30, 2006 from $8.7 million for the same period of the prior year.
Comparison of the three months ended June 30, 2006 as compared to the three months ended June 30, 2005.
Revenues. Revenues increased to $33.4 million for the three months ended June 30, 2006 as compared to $24.2 million for same period of the prior year, an increase of $9.2 million or 38.3%.
| • | Revenues from the sales of steel-case cells decreased to $12.3 million in the three months ended June 30, 2006 from $14.5 million in the same period in 2005, a decrease of $2.2 million or 15.3%, due to both a decrease in sales volume by 6.3% and a decrease in average selling price by 10.6% primarily attributable to the pricing pressure in an increasingly competitive market. |
| • | Revenues from the sales of aluminum-case cells increased to $10.5 million in the three months ended June 30, 2006 from $5.0 million in the same period in 2005, an increase of $5.4 million or 108.0%, due to an increase in sales volume of 124.3% driven by increased sales in the OEM market, offset by a decrease in the average selling price by 7.8% attributable to pricing pressure in a competitive market. |
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| • | Revenues from sales of battery packs decreased to $3.0 million in the three months ended June 30, 2006 from $4.4 million in the same period in 2005, due to a decrease in the average selling price by 50.5%, offset by a increased sales volume by 30.4%. The decrease in average selling price is primarily attributable to the pricing pressure in an increasingly competitive market, with the high rate of decrease reflecting the amplified effect of pricing pressures in both the prismatic cell and the battery pack markets. The increase in sales volume is primarily attributable to the increase in market share because of the decrease in selling price. |
| • | We also sold $7.4 million of high-power lithium-ion cells and $199,000 of lithium polymer cells in the three months ended June 30, 2006. |
Cost of Revenues . Cost of revenues increased to $24.9 million for the three months ended June 30, 2006 as compared to $17.6 million for the same period in 2005, an increase of $7.3 million or 41.5%. The increase in cost of revenue was attributable to an increase in units of products sold offset by a decrease in unit costs for prismatic cells and for battery packs. The decrease in unit manufacturing costs is primarily the result of a decrease in the cost of raw materials generally, an increase in efficiency in our use of raw materials and our manufacturing yields resulting from our improvement in process technology and an increase in sales volume giving us a larger base to spread out our fixed cost allocation. By product breakdown:
| • | unit cost of revenue for steel-case cells, decreased by 2.1%; |
| • | unit cost of revenue for aluminum-case cells, decreased by 10.7%; |
| • | unit cost of manufacturing battery packs decreased by 65.7%. |
As a result, gross profit for the three months ended June 30, 2006 was $8.5 million or 25.4% of revenues as compared to gross profit of $6.6 million or 27.1% of revenues for the same period in 2005.
Research and Development Costs . Research and development costs increased to $477,000 for the three months ended June 30, 2006 as compared to $129,000 for the same period in 2005. Share-based compensation included in research and development expenses was $130,000 for the three months ended June 30, 2006 due to the above-mentioned adoption of SFAS No. 123R. Depreciation expenses increased by $65,000 as we purchased more equipment for our R&D efforts. Salaries related to research increased to $273,000 from $41,000 for the same period of the prior year, an increase of $232,000, primarily due to hiring more experienced research employees.
Sales and Marketing Expenses . Sales and marketing expenses decreased to $1.0 million for the three month period ended June 30, 2006 as compared to $1.1 million for the same period in 2005, an decrease of $37,000 million or 3.4%. As a percentage of revenues, sales and marketing expenses have decreased to 3.1% for the three months ended June 30, 2006, from 4.5% for the same period in 2005. Share-based compensation was $63,000 for the three months ended June 30, 2006 due to the above-mentioned adoption of SFAS No. 123R.
General and Administrative Expenses . General and administrative expenses increased to $2.0 million, or 5.9% of revenues, for the three months ended June 30, 2006 as compared to $1.4 million, or 6.0% of revenues, for the same period in 2005, an increase of $519,000 million or 36%. Share-based compensation included in general and administrative expenses was $350,000 for the three months ended June 30, 2006 due to the above-mentioned adoption SFAS No. 123R. Professional fees and expenses increased $245,000 for the three months ended June 30, 2006, as compared with the same period in 2005, reflecting the additional costs of operating as a public company. Bad debt expense totaled approximately $58,000 for the three months ended June 30, 2006 as compared to the bad debt expense of approximately $599,000 as the result of management strengthening the collection of accounts receivable during the period.
Operating Income . As a result of the above, operating income totaled $5.0 million for the three months ended June 30, 2006 as compared to operating income of $3.9 million for the same period of the prior year, an increase of $1.1 million or 28.5%. As a percentage of revenues, operating income was 15% for the three months ended June 30, 2006 as compared to 16.2% for the same period of the prior year.
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Finance Costs, Net . Finance costs, net increased to $297,000 for the three month period ended June 30, 2006 as compared to $78,000 for the same period of the prior year, an increase of $219,000. We had $53.2 million in short term bank loans as of June 30, 2006 as compared to $37.5 million outstanding as of June 30, 2005.
Other Expenses . Other expenses were $1,000 for the three months ended June 30, 2006, as compared to $9,000 for the same period in 2005.
Net Income . As a result of the foregoing, we increased our net income to $4.7 million for the three months ended June 30, 2006 from $3.5 million for the same period in 2005.
Capital Resources and Liquidity
We have historically financed our liquidity requirements from a variety of sources, including short-term loans and bills payable under bank credit agreements, sales of bills receivable and issuance of capital stock. As of June 30, 2006, we had cash and cash equivalents of $6.3 million, as compared to $33.1 million as of September 30, 2005. In addition, we had pledged deposits amounting to $19.0 million and $19.4 million at June 30, 2006 and September 30, 2005, respectively. Typically, banks will require borrowers to maintain deposits of approximately 20% to 100% of the outstanding loan balances. The individual bank loans have maturities ranging from 5 to 12 months which coincides with the periods the cash remains pledged to the banks.
The following table sets forth a summary of our cash flows for the periods indicated:
|
Nine Months Ended
June 30, |
||||||||
| 2005 | 2006 | |||||||
|
(as restated,
unaudited) |
(unaudited) | |||||||
| (in thousands) | ||||||||
|
Net cash provided by/(used in) operating activities |
$ | 15,427 | $ | (8,632 | ) | |||
|
Net cash used in investing activities |
(24,768 | ) | (32,406 | ) | ||||
|
Net cash provided by financing activities |
7,778 | 13,752 | ||||||
|
Effect of exchange rate on cash and cash equivalents |
(1 | ) | 562 | |||||
|
Net decrease in cash and cash equivalent |
(1,564 | ) | (26,724 | ) | ||||
|
Cash and cash equivalents at the beginning of period |
3,212 | 33,056 | ||||||
|
Cash and cash equivalents at the end of period |
1,648 | 6,332 | ||||||
Operating Activities
Net cash used in operating activities was $8.6 million in the nine months ended June 30, 2006 compared with net cash provided by operating activities of $15.4 million in the same period in 2005. The negative cash flow was mainly the result of an increase in inventory levels as we increased our production output in the nine months ended June 31, 2006, and also an increase in the level of our accounts receivable offset by an increase in accounts and bills payable.
Investing Activities
Net cash used in investing activities increased from $24.8 million in the nine months ended June 30, 2005 to $32.4 million in the same period in 2006, reflecting an increase in our purchases of equipment, primarily attributable to the construction of the facility to house a new cylindrical cell production line.
Financing Activities
Net cash provided by financing activities was $7.8 million in the nine months ended June 30, 2005 compared to $13.8 million in the same period in 2006. This was mainly attributable to (i) a $4.6 million increase in net proceeds from borrowing due to more loans being secured for working capital purposes in the nine months ended June 30, 2006, and (ii) $15 million and $1.8 million decrease to cash deposited to bank as collateral and repayment of other borrowing. The impact of these cash outflow was offset by receipt of $15.6 million cash proceed from capital raising in January 2005. No capital raising was undertaken in the nine months ended June 30, 2006. As of June 30, 2006, the principal outstanding amounts under our credit facilities and lines of credit were as follows:
|
Maximum Amount
Available |
Amount Borrowed | |||||
| (in thousands) | ||||||
|
Credit Facilities: |
||||||
|
Agricultural Bank of China |
$ | 50,028 | $ | 46,471 | ||
|
Shenzhen Development Bank |
18,760 | 14,212 | ||||
|
China Construction Bank |
12,507 | 8,129 | ||||
|
Shenzhen Commercial Bank |
6,253 | 6,253 | ||||
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|
Maximum Amount
Available |
Amount Borrowed | |||||
| (in thousands) | ||||||
|
China CITIC Bank |
16,321 | 564 | ||||
|
Subtotal—Credit Facilities |
$ | 103,869 | $ | 75,629 | ||
The above principal outstanding amounts under credit facilities included short-term bank loans of $53 million and bills payable of $35 million.
For the purpose of presentation, the effect of increase in bills payable balances is included in operating activities in the statements of cash flows due to their nature.
During the three months ended June 30, 2006, we repaid nine bank loan agreements totaling $20.5 million, and entered into seven new bank loan agreements totaling $30.1 million with existing lenders. The seven new facilities provide for monthly interest payments at fixed annual interest rates from 5.22% to 5.85%, with principal repayments at maturities during the last calendar quarter of 2006 and the second calendar quarter of 2007.
On April 21, 2006, we renewed the Comprehensive Credit Facility Agreement of Maximum Amount (“Commercial Bank Credit Facility”) with Shuibei Branch, Shenzhen Commercial Bank. We may borrow up to RMB 50 million under the Commercial Bank Credit Facility, which expires on April 21, 2007. Under the Commercial Bank Credit Facility, we borrowed RMB 50 million on April 28, 2006, bearing interest at an annual rate of 5.265% and maturing on April 21, 2007.
On April 5, 2006, we renewed the Comprehensive Credit Facility Agreement of Maximum Amount with Longgang Branch, Shenzhen Development Bank. Under the Credit Facility, we may borrow up to RMB 150 million, which expires on April 29, 2007. Under the Credit Facility, on April 28, 2006, we entered into a loan agreement with Shenzhen Development Bank, which provides for $12.5 million at a fixed interest annual interest rate of 5.85% and expires pursuant to its terms on April 28, 2007.
On January 11, 2006, Shenzhen BAK repaid in full its loan from the Agricultural Bank of China, originally entered into on July 29, 2005 for up to $6,178,942 and maturing January 29, 2006. The principal balance at the time of repayment was $6,178,942.
On February 22, 2006, Shenzhen BAK renewed its outstanding loan from China Construction Bank in the amount of $3,726,847 under an Application Letter for Drawing for Bank Loan Facility. The new loan agreement provides for a term of six months, with interest accruing at an annual rate of 5.481%, payable monthly, and principal payable at maturity. The principal and interest terms of the loan renewal are the same as those terms under the original loan.
We had a working capital surplus of $15.0 million as of June 30, 2006, as compared to $21.0 million as of September 30, 2005, a decrease of $6.0 million. This decrease was primarily attributable to increase in short-term bank loans. We had short-term bank loans maturing in less than one year of $53.2 million as of June 30, 2006, as compared to $39.5 million as of September 30, 2005, an increase of $13.7 million.
Capital Expenditures
We made capital expenditures of $17.7 million in the nine months ended June 30, 2006. Our capital expenditures were used primarily to purchase plant and equipment to expand our production capacity.
We have completed the construction of 174,784 square meters of new facilities comprised of manufacturing facilities, warehousing and packaging facilities, dormitory space and administrative offices at the BAK Industrial Park. Of that space, 107,388 square meters are new manufacturing facilities. We have completed construction and put into use an additional administrative area, production facility, four manufacturing facilities, a warehouse and packaging facility, two dormitories and one dining hall. At present, we have no significant payment obligations related to these facilities, although we continue to make payments regarding the construction of the facility as costs arise.
Currently, the facilites under construction include a manufacturing facility, a dormitory, a dinning hall and a conference room, totaling 43,394 square meters. We anticipate finishing a major portion of BAK Industrial Park by the end of calendar year 2006.
We do not hold the land use right to the tract of property on which we have constructed our manufacturing facilities and other related facilities. According to the relevant PRC laws and regulations, a land use right certificate, along with government approvals for land planning, project planning, and construction must be
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obtained before the construction of any building is commenced. An ownership certificate will be granted by the government upon application under the condition that the aforementioned certificate and government approvals are obtained.
We have begun construction of our facilities with the approval of the local government of Kuichong Township of Longgang District of Shenzhen, which we understand does not have the authority to grant us the land use rights certificate. Under our agreement with the Kuichong Township government, we have to pay for a 50-year land use rights certificate at an agreed unit price, which in the aggregate amounted to $4.0 million as of September 30, 2004 and $3.2 million as of September 30, 2005, following an adjustment of the site area after a land survey. Out of the $3.2 million, $0.3 million has been paid to the Kuichong Township government. We have been actively negotiating with the Shenzhen municipal government with a view to resolving the lack of authority issue, but we cannot assure you that we will be able to acquire the land use right by purchasing it directly from the Shenzhen municipal government on the same terms, or if at all. In the meantime, we have recognized a net payable purchase price of $2.9 million for the land use rights on the assumption that it will be on the same terms as those agreed with the Kuichong Township government.
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations and commercial commitments as of June 30, 2006:
| Payment Due by Period | ||||||||||
| Total |
Less than
1 Year |
1-3
Years |
3-5
Years |
More than
5 Years |
||||||
| (in thousands) | ||||||||||
|
Short-term bank loans |
53,154 | 53,154 | — | — | — | |||||
|
Bills payable |
34,981 | 34,981 | — | — | — | |||||
|
Operating lease obligations |
132 | 73 | 59 | — | — | |||||
|
Capital commitments |
2,161 | 2,161 | — | — | — | |||||
|
Future interest payment on short-term bank loans |
1,479 | 1,479 | — | — | — | |||||
|
Total |
91,907 | 91,848 | 59 | — | — | |||||
Other than the contractual obligations and commercial commitments set forth above, we did not have any other long-term debt obligations, operating lease obligations, capital commitments, purchase obligations or other long-term liabilities as of June 30, 2006.
Off-Balance Sheet Transactions
In the ordinary course of business practices in China, we enter into transactions with banks or other lenders where we guarantee the debt of other parties. These parties may be related to or unrelated to us. Conversely, our debt with lenders may also be guaranteed by other parties which may be related or unrelated to us.
Under US GAAP, these transactions may not be recorded on our balance sheet or may be recorded in amounts different than the full contract or notional amount of the transaction. Our primary off balance sheet arrangements would result from our loan guaranties in which Shenzhen BAK would provide contractual assurance of the debt, or guarantee the timely re-payment of principal and interest of the guaranteed party.
Typically, no fees are received for this service. Thus in those transactions, Shenzhen BAK would have a contingent obligation related to the guaranty of payment in the event the underlying loan is in default.
Transactions described above require accounting treatment under FASB Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). Under that standard, we would be required to recognize the fair value of guarantees issued or modified after December 31, 2002 for non-contingent guaranty obligations, and also a liability for contingent guaranty obligations based on the probability that the guaranteed party will not perform under the contractual terms of the guaranty agreement.
We have assessed the liabilities arising from these guarantees and considered they are immaterial to the consolidated financial statements. Therefore, no liabilities in respect of the guarantees were recognized as of June 30, 2006. We had guaranteed the timely re-payment of principal and interest of two parties to a bank. The maximum amount of our exposure for those guarantees at June 30, 2006 and September 30, 2005 were $5.5 million and $4.8 million respectively.
From time to time, we factor bills receivable from time to time to banks. At the time of the factoring, all rights and privileges of holding the receivables are transferred to the banks. We remove the asset from our books and records a corresponding expense for the amount of the discount. We remain contingently liable on the amount outstanding in the event the bill issuer defaults.
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Critical Accounting Policies
Our consolidated financial information has been prepared in accordance with generally accepted accounting principles in the United States, which requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities, (2) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (3) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
When reviewing our financial statements, you should consider (1) our selection of critical accounting policies, (2) the judgment and other uncertainties affecting the application of those policies, and (3) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements.
Recoverability of Long-Lived Assets
Our business is capital intensive and has required, and will continue to require, significant investments in property, plant and equipment. As of September 30, 2005 and June 30, 2006, the carrying amount of property, plant and equipment, net was $65.8 million and $90.9 million, respectively. We assess the recoverability of property, plant and equipment to be held and used by a comparison of the carrying amount of an asset or group of assets to the future net undiscounted cash flows expected to be generated by the asset or group of assets. If such assets are considered impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
A prolonged general economic downturn and, specifically, a continued downturn in the battery cell industry as well as other market factors could intensify competitive pricing pressure, create an imbalance of industry supply and demand, or otherwise diminish volumes or profits. Such events, combined with changes in interest rates, could adversely affect our estimates of future net cash flows to be generated by our long-lived assets. Consequently, it is possible that our future operating results could be materially and adversely affected by additional impairment charges related to the recoverability of our long-lived assets.
Inventory Obsolescence
We review our inventory for potential impairment on a quarterly or more frequent basis as deemed necessary. Such review includes, but is not limited to, reviewing the levels of inventory versus customer requirements and obsolescence. The review and evaluation also considers the potential sale of impaired inventory at lower than market prices. If it is determined that inventory items are impaired, we adjust our reserves to cover the estimated amount of the impairment. Though management considers these reserves adequate and proper, changes in sales volumes due to unexpected economic or competitive conditions are among the factors that could materially affect the adequacy of this reserve.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our accounts receivable. We determine the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense is included in the general and administrative expenses. We review outstanding account balances individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of September 30, 2005 and June 30, 2006, we had not charged off any balances as we had yet to exhaust all means of collection.
Stock-Based Compensation
We have adopted the alternate intrinsic value method recognition provision of SFAS 123. Pursuant to the requirements of SFAS No. 123, we disclose the pro forma effect of application of the preferred fair value method recognition provision. Further, effective October 1, 2005, we adopted the provisions of SFAS 123R, which requires the use of the fair value method of accounting for share-based compensation. Under the fair value based method, compensation cost related to employee stock options or similar equity instruments is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. We determine fair value using the Black-Scholes model. Under this model, certain assumptions, including the risk-free interest rate, the expected life of the options and the estimated fair value of our ordinary shares and the expected volatility, are required to determine the fair value of the options. If different assumptions had been used, the fair value of the options would have been different from the amount we computed and recorded, which would have resulted in either an increase or decrease in the compensation expense.
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Changes in Accounting Standards
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, “ Share-Based Payment ” which became effective for us on October 1, 2005. SFAS 123R revises SFAS 123 and supersedes APB 25. SFAS 123R requires all public and non-public companies to measure and recognize compensation expense for all stock-based payments for services received at the grant-date fair value, with the cost recognized over the vesting period (or the requisite service period). We adopted SFAS 123R since the fiscal quarter ended December 31, 2005 using a modified prospective approach.
In December 2004, the Financial Accounting Standards Board issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” (“SFAS 151”) which became effective for us on October 1, 2005. This standard clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted material should be expensed as incurred and not included in inventory. In addition, this standard requires that the allocation of fixed production overhead costs to inventory be based on the normal capacity of the production facilities. The impact of the adoption of SFAS 151 has not been material.
Exchange Rates
The financial records of BAK International, Shenzhen BAK and BAK Electronic are maintained in Renminbi. In order to prepare our financial statements, we have translated amounts in RMB into amounts in U.S. dollars. The amounts of our assets and liabilities on our balance sheets are translated using the closing exchange rate as of the date of the balance sheet. Revenues, expenses, gains and losses are translated using the average exchange rate prevailing during the period covered by such financial statements. Adjustments resulting from the translation, if any, are included in our cumulative other comprehensive income (loss) in our shareholders’ equity section of our balance sheet. All other amounts that were originally booked in RMB and translated into U.S. dollars, were translated using the closing exchange rate on the date of recognition. Consequently, the exchange rates at which the amounts in those comparisons were computed varied from year to year.
The exchange rates used to translate amounts in RMB into US dollars in connection with the preparation of our financial statements were as follows:
| RMB per US Dollar | ||||
| 2006 | 2005 | |||
|
Balance sheet items as of June 30 |
7.9956 | N/A | ||
|
Amounts included in the statement of operations, statement of changes in stockholders’ equity and statement of cash flows for the three months and nine months ended June 30 |
8.04914 | 8.2765 | ||
|
Balance sheet items as of September 30 |
N/A | 8.0920 | ||
Renminbi is not readily convertible into U.S. dollars in the foreign exchange markets. The foreign exchange rate between the RMB and the U.S. dollar had been stable at approximately RMB 8.28 to $1.00 for the last few years. On July 21, 2005, the Central Bank of China announced that it would allow the RMB to move to a flexible exchange rate with a maximum daily variance against the U.S. dollar of 0.3%. No provision has been made in the accompanying financial statements for the change in currency policy, nor has any determination been made, as to the potential impact, this may have on our future operations. As a result, the stated exchange rates may not accurately reflect the amount in U.S. dollars into which RMB could be actually converted at the date or during the periods reflected in the foregoing table.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to interest rate risk primarily with respect to our short-term bank loans. Although the interest rates, based on the banks’ prime rates, are fixed for the terms of the loans, the terms are typically five to twelve months and interest rates are subject to change upon renewal. There were no material changes in interest rates for short-term bank loans renewed during the nine months ended June 30, 2006. A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities at June 30, 2006 would decrease net income before provision for income taxes by $531,542 or 3.3% for the nine months ended June 30, 2006. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.
Foreign Exchange Risk
Although our reporting currency is the U.S. dollar, approximately 68.3% of our revenues and 90% of our costs and expenses for the nine months ended June 30, 2006 are denominated in RMB, with the balance denominated in U.S. dollars. Approximately 93.9% of our assets except for cash were denominated in RMB as of June 30, 2006. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB depreciates against the U.S. dollar, the value of our Renminbi revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. We record transactions denominated in currencies other than the U.S. dollar by translating them into U.S. dollars at the applicable exchange rates on the transaction dates. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the applicable exchange rate on the balance sheet date. Any resulting exchange differences are recorded in other comprehensive income or loss. An average appreciation (depreciation) of the RMB against the U.S. dollar of 5% would increase (decrease) our comprehensive income by $5.2 million based on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of June 30, 2006. As of June 30, 2006, our accumulated other comprehensive income (loss) was $2.3 million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act, management has evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. In addition, management has performed the same evaluation as of the date of filing this quarterly report on Form 10-Q. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer.
First Restatement
In the course of the SEC review of registration statements on Form SB-2 (File Nos. 333-122209 and 333-130247), we restated on January 30, 2006, pursuant to Amendment No.1 to our annual report on Form 10-KSB for the fiscal year ended September 30, 2005, our consolidated balance sheet as of September 30, 2004, our consolidated statements of income and comprehensive income, our consolidated statements of cash flows and our consolidated statements of changes in shareholders’ equity for the fiscal year ended September 30, 2004, and also extended or modified certain notes to these consolidated financial statements. This restatement resulted arose out of accounting errors relating to (1) misclassification of cash transactions, (2) incorrect charging to our statements of income and comprehensive income and comprehensive income for fiscal 2003 and 2004 for deficit attributable to 1,152,456 shares outstanding prior to our reverse merger on January 20, 2005, and (3) incorrect presentation of depreciating expenses in the statement of income and comprehensive income. The restatement in an increase in net cash from financing activities, a decrease in the number of common stock outstanding and a corresponding increase in paid-in capital, and a decrease in gross profit for the fiscal year ended September 30, 2004 by $1,635,971, or approximately 11%.
Second Restatement
In the course of the SEC review of the registration statements referred to above, we determined that beginning with fiscal quarter ended December 31, 2005, we would no longer be considered a “small business issuer.” We restated on March 29, 2006, pursuant to Amendment No.2 to our quarterly report on Form 10-Q for the quarter ended December 31, 2005, our consolidated balance sheet as of December 31, 2005, our consolidated statement of income and comprehensive income and our consolidated statement of cash flows for the three months ended December 31, 2005 to reflect the prospective adoption of SFAS No. 123R relating to the accounting for stock- based compensation commencing in the first quarter of our fiscal year ending September 30, 2006. Pursuant to the restatement, we incurred an incremental share-based compensation expense of $711,512 in the quarter ended December 31, 2005. This restatement resulted in, among other things, a decrease in gross profit and net income per share for the first quarter of our fiscal year 2006.
Third Restatement
As reported in the current report on Form 8-K filed with the SEC on August 4, 2006, we changed our independent registered public accounting firm from Schwartz Levitsky Feldman LLP to KPMG. We engaged KPMG on May 15, 2006 to audit the Company’s financial statements for the fiscal years ended September 30, 2003, 2004 and 2005. During the course of the audit, KPMG notified our accounting staff of misstatements in our previously reported financial statements for the fiscal years ended September 30, 2003, 2004 and 2005 that required correction relating to: (1) the overstatement of interest expense because of an error in the application of accounting principles relating to interest capitalization, and the related understatement of property, plant and equipment, construction in progress and depreciation expenses; (2) the incorrect charging to shareholders’ equity for fiscal year 2005 the provision for staff and workers’ bonus and welfare fund instead of charging it to the statements of income and comprehensive income; (3) the overstatement of the provision for contributions to a social insurance plan because of a misinterpretation of the applicable PRC laws; (4) the understatement of our accumulated foreign-currency translation adjustment for fiscal 2005 included in comprehensive income and overstatement of our additional paid-in capital due to a calculation error during consolidation; (5) other misstatements identified, which were individually not material, include of amounts related to amortization of lease prepayments, prepayments and other receivables, accrued expenses and other payables, cost of revenues, general and administrative expenses, finance costs, other expenses, and certain cash flow items, and (6) the consequential understatements or overstatements of income tax expenses. The net restatement adjustments resulting from these accounting misstatements resulted in an increase in our net income and net income per share for the fiscal years 2003, 2004 and 2005, respectively.
Management’s Determination on Disclosure controls and procedure
Management has determined that the above-mentioned three restatements related to control deficiencies that in turn resulted from material weaknesses in our internal control over financial reporting. The Public Company Accounting Oversight Board’s Auditing Standard No. 2 defines a material weakness as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result of existence of the material weaknesses, as described below, our chief executive officer and our chief financial officer have concluded that, as of June 30, 2006, quarterly Form 10-Q, our disclosure controls and procedures were not effective at a reasonable assurance level.
For the purposes of this quarterly report on Form 10-Q, we re-closed our financial statements for the three months and nine months ended June 30, 2005 and 2006 and Management believes that the financial statements included in this quarterly report on Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
Internal Control over Financial Reporting
Internal control over financial reporting refers to a process designed by, or under the supervision of, our chief executive officer and chief financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the U.S. GAAP and includes those policies and procedures that:
| • | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with the U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our board of directors; and |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements. |
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal controls over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Material Weaknesses
Management has determined that the above-mentioned three restatements resulted from the following material weaknesses:
| • | a lack of sufficient accounting staff with adequate training and familiarity with the application of the U.S. GAAP; |
| • | a lack of sufficient internal control over financial reporting designed to ensure proper preparation of the financial statements under the U.S. GAAP; and |
| • | a lack of controls and procedures for review and examination of financial statements prepared in accordance with the U.S. GAAP. |
Remediation Measures
We are committed to maintaining an effective internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements for external purposes in accordance with the generally accepted accounting principles in the United States. To remediate the material weaknesses described above, we have taken and continue to take the following steps:
| • | Beginning April 2006, hired accounting staff familiar with the U.S. GAAP and financial accounting and auditing experience with a “Big Four” public accounting firm to prepare consolidated financial statements and disclosures. |
| • | Required draft financial statements to be reviewed by senior accountants with more than ten-year auditing experience. |
| • | Increased training of all accounting personnel on U.S. GAAP: basic accounting personnel to participate in training programs concerning general accounting policies and principles provided by governmental agencies and professional firms; key accounting personnel to participate in special training programs provided by professional accounting firms retained by us on the difference between U.S. GAAP and PRC GAAP, recent developments in accounting policies, and previous errors in preparation and disclosure of our financial statements. |
| • | Retained experienced accountants and external consultants to advise us on accounting treatment of complicated transactions and matters unfamiliar to our accounting staff, such as accounting for share-based compensation. |
| • | Retained experienced PRC domestic counsel to advise us on applicable PRC laws and regulations, and international counsel to ensure that our accounting treatment and disclosures comply with the SEC rules and the requirements under U.S. GAAP. |
| • | Engaged experienced external consultants with expertise in the Sarbanes-Oxley Act of 2002, internal control over financial reporting, auditing and risk control to help us design and implement internal control procedures regarding financial reporting and disclosures. |
| • | Established flow charts illustrating detailed procedures relating to our business, internal control, risk control matrix, and testing methods. |
| • | Established in March 2006 an internal auditing department, which directly reports to our audit committee and is responsible for inspecting and evaluating the implementation of all internal control and procedures in respect of financial reporting. |
| • | Established in June 2006 disclosure committee responsible for reviewing, analyzing and examining our financial statements and disclosure items, a requirement that must be complied with prior to the publication of our financial statements and disclosure items. |
We have taken, and continue to take, these remediation measures to address the material weaknesses in our internal control over financial reporting. Although we believe that these material weaknesses have not been fully resolved as of the date of filing of this quarterly report on Form 10-Q, we are carrying out measures to fully remedy all material weaknesses by the end of fiscal year ending September 30, 2006. We are in the process of evaluating, implementing and testing our internal control procedures in anticipation of the compliance with Section 404 of the Sarbanes-Oxley Act of 2002 for the fiscal year ending September 30, 2006.
Except for the foregoing remediation measures, there have been no material changes in our disclosure controls and procedures, or our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our disclosure controls and procedures or our internal control over financial reporting.
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None.
Risks Related to Our Business
Our limited operating history may not serve as an adequate basis to evaluate our future prospects and results of operations.
We have a limited operating history. We are engaged in the business of developing, manufacturing and selling of lithium-based rechargeable battery cells used for a wide range of portable electronic applications. We were established in Shenzhen, China in August 2001 and commenced operations in June 2002. Our limited operating history may not provide a meaningful basis for you to evaluate our business, financial performance and prospects. We may not be able to:
| • | maintain our leading position in the cellular phone battery replacement market; |
| • | retain existing customers or acquire new customers; |
| • | diversify our revenue sources by successfully developing and selling our products in the global cellular phone OEM market, notebook computer battery market and other markets; |
| • | keep up with evolving industry standards and market developments; |
| • | respond to competitive market conditions; |
| • | maintain adequate control of our expenses; |
| • | manage our relationships with our suppliers; |
| • | attract, train, retain and motivate qualified personnel; or |
| • | protect our proprietary technologies. |
If we are unsuccessful in addressing any of these challenges, our business may be materially and adversely affected.
We are primarily dependent on sales of lithium-ion battery cells for the cellular phone battery replacement market. A reduction in the volume or average price of lithium-ion battery cells that we sell for this market would cause our overall revenue to decline.
We derived a substantial portion of our revenues from the sales of our lithium-ion battery cells for the cellular phone battery replacement market, respectively. While we intend to diversify our revenue sources by expanding to the global cellular phone OEM market, notebook computers and high-power electrical tool markets, we expect that sales of battery cells used for the cellular phone battery replacement market will continue to comprise a significant portion of our revenues in the near future. Accordingly, any decrease in the demand for our battery cells in the replacement market resulting from success of competing products, slower than expected growth of sales in the replacement market or other adverse developments relating to the replacement market may materially and adversely affect our business and cause our overall revenue to decline. In addition, our expansion to the global cellular phone battery OEM market and other markets may not increase our revenue to a level that would enable us to materially reduce our dependence on sales of battery cells for the cellular phone replacement market.
Our business depends on the growth in demand for portable electronic devices.
As the market demand for portable electronic devices is directly related to the demand for our products, a fast growing portable electronic device market will be critical to the success of our business. In anticipation of an expected increase in demand for portable electronic devices such as cellular phones and notebook computers in next few years, we have expanded our manufacturing capacity. However, the markets we have targeted, including those of PRC, may not achieve the level of growth we expect. If this market fails to achieve our expected level of growth, we will have excess production capacity and may not be able to generate enough revenue to maintain our profitability.
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Our future success depends on the success of manufacturers of the end applications that use our products.
As we expand to the battery markets for global OEM cellular phones, notebook computers and other portable electronic devices, our future success depends on whether end application manufacturers are willing to use batteries from our product lines. To secure acceptance of our products, we must constantly develop and introduce more reliable and cost-effective battery cells with enhanced functionality to meet evolving industry standards. Our failure to gain acceptance of our products from these manufactures could materially and adversely affect our future success.
Even if a manufacturer decides to use batteries that incorporate our products, the manufacturer may not be able to market and sell its products successfully. The manufacturer’s inability to market and sell its products successfully, whether from lack of market acceptance or otherwise, could materially and adversely affect our business and prospects because this manufacturer may not order new products from us. If we cannot achieve the expected level of sales, we will not be able to make enough profits to offset the expenditures we have incurred to expand our production capacity, nor will we be able to grow our business. Accordingly, our business, financial condition, results of operations and future success would be materially and adversely affected.
We experience fluctuations in quarterly operating results.
Our quarterly operating results have fluctuated in the past and will likely fluctuate in the future. The demand for our products is driven largely by demand for the end applications that are powered by our products. Accordingly, the rechargeable battery industry is affected by market conditions that are often outside our control. Our results of operations may fluctuate significantly from period to period due to a number of factors, including seasonal variations in consumer demand for batteries and their end applications, capacity ramp up by competitors, industry-wide technological changes, the loss of a key customer and the postponement, rescheduling or cancellation of large orders by a key customer. As a result of these factors and other risks discussed in this section, you should not rely on period-to-period comparisons to predict our future performance.
Our failure to keep up with rapid technological changes and evolving industry standards may cause our products to become obsolete and less marketable, resulting in our loss of market share to our competitors.
The lithium-based battery market is characterized by changing technologies and evolving industry standards, which are difficult to predict. This, coupled with frequent introduction of new products and models, has shortened product life cycles and may render our products obsolete or unmarketable. Our ability to adapt to evolving industry standards and anticipate future standards will be a significant factor in maintaining and improving our competitive position and our prospects for growth. To achieve this goal, we have invested and plan to continue investing significant financial resources in our R&D infrastructure. Research and development activities, however, are inherently uncertain, and we might encounter practical difficulties in commercializing our research results. Accordingly, our significant investment in our R&D infrastructure may not bear fruit. On the other hand, our competitors may improve their technologies or even achieve technological breakthroughs that would render our products obsolete or less marketable. Therefore, our failure to effectively keep up with the rapidly technological changes and evolving industry standards by introducing new and enhanced products may cause us to lose our market share and to suffer a decrease in our revenue.
Failure to successfully obtain OEM certification from international cellular phone brand owners may materially and adversely affect our future growth.
We intend to leverage our position in the cellular phone battery replacement market and to expand to the global cellular phone OEM market. To achieve this goal, we must first be qualified by international brand owners. We have started the process with Motorola, Nokia as well as other international brand owners. Since international brand owners have very stringent requirements, the qualification process can be lengthy and costly for new component suppliers such as us. Our failure to obtain qualifications from international brand owners would have a material adverse effect on our ability to execute our business plan and achieve the level of growth we have planned.
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We may not be able to manage our expansion of operations effectively.
We were established in August 2001 and have grown rapidly since. We are in the process of significantly expanding our business in order to meet the increasing demand for our products, as well as to capture new market opportunities. As we continue to grow, we must continue to improve our operational and financial systems, procedures and controls, increase manufacturing capacity and output, and expand, train and manage our growing employee base. In order to fund our on-going operations and our future growth, we need to have sufficient internal sources of liquidity or access to additional financing from external sources. Furthermore, our management will be required to maintain and strengthen our relationships with our customers, suppliers and other third parties. As a result, our continued expansion has placed, and will continue to place, significant strains on our management personnel, systems and resources. We will also need to further strengthen our internal control and compliance functions to ensure that we will be able to comply with our legal and contractual obligations and minimize our operational and compliance risks. Our current and planned operations, personnel, systems, internal procedures and controls may not be adequate to support our future growth. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our business strategies or respond to competitive pressures.
We may not be able to substantially increase our manufacturing output in order to maintain our cost competitiveness.
We believe that our ability to provide cost-effective products is one of the most significant factors that contributed to our current success and will be essential for our future growth. We believe this is one of our competitive advantages over our Japanese and Korean competitors. In order to continue doing so, we will need to increase our manufacturing output to a level that will enable us to substantially reduce the cost of our products on a per unit basis through economies of scale. However, our ability to substantially increase our manufacturing output is subject to significant constraints and uncertainties, including:
| • | the need to raise significant additional funds to purchase and prepay raw materials or to build additional manufacturing facilities, which we may be unable to obtain on reasonable terms or at all; |
| • | delays and cost overruns as a result of a number of factors, many of which may be beyond our control, such as increases in raw material prices and problems with equipment vendors; |
| • | delays or denial of required approvals by relevant government authorities; |
| • | diversion of significant management attention and other resources; and |
| • | failure to execute our expansion plan effectively. |
If we are unable to increase our manufacturing output because of any of the risks described above, we may be unable to maintain our competitive position or achieve the growth we expect. Moreover, even if we expand our manufacturing output, we may not be able to generate sufficient customer demand for our products to support our increased production output.
We are and will continue to be subject to rapidly declining average selling prices, which may harm our revenue and gross profits.
Portable consumer electronics such as cellular phones and notebook computers are subject to rapid declines in average selling prices due to rapidly evolving technologies, industry standards and consumer preferences. As a result, manufacturers of these electronic devices expect us as suppliers to cut our costs and lower the price of our products in order to mitigate the negative impact on their own margins. We have reduced the price of our products in the past in order to meet market demand and expect to continue to face market-driven downward pricing pressures in the future. Our revenue and profitability will suffer if we are unable to offset any declines in our average selling prices by developing new or enhanced products on a timely basis with higher selling prices or gross profit margins, increasing our sales volumes or reducing our costs.
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We have had material weaknesses in internal control over financial reporting, which relate primarily to the disclosure and presentation of financial information under U.S. GAAP. We have restated our financial statements three times. We cannot assure you that additional material weaknesses will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in material misstatements in our financial statements which could require us to restate financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on our stock price.
In the course of the SEC review of registration statements on Form SB-2 (File Nos. 333-122209 and 333-130247), we restated our consolidated balance sheet as of September 30, 2004, our consolidated statements of income and comprehensive income, our consolidated statements of cash flows and our consolidated statements of changes in shareholders equity for the fiscal year ended September 30, 2004, and also extended or modified certain notes to these consolidated financial statements. This restatement arose out of accounting errors relating to (1) misclassification of cash transactions, (2) incorrect charging to our statements of income and comprehensive income and comprehensive income for fiscal 2003 and 2004 for deficit attributable to 1,152,456 shares outstanding prior to our reverse merger on January 20, 2005, and (3) incorrect presentation of depreciation expenses in the statement of income and comprehensive income. The restatement resulted in an increase in net cash from financing activities, a decrease in the number of common stock outstanding and a corresponding increase in paid-in capital, and a decrease in gross profit for the fiscal year ended September 30, 2004 by $1,635,971, or approximately 11%.
In the course of the SEC review of the registration statements referred to above, we determined that beginning with fiscal quarter ended December 31, 2005, we would no longer be considered a “small business issuer.” We restated our consolidated balance sheet as of December 31, 2005, our consolidated statement of income and comprehensive income and our consolidated statement of cash flows for the three months ended December 31, 2005 to reflect the prospective adoption SFAS No. 123R relating to the accounting for stock-based compensation commencing in the first quarter of our fiscal year ending September 30, 2006. Pursuant to the restatement, we incurred an incremental share-based compensation expense of $711,512 in the quarter ended December 31, 2005. This restatement resulted in, among other things, a decrease in gross profit and net income per share for the first quarter of our fiscal year 2006.
As reported in the current report on Form 8-K filed with the SEC on August 4, 2006, we changed our independent registered public accounting firm from Schwartz Levitsky Feldman LLP to KPMG. We engaged KPMG on May 15, 2006 to carry out an audit of our financial statements for the fiscal years ended September 30, 2003, 2004 and 2005. During the course of the audit, KPMG notified our accounting staff of misstatements in our previously reported financial statements for the fiscal years ended September 30, 2003, 2004 and 2005 that required correction relating to: (1) the overstatement of interest expense because of an error in the application of accounting principles relating to interest capitalization, and the related understatement of property, plant and equipment, construction in progress and depreciation expenses; (2) the incorrect charging to shareholders’ equity for fiscal year 2005 the provision for staff and workers’ bonus and welfare fund instead of charging it to the statements of income and comprehensive income; (3) the overstatement of the provision for contributions to a social insurance plan because of a misinterpretation of the applicable PRC laws; (4) the understatement of our accumulated foreign-currency translation adjustment for fiscal 2005 included in comprehensive income and overstatement of our additional paid-in capital due to a calculation error during consolidation; (5) other misstatements identified, which were individually not material, include amounts related to amortization of lease prepayments, prepayments and other receivables, accrued expenses and other payables, cost of revenues, general and administrative expenses, finance costs, other expenses, and certain cash flow items, and (6) the consequential understatements or overstatements of income tax expenses. The net restatement adjustments resulted in an increase in our net income and earnings per share in the relevant periods.
Management has determined that the restatements referred to above resulted from material weaknesses in our internal control over financial reporting. These material weaknesses relate primarily to the disclosure and presentation of financial information in accordance with U.S. GAAP. See “Item 4 Controls and Procedures” for a more detailed discussion of these material weaknesses.
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We cannot assure you that additional significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional significant deficiencies or material weaknesses, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that will be required when the SEC’s rules under Section 404 of the Sarbanes-Oxley Act of 2002 become applicable to us beginning with our annual report on Form 10-K for the fiscal year ended September 30, 2006. The existence of a material weakness could result in errors in our financial statements that could result in another restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.
Failure to achieve and maintain effective internal controls could have a material adverse effect on our business, results of operations and the trading price of our common stock.
We are subject to the reporting obligations under the U.S. securities laws. The SEC, under Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to include a report of management on such companies’ internal control over financial reporting in their annual reports that contain an assessment by management of the effectiveness of their internal control over financial reporting at a reasonable assurance level. In addition, an independent registered public accounting firm for a public company must attest to and report on management’s assessment of the effectiveness of the company’s internal control over financial reporting. These requirements will first apply to our annual report on Form 10-K for the fiscal year ending September 30, 2006.
Management has determined that as of the fiscal quarter June 30, 2006 and as of the date of filing of this report, the restatements, as described in “Item 4 Controls and Procedures,” resulted from material weaknesses in our internal control over financial reporting. To remediate these material weaknesses, which relate primarily to the disclosure and presentation of financial information in accordance with U.S. GAAP, we have taken and continue to take a number of remediation measures, as described in “Item 4 Controls and Procedures.” However, we cannot assure you that we can fully remediate all our material weaknesses or address additional material weaknesses or significant deficiencies that may subsequently arise by the year end date of fiscal year 2006, so that our management can conclude that we will have an effective internal control over financial reporting as of the fiscal year end for our annual report on Form 10-K for the fiscal year 2006. If we cannot implement the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely manner or with adequate compliance, our independent auditors may not be able to provide a written attestation as to the effectiveness of our internal controls over financial reporting, in which event, our independent auditors may issue a disclaimer of their audit opinion. Our failure to achieve and maintain effective internal control over financial reporting may result in sanctions or investigations by regulatory authorities, such as the SEC, and loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our common stock. Furthermore, we anticipate that we will incur considerable costs and use significant management and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act of 2002.
We became a public company through our acquisition by a non-operating public shell company, where we were the accounting acquirer and assumed all liabilities of our predecessor entity.
Our January 2005 share exchange with Medina Coffee, Inc. was accounted for as a reverse merger in which Shenzhen BAK Battery Co., Ltd. was deemed to be the accounting acquirer and Medina Coffee, which was originally incorporated in 1999, was deemed to be the legal acquirer. Accordingly, we have assumed all the liabilities of Medina Coffee. Medina Coffee was incorporated for the purposes of engaging in the retail coffee business and at the time of the share exchange, Medina Coffee had no substantial operations, assets or liabilities. We cannot guarantee that we will not become subject to any liabilities related to the conduct by Medina Coffee of its business prior to its acquisition by us that may subsequently arise.
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We are dependent on a limited number of customers for a significant portion of our revenues and this dependence is likely to continue.
We have been dependent on a limited number of customers for a significant portion of our revenue. Our top five customers accounted for approximately 34.5% and 39.9% of our revenues in the years ended September 30, 2005 and for the nine months ended June 30, 2006, respectively. 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 purchasing our products. We expect that a limited number of customers will continue to contribute to a significant portion of our sales in the near future. Our ability to maintain close relationships with these top customers is essential to the growth and profitability of our business. If we fail to sell our products to one or more of these top customers in any particular period, or if a large customer purchases fewer of our products, defers orders or fails to place additional orders with us, or if we fail to develop additional major customers, our revenue could decline, and our results of operations could be adversely affected.
We do not have long-term purchase commitments from our customers, which may result in significant uncertainties and volatility with respect to our revenue from period to period.
We do not have long-term purchase commitments from our customers and the term of our sales contracts with our customers is typically one year. Furthermore, these contracts leave certain major terms such as price and quantity of products open to be determined in each purchase order. These contracts also allow parties to readjust the contract price for substantial changes in market conditions. As a result, if our customers hold stronger bargaining power than us or the market conditions are in their favor, we may not be able to enjoy the price downside protection or upside gain. Furthermore, our customers may decide not to continue placing purchase orders with us in the future at the same level as in prior periods. As a result, our results of operations may vary from period to period and may fluctuate significantly in the future.
We may not be able to accurately plan our production based on our sales contracts, which may result in excess product inventory or product shortages.
Our sales contracts typically provide for a non-binding, three-month forecast on the quantity of products that our customers may purchase from us. We typically have only a 15-day lead time to manufacture products to meet our customers’ requirements once our customers place orders with us. To meet the short delivery deadline, we generally make significant decisions on our production level and timing, procurement, facility requirements, personnel needs and other resources requirements based on our estimate in light of this forecast, our past dealings with such customers, market conditions and other relevant factors. Our customers’ final purchase orders may not be consistent with our estimates. If the final purchase orders substantially differ from our estimates, we may have excess product inventory or product shortages. Excess product inventory could result in unprofitable sales or write-offs as our products are susceptible to obsolescence and price declines. Producing additional products to make up for any product shortages within a short time frame may be difficult, making us unable to fill out the purchase orders. In either case, our results of operations would fluctuate from period to period.
We depend on third parties to supply key raw materials to us. Failure to obtain sufficient supply of these raw materials in a timely fashion and at reasonable costs could significantly delay our production and shipments, which would cause us to breach our sales contracts with our customers.
We purchase from Chinese domestic suppliers certain key raw materials such as electrolytes, electrode materials and import separators, a key component of battery cells from foreign countries. We purchase raw materials on the basis of purchase orders. In the absence of firm and long-term contracts, we may not be able to obtain sufficient supply of these raw materials from our existing suppliers or alternates in a timely fashion or at a reasonable cost. Our failure to secure sufficient supply of key raw materials in a timely fashion would result in a significant delay in our production and shipments, which may cause us to breach our sales contracts with our customers. Furthermore, failure to obtain sufficient supply of these raw materials at a reasonable cost could also harm our revenue and gross profit margins.
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We face intense competition from other battery cell manufacturers, many of which have significantly greater resources.
The market for battery cells used for portable electronic devices such as cellular phones is intensely competitive and is characterized by frequent technological changes and evolving industry standards. We expect competition to become more intense. Increased competition may result in a decline in average selling prices, causing a decrease in gross profit margins. We have faced and will continue to face competition from manufacturers of traditional rechargeable battery cells, such as nickel-cadmium batteries, from manufacturers of rechargeable battery cells of more recent technologies, such as nickel-metal hydride and liquid electrolyte, other manufacturers of lithium-ion battery cells, as well as from companies engaged in the development of batteries incorporating new technologies. Other manufacturers of lithium-ion battery cells 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 of these existing competitors have greater financial, personnel, technical, manufacturing, marketing, sales and other resources than we do. As a result, these competitors may be in a stronger position to respond quickly to market opportunities, new or emerging technologies and evolving industry standards. Many of our competitors are developing a variety of battery technologies, such as lithium polymer and fuel cell batteries, which are expected to compete with our existing product line. Other companies undertaking R&D activities of solid-polymer lithium-ion batteries have developed prototypes and are constructing commercial scale production facilities. It is possible that our competitors will be able to introduce new products with more desirable features than ours and their new products will gain market acceptance. If our competitors successfully do so, we may not be able to maintain our competitive position and our future success would be materially and adversely affected.
We depend on third-party battery pack manufacturers to incorporate our products into battery packs to make batteries ready for use in various portable consumer electronics. If these factories fail to properly assemble our products and battery packs, resulting in defective batteries, our reputation could be severely damaged and our sales could be materially and adversely affected.
We manufacture only battery cells, which is a key and the most valuable component of a battery. Battery cells need to be incorporated into battery packs to constitute batteries ready for use in various portable consumer electronics. Some of our end application customers may ask us to designate certain third-party battery pack manufacturers to assemble our products into batteries. While assembly is a fairly straightforward process as it does not involve much complex technologies, unless assembled properly, the batteries could malfunction. If the battery pack manufacturers with whom we cooperated fail to assemble batteries properly and cause a large number of batteries to be defective due to reasons unrelated to the quality of our products, our reputation could be severely damaged. If these battery pack manufacturers are unable to assemble a sufficient number of batteries to meet the requirements of our end application customers and we cannot timely find qualified alternative battery pack manufacturers, our sales could be materially and adversely affected.
Our business depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lost their services.
Our future success heavily depends on the continued service of our senior executives and other key employees. In particular, we rely on the expertise and experience of our chief executive office and president, Mr. Xiangqian Li, our chief operating officer and chief technical officer, Dr. Huanyu Mao. If one or more of our senior executives are unable or unwilling to continue to work for us in their present positions, we may have to spend a considerable amount of time and costs in searching, recruiting and integrating the replacements into our operations, which would substantially divert our management’s attention from our business and severely disrupt our business. This may also adversely affect our ability to execute our business strategy. Moreover, if any of our senior executives joins a competitor or forms a competing company, we may lose customers, suppliers, know-how and key personnel. Each of our executive officers has entered into an employment agreement with us, which contains non-competition and confidentiality clauses. However, if any dispute arises between our executive officers and us, it is hard to predict the extent to which any of these agreements could be enforced in China, where these executive officers reside, in light of the uncertainties with China’s legal system.
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The success of our business depends on our ability to attract, train and retain highly skilled employees and key personnel.
Because of the highly specialized, technical nature of our business, we must attract, train and retain a sizable workforce comprising highly skilled employees and other key personnel. Since our industry is characterized by high demand and intense competition for talent, we may have to pay higher salaries and wages and provide greater benefits in order to attract and retain highly skilled employees or other key personnel that we will need to achieve ours strategic objectives. As we are still a relatively young company and our business has grown rapidly, our ability to train and integrate new employees into our operations may not meet the requirements of our growing business. Our failure to attract, train or retain highly skilled employees and other key personnel in numbers that are sufficient to satisfy our needs would materially and adversely affect our business.
Manufacturing or use of our products may cause accidents, which could result in significant production interruption, delay or claims for substantial damages.
Due to the high energy density inherent in lithium-based batteries, our batteries can pose certain safety risks, including the risk of fire. Although we incorporate safety procedures in the research, development, manufacture and transportation of batteries that are designed to minimize safety risks, the manufacture or use of our products may still cause accidents. Any accident, whether occurring at the manufacturing facilities or from the use of our products, may result in significant production interruption, delays or claims for substantial damages caused by personal injuries or property damages.
We extend relatively long payment terms to our customers.
As is customary in the our industry in the PRC, we extend relatively long payment terms and provide generous return policies to our customers. As a result of the size of many of our orders, these extended terms may adversely affect our cash flow and our ability to fund our operations out of our operating cash flow. In addition, although we attempt to establish appropriate reserves for our receivables, those reserves may not prove to be adequate in view of actual levels of bad debts. The failure of our customers to pay us timely would negatively affect our working capital, which could in turn adversely affect our cash flow.
Our customers often place large orders for products, requiring fast delivery, which impacts our working capital. If our customers do not incorporate our products into their products and sell them in a timely fashion, for example, due to excess inventories, sales slowdowns or other issues, they may not pay us in a timely fashion, even on our extended terms. Our customers’ failure to pay may force us to defer or delay further product orders, which may adversely affect our cash flows, sales or income in subsequent periods.
We manufacture and market lithium-based battery cells only. If a viable substitute product or chemistry emerges and gains market acceptance, our business, financial condition and results of operations will be materially and adversely affected.
We manufacture and market lithium-based battery cells only. As we believe that the market for lithium-based batteries has good growth potential, we have focused our R&D activities on exploring new chemistry and formula to enhance our product quality and features while reducing cost. Some of our competitors are conducting R&D on alternative battery technologies, such as fuel cells. If any viable substitute product emerges and gains market acceptance because it has more enhanced features, more power, more attractive pricing, or better reliability, the market demand for our products may be reduced, and accordingly our business, financial condition and results of operations would be materially and adversely affected.
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We face risks associated with the marketing, distribution and sale of our products internationally, and if we are unable to effectively manage these risks, they could impair our ability to expand our business abroad.
For the nine months ended June 30, 2006, we derived 31.7% of our sales from outside Mainland China. The marketing, international distribution and sale of our products expose us to a number of risks, including:
| • | fluctuations in currency exchange rates; |
| • | difficulty in engaging and retaining distributors that are knowledgeable about, and can function effectively in, overseas markets; |
| • | increased costs associated with maintaining marketing efforts in various countries; |
| • | difficulty and cost relating to compliance with the different commercial and legal requirements of the overseas markets in which we offer our products; |
| • | inability to obtain, maintain or enforce intellectual property rights; and |
| • | trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make us less competitive in some countries. |
Defects in our products could result in a loss of customers and decrease in revenue, unexpected expenses and a loss of the market share.
We have purchased certain product liability insurance from some PRC-based insurance companies to provide against any claims against us based on our product quality. If any of our products is found to have reliability, quality or compatibility problems, we will be required to accept returns, provide replacement, provide refund, or pay damages. As our insurance policy imposes a ceiling for maximum coverage and high deductibles, we may not be able to obtain from our insurance policy an amount enough to compensate our customers for damages they suffered attributable to the quality of our products. Moreover, as our insurance policy also excludes certain types of claims from its coverage and if any of our customers’ claims against us falls into those exclusions, we would not receive any amount from our insurance policy at all. In either case, we may still be required to incur substantial amounts to indemnify our customers in respect of their product quality claims against us, which would materially and adversely affect the results of our operations and severely damage our reputation.
We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could cause our loss of significant rights and inability to continue providing our existing product offerings.
Our success also depends largely on our ability to use and develop our technology and know-how without infringing the intellectual property rights of third parties. The validity and scope of claims relating to lithium-ion battery technology patents involve complex scientific, legal and factual questions and analysis and, therefore, may be highly expensive and time-consuming. If there is a successful claim of infringement against us, we may be required to pay substantial damages to the party claiming infringement, develop non-infringing technologies or enter into royalty or license agreements that may not be available at acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis would harm our business. Protracted litigation could result in our customers, or potential customers, deferring or limiting their purchase or use of our products until resolution of such litigation. Parties making the infringement claim may also obtain an injunction that can prevent us from selling our products or using technology that contains the allegedly infringing contents. Any intellectual property litigation could have a material adverse effect on our business, results of operation and financial condition.
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We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We rely on a combination of patent, trademark and trade secret laws, as well as confidentiality agreements to protect our intellectual property rights. As of June 30, 2006, we owned 50 patents in China and had 171 pending patent applications in China. We had 26 registered trademarks in China that cover various categories of goods and services. Some of our trademarks, such as BAK, are also registered trademarks in the United States, European Union, Korea, Russia, Taiwan and Hong Kong. There is a possibility that not all the pending patent applications will result in issue of patents or, if issued, that it will sufficiently protect our intellectual property rights. Implementation of PRC intellectual property-related laws has historically been lax, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Policing unauthorized use of proprietary technology is difficult and expensive. The steps we have taken may not be adequate to prevent unauthorized use of our intellectual property rights. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us any royalties. Though we are not currently involved in any litigation with respect to intellectual property, we may need to enforce our intellectual property rights through litigation.
We do not hold land use right for our BAK Industrial Park where our facilities are located, nor did we obtain the required construction and zoning permits for our manufacturing facilities and other related facilities situated on the land.
We do not hold the land use right to the tract of property on which we have constructed our new manufacturing facilities and other related facilities. Under relevant PRC laws and regulations, because we do not have the land use right for the underlying land, we were not eligible to apply for the required construction or zoning permits for the facilities we later built on the land, including our manufacturing facilities, and therefore we are not deemed to be the rightful owner for all these facilities. While we have been actively negotiating with the Shenzhen municipal government with a view to resolving this issue, we may not be able to purchase the land use right to the underlying land from the Shenzhen municipal government on commercially reasonable terms, or if at all. Even if we manage to acquire the land use right, we cannot assure you that we will not be subject to any fine or other penalty for our past non-compliance with construction and zoning requirements. If we are unsuccessful in acquiring the land use right, we could be forced to halt our production, vacate our current premises, and lose all of our facilities situated on the land without any compensation, which would adversely and materially affect our business, results of operations and our financial condition.
Compliance with environmental regulations can be expensive, and our failure to comply with these regulations may result in adverse publicity and a material adverse effect on our business.
As a manufacturer, we are subject to various Chinese environmental laws and regulations on air emission, waste water discharge, solid wastes and noise. Although we believe that our operations are in substantial compliance with current environmental laws and regulations, we may not be able to comply with these regulations at all times as the PRC environmental legal regime is evolving and becoming more stringent. Therefore, if the PRC imposes more stringent regulations in the future, we will have to incur additional substantial costs and expenses in order to comply with new regulations, which may negatively affect our results of operations. If we fail to comply with any of the present or future environmental regulations in material aspects, we may suffer from negative publicity and may be required to pay substantial fines, suspend or even cease operations. Failure to comply with PRC environmental laws and regulations may materially and adversely affect our business, financial condition and results of operations.
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We have significant short-term debt obligations, which mature in less than one year. Failure to extend those maturities of, or to refinance, that debt could result in defaults, and in certain instances, foreclosures on our assets.
As June 30, 2006, we had $53.0 million of short-term loans and $35.0 million of bills payable maturing in less than one year, a substantial portion of which was secured by certain of our assets that amounted to $36.7 million. Our deposits, inventory, machinery and equipment worth $17.8 million secured the short-term bank loans, and our deposits worth of $18.9 million secured the bills payable. Failure to obtain extensions of the maturity dates of, or to refinance, these obligations or to obtain additional equity financing to meet these debt obligations would result in an event of default with respect to such obligations and could result in the foreclosure on the collateral. The sale of such collateral at foreclosure would significantly disrupt our ability to produce products for our customers in the quantities required by customer orders or deliver products in a timely fashion, which could significantly lower our revenues and profitability. We may be able to refinance or obtain extensions of the maturities of all or some of such debt only on terms that significantly restrict our ability to operate, including terms that place additional limitations on our ability to incur other indebtedness, to pay dividends, to use our assets as collateral for other financings, to sell assets or to make acquisitions or enter into other transactions. Such restrictions may adversely affect our ability to finance our future operations or to engage in other business activities. If we finance the repayment of our outstanding indebtedness by issuing additional equity or convertible debt securities, such issuances could result in substantial dilution to our stockholders.
We have limited insurance coverage against damages or loss we might suffer.
The insurance industry in China is still in an early stage of development and business interruption insurance available in China offers limited coverage compared to that offered in many developed countries. We do not carry business interruption insurance and therefore any business disruption or natural disaster could result in substantial damages or losses to us. In addition, there are certain types of losses (such as losses from forces of nature) that are generally not insured because they are either uninsurable or because insurance cannot be obtained on commercially reasonable terms. Should an uninsured loss or a loss in excess of insured limits occur, our business could be materially adversely effected. Further, we have not been able to insure any of our manufacturing facilities since we have not yet received the applicable land use rights certificate. If we were to suffer any losses or damages to our manufacturing facilities, our business, financial condition and results of operations will be materially and adversely affected.
Risks Related to Doing Business in China
Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.
All of our business operations are conducted in China and a significant portion of our sales are made in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:
| • | the amount of government involvement; |
| • | the level of development; |
| • | the growth rate; |
| • | the control of foreign exchange; and |
| • | the allocation of resources. |
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While the Chinese economy has grown significantly in the past 20 years, the growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. We cannot predict the future direction of economic reforms or the effects that such measures may have on our business, financial condition or results of operations.
Any adverse change in the economic conditions, in government policies or in laws and regulations in China could have a material adverse effect on the overall economic growth, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our business.
We may be unable to enforce our legal 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 system 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 are subject to considerable discretion and variation on the part of the PRC government, including its courts, 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. As a result, we may not be aware of any violations of these policies and rules until some time after the violation. 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 that may affect our ability to achieve our business objectives. If we are unable to enforce any legal rights we may have under our contracts or otherwise, our ability to compete with other companies in our industry could be materially and negatively affected. In addition, any litigation in China may be protracted and result in substantial cost and diversion of resources and management attention.
We currently enjoy a reduced tax rate and other government incentives, and the loss of or reduction in these benefits may materially and adversely affect our business and results of operations.
According to relevant PRC laws and regulations, an enterprise located in Shenzhen including the district where we are currently located is subject to a 15% enterprise income tax. According to PRC laws and regulations on foreign invested enterprises, a foreign invested manufacturing enterprise is entitled to, starting from its first profitable year, a two-year exemption from its enterprise income tax followed by a three-year 50% reduction in its enterprise income tax rate. Our PRC subsidiaries, Shenzhen BAK and BAK Electronics, are each entitled to a two-year exemption from enterprise income tax from its first profitable year, and a reduced enterprise income tax rate of 7.5% for the following three years. As such, for the first two years ended December 31, 2003, Shenzhen BAK was exempted from any enterprise income tax. Between January 1, 2004 and December 31, 2006, Shenzhen BAK is subject to enterprise income tax rate of 7.5%. BAK Electronics, established in August 2005, is currently exempt from any enterprise income tax because it had no business operations in fiscal 2005. In addition, due to the additional capital invested in Shenzhen BAK in 2005, Shenzhen BAK was granted a full tax exemption on 55.88% of its taxable income for calendar years 2005 and 2006, and a 50% tax exemption on 55.88% of its taxable income for calendar years from 2007 to 2009.
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However, the PRC government authorities could reduce or eliminate these incentives at any time in the future. There have been preliminary high-level discussions within the PRC on leveling the playing field between foreign invested enterprises and PRC domestic enterprises by phasing out preferential tax rates applicable to foreign invested enterprises. We may not be able continue to qualify as an advanced technology enterprise that will enable us to enjoy the reduced tax rate. We cannot predict whether and when we may lose, in whole or in part, the preferential tax treatment and other incentives we have now. If we lose part or all of these preferential treatments, we would be subject to a normal enterprise tax rate of 33%. Any loss of or reduction in the preferential tax treatments we have received could materially adversely affect our financial condition and results of operations.
We rely on dividends and other distribution on equity paid by our subsidiaries for our cash needs
We are a holding company, and we conduct all of our operations through our two subsidiaries in PRC: Shenzhen BAK and BAK Electronics, each a limited liability company established in China. We rely on dividends and other distributions on equity paid by our PRC subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions to our stockholders, to service any debt we may incur and to pay our operating expenses. Current regulations in the PRC permit payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations. According to the articles of association of our subsidiaries, each of our subsidiaries is required to set aside at least 10% of its after-tax profit based on the Chinese accounting standards and regulations each year to its enterprise development reserve, until the balance in the reserve reaches 50% of the registered capital of the company. Funds in the reserve are not distributable to us in forms of cash dividends, loans or advances. In addition, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us, which in turn will adversely affect our cash needs.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries and our affiliated entity to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our stockholders.
Fluctuation in the value of the RMB may have a material adverse effect on your investment.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 1.4% appreciation of the RMB against the U.S. dollar between July 21, 2005 and June 30, 2006. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar. Our revenues and costs are mostly denominated in the RMB, and a significant portion of our financial assets are also denominated in RMB. We rely entirely on dividends and other fees paid to us by our subsidiaries in China. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on common stock in U.S. dollars. For example, an appreciation of the RMB against the U.S. dollar would make any new RMB-denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into the RMB for such purposes. An appreciation of the RMB against the U.S. dollar would also result in foreign currency translation losses for financial reporting purposes when we translate our U.S. dollar denominated financial assets into the RMB, as the RMB is our reporting currency.
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Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us, or otherwise adversely affect us.
SAFE issued a public notice in October 2005 requiring PRC residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies, referred to in the notice as an “offshore special purpose company.” PRC residents that are stockholders of offshore special purpose companies established before November 1, 2005 are required to register with the local SAFE branch before March 31, 2006. Our current beneficial owners who are PRC residents have registered with the local SAFE branch as required under the SAFE notice . The failure of these beneficial owners to timely amend their SAFE registrations pursuant to the SAFE notice or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in the SAFE notice may subject such beneficial owners to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to our company or otherwise adversely affect our business.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. laws, including the federal securities laws or other foreign laws against us or our management.
All of our current operations are conducted in China. Moreover, most of our current 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 and in the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon these persons. In addition, uncertainty exists as to whether the courts of China would recognize or enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities laws 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.
An outbreak of a pandemic avian influenza SARS or other contagious disease may have an adverse effect on the economies of certain Asian countries and may adversely affect our results of operations.
During the past three years, large parts of Asia experienced unprecedented outbreaks of avian influenza caused by the H5N1 virus which, according to a report of the World Health Organization, or WHO, in 2004, “moved the world closer than any time since 1968 to an influenza pandemic with high morbidity, excess mortality and social and economic disruption.” Currently, no fully effective avian flu vaccines have been developed and there is evidence that the H5N1 virus is evolving and an effective vaccine may not be discovered in time to protect against the potential avian flu pandemic. In the first half of 2003, certain countries in Asia experienced an outbreak of SARS, a highly contagious form of atypical pneumonia, which seriously interrupted the economic activities and the demand for goods plummeted in the affected regions. An outbreak of avian flu, SARS or other contagious disease or the measures taken by the governments of affected countries against such potential outbreaks, may seriously interrupt our production operations or those of our suppliers and customers, which may have a material adverse effect on our results of operations. The perception that an outbreak of avian flu, SARS or other contagious disease may occur again may also have an adverse effect on the economic conditions of countries in Asia.
Our production facilities are subject to risks of power shortages.
Many cities and provinces in the PRC have suffered serious power shortages since the second quarter of 2004. Many of the regional grids do not have sufficient power generating capacity to fully satisfy the increased demand for electricity driven by continual economic growth and persistent hot weather. Local governments have recently required local factories to temporarily shut down their operations or reduce their daily operational hours in order to reduce local power consumption levels. To date, our operations have not been affected by those administrative measures. However, there is a risk that our operations may be affected by those administrative measures in the future, thereby causing material production disruption and delay in delivery schedule. We do not have any back-up power generation system. Although we have not experienced any power outages in the past, we may be adversely affected by any power outages in the future.
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Risks Related to Our Common Stock
The market price for our common stock may be volatile.
The market price for our common stock may be highly volatile and could be subject to wide fluctuations in response to factors some of which may be beyond our control. Factors affecting the trading price of our common stock include:
| • | the lack of depth and liquidity of the market for our common stock; |
| • | actual or anticipated fluctuations in our quarterly operating results; |
| • | announcements of new products or services by us or our competitors; |
| • | changes in financial estimates by securities analysts; |
| • | market conditions in our industry; |
| • | changes in operations or market valuations of other companies in our industry; |
| • | our sales of common stock; |
| • | investor perceptions of us and our business; |
| • | changes in the estimates of the future size and growth rate of our markets; |
| • | market conditions in industries of our customers; |
| • | announcements by our competitors of significant acquisitions; |
| • | strategic partnerships, joint ventures or capital commitments; |
| • | recruitment or departures of key personnel; |
| • | potential litigation; and |
| • | overall economy, geopolitical events, terrorist activities or threats of terrorism. |
In addition, the stock market in general has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the performance of listed companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. For example, the trading price of our common stock could decline in reaction to events that negatively affect other companies in our industry even if these events do not directly affect us at all.
In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
Our existing stockholders have significant control of our management and affairs, which they could exercise against your interests.
As of June 30, 2006, Mr. Xiangqian Li, our president and chief executive officer and chairman of our board, and our other executive officers and directors beneficially owned an aggregate of 45.1% of our outstanding common stock. As a result, our directors and executive officers, acting together, may be able to control our management and affairs, including the election of directors and approval of significant corporate transactions, such as mergers, consolidation, and sale of all or substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, even if such a change of control would benefit our stockholders.
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We are obligated to indemnify our officers and directors for certain losses they suffer.
Our bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against liabilities, 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 to the maximum extent permitted by the laws of the State of Nevada. If we are required to indemnify any persons under this policy, we may have to pay indemnity in a substantial amount which we may be unable to recover at all.
Provisions in our bylaws could entrench our board of directors and prevent a change in control.
Our bylaws (1) provide that the percentage of stockholders required to call special meetings of stockholders is 10%, subject to any contrary provision in our articles of incorporation, (ii) do not permit stockholders to fill vacancies in the board if such vacancies were not filled by the board, (iii) provide that no contract or transaction between us and one or more of our directors or officers is void if certain criteria are met and (iv) allow for the amendment of our bylaws by the board of directors rather than our stockholders, as permitted by our articles of incorporation. Collectively, these provisions may have the effect of entrenching our existing board members, discouraging or preventing a transaction including a change in control transaction where such transaction would be beneficial to our stockholders.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 12, 2006, we granted 5,000 restricted shares to each of our three newly appointed independent directors pursuant to our Compensation Plan for Non-Employee Directors. The restricted shares will vest according to the following schedule:
| • | 25% will vest immediately on the grant date; and |
| • | the balance 75% will vest in three equal quarterly instalments on the last day of each subsequent quarter or in three equal quarterly instalments on the last day of each calendar quarter beginning on the last day of the full calendar quarter after the grant date. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
By the written consent of holders of a majority of our shares of common stock (the “Majority Stockholders”) approved by written consent the Stock Option Plan and Compensation Plan for Non-Employee Directors of China BAK Battery, Inc. However, none of the foregoing actions will be effective until the end of the twentieth calendar day after an Information Statement under Section 14(c) of the Securities Exchange Act of 1934, as amended, which includes information relating to the foregoing actions, is sent to our stockholders. This Information Statement was sent out to our stockholders on or around April 19, 2006 and the actions became effective on May 12, 2006.
On April 21, 2006, Shenzhen BAK Battery Co., Ltd, (“Shenzhen BAK”) renewed its Comprehensive Credit Facility Agreement of Maximum Amount (“Commercial Bank Credit Facility”) with Shuibei Branch, Shenzhen Commercial Bank. Shenzhen BAK may borrow up to RMB 50 million under the Commercial Bank Credit Facility, which expires on April 21, 2007. In connection with the Commercial Bank Credit Facility, Mr. Li Xiangqian and BAK International, Limited entered into a Guaranty Contract of Maximum Amount (the “Commercial Bank Guaranty”) on April 5, 2006, whereby Mr. Li and BAK International, Limited will provide an unconditional guaranty of joint and several liability for all indebtedness of Shenzhen BAK under the Commercial Bank Credit Facility. Under the Commercial Bank Credit Facility, Shenzhen BAK borrowed RMB 50 million on April 28, 2006, bearing interest at an annual rate of 5.265% and maturing on April 21, 2007.
On April 5, 2006, Shenzhen BAK renewed its Comprehensive Credit Facility Agreement of Maximum Amount (“Shenzhen Development Bank Credit Facility”) with Longgang Branch, Shenzhen Development Bank. Shenzhen BAK may borrow up to RMB 150 million under the Shenzhen Development Bank Credit Facility, which term is from April 29, 2006 to April 29, 2007. In connection with the Shenzhen Development Bank Credit Facility, Mr. Li Xiangqian entered into a Guaranty Contract of Maximum Amount (the “Shenzhen Development Bank Guaranty”) on April 5, 2006, whereby Mr. Li will provide an unconditional guaranty of joint and several
44
liability for all indebtedness of Shenzhen BAK under the Shenzhen Development Bank Credit Facility, and Mr. Li pledged 19,110,093 of his shares of our common stock, and Shenzhen BAK pledged $10.0 million of inventory and $9.8 million of equipment and machinery as security for the Shenzhen Development Bank Credit Facility. Under the Shenzhen Development Bank Credit Facility, Shenzhen BAK entered into a loan agreement with Shenzhen Development Bank on April 28, 2006, which provides for RMB 100 million at a fixed interest rate of 5.85% and expires pursuant to its terms on April 28, 2007.
As previously disclosed in our 10-Q/A for the period ended December 31, 2005, by the written consent of holders of a majority of our shares of common stock (the “Majority Stockholders”), an amendment to our Articles of Incorporation and Bylaws was approved which will give our board of directors (the “Board”) the authority to determine the number of directors on the Board. Finally, the Majority Stockholders approved by written consent the Stock Option Plan and Compensation Plan for Non-Employee Directors of China BAK Battery, Inc. An Information Statement under Section 14(c) of the Securities Exchange Act of 1934, as amended (the “Information Statement”), which included information relating to the foregoing actions, was sent to our stockholders on or about April 22, 2006. The foregoing actions became effective on May 12, 2006, the twentieth calendar day after the mailing of the Information Statement.
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| Number |
Description |
|
| 3.1 | Articles of Incorporation of the Registrant | |
| 3.2 | Bylaws of the Registrant | |
| 10.1 | China BAK Battery, Inc. Stock Option Plan | |
| 10.2 | China BAK Battery, Inc. Compensation Plan for Non-Employee Directors | |
| 10.3 | Form of Indemnification Agreement with the Registrant’s directors | |
| 10.4 | Employment Agreement between the Registrant and Xiangqian Li | |
| 10.5 | Form of Employment Agreement between the Registrant and other executive officers | |
| 10.6 | Comprehensive Credit Facility Agreement, dated as of April 21, 2006, by and between Shenzhen BAK Battery Co., Ltd. and Shuibei Branch, Shenzhen Commercial Bank | |
| 10.7 | Guaranty Contract of Maximum Amount, dated as of April 21, 2006, by and between BAK International Limited and Shuibei Branch, Shenzhen Commercial Bank | |
| 10.8 | Individual Guaranty Contract of Maximum Amount, dated as of April 21, 2006, by and between Xiangqian Li and Shuibei Branch, Shenzhen Commercial Bank | |
| 10.9 | Pledge Contract of Maximum Amount, dated as of May 8, 2006, by and between Shenzhen BAK Battery Co., Ltd. and Shuibei Branch, Shenzhen Commercial Bank | |
| 10.10 | Comprehensive Credit Facilities Agreement, dated as of April 5, 2006, by and between Shenzhen BAK Battery Co., Ltd. and Longgang Branch, Shenzhen Development Bank | |
| 10.11 | Guaranty Contract of Maximum Amount, dated as of April 5, 2006, by and between Xiangqian Li and Longgang Branch, Shenzhen Development Bank | |
| 10.12 | Pledge Contract of Maximum Amount, dated as of April 5, 2006, by and between Shenzhen BAK Battery Co., Ltd. and Longgang Branch, Shenzhen Development Bank | |
| 10.13 | Pledge Contract of Maximum Amount, dated as of April 5, 2006, by and between Xiangqian Li and Longgang Branch, Shenzhen Development Bank | |
| 10.14 | Mortgage Contract of Maximum Amount, dated as of April 5, 2006, by and between Shenzhen BAK Battery Co., Ltd. and Longgang Branch, Shenzhen Development Bank | |
| 10.15 | Contract of Limit for Discount of Commercial Acceptance Draft, dated as of April 29, 2006, by and between Shenzhen BAK Battery Co., Ltd. and Longgang Branch, Shenzhen Development Bank | |
| 10.16 | Pledge Contract of Maximum Amount, dated as of April 29, 2006, by and between Shenzhen BAK Battery Co., Ltd. and Longgang Branch, Shenzhen Development Bank | |
| 14.1 | Code of Business Conduct and Ethics of the Registrant | |
| 31.1 | Chief Executive Officer Certification furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Chief Financial Officer Certification furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Chief Executive Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Chief Financial Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: August 22, 2006 | CHINA BAK BATTERY, INC. | |||||
| By: |
/s/ Li Xiangqian |
|||||
| Li Xiangqian, Chief Executive Officer | ||||||
| (Principal Executive Officer) | ||||||
| By: |
/s/ Han Yongbin |
|||||
| Han Yongbin, Chief Financial Officer | ||||||
| (Principal Financial Officer and Principal Accounting Officer) | ||||||
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Exhibit 3.1
Articles of Incorporation of China BAK Battery, Inc.
(as last amended on February 14, 2005)
Pursuant to the provisions of the laws of the State of Nevada relating to private corporation, this Nevada corporation hereby adopts the following Articles of Incorporation:
ARTICLE I
[NAME]
The name of the corporation shall be “China BAK Battery, Inc.”
ARTICLE II
[RESIDENT AGENT]
The initial agent for service of process is Nevada Agency and Trust Company, 50 West Liberty Street, Suite 880, City of Reno, Washoe County, State of Nevada 89501.
ARTICLE III
[PURPOSES]
The purposes for which the corporation is organized are to engage in any activity or business not in conflict with the laws of the State of Nevada or of the United States of America, and without limiting the generality of the foregoing, specifically:
| I. | [OMNIBUS] |
To have to exercise all the powers now or hereafter conferred by the laws of the State of Nevada upon corporations organized pursuant to the laws under which the corporation is organized and any and all acts amendatory thereof and supplemental thereto.
| II. | [CARRYING ON BUSINESS OUTSIDE STATE] |
To conduct and carry on its business or any branch thereof in any state or territory or the United States or in any foreign country in conformity with the laws of such state, territory, or foreign country, and to have and maintain in any state, territory, or foreign country a business office, plant, store or other facility.
| III. | [PURPOSE TO BE CONSTRUED AS POWERS] |
The purposes specified herein shall be construed both as purposes and powers and shall be in no wise limited or restricted by reference to, or inference from, the terms of any other clause in this or any other article, but the purposes and powers specified in each of the
clauses herein shall be regarded as independent purposes and powers, and the enumeration of specific purposes and powers shall not be construed to limit or restrict in any manner the meaning of general terms or of the general powers of the Corporation; nor shall the expression of one thing be deemed to exclude another, although it be of like nature not expressed.
ARTICLE IV
[CAPITAL STOCK]
The corporation shall have authority to issue an aggregate of ONE HUNDRED MILLION (100,000,000) Common Capital Shares, ONE MILL ($0.001) PAR VALUE per share, for a total capitalization of ONE HUNDRED THOUSAND ($100,000) DOLLARS.
The holders of shares of capital stock of the corporation shall not be entitled to pre-emptive or preferential rights to subscribe to any unissued stock or any other securities which the corporation may now or hereafter be authorized to issue.
The corporation’s capital stock may be issued and sold from time to time for such consideration as may be fixed by the Board of Directors, provided that the consideration fixed is not less than par value.
The stockholders shall not possess cumulative voting rights at all shareholders meeting called for the purpose of electing a Board of Directors.
ARTICLE V
[DIRECTORS]
The affairs of the corporation shall be governed by a Board of Directors of no more than eight (8) nor less than one (1) person.
The name and address for the first Board of Directors is:
|
Name |
Address |
|
|
Harry Miller |
401 Detwiller Lane Bellevue, Washington 98004 |
ARTICLE VI
[ASSESSMENT OF STOCK]
The capital stock of the corporation, after the amount of the subscription price or par value has been paid in, shall not be subject to pay debts of the corporation, and no paid up stock and no stock issued as fully paid up shall ever be assessable or assessed.
2
ARTICLE VII
[INCORPORATOR]
The name and address of the incorporator of the corporation is as follows:
|
Name |
Address |
|
| Amanda Cardinalli |
50 West Liberty Street, Suite 880 Reno, Nevada 89501 |
ARTICLE VIII
PERIOD OF EXISTENCE
The period of existence of the corporation shall be perpetual.
ARTICLE IX
[BY-LAWS]
The initial By-laws of the corporation shall be adopted by its Board of Directors. The power to alter, amend, or repeal the By-laws, or to adopt new By-laws, shall be vested in the Board of Directors, except as otherwise may be specifically provided for in the By-laws.
ARTICLE X
[STOCKHOLDERS’ MEETINGS]
Meetings of stockholders shall be held at such place within or without the State of Nevada as may be provided by the By-laws of the corporation. Special meetings of the stockholders may be called by the President or any other executive officer of the corporation, the Board of Directors, or any member thereof, or by the record holder or holders of at least ten (10%) of all shares entitled to vote at the meeting. Any action otherwise required to be taken at a meeting of the stockholders, except election of directors, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be signed by stockholders having at least a majority of the voting power.
ARTICLE XI
[CONTRACTS OF CORPORATION]
No contract or other transaction between the corporation and any other corporation, whether or not a majority of the shares of the capital stock of such other corporation is owned by this corporation, and no act of this corporation shall in any way be affected or invalidated by the fact that any of the directors of this corporation are pecuniarily or otherwise interested
3
in, or are directors or officers of such other corporation. Any director of this corporation, individually, or any firm of which such director may be a member, may be a party to, or may be pecuniarily or otherwise interested in any contract or transaction of the corporation; provided, however, that the fact that he or such firm is so interested shall be disclosed or shall have been known to the Board of Directors of this corporation, or a majority thereof; and any director of this corporation who is also a director or officer of such other corporation, or who is so interested, may be counted in determining the existence of a quorum at any meeting of the Board of Directors of this corporation that shall authorize such contract or transaction, and may vote thereat to authorize such contract or transaction, with like force and effect as if he were not such director or officer of such other corporation or not so interested.
ARTICLE XII
[LIABILITY OF DIRECTORS AND OFFICERS]
No director or officer shall have any personal liability to the corporation or its stockholders for damages for breach of fiduciary duty as a director or officer, except that this Article Twelve shall not eliminate or limit the liability of a director or officer for (i) acts or omissions which involve intentional misconduct, fraud or a knowing violation of law, or (ii) the payment of dividends in violation of the Nevada Revised Statutes.
IN WITNESS WHEREOF, the undersigned incorporator has hereunto affixed her signature at Reno, Nevada this 4th day of October, 1999.
| /s/ Amanda Cardinalli |
| AMANDA CARDINALLI |
4
Exhibit 3.2
Bylaws of China BAK Battery, Inc.
(as last amended on May 15, 2006)
ARTICLE I
OFFICES
Section 1.1 Registered Office. The registered office and registered agent of China BAK Battery, Inc. (the “Corporation”) will be as from time to time set forth in the Corporation’s Articles of Incorporation or in any certificate filed with the Secretary of State of the State of Nevada to amend such information.
Section 1.2 Other Offices. The Corporation may also have offices at such other places, both within and without the State of Nevada, as the Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE II
SHAREHOLDERS
Section 2.1 Place of Meetings. All meetings of the shareholders for the election of Directors will be held at such place, within or without the State of Nevada or the United States of America, as may be fixed from time to time by the Board of Directors. Meetings of shareholders for any other purpose may be held at such time and place, within or without the State of Nevada or the United States of America, as may be stated in the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2.2 Annual Meeting. An annual meeting of the shareholders will be held at such time as may be determined by the Board of Directors, at which meeting the shareholders will elect a Board of Directors and transact such other business as may properly be brought before the meeting.
Section 2.3 List of Shareholders. At least ten (10) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting, arranged in alphabetical order, with the address of and the number of voting shares registered in the name of each, will be prepared by the officer or agent having charge of the stock transfer books. Such list will be kept on file at the registered office of the Corporation for a period of ten (10) days prior to such meeting and will be subject to inspection by any shareholder at any time during usual business hours. Such list will be produced and kept open at the time and place of the meeting during the whole time thereof, and will be subject to the inspection of any shareholder who may be present.
Section 2.4 Special Meetings. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by law, the Articles of Incorporation or these Bylaws, may be called by the President or the Board of Directors, or will be called by the President or Secretary at the request in writing of the holders of not less than thirty percent (30%) of all the shares issued, outstanding and entitled to vote. Such request will state the purpose or purposes of the proposed meeting. Business transacted at all special meetings will be confined to the purposes stated in the notice of the meeting unless all shareholders entitled to vote are present and consent.
Section 2.5 Notice. Written or printed notice stating the place, day and hour of any meeting of the shareholders and, in case of a special meeting, the purpose or purposes for which the meeting is called, will be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the President, the Secretary, or the officer or person calling the meeting, to each shareholder of record entitled to vote at the meeting. If mailed, such notice will be deemed to be delivered
1
when deposited in the United States mail, addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid.
Section 2.6 Quorum. With respect to any matter, the presence in person or by proxy of the holders of thirty-three and one-third percent (33 1/3%) of the shares entitled to vote on that matter will be necessary and sufficient to constitute a quorum for the transaction of business except as otherwise provided by law, the Articles of Incorporation or these Bylaws. If, however, such quorum is not present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, will have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. If the adjournment i s for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting will be given to each shareholder of record entitled to vote at the meeting. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally notified.
Section 2.7 Voting. When a quorum is present at any meeting of the Corporation’s shareholders, the vote of the holders of a majority of the shares entitled to vote that are actually voted on any question brought before the meeting will be sufficient to decide such question; provided that if the question is one upon which, by express provision of law, the Articles of Incorporation or these Bylaws, a different vote is required, such express provision shall govern and control the decision of such question.
Section 2.8 Method of Voting. Each outstanding share of the Corporation’s capital stock, regardless of class or series, will be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class or series are limited or denied by the Articles of Incorporation, as amended from time to time. At any meeting of the shareholders, every shareholder having the right to vote will be entitled to vote in person or by proxy executed in writing by such shareholder and bearing a date not more than six (6) months prior to such meeting, unless it is coupled with an interest, or unless such instrument provides for a longer period, which may not exceed 7 years from the date of its creation. A telegram, telex, cablegram or similar transmission by the shareholder, or a photographic, photostatic, facsimile or similar reproduction of a writing executed by the shareholder, shall be treated as an execution in writing for purposes of the preceding sentence. Subject to these restrictions every properly created proxy is not revoked and shall continue in full force and effect until another instrument or transmission revoking it or a properly created proxy bearing a later date is filed with or transmitted to the Secretary of the Corporation. Such proxy will be filed with the Secretary of the Corporation prior to or at the time of the meeting. Voting for Directors will be in accordance with Article III of these Bylaws. Voting on any question or in any election may be by voice vote or show of hands unless the presiding officer orders or any shareholder demands that voting be by written ballot.
Section 2.9 Record Date; Closing Transfer Books. The Board of Directors may fix in advance a record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such record date to be not less than ten (10) nor more than sixty (60) days prior to such meeting, or the Board of Directors may close the stock transfer books for such purpose for a period of not less than ten (10) nor more than sixty (60) days prior to such meeting. In the absence of any action by the Board of Directors, the date upon which the notice of the meeting is mailed will be the record date.
Section 2.10 Action by Consent. Except as prohibited by law, any action required or permitted by law, the Articles of Incorporation or these Bylaws to be taken at a meeting of the shareholders of the Corporation may be taken without a meeting if a consent or consents
2
in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and will be delivered to the Corporation by delivery to its registered office in Nevada, its principal place of business or an officer or agent of the Corporation having custody of the minute book.
ARTICLE III
BOARD OF DIRECTORS
Section 3.1 Management. The business and affairs of the Corporation will be managed by or under the direction of the Board of Directors, who may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law, the Articles of Incorporation or these Bylaws directed or required to be exercised or done by the shareholders.
Section 3.2 Qualification; Election; Term. Each Director must be a natural person at least 18 years of age. None of the Directors need be a shareholder of the Corporation or a resident of the State of Nevada. The Directors will be elected by plurality vote at the annual meeting of the shareholders, except as hereinafter provided, and each Director elected will hold office until whichever of the following occurs first: his successor is elected and qualified, his resignation, his removal from office by the shareholders or his death.
Section 3.3 Number. The authorized number of Directors of the Corporation shall be not less than one (1) nor more than eight (8).
Section 3.4 Removal. Any Director may be removed either for or without cause at any special meeting of shareholders by the affirmative vote of the shareholders representing not less than two-thirds of the voting power of the issued and outstanding stock entitled to voting power; provided, that notice of intention to act upon such matter has been given in the notice calling such meeting.
Section 3.5 Vacancies. All vacancies in the Board of Directors, including those caused by an increase in the number of Directors, may be filled by a majority of the remaining Directors, though less than a quorum, unless provided for in the Articles of Incorporation. A Director elected to fill a vacancy will be elected for the unexpired term of his predecessor in office.
Section 3.6 Place of Meetings. Meetings of the Board of Directors, regular or special, may be held at such place within or without the State of Nevada or the United States of America as may be fixed from time to time by the Board of Directors.
Section 3.7 Annual Meeting. The first meeting of each newly elected Board of Directors will be held without further notice immediately following the annual meeting of shareholders and at the same place, unless by unanimous consent, the Directors then elected and serving shall change such time or place.
Section 3.8 Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place as is from time to time determined by resolution of the Board of Directors.
Section 3.9 Special Meetings. Special meetings of the Board of Directors may be called by the President on oral or written notice to each Director, given either personally, by telephone, by telegram or by mail; special meetings will be called by the President or the
3
Secretary in like manner and on like notice on the written request of at least two (2) Directors. Except as may be otherwise expressly provided by law, the Articles of Incorporation or these Bylaws, neither the business to be transacted at, nor the purpose of, any special meeting need be specified in a notice or waiver of notice.
Section 3.10 Quorum. At all meetings of the Board of Directors the presence of a majority of the number of Directors then in office will be necessary and sufficient to constitute a quorum for the transaction of business, and the affirmative vote of at least a majority of the Directors present at any meeting at which there is a quorum will be the act of the Board of Directors, except as may be otherwise specifically provided by law, the Articles of Incorporation or these Bylaws. If a quorum is not present at any meeting of the Board of Directors, the Directors present thereat may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum is present.
Section 3.11 Interested Directors. No contract or transaction between the Corporation and one or more of its Directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of the Corporation’s Directors or officers are Directors or officers or have a financial interest, will be void or voidable solely for this reason, solely because the Director or officer is present at or participates in the meeting of the Board of Directors or committee thereof that authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (i) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested Directors, even though the disinterested Directors be less than a quorum, (ii) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof or the shareholders. Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee that authorizes the contract or transaction.
Section 3.12 Committees. The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate committees, each committee to consist of one (1) or more Directors of the Corporation, which committees will have such power and authority and will perform such functions as may be provided in such resolution. Such committee or committees will have such name or names as may be designated by the Board of Directors and will keep regular minutes of their proceedings and report the same to the Board of Directors when required.
Section 3.13 Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee of the Board of Directors may be taken without such a meeting if a consent or consents in writing, setting forth the action so taken, is signed by all the members of the Board of Directors or such committee, as the case may be.
Section 3.14 Compensation of Directors. Directors will receive such compensation for their services and reimbursement for their expenses as the Board of Directors, by resolution, may establish; provided that nothing herein contained will be construed to preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor.
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ARTICLE IV
NOTICE
Section 4.1 Form of Notice. Whenever by law, the Articles of Incorporation or these Bylaws, notice is to be given to any Director or shareholder, and no provision is made as to how such notice is to be given, such notice may be given: (i) in writing, by mail, postage prepaid, addressed to such Director or shareholder at such address as appears on the books of the Corporation or (ii) in any other method permitted by law. Any notice required or permitted to be given by mail will be deemed to be given at the time the same is deposited in the United States mail.
Section 4.2 Waiver. Whenever any notice is required to be given to any shareholder or Director of the Corporation as required by law, the Articles of Incorporation or these Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated in such notice, will be equivalent to the giving of such notice. Attendance of a shareholder or Director at a meeting will constitute a waiver of notice of such meeting, except where such shareholder or Director attends for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting has not been lawfully called or convened.
ARTICLE V
OFFICERS AND AGENTS
Section 5.1 In General. The officers of the Corporation will be elected by the Board of Directors and will be a President, Secretary and Treasurer. The Board of Directors may also elect a Chairman of the Board, Vice Chairman of the Board, Vice Presidents, Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers. Any two (2) or more offices may be held by the same person.
Section 5.2 Election. The Board of Directors, at its first meeting after each annual meeting of shareholders, will elect the officers, none of whom need be a member of the Board of Directors.
Section 5.3 Other Officers and Agents. The Board of Directors may also elect and appoint such other officers and agents as it deems necessary, who will be elected and appointed for such terms and will exercise such powers and perform such duties as may be determined from time to time by the Board of Directors.
Section 5.4 Compensation. The compensation of all officers and agents of the Corporation will be fixed by the Board of Directors or any committee of the Board of Directors, if so authorized by the Board of Directors.
Section 5.5 Term of Office and Removal. Each officer of the Corporation will hold office until his death, his resignation or removal from office, or the election and qualification of his successor, whichever occurs first. Any officer or agent elected or appointed by the Board of Directors may be removed at any time, for or without cause, by the affirmative vote of a majority of the entire Board of Directors, but such removal will not prejudice the contract rights, if any, of the person so removed. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors.
Section 5.6 Employment and Other Contracts. The Board of Directors may authorize any officer or officers or agent or agents to enter into any contract or execute and deliver any instrument in the name or on behalf of the Corporation, and such authority may be
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general or confined to specific instances. The Board of Directors may, when it believes the interest of the Corporation will best be served thereby, authorize executive employment contracts that contain such terms and conditions as the Board of Directors deems appropriate. Nothing herein will limit the authority of the Board of Directors to authorize employment contracts for shorter terms.
Section 5.7 Chairman of the Board of Directors. If the Board of Directors has elected a Chairman of the Board, he will preside at all meetings of the shareholders and the Board of Directors. Except where by law the signature of the President is required, the Chairman will have the same power as the President to sign all certificates, contracts and other instruments of the Corporation. During the absence or disability of the President, the Chairman will exercise the powers and perform the duties of the President.
Section 5.8 President. The President will be the Chief Executive Officer of the Corporation, unless another person is elected to serve in such capacity, and, subject to the control of the Board of Directors, will supervise and control all of the business and affairs of the Corporation. He will, in the absence of the Chairman of the Board, preside at all meetings of the shareholders and the Board of Directors. The President will have all powers and perform all duties incident to the office of President and will have such other powers and perform such other duties as the Board of Directors may from time to time prescribe.
Section 5.9 Vice Presidents. Each Vice President will have the usual and customary powers and perform the usual and customary duties incident to the office of Vice President, and will have such other powers and perform such other duties as the Board of Directors or any committee thereof may from time to time prescribe or as the President may from time to time delegate to him. In the absence or disability of the President and the Chairman of the Board, a Vice President designated by the Board of Directors, or in the absence of such designation the Vice Presidents in the order of their seniority in office, will exercise the powers and perform the duties of the President.
Section 5.10 Secretary. The Secretary will attend all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose. The Secretary will perform like duties for the Board of Directors and committees thereof when required. The Secretary will give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors. The Secretary will keep in safe custody the seal of the Corporation. The Secretary will be under the supervision of the President. The Secretary will have such other powers and perform such other duties as the Board of Directors may from time to time prescribe or as the President may from time to time delegate to him.
Section 5.11 Assistant Secretaries. The Assistant Secretaries in the order of their seniority in office, unless otherwise determined by the Board of Directors, will, in the absence or disability of the Secretary, exercise the powers and perform the duties of the Secretary. They will have such other powers and perform such other duties as the Board of Directors may from time to time prescribe or as the President may from time to time delegate to them.
Section 5.12 Treasurer. The Treasurer will have responsibility for the receipt and disbursement of all corporate funds and securities, will keep full and accurate accounts of such receipts and disbursements, and will deposit or cause to be deposited all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer will render to the Directors whenever they may require it an account of the operating results and financial condition of the Corporation, and will have such other powers and perform such other duties as the Board of Directors may from time to time prescribe or as the President may from time to time delegate to him.
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Section 5.13 Assistant Treasurers. The Assistant Treasurers in the order of their seniority in office, unless otherwise determined by the Board of Directors, will, in the absence or disability of the Treasurer, exercise the powers and perform the duties of the Treasurer. They will have such other powers and perform such other duties as the Board of Directors may from time to time prescribe or as the President may from time to time delegate to them.
Section 5.14 Bonding. The Corporation may secure a bond to protect the Corporation from loss in the event of defalcation by any of the officers, which bond may be in such form and amount and with such surety as the Board of Directors may deem appropriate.
ARTICLE VI
CERTIFICATES REPRESENTING SHARES
Section 6.1 Form of Certificates. Certificates, in such form as may be determined by the Board of Directors, representing shares to which shareholders are entitled, will be delivered to each shareholder. Such certificates will be consecutively numbered and entered in the stock book of the Corporation as they are issued. Each certificate will state on the face thereof the holder’s name, the number, class of shares, and the par value of such shares or a statement that such shares are without par value. They will be signed by the President or a Vice President and the Secretary or an Assistant Secretary, and may be sealed with the seal of the Corporation or a facsimile thereof. If any certificate is countersigned by a transfer agent, or an assistant transfer agent or registered by a registrar, either of which is other than the Corporation or an employee of the Corporation, the signatures of the Corporation’s officers may be facsimiles. In case any officer or officers who have signed, or whose facsimile signature or signatures have been used on such certificate or certificates, ceases to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates have been delivered by the Corporation or its agents, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the Corporation.
Section 6.2 Lost Certificates. The Board of Directors may direct that a new certificate be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost or destroyed. When authorizing such issue of a new certificate, the Board of Directors, in its discretion and as a condition precedent to the issuance thereof, may require the owner of such lost or destroyed certificate, or his legal representative, to advertise the same in such manner as it may require and/or to give the Corporation a bond, in such form, in such sum, and with such surety or sureties as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. When a certificate has been lost, apparently destroyed or wrongfully taken, and the holder of record fails to notify the Corporation within a reasonable time after such holder has notice of it, and the Corporation registers a transfer of the shares represented by the certificate before receiving such notification, the holder of record is precluded from making any claim against the Corporation for the transfer of a new certificate.
Section 6.3 Transfer of Shares. Shares of stock will be transferable only on the books of the Corporation by the holder thereof in person or by such holder’s duly authorized attorney. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it will be the duty of the Corporation or the
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transfer agent of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.
Section 6.4 Registered Shareholders. The Corporation will be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, will not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it has express or other notice thereof, except as otherwise provided by law.
ARTICLE VII
GENERAL PROVISIONS
Section 7.1 Dividends. Dividends upon the outstanding shares of the Corporation, subject to the provisions of the Articles of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting. Dividends may be declared and paid in cash, in property, or in shares of the Corporation, subject to the provisions of Chapter 78 of the Nevada Revised Statutes and the Articles of Incorporation. The Board of Directors may fix in advance a record date for the purpose of determining shareholders entitled to receive payment of any dividend, such record date to be not more than sixty (60) days prior to the payment date of such dividend, or the Board of Directors may close the stock transfer books for such purpose for a period of not more than sixty (60) days prior to the payment date of such dividend. In the absence of any action by the Board of Directors, the date upon which the Board of Directors adopts the resolution declaring such dividend will be the record date.
Section 7.2 Reserves. There may be created by resolution of the Board of Directors out of the surplus of the Corporation such reserve or reserves as the Directors from time to time, in their discretion, deem proper to provide for contingencies, or to equalize dividends, or to repair or maintain any property of the Corporation, or for such other purpose as the Directors may deem beneficial to the Corporation, and the Directors may modify or abolish any such reserve in the manner in which it was created. Surplus of the Corporation to the extent so reserved will not be available for the payment of dividends or other distributions by the Corporation.
Section 7.3 Telephone and Similar Meetings. Shareholders, Directors and committee members may participate in and hold meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Participation in such a meeting will constitute presence in person at the meeting, except where a person participates in the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting had not been lawfully called or convened.
Section 7.4 Books and Records. The Corporation will keep correct and complete books and records of account and minutes of the proceedings of its shareholders and Board of Directors, and will keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each.
Section 7.5 Fiscal Year. The fiscal year of the Corporation will be fixed by resolution of the Board of Directors.
Section 7.6 Seal. The Corporation may have a seal, and such seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Any officer of the Corporation will have authority to affix the seal to any document requiring it.
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Section 7.7 Indemnification. The Corporation will indemnify its Directors to the fullest extent permitted by the Chapter 78 of the Nevada Revised Statutes and may, if and to the extent authorized by the Board of Directors, so indemnify its officers and any other person whom it has the power to indemnify against liability, reasonable expense or other matter whatsoever.
Section 7.8 Insurance. The Corporation may at the discretion of the Board of Directors purchase and maintain insurance on behalf of the Corporation and any person whom it has the power to indemnify pursuant to law, the Articles of Incorporation, these Bylaws or otherwise.
Section 7.9 Resignation. Any Director, officer or agent may resign by giving written notice to the President or the Secretary. Such resignation will take effect at the time specified therein or immediately if no time is specified therein. Unless otherwise specified therein, the acceptance of such resignation will not be necessary to make it effective.
Section 7.10 Amendment of Bylaws. These Bylaws may be altered, amended or repealed at any meeting of the Board of Directors at which a quorum is present, by the affirmative vote of a majority of the Directors present at such meeting.
Section 7.11 Invalid Provisions. If any part of these Bylaws is held invalid or inoperative for any reason, the remaining parts, so far as possible and reasonable, will be valid and operative.
Section 7.12 Relation to Articles of Incorporation. These Bylaws are subject to, and governed by, the Articles of Incorporation.
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Exhibit 10.1
CHINA BAK BATTERY, INC.
STOCK OPTION PLAN
ARTICLE I.
THE PLAN
1.1 Name. This Plan shall be known as the “China BAK Battery, Inc. Stock Option Plan.” Capitalized terms used herein are defined in Article VII hereof.
1.2 Purpose. The purpose of the Plan is to promote the growth and general prosperity of the Company by permitting the Company to grant Options to purchase Common Stock and Restricted Stock of the Company to key Employees, Nonemployee Directors, and Advisors. The Plan is designed to help the Company and its subsidiaries and affiliates attract and retain superior personnel for positions of substantial responsibility and to provide key Employees, Nonemployee Directors, and Advisors with an additional incentive to contribute to the success of the Company.
This Plan is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and any regulatory or other guidance issued under such section. At the Effective Date of the Plan, additional guidance had yet to be promulgated by the Department of Treasury. Any terms of the Plan that conflict with such guidance shall be null and void as of the Effective Date. After such additional guidance is issued, the intent is to amend the Plan to delete any conflicting provisions and to add such other provisions as are required to fully comply with Section 409A and any other legislative or regulatory requirements applicable to the Plan. The Plan is also intended to comply with Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended from time to time, or any successor provision thereto (“Rule 16b-3”), and shall be construed to so comply. With respect to any restriction in the Plan that is based on the requirements of Rule 16b-3 or the rules of any exchange upon which the Company’s securities are listed or automated quotation system upon which the Company’s securities are quoted, or any other applicable law, rule or restriction, to the extent that any such restriction is no longer required, the Committee shall have the sole discretion and authority to remove such restrictions from the Plan and/or to waive them.
1.3 Effective Date. The Plan shall become effective upon the Effective Date.
1.4 Eligibility to Participate. Any key Employee, Nonemployee Director, or Advisor shall be eligible to participate in the Plan. Subject to the provisions of this Plan, the Committee may grant Options in accordance with such determinations as the Committee shall make from time to time in its sole discretion.
1.5 Shares Subject to the Plan. The shares of Common Stock to be issued pursuant to the Plan shall be either authorized and unissued shares of Common Stock or shares of Common Stock issued and thereafter acquired by the Company.
1.6 Maximum Number of Plan Shares. Subject to adjustment pursuant to the provisions of Section 5.2, and subject to any additional restrictions elsewhere in the Plan, the maximum aggregate number of shares of Common Stock that may be issued and sold hereunder shall be 4,000,000. Notwithstanding the foregoing, the maximum aggregate number of shares of Company Common Stock which may be issued under the Plan shall during any given calendar year not exceed 5% of the total outstanding shares of Company Common Stock during such calendar year.
1.7 Options and Stock Granted Under Plan. If an Option terminates without being wholly exercised, new Options may be granted hereunder covering the number of Plan Shares to which such Option termination relates. Moreover, when an Option is exercised in whole or in part, the number of Plan Shares then available for issuance hereunder shall be increased by a number of shares equal to the number of Plan Shares to which the exercise relates.
1.8 Conditions Precedent. The Company shall not issue any certificate for Plan Shares pursuant to the Plan prior to fulfillment of all of the following conditions:
(a) The admission of the Plan Shares to listing on all stock exchanges on which the Common Stock is then listed, unless the Committee determines in its sole discretion that such listing is neither necessary nor advisable;
(b) The completion of any registration or other qualification of the offer or sale of the Plan Shares under any federal or state law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body that the Committee shall in its sole discretion deem necessary or advisable; and
(c) The obtaining of any approval or other clearance from stockholders of the Company and any federal or state governmental agency that the Committee shall in its sole discretion determine to be necessary or advisable.
1.9 Reservation of Shares of Common Stock. During the term of the Plan, the Company shall at all times reserve and keep available such number of shares of Common Stock as shall be necessary to satisfy the requirements of the Plan as to the number of Plan Shares. In addition, the Company shall from time to time, as is necessary to accomplish the purposes of the Plan, seek or obtain from any regulatory agency having jurisdiction any requisite authority that is necessary to issue Plan Shares hereunder. The inability of the Company to obtain from any regulatory agency having jurisdiction the authority deemed by the Company’s counsel to be necessary to the lawful issuance of any Plan Shares shall relieve the Company of any liability in respect of the nonissuance of Plan Shares as to which the requisite authority shall not have been obtained.
1.10 Tax Withholding .
(a) Condition Precedent. The issuance of Plan Shares is subject to the condition that if at any time the Committee shall determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any federal, state or local law is necessary or desirable as a
condition of, or in connection with, such issuances, then the issuances shall not be effective unless the withholding shall have been effected or obtained in a manner acceptable to the Committee.
(b) Manner of Satisfying Withholding Obligation. When a participant is required by the Committee to pay to the Company an amount required to be withheld under applicable income tax laws in connection with the exercise of an Option, such payment may be made (i) in cash, (ii) by check, (iii) if permitted by the Committee, by delivery to the Company of shares of Common Stock already owned by the participant having a Fair Market Value on the Tax Date equal to the amount required to be withheld, (iv) if permitted by the Committee, through the withholding by the Company of a portion of the Plan Shares acquired upon the exercise of the Options (if applicable) having a Fair Market Value on the Tax Date equal to the amount required to be withheld, or (v) in any other form of valid consideration, as permitted by the Committee in its discretion.
1.11 Exercise of Options .
(a) Method of Exercise. Each Option shall be exercisable in accordance with the terms of the Option Agreement pursuant to which the Option was granted. No Option may be exercised for a fraction of a Plan Share.
(b) Payment of Purchase Price. The purchase price of any Plan Shares purchased shall be paid at the time of exercise of the Option either (i) in cash, (ii) by certified or cashier’s check, (iii) if permitted by the Committee, by shares of Common Stock so long as the participant has not acquired the Common Stock from the Company within six (6) months prior to the date of exercise, (iv) if permitted by the Committee, by cash or certified or cashier’s check for the par value of the Plan Shares plus a promissory note for the balance of the purchase price, which note shall provide for full personal liability of the maker and shall contain such terms and provisions as the Committee may determine, including without limitation the right to repay the note partially or wholly with Common Stock, (v) if approved by the Committee, in accordance with a cashless exercise program under which either (A) if so instructed by the participant, Plan Shares may be issued directly to the participant’s broker or dealer upon receipt of the purchase price in cash from the broker or dealer, or (B) Plan Shares may be issued by the Company to a participant’s broker or dealer in consideration of such broker’s or dealer’s irrevocable commitment to pay to the Company that portion of the proceeds from the sale of such Plan Shares that is equal to the exercise price of the Option(s) relating to such Plan Shares, or (vi) in any other form of valid consideration, as permitted by the Committee in its discretion. If any portion of the purchase price or a note given at the time of exercise is paid in shares of Common Stock, those shares shall be valued at the then Fair Market Value.
1.12 Written Notice Required. Any Option shall be deemed to be exercised for purposes of the Plan when written notice of exercise has been received by the Company at its principal office from the person entitled to exercise the Option and payment for the Plan Shares with respect to which the Option is exercised has been received by the Company in accordance with Section 1.11.
1.13 Compliance with Securities Laws. Plan Shares shall not be issued with respect to any Option unless the issuance and delivery of the Plan Shares and the exercise of an Option shall comply with all relevant provisions of state and federal law (including without limitation (i) the
Securities Act and the rules and regulations promulgated thereunder, and (ii) the requirements of any stock exchange upon which the Plan Shares may then be listed) and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Committee may also require a participant to furnish evidence satisfactory to the Company, including without limitation a written and signed representation letter and consent to be bound by any transfer restrictions imposed by law, legend, condition, or otherwise, that the Plan Shares are being acquired only for investment and without any present intention to sell or distribute the shares in violation of any state or federal law, rule, or regulation. Further, each participant shall consent to the imposition of a legend on the certificate representing the Plan Shares issued pursuant to the exercise of an Option restricting their transfer as required by law or this section.
1.14 Employment or Service of Optionee. Nothing in the Plan or in any Option or Restricted Stock granted hereunder shall confer upon any Employee any right to continued employment by the Company or any of its subsidiaries or affiliates or limit in any way the right of the Company or any of its subsidiaries or affiliates at any time to terminate or alter the terms of that employment. Nothing in the Plan or in any Option granted hereunder shall confer upon any Nonemployee Director or Advisor any right to continued service as a Nonemployee Director or Advisor of the Company or any of its subsidiaries or affiliates or limit in any way the right of the Company or any of its subsidiaries or affiliates at any time to terminate or alter the terms of that service.
1.15 Rights of Optionees Upon Termination of Employment or Service. In the event an Optionee ceases to be an Employee, Nonemployee Director, or Advisor for any reason other than death, Permanent Disability or Misconduct, unless provided in an Option Agreement or in Article VI hereof, then, the unvested portion of the Optionee’s Option shall terminate immediately and cease to remain outstanding and the vested portion shall immediately terminate at the beginning of the thirty-first (31 st ) day following termination of Optionee’s service. In the event an Optionee ceases to serve as an Employee, Nonemployee Director, or Advisor due to death, Permanent Disability or Misconduct, the Optionee’s Options may be exercised as follows:
(a) Death. Except as otherwise limited by the Committee at the time of the grant of an Option, if an Optionee dies while serving as an Employee, Nonemployee Director, or Advisor or within three months after ceasing to be an Employee, Nonemployee Director, Advisor, his or her Option shall become fully exercisable on the date of his or her death and shall expire 12 months thereafter, unless by its terms it expires sooner or unless, with respect to a Nonqualified Stock Option, the Committee agrees, in its sole discretion, to further extend the term of such Nonqualified Stock Option. During such period, the Option may be fully exercised, to the extent that it remains unexercised on the date of death, by the Optionee’s personal representative or by the distributees to whom the Optionee’s rights under the Option shall pass by will or by the laws of descent and distribution.
(b) Disability. If an Optionee ceases to serve as an Employee, Nonemployee Director, or Advisor as a result of Permanent Disability, the Optionee’s Option shall become fully exercisable and shall expire 12 months thereafter, unless by its terms it expires sooner or, unless, with
respect to a Nonqualified Stock Option, the Committee agrees, in its sole discretion, to extend the term of such Nonqualified Stock Option.
(c) Misconduct. Should the Optionee cease to be an Employee, Nonemployee Director or Advisor because of Misconduct, the Optionee’s Option shall terminate whether vested or unvested immediately.
1.16 Transferability of Options. Except as the Committee may otherwise provide, Options shall not be transferable other than by will or the laws of descent and distribution or, with respect to Nonqualified Stock Options, pursuant to the terms of a qualified domestic relations order as defined by the Code or Title I of ERISA, or the rules thereunder. The designation by an Optionee of a beneficiary shall not constitute a transfer of the Option. The Committee may, in its discretion, provide in an Option Agreement that Nonqualified Stock Options granted hereunder may be transferred by the Optionee to members of his or her immediate family, trusts for the benefit of such immediate family members and partnerships in which such immediate family members are the only partners.
1.17 Information to Participants. The Company shall furnish to each participant a copy of the annual report, proxy statements and all other reports (if any) sent to the Company’s stockholders. Upon written request, the Company shall furnish to each participant a copy of its most recent Form 10-K Annual Report (if any) and each quarterly report to stockholders issued (if any) since the end of the Company’s most recent fiscal year.
ARTICLE II.
ADMINISTRATION
2.1 Committee. The Plan shall be administered by a Committee, which shall be appointed by the Board. If the Board so elects, the Plan may be administered by different Committees with respect to different groups of participants. The Committee shall be constituted to satisfy applicable laws. Subject to the provisions of the Plan, the Committee shall have the sole discretion and authority to determine from time to time the Employees, Non-Employee Directors, and Advisors to whom Options shall be granted and the number of Plan Shares subject to each Option, to interpret the Plan, to prescribe, amend and rescind any rules and regulations necessary or appropriate for the administration of the Plan, to determine and interpret the details and provisions of each Option Agreement, to modify or amend any Option Agreement or waive any conditions or restrictions applicable to any Options (or the exercise thereof) or Restricted Stock, and to make all other determinations necessary or advisable for the administration of the Plan. The Board may remove any member of the Committee, with or without cause.
2.2 Majority Rule; Unanimous Written Consent. A majority of the members of the Committee shall constitute a quorum, and any action taken by a majority present at a meeting at which a quorum is present or any action taken without a meeting evidenced by a writing executed by all members of the Committee shall constitute the action of the Committee. Meetings of the Committee may take place by telephone conference call.
2.3 Company Assistance. The Company shall supply full and timely information to the Committee on all matters relating to Employees, Nonemployee Directors, and Advisors, their employment, death, Permanent Disability, or other termination of employment or other relationship with the Company, and such other pertinent facts as the Committee may require. The Company shall furnish the Committee with such clerical and other assistance as is necessary in the performance of its duties.
2.4 Exculpation of Committee. No member of the Committee shall be personally liable for, and the Company shall indemnify all members of the Committee and hold them harmless against, any claims resulting directly or indirectly from any action or inaction by the Committee pursuant to the Plan.
ARTICLE III.
NONQUALIFIED STOCK OPTIONS
3.1 Option Terms and Conditions. The terms and conditions of Options granted under this Article may differ from one another as the Committee shall, in its discretion, determine as long as all Options granted under this Article satisfy the requirements of this Article.
3.2 Duration of Options. Each Option granted pursuant to this Article and all rights thereunder shall expire on the date determined by the Committee. In addition, each Option shall be subject to early termination as provided elsewhere in the Plan.
3.3 Purchase Price. The purchase price for the Plan Shares acquired pursuant to the exercise, in whole or in part, of any Option granted under this Article shall not be less than the Fair Market Value of the Plan Shares at the time of the grant of the Option.
3.4 Individual Option Agreements. Each Optionee receiving Options pursuant to this Article shall be required to enter into a written Option Agreement with the Company. In such Option Agreement, the Optionee shall agree to be bound by the terms and conditions of the Plan, the Options made pursuant hereto, and such other matters as the Committee deems appropriate.
ARTICLE IV.
RESTRICTED STOCK
4.1 Grant. Notwithstanding any provisions of the Plan to the contrary, the Committee shall have sole and complete authority to determine to whom Shares of Restricted Stock shall be granted, the number of Shares of Restricted Stock to be granted to each participant, the duration of the period during which, and the conditions under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of such Restricted Stock.
4.2 Dividends and Distributions. Dividends and other distributions paid on or in respect of any shares of Restricted Stock may be paid directly to the participant, or may be reinvested in additional shares of Restricted Stock as determined by the Committee in its sole discretion.
ARTICLE V.
TERMINATION, AMENDMENT, AND ADJUSTMENT
5.1 Termination and Amendment. The Plan shall terminate with respect to Nonqualified Stock Options on the date that is fifty years after the Effective Date unless provided otherwise in the option agreement. No Option shall be granted under the Plan after the respective date of termination. Subject to the limitations contained in this section, the Committee may at any time amend or revise the terms of the Plan, including the form and substance of the Option Agreements to be used in connection herewith; provided that no amendment or revision may be made without the approval of the stockholders of the Company if such approval is required under the Code, Rule 16b-3, or any other applicable law or rule. No amendment, suspension, or termination of the Plan shall, without the consent of the individual who has received an Option, alter or impair any of that individual’s rights or obligations under any Option granted under the Plan prior to that amendment, suspension, or termination.
5.2 Adjustments. If the outstanding Common Stock is increased, decreased, changed into, or exchanged for a different number or kind of shares or securities through merger, consolidation, combination, exchange of shares, other reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or any other increase, or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company (but not including conversion of convertible securities issued by the Company), an appropriate and proportionate adjustment shall be made in the maximum number and kind of Plan Shares as to which Options may be granted under the Plan. A corresponding adjustment changing the number or kind of shares allocated to unexercised Options or portions thereof that shall have been granted prior to any such change shall likewise be made. Any such adjustment in outstanding Options shall be made without change in the aggregate purchase price applicable to the unexercised portion of the Options, but with a corresponding adjustment in the price for each share covered by the Options. The foregoing adjustments and the manner of application of the foregoing provisions shall be determined solely by the Committee, and any such adjustment may provide for the elimination of fractional share interests.
ARTICLE VI.
CORPORATE TRANSACTIONS;
CHANGES IN CAPITALIZATION; DISSOLUTION
6.1 Corporate Transactions. In the event of any Corporate Transaction, each outstanding option shall automatically accelerate so that each such option shall, immediately prior to the effective date of Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, an outstanding Option shall not so accelerate if and to the extent: (i) such Option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable Option to purchase shares of the
capital stock of the successor corporation (or parent thereof), (ii) such Option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested Option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to such option or (iii) the acceleration of such Option is subject to other limitations imposed by the Committee at the time of the option grant. The determination of option comparability under clause (i) above shall be made by the Committee, and its determination shall be final, binding and conclusive.
6.2 Termination. Immediately following the consummation of the Corporate Transaction, all outstanding Options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) as provided in this Section VII.
6.3 Assumption. Each Option which is assumed in connection with the Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be made to (i) the number and class of securities available for issuance under the Plan following consummation of such Corporate Transaction and (ii) the exercise price payable per share under each outstanding Option, provided the aggregate exercise price payable for such securities shall remain the same.
6.4 Subsequent Termination. The Committee shall have the discretion, exercisable at the time the Option is granted or at any time while the Option remains outstanding, to provide that any Options which are assumed or replaced in the Corporate Transaction and do not otherwise accelerate at that time shall automatically accelerate in the event the Optionee’s Service should subsequently terminate by reason of an involuntary termination within eighteen (18) months following the effective date of such Corporate Transaction. Any Options so accelerated shall remain exercisable for fully-vested shares until the earlier of (i) the expiration of the option term or (ii) the expiration of the one (1)-year period measured from the effective date of the involuntary termination.
6.5 Automatic Acceleration. The Committee shall have the discretion, exercisable either at the time the Option is granted or at any time while the option remains outstanding to provide for the automatic acceleration of one or more outstanding Options upon the occurrence of a Corporate Transaction, whether or not those Options are to be assumed or replaced (or those repurchase rights are to be assigned) in the Corporation Transaction.
6.6 No Limitation on Actions. The grant of Options under the Plan shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.
6.7 Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the
Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action.
ARTICLE VII.
MISCELLANEOUS
7.1 Other Compensation Plans. The adoption of the Plan shall not affect any other stock option or incentive or other compensation plans in effect for the Company or any subsidiary or affiliate of the Company, nor shall the Plan preclude the Company or any subsidiary or affiliate thereof from establishing any other forms of incentive or other compensation plans.
7.2 Plan Binding on Successors. The Plan shall be binding upon the successors and assigns of the Company and any subsidiary or affiliate of the Company that adopts the Plan.
7.3 Number and Gender. Whenever used herein, nouns in the singular shall include the plural where appropriate, and the masculine pronoun shall include the feminine gender.
7.4 Headings. Headings of articles and sections hereof are inserted for convenience of reference and constitute no part of the Plan.
7.5 Stockholder Rights. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares.
7.6 Market Stand-Off. In connection with any underwritten public offering by the Corporation of its equity securities pursuant to an effective registration statement filed under the Securities Act of 1933, the Optionee may not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any shares of Common Stock acquired upon exercise of an option granted under the Plan without the prior written consent of the Corporation or its underwriters. Such restriction (the “Market Stand-Off”) shall be in effect for such period of time from and after the effective date of the final prospectus for the offering as may be required to execute such agreements as the Corporation or the underwriters request in connection with the Market Stand-Off.
ARTICLE VIII.
DEFINITIONS
As used herein with initial capital letters, the following terms have the meanings hereinafter set forth unless the context clearly indicates to the contrary:
8.1 ”Advisor” means any individual performing substantial bona fide services for the Company or any subsidiary or affiliate of the Company that has adopted the Plan who is not an Employee or a Director.
8.2 ”Applicable Laws” means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options are, or will be, granted under the Plan.
8.3 ”Board” means the Board of Directors of the Company.
8.4 ”Code” means the Internal Revenue Code of 1986, as amended.
8.5 ”Committee” means the Committee appointed in accordance with Section 2.1.
8.6 ”Common Stock” means the Common Stock, par value $.001 per share, of the Company or, in the event that the outstanding shares of such Common Stock are hereafter changed into or exchanged for shares of a different stock or security of the Company or some other corporation, such other stock or security.
8.7 ”Company” means China BAK Battery, Inc., a Nevada corporation.
8.8 ”Corporate Transaction” means either of the following stockholder-approved transactions to which the Company is a party:
i. a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities are transferred to a person or person different from the persons holding those securities immediately prior to such transaction, or
ii. the sale, transfer or other disposition of all or substantially all of the Company’s assets in complete liquidation or dissolution of the Company.
8.9 ”Director” means a member of the Board.
8.10 ”Effective Date” means May 16, 2005.
8.11 ”Employee” means an employee (as defined in Section 3401(c) of the Code and the regulations thereunder) of the Company or of any subsidiary or affiliate of the Company that adopts the Plan, including Officers.
8.12 ”ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
8.13 ”Exchange Act” means the Securities Exchange Act of 1934, as amended.
8.14 ”Fair Market Value” means such value as determined by the Committee on the basis of such factors as it deems appropriate; provided that if the Common Stock is traded on a national securities exchange or transactions in the Common Stock are quoted on the Nasdaq National Market System, such value as shall be determined by the Committee on the basis of the reported sales prices for the Common Stock over a ten business day period ending on the date for which such determination is relevant, as reported on the national securities exchange or the Nasdaq National Market System, as the case may be. If the Common Stock is not listed and traded upon a recognized securities exchange or on the Nasdaq National Market System, the Committee shall make a determination of Fair Market Value on a reasonable basis, which may include the mean between the closing bid and asked quotations for such stock on the date for which such determination is relevant (as reported by a recognized stock quotation service) or, in the event that there shall be no bid or asked quotations on the date for which such determination is relevant, then on the basis of the mean between the closing bid and asked quotations on the date nearest preceding the date for which such determination is relevant for which such bid and asked quotations were available.
8.15 ”Misconduct” means the commission of any act of fraud, embezzlement or dishonesty by the Optionee, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Company, or any other intentional misconduct or negligence by such person adversely affecting the business or affairs of the Company in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Company may consider as grounds for the dismissal or discharge of any Optionee or other person in the service of the Company.
8.16 ”Nonemployee Director” means a member of the Board who is not an Officer or Employee; provided that, as used in Section 2.1, the term “Non-Employee Director” shall have the meaning provided in that section.
8.17 ”Nonqualified Stock Option” means an Option granted pursuant to Article III.
8.18 ”Officer” means an officer of the Company or of any subsidiary or affiliate of the Company.
8.19 ”Option” means a Nonqualified Stock Option.
8.20 ”Optionee” means an Employee, Nonemployee Director, or Advisor to whom an Option has been granted hereunder.
8.21 ”Option Agreement” means an agreement between the Company and an Optionee with respect to one or more Options.
8.22 ”Permanent Disability” has the same meaning as that provided in Section 22(e)(3) of the Code.
8.23 ”Plan” means the China BAK Battery, Inc. Stock Option Plan, as amended from time to time.
8.24 ”Plan Shares” means shares of Common Stock issuable pursuant to the Plan.
8.25 ”Restricted Stock” means any shares granted under Article IV of the Plan.
8.26 ”Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor rule.
8.27 ”Securities Act” means the Securities Act of 1933, as amended.
8.28 ”Tax Date” means the date on which the amount of tax to be withheld is determined.
Exhibit 10.2
CHINA BAK BATTERY, INC.
COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
| 1. | Purpose. |
The China BAK Battery, Inc. Compensation Plan for Non-Employee Directors (the “Plan”) has been established by China BAK Battery, Inc. (the “Company”) for non-employee members of the Company’s Board of Directors (the “Board”) for the purposes of (i) attracting, retaining and incentivizing highly qualified individuals to serve in such capacity; and (ii) aligning the interests of the Company’s non-employee directors with its stockholders by providing an additional means for such individuals to increase their ownership of the Company’s common stock, par value, $0.001 per share (the “Common Stock”).
This Plan is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and any regulatory or other guidance issued under such section. At the Effective Date (as defined in Section 17 below) of the Plan, additional guidance had yet to be promulgated by the Department of Treasury. Any terms of the Plan that conflict with such guidance shall be null and void as of the Effective Date. After such additional guidance is issued, the intent is to amend the Plan to delete any conflicting provisions and to add such other provisions as are required to fully comply with Section 409A and any other legislative or regulatory requirements applicable to the Plan. The Plan is also intended to comply with Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended from time to time, or any successor provision thereto (“Rule 16b-3”), and shall be construed to so comply. With respect to any restriction in the Plan that is based on the requirements of Rule 16b-3 or the rules of any exchange upon which the Company’s securities are listed or automated quotation system upon which the Company’s securities are quoted, or any other applicable law, rule or restriction, to the extent that any such restriction is no longer required, the Board shall have the sole discretion and authority to remove such restrictions from the Plan and/or to waive them.
| 2. | Eligibility. |
Only members of the Board who do not serve as officers or employees of the Company, any parent of the Company or any of the Company’s subsidiaries (“Eligible Directors”) will be eligible to participate in the Plan.
| 3. | Non-Employee Director Compensation. |
(a) Annual Retainer Fees . Eligible Directors will be entitled to receive an annual retainer fee (the “Annual Retainer”) for their membership on the Board. The amount of such fee will be established from time to time by the Board. In addition, Eligible Directors will receive 5,000 shares of Common Stock with twenty-five percent (25%) of such shares vesting immediately upon election to participate in the Plan and the remaining shares to vest in increments of twenty-five (25%) percent each subsequent full quarter (March 31, June 30, September 30, December 31).
(b) Valuation of Shares . The fair market value of a share of Common Stock on a given date shall be the 4:00 p.m., New York City time, closing price of a share of Common Stock on such national securities exchange as may be designated by the Board, or, in the event that the Common Stock is not listed for trading on a national securities exchange, but is quoted on an automated quotation system, the average closing bid per share of the Common Stock on such automated quotation system or, in the event that the Common Stock is not quoted on any such system, the average of the closing bid prices per share of the Common Stock as furnished by a professional market maker making a market in the Common Stock designated by the Board.
| 4. | Deferral Election. |
Any Eligible Director may elect to defer the time of payment of all or any portion of any compensation that the Eligible Director may become entitled to receive pursuant to Section 3 other than any amount that the Eligible Director may receive in shares of Common Stock. In no event, however, may an Eligible Director elect to defer any compensation that he or she has already received or would otherwise have an unrestricted right to receive currently. Any deferral election shall be made at such time and in such manner as may be specified by the Board. An Eligible Director’s deferral election shall specify the time and manner of payment of all deferred amounts which election shall be subject to the requirements of Section 7. Compensation for services performed during a taxable year may be deferred at the Eligible Director’s election only if the election to defer such compensation is made not later than the close of the preceding taxable year or at such other time as may be permitted in rules or other guidance adopted by the Internal Revenue Service. Notwithstanding the foregoing, in the case of the first year in which an Eligible Director becomes eligible to participate in the Plan, such election may be made with respect to services performed subsequent to the election within 30 days after the date the Eligible Director becomes eligible to participate in the Plan. For purposes of this Section 4, the term “Plan” refers to the compensation deferral feature contained in Sections 4 through 11 of this Plan.
| 5. | Establishment of Deferred Account. |
The Board shall establish a deferred account (the “Deferred Account”) for each Eligible Director to which shall be credited the amount of all compensation deferred under this Plan from time to time by the Eligible Director. An Eligible Director’s compensation deferral election shall specify the amount or percentage of compensation to be credited to the Eligible Director’s Deferred Account. An Eligible Director may only change his or her Deferred Account election with respect to future deferred amounts at such time as permitted by the Board.
| 6. | Adjustment of Deferred Account. |
The balance of each Eligible Director’s Deferred Account shall be maintained by the Company as a bookkeeping entry based on dollar units and shall be adjusted by the Company from time to time to reflect amounts deferred and payments made since the date of the last adjustment. In addition, the balance of each Eligible Director’s Deferred Account shall be credited by the Company with interest from time to time at the then prevailing prime rate of interest as published in the Wall Street Journal or such other similar and reasonable rate of interest as the Board may determine.
| 7. | Payment of Deferred Account. |
An Eligible Director’s Deferred Account shall be paid to the Eligible Director in such manner and at such time as the Eligible Director may elect in accordance with Section 4. In no event, shall any amount of compensation deferred under the Plan be distributed earlier than: (a) the Eligible Director’s separation from service with the Company; (b) the date of the Eligible Director’s Disability (as defined in Section 17 below); (c) the date of the Eligible Director’s death; (d) a specified time (or pursuant to a fixed schedule) specified under the Plan at the date of the deferral of such compensation; or (e) a Change in Control pursuant to Section 8 below. If an Eligible Director does not elect a time of payment, then it shall be presumed that the Eligible Director elected that his or her payment shall be made as of the earliest to occur of the Eligible Director’s separation from service with the Company, Disability or death. If an Eligible Director does not elect the manner of payment, it shall be presumed that the Eligible Director elected that his or her payment shall be made as a single payment. For purposes of all payments, the balance in an Eligible Director’s Deferred Account shall be adjusted by the Company pursuant to Section 6 immediately prior to any payment date.
| 8. | Distribution in the Event of a Change in Control. |
Notwithstanding any other provision of this Plan or of any election made by an Eligible Director with respect to the period of any deferral or the form and timing of any payment from his Deferred Account, the unpaid balance thereof shall be paid to the Eligible Director within 60 days after the date of a Change in Control of the Company. For purposes hereof, a “Change in Control” means, a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company, as defined in the regulations issued by the Treasury Department and other guidance issued by the Treasury Department or Internal Revenue Service under Section 409A of the Code.
| 9. | Rights of Eligible Director or Other Distributee. |
Nothing contained herein, and no action taken pursuant to the provisions hereof shall create, or be deemed to create a trust of any kind, or to establish any fiduciary relationship between the Company and any Eligible Director or other payee. The Deferred Account established hereunder shall be for recordkeeping purposes only. Amounts that have been deferred will be recorded as a liability in the Company’s books at the time of the deferral of the payment, but no funds shall be set aside for payment of the liability. To the extent that any person acquires a right to receive payments from the Company under the provisions hereof, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments made pursuant to this Plan shall be made from the general assets of the Company, provided, however, that nothing set forth herein shall be construed as prohibiting the Company from establishing a trust for its own benefit to hold any assets to satisfy its liabilities pursuant to the Plan. If the Company establishes such a trust, no Eligible Director shall have any interest in the assets of such trust.
| 10. | Designation of Beneficiary. |
An Eligible Director may designate a person, trust or organization to receive the unpaid balance of the Eligible Director’s Deferred Account in the event of the Eligible Director’s death by executing and delivering to the Board a beneficiary designation on a form reasonably acceptable to the Board. An Eligible Director may change and successively change any such designation by executing a new beneficiary designation form. Unless the beneficiary designation form indicates otherwise, any designation of beneficiary shall be deemed to apply to the unpaid balance of all of the Eligible Director’s Deferred Account. If there is no valid beneficiary designation on file with the Board on the date of the Eligible Director’s death, the unpaid balance of the Eligible Director’s Deferred Account shall be paid to the duly appointed personal representative of the Eligible Director’s estate.
| 11. | Nonassignability of Benefits. |
Neither the Eligible Director nor any other person shall have any power or right to assign, anticipate, hypothecate or otherwise encumber any amount credited to the Eligible Director’s Deferred Account nor shall any such amounts be transferable by operation of law in the event of the bankruptcy or insolvency of the Eligible Director or other person.
| 12. | Shares of Common Stock Subject to the Plan. |
The total number of shares of Common Stock that may be issued under the Plan is 500,000 (the “Share Limit”), subject to adjustment pursuant to Section 14 below. The shares of Common Stock will be made available from authorized but unissued Common Stock or from Common Stock issued and held in the treasury of the Company. For purposes of determining the number of shares of Common Stock that are at any time available for issuance under the Plan, the number of shares of Common Stock that are issued will be counted against the Share Limit at the time of issuance of the shares, as applicable.
| 13. | Dividend Equivalents. |
Shares of Common Stock, shall be credited with an amount equivalent to the dividends which would have been paid on an equal number of outstanding shares of Common Stock (“Dividend Equivalents”). Dividend Equivalents shall be credited (i) as of the payment date of such dividends, and (ii) only with respect to shares which were otherwise deliverable, or into which Dividend Equivalents were converted pursuant to the second paragraph of this Section 13, prior to the record date of the dividend. Shares held pending distribution shall continue to be credited with Dividend Equivalents.
Dividend Equivalents so credited shall be converted into an additional number of shares as of the payment date of the dividend (based on the 4:00 p.m., New York City time, closing price of a share of Common Stock on such payment date). Such shares shall thereafter be treated in the same manner as any other shares under the Plan. Dividend Equivalents with respect to shares of Common Stock that result in fractional shares shall be held for the credit of the director until the next dividend payment date and shall be converted into shares on such date. Any Dividend Equivalents not converted into shares shall be paid in cash upon the final distribution of the Eligible Director’s shares.
| 14. | Adjustments Upon Certain Corporate Changes. |
In the event of any subdivision or consolidation of outstanding shares of Common Stock, declaration of a dividend payable in shares of Common Stock, stock split, recapitalization or capital reorganization, consolidation or merger of the Company with another corporation or entity, adoption by the Company of any plan of exchange affecting Common Stock, distribution to holders of Common Stock or securities or property (including cash dividends that the Board determines are not in the ordinary course of business but excluding normal cash dividends), corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Board may make such substitution or adjustments to reflect such change in the aggregate number and class of shares reserved for issuance under the Plan.
| 15. | Administration. |
Subject to any provision of Rule 16b-3 that would require otherwise, the Plan shall be administered by the Board which shall have full authority to construe, interpret and administer the Plan. The Board may make such rules and establish such procedures for the administration of the Plan as it deems appropriate to carry out the purpose of the Plan. The Board may act on its own behalf or through the actions of its duly authorized delegate. Any determination by the Board shall be final and binding on all persons.
| 16. | Amendment and Termination of the Plan. |
The Plan may be terminated and may be altered, amended, suspended or terminated at any time, in whole or in part, by the Board; provided, however, that no such action will be effective without stockholder approval if such approval is required by law or under the rules of such stock exchange or automated quotation system on which the Common Stock is listed or quoted. In addition, no such action may, without the consent of the Eligible Director to whom payment has been made, adversely affect the pre-existing rights of any such Eligible Director. Unless previously terminated pursuant to this Section 16, the Plan shall terminate on the tenth anniversary of the Effective Date (as defined in Section 17 below).
| 17. | General Provisions. |
(a) No Right to Serve as a Director . Neither the Plan nor any action taken under the Plan shall be construed as giving any Eligible Director the right to be nominated, re-elected or retained as a member of the Board.
(b) Effective Date and Stockholder Approval . The Plan is effective 20 days after the mailing of the Information Statement dated April 19, 2006.
(c) Conditions to Issuance of Plan Shares . If at any time the Board shall determine, in its sole discretion, that the listing, registration or qualification of the Common Stock issuable under the Plan is required under any federal or state law or by any securities exchange, or the consent or approval of any
governmental regulatory body is necessary or desirable as a condition of, or in connection with, the delivery or purchase of such shares, such shares shall not be granted unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board.
(d) Special Terms . The term “Disability” means the Eligible Director is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months.
(e) Gender and Number . Whenever the context shall require, the masculine gender shall be construed to include the feminine and the singular number the plural.
(f) Headings . The headings of sections and subsections herein are included solely for convenience of reference and do not affect the meaning of any of the provisions of the Plan.
(g) Governing Law . The Plan and all rights and obligations hereunder shall be construed in accordance with and governed by the laws of the State of Nevada.
Exhibit 10.3
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the “Agreement”) is entered into as of [ ], 200[__] by and between China BAK Battery Inc., a Nevada company (the “Company”) and the undersigned, a director and/or officer of the Company (“Indemnitee”).
RECITALS
1. The Company recognizes that highly competent persons are becoming more reluctant to serve corporations as directors or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against risks of claims and actions against them arising out of their services to the corporation.
2. The Board of Directors of the Company (the “Board”) has determined that the inability to attract and retain highly competent persons to serve the Company is detrimental to the best interests of the Company and its shareholders and that it is reasonable and necessary for the Company to provide adequate protection to such persons against risks of claims and actions against them arising out of their services to the corporation.
3. The Company is willing to indemnify Indemnitee to the fullest extent permitted by applicable law, and Indemnitee is willing to serve and continue to serve the Company on the condition that he be so indemnified.
AGREEMENT
In consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:
| A. | DEFINITIONS |
The following terms shall have the meanings defined below:
Expenses shall include damages, judgments, fines, penalties, settlements and costs, attorneys’ fees and disbursements and costs of attachment or similar bond, investigations, and any expenses paid or incurred in connection with investigating, defending, being a witness in, participating in (including on appeal), or preparing for any of the foregoing in, any Proceeding.
Indemnifiable Event means any event or occurrence that takes place either before or after the execution of this Agreement, related to the fact that Indemnitee is or was a director or an officer of the Company, or is or was serving at the request of the Company as a director or officer of another corporation, partnership, joint venture or other entity, or was a director or officer of an entity that was a predecessor of the Company or another entity at the request of such predecessor entity, or related to anything done or not done by Indemnitee in any such capacity.
Participant means a person who is a party to, or witness or participant (including on appeal) in, a Proceeding.
Proceeding means any threatened, pending, or completed action, suit or proceeding, or any inquiry, hearing or investigation, whether civil, criminal, administrative, investigative or other, in which Indemnitee may be or may have been involved as a party or otherwise by reason of an Indemnifiable Event, including, without limitation, any threatened, pending, or completed action, suit or proceeding by or in the right of the Company.
| B. | AGREEMENT TO INDEMNIFY |
1. General Agreement . In the event Indemnitee was, is, or becomes a Participant in, or is threatened to be made a Participant in, a Proceeding, the Company shall indemnify the Indemnitee from and against any and all Expenses which Indemnitee incurs or becomes obligated to incur in connection with such Proceeding, to the fullest extent permitted by applicable law.
2. Indemnification of Expenses of Successful Party . Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits in defense of any Proceeding or in defense of any claim, issue or matter in such Proceeding, Indemnitee shall be indemnified against all Expenses incurred in connection with such Proceeding or such claim, issue or matter, as the case may be.
3. Partial Indemnification . If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for a portion of Expenses, but not for the total amount of Expenses, the Company shall indemnify the Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
4. Exclusions . Notwithstanding anything in this Agreement to the contrary, Indemnitee shall not be entitled to indemnification under this Agreement:
(a) to the extent that payment is actually made to Indemnitee under a valid, enforceable and collectible insurance policy;
(b) in connection with a judicial action by or in the right of the Company, in respect of any claim, issue or matter as to which the Indemnitee shall have been adjudicated by final judgment in a court of law to be liable for gross negligence or willful misconduct in the performance of his duty to the Company unless and only to the extent that any court in which such action was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such Expenses as such court shall deem proper;
(c) in connection with any Proceeding initiated by Indemnitee against the Company or any director or officer of the Company, and not by way of defense, unless (i) the Company has joined in or the Board has consented to the initiation of such Proceeding; or (ii) the Proceeding is one to enforce indemnification rights under this Agreement or any applicable law;
(d) for a disgorgement of profits made from the purchase and sale by the Indemnitee of securities pursuant to Section 16(b) of the Exchange Act or similar provisions of any applicable U.S. state statutory law or common law;
2
(e) brought about by the dishonesty or fraud of the Indemnitee seeking payment hereunder; provided, however, that the Indemnitee shall be protected under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless a judgment or other final adjudication thereof adverse to the Indemnitee establishes that he committed (i) acts of active and deliberate dishonesty, (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated;
(f) for any judgment, fine or penalty which the Company is prohibited by applicable law from paying as indemnity; or
(g) arising out of Indemnitee’s breach of an employment agreement with the Company (if any) or any other agreement with the Company or any of its subsidiaries.
5. No Employment Rights . Nothing in this Agreement is intended to create in Indemnitee any right to continued employment with the Company.
6. Contribution . If the indemnification provided in this Agreement is unavailable and may not be paid to Indemnitee for any reason other than those set forth in Section 4, then the Company shall contribute to the amount of Expenses paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and by the Indemnitee on the other hand from the transaction from which such Proceeding arose, and (ii) the relative fault of the Company on the one hand and of the Indemnitee on the other hand in connection with the events which resulted in such Expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the Indemnitee on the other hand shall be determined by reference to, among other things, the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such Expenses, judgments, fines or settlement amounts. The Company agrees that it would not be just and equitable if contribution pursuant to this Section 6 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations.
| C. | INDEMNIFICATION PROCESS |
1. Notice and Cooperation By Indemnitee . Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement, provided that the delay of Indemnitee to give notice hereunder shall not prejudice any of Indemnitee’s rights hereunder, unless such delay results in the Company’s forfeiture of substantive rights or defenses. Notice to the Company shall be given in accordance with Section F.7 below. In addition, Indemnitee shall give the Company such information and cooperation as the Company may reasonably request.
2. Indemnification Payment .
(a) Advancement of Expenses . Indemnitee may submit a written request to the Company requesting that the Company advance to Indemnitee all Expenses that may be reasonably incurred by Indemnitee in connection with a Proceeding as such Expenses are
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incurred. The Company shall, within ten business days of receiving such a written request by Indemnitee, advance all requested Expenses to Indemnitee.
(b) Reimbursement of Expenses . To the extent Indemnitee has not requested any advanced payment of Expenses from the Company, Indemnitee shall be entitled to receive reimbursement for the Expenses incurred in connection with a Proceeding from the Company immediately after Indemnitee makes a written request to the Company for reimbursement.
(c) Determination by the Reviewing Party . Notwithstanding anything foregoing to the contrary, in the event the Reviewing Party informs the Company that Indemnitee is not entitled to indemnification in connection with a Proceeding under this Agreement or applicable law, the Company shall be entitled to be reimbursed by Indemnitee for all the Expenses previously advanced or otherwise paid to Indemnitee in connection with such Proceeding; provided , however , that Indemnitee may bring a suit to enforce his indemnification right in accordance with Section C.3 below.
3. Suit to Enforce Rights . Regardless of any action by the Reviewing Party, if Indemnitee has not received full indemnification within 30 days after making a written demand in accordance with Section C.2 above, Indemnitee shall have the right to enforce its indemnification rights under this Agreement by commencing litigation in any court of competent jurisdiction seeking a determination by the court or challenging any determination by the Reviewing Party or any aspect of the Agreement. Any determination by the Reviewing Party not challenged by Indemnitee and any judgment entered by the court shall be binding on the Company and Indemnitee.
4. Assumption of Defense . In the event the Company is obligated under this Agreement to advance any Expenses for any Proceeding against Indemnitee, the Company shall be entitled to assume the defense of such Proceeding, with counsel approved by Indemnitee, upon delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Proceeding, unless (i) the employment of counsel by Indemnitee has been previously authorized by the Company, (ii) Indemnitee shall have reasonably concluded, based on written advice of counsel, that there may be a conflict of interest of such counsel retained by the Company between the Company and Indemnitee in the conduct of any such defense, or (iii) the Company ceases or terminates the employment of such counsel with respect to the defense of such Proceeding, in any of which events the fees and expenses of Indemnitee’s counsel shall be at the expense of the Company. At all times, Indemnitee shall have the right to employ counsel in any Proceeding at Indemnitee’s expense.
5. Defense to Indemnification, Burden of Proof and Presumptions . It shall be a defense to any action brought by Indemnitee against the Company to enforce this Agreement that it is not permissible under this Agreement or applicable law for the Company to indemnify the Indemnitee for the amount claimed. In connection with any such action or any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified under this Agreement, the burden of proving such a defense or determination shall be on the Company. Neither the failure of the Reviewing Party or the Company to have made a determination prior to the commencement of such action by Indemnitee that indemnification is proper under the circumstances because Indemnitee has met the standard
4
of conduct set forth in applicable law, nor an actual determination by the Reviewing Party or the Company that Indemnitee had not met such applicable standard of conduct shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.
6. No Settlement Without Consent . The Company shall not settle any Proceeding in any manner that would impose any damage, loss, penalty or limitation on Indemnitee without Indemnitee’s prior written consent. Neither the Company nor Indemnitee shall unreasonably withhold its consent to any proposed settlement, provided that Indemnitee may withhold his consent if any proposed settlement imposes any damage, loss, penalty or limitation on Indemnitee.
7. Company Participation . The Company shall not be liable to indemnify the Indemnitee under this Agreement with regard to any judicial action if the Company was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action, unless such lack of opportunity does not result in the Company’s forfeiture of substantive rights or defenses.
8. Reviewing Party .
(a) For purposes of this Agreement, the Reviewing Party with respect to each indemnification request of Indemnitee shall by (A) the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, said Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee; and, if it is determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel or member of the Board of Directors shall act reasonably and in good faith in making a determination under the Agreement of the Indemnitee’s entitlement to indemnification. Any costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. “ Disinterested Director ” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.
(b) If the determination of entitlement to indemnification is to be made by Independent Counsel, the Independent Counsel shall be selected as provided in this Section 8(b). The Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be,
5
a written objection to such selection; provided , however , that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “ Independent Counsel” as defined in Section 8(d) of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the a court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting under this Agreement, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 8(b), regardless of the manner in which such Independent Counsel was selected or appointed.
(c) In making a determination with respect to entitlement to indemnification hereunder, the Reviewing Party shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement (with or without court approval), conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitee’s action is based on the records or books of account of the Company and any other corporation, partnership, joint venture or other entity of which Indemnitee is or was serving at the written request of the Company as a director, officer, employee, agent or fiduciary, including financial statements, or on information supplied to Indemnitee by the officers and directors of the Company or such other corporation, partnership, joint venture or other entity in the course of their duties, or on the advice of legal counsel for the Company or such other corporation, partnership, joint venture or other entity or on information or records given or reports made to the Company or such other corporation, partnership, joint venture or other entity by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Company or such other corporation, partnership, joint venture or other entity. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Company or such other corporation, partnership, joint venture or other entity shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. The provisions of this Section 8(c) shall not be deemed to be exclusive or to limit in any way the other circumstances in which the
6
Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement.
(d) “ Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.
| D. | DIRECTOR AND OFFICER LIABILITY INSURANCE |
1. Good Faith Determination . The Company shall from time to time make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses incurred in connection with their services to the Company or to ensure the Company’s performance of its indemnification obligations under this Agreement.
2. Coverage of Indemnitee . To the extent the Company maintains an insurance policy or policies providing directors’ and officers’ liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any of the Company’s directors or officers.
3. No Obligation . Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain any director and officer insurance policy if the Company determines in good faith that such insurance is not reasonably available in the case that (i) premium costs for such insurance are disproportionate to the amount of coverage provided, or (ii) the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit.
| E. | NON-EXCLUSIVITY; FEDERAL PREEMPTION; TERM |
1. Non-Exclusivity . The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company’s current memorandum and articles of association, applicable law or any written agreement between Indemnitee and the Company (including its subsidiaries and affiliates). The indemnification provided under this Agreement shall continue to be available to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in any such capacity at the time of any Proceeding.
2. Federal Preemption . Notwithstanding the foregoing, both the Company and Indemnitee acknowledge that in certain instances, U.S. federal law or public policy may
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override applicable law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Such instances include, but are not limited to, the U.S. Securities and Exchange Commission’s prohibition on indemnification for liabilities arising under certain U.S. federal securities laws. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company’s right under public policy to indemnify Indemnitee.
3. Duration of Agreement . All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an officer and/or a director of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any Proceeding by reason of his former or current capacity at the Company, whether or not he is acting or serving in any such capacity at the time any expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer and/or a director of the Company or any other enterprise at the Company’s request.
| F. | MISCELLANEOUS |
1. Amendment of this Agreement . No supplement, modification, or amendment of this Agreement shall be binding unless executed in writing by the parties hereto. No waiver of any of the provisions of this Agreement shall operate as a waiver of any other provisions (whether or not similar), nor shall such waiver constitute a continuing waiver. Except as specifically provided in this Agreement, no failure to exercise or any delay in exercising any right or remedy shall constitute a waiver.
2. Subrogation . In the event of payment to Indemnitee by the Company under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company to bring suit to enforce such rights.
3. Assignment; Binding Effect . Neither this Agreement nor any of the rights or obligations hereunder may be assigned by either party hereto without the prior written consent of the other party; except that the Company may, without such consent, assign all such rights and obligations to a successor in interest to the Company which assumes all obligations of the Company under this Agreement. Notwithstanding the foregoing, this Agreement shall be binding upon and inure to the benefit of and be enforceable by and against the parties hereto and the Company’s successors (including any direct or indirect successor by purchase, merger, consolidation, or otherwise to all or substantially all of the business and/or assets of the Company) and assigns, as well as Indemnitee’s spouses, heirs, and personal and legal representatives. As a condition to any purchase, merger, consolidation or other business combination transaction involving the Company, the Company’s successor shall expressly assume the obligations under this Agreement.
4. Severability and Construction . Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company’s inability, pursuant to a court order, to perform its
8
obligations under this Agreement shall not constitute a breach of this Agreement. In addition, if any portion of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, or otherwise unenforceable, the remaining provisions shall remain enforceable to the fullest extent permitted by applicable law. The parties hereto acknowledge that they each have opportunities to have their respective counsels review this Agreement. Accordingly, this Agreement shall be deemed to be the product of both of the parties hereto, and no ambiguity shall be construed in favor of or against either of the parties hereto.
5. Counterparts . This Agreement may be executed in two counterparts, both of which taken together shall constitute one instrument.
6. Governing Law . This agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of New York, U.S.A., without giving effect to conflicts of law provisions thereof.
7. Notices . All notices, demands, and other communications required or permitted under this Agreement shall be made in writing and shall be deemed to have been duly given if delivered by hand, against receipt, or mailed, postage prepaid, certified or registered mail, return receipt requested, and addressed to the Company at:
China BAK Battery Inc.
BAK Industrial Park, No. 1 BAK Street,
Kuichong Town, Longgang District,
Shenzhen 518119, People’s Republic of China
Attention: [ l ]
and to Indemnitee at its last address notified to the Company.
8. Entire Agreement . This Agreement constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof.
(Signature page follows)
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IN WITNESS WHEREOF, the parties hereto execute this Agreement as of the date first written above.
| COMPANY |
| China BAK Battery, Inc. |
| Name: |
| Title: |
| INDEMNITEE |
| Name: |
Exhibit 10.4
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the “ Agreement ”), is entered into as of June 30, 2006 by and between China BAK Battery, Inc., a corporation incorporated under the laws of the State of Nevada, U.S. (the “Company”) and Xiangqian Li (the “ Employee ”).
RECITALS
A. The Company has appointed the Employee as its Chief Executive Officer and the Employee has accepted such appointment for the term of Employment (as defined below).
B. In connection with such appointment, the Company and the Employee desire to enter into this Agreement setting forth the terms and conditions of the Employment
AGREEMENT
The parties hereto agree as follows:
| 1 | POSITION |
The Employee hereby accepts a position of Chief Executive Officer and President (the “ Employment ”) of the Company.
| 2 | TERM |
Subject to the terms and conditions of this Agreement, the initial term of the Employment shall be three years, commencing on June 30, 2006 (the “ Effective Date ”), until June 30, 2009, unless terminated sooner pursuant to the terms of this Agreement. Upon expiration of the initial three-year term, the Employment shall be automatically extended for successive one-year terms unless either party gives the other party hereto a one-month prior written notice to terminate the Employment prior to the expiration of such term or unless terminated sooner pursuant to the terms of this Agreement.
| 3 | PROBATION |
No probationary period.
| 4 | DUTIES AND RESPONSIBILITIES |
The Employee’s duties at the Company will include all jobs assigned by the Company’s Board of the Directors (the “Board”) or officers senior to the Employee.
The Employee shall devote all of his or her working time, attention and skills to the performance of his or her duties at the Company and shall faithfully and diligently serve the Company in accordance with this Agreement, the articles of association and by-laws of the Company, and the guidelines, policies and procedures of the Company approved from time to time by the Board.
The Employee shall use his or her best endeavor to perform his or her duties hereunder. The Employee shall not, without the prior written consent of the Board, become an employee of any entity other than the Company and any subsidiary or affiliate of the Company, and shall not be concerned or interested in any business or entity that competes with that carried on by the Company (any such business or entity, a “ Competitor ”), provided that nothing in this clause shall preclude the Employee from holding less than 5% of any class of equity securities of any Competitor that are listed on any securities exchange or recognized securities market anywhere. The Employee shall notify the Company in writing of his or her interest in such shares or securities in a timely manner and with such details and particulars as the Company may reasonably require.
| 5 | LOCATION |
The Employee will be based in Shenzhen, China. The Company reserves the right to transfer or second the Employee to any location in China or elsewhere in accordance with its operational requirements.
| 6 | COMPENSATION AND BENEFITS |
| (a) | Cash Compensation . The Employee’s cash compensation (including salary) shall be provided by the Company pursuant to Schedule A hereto, subject to annual review and adjustment by the Company. |
| (b) | Equity Incentives . To the extent the Company adopts and maintains a share incentive plan, the Employee will be eligible for participating in such plan pursuant to the terms thereof as determined by the Company. |
| (c) | Benefits . The Employee is eligible for participation in any standard employee benefit plan of the Company that currently exists or may be adopted by the Company in the future, including, but not limited to, any retirement plan, life insurance plan, health insurance plan, disability insurance plan and travel/holiday plan. If the Employee elects, the Company shall pay the reasonable cost of membership for the Employee, his or her spouse and dependent children not greater than twenty-one (21) years of age, for a private patient medical plan, with a reputable medical expense insurance scheme as the Company shall decide from time to time. |
| 7 | TERMINATION OF THE AGREEMENT |
| (a) | By the Company . |
(i) The Company may terminate the Employment for cause, at any time, without notice or remuneration, if (1) the Employee is convicted or pleads guilty to a felony or to an act of fraud, misappropriation or embezzlement, (2) the Employee has been negligent or acted dishonestly to the detriment of the Company, or (3) the Employee has engaged in actions amounting to misconduct or failed to perform his or her duties hereunder and such failure continues after the Employee is afforded a reasonable opportunity to cure such failure.
(ii) In addition, the Company may terminate the Employment without cause, at any time, upon one-month written notice. The Company shall have the option, in its sole discretion, to make the Employee’s termination effective at any time prior to the end of such notice period as long as the Company pays the Employee all compensation to which the Employee is entitled up through the last day of the one-month notice period.
(iii) If the Employee’s employment is terminated by the Company without cause (other than by reason of disability or death), the Employee shall receive, within 30 days following termination, a lump sum payment of (i) any earned but unpaid salary through the date of termination, and (ii) any earned but unpaid bonus for any calendar year preceding the year in which the termination occurs. In addition, subject to the Employee having completed the probation period, if any, and the Employee’s compliance with Sections 8, 9 and 10 below, the Employee shall receive continued payments of his or her salary: (i) for one month following a termination effective prior to the first anniversary of the Effective Date; (ii) for two months following a termination effective prior to the second anniversary of the Effective Date; (iii) for three months following a termination effective prior to the third anniversary of the Effective Date; and (iv) for three months following a termination effective at any time after the third anniversary of the Effective Date. The Employee shall have no further rights to any compensation (including any salary or bonus) or any other benefits under this Agreement. If the Employee is terminated for cause pursuant to this Section 7(a), he or she shall be entitled to receive only his or her salary through the date of termination and he shall have no further rights to any compensation (including any salary or bonus) or any other benefits under this Agreement.
(iv) All other benefits, if any, due to the Employee following a termination with or without cause shall be determined in accordance with the plans, policies and practices of the Company; provided , however , that the Employee shall not participate in any severance plan, policy or program of the Company.
| (b) | By the Employee . The Employee may terminate the Employment at any time with a one-month prior written notice to the Company, if (1) there is a material reduction in the Employee’s authority, duties and responsibilities, or (2) there is a material reduction in the Employee’s annual salary before the next annual salary review. In addition, the Employee may resign prior to the expiration of the Agreement if such resignation is approved by the Board of Directors of the Company (the “Board”) or an alternative arrangement with respect to the Employment is agreed to by the Board. Upon a termination by the Employee pursuant to this Section 7(b), the Employee shall be entitled to his or her salary through the date of such termination and he shall have no further rights to any compensation (including any salary or bonus) or any other benefits under this Agreement. All other benefits, if any, due to the Employee following termination pursuant to this Section 7(b) shall be determined in accordance with the plans, policies and practices of the Company; provided , however , that the Employee shall not participate in any severance plan, policy or program of the Company. |
| 8 | CONFIDENTIALITY AND NONDISCLOSURE |
In the course of the Employee’s services, the Employee may have access to the Company and/or the Company’s client’s and/or prospective client’s trade secrets and confidential information, including but not limited to those embodied in memoranda, manuals, letters or other documents, computer disks, tapes or other information storage devices, hardware, or other media or vehicles, pertaining to the Company and/or the Company’s client’s and/or prospective client’s business. All such trade secrets and confidential information are considered confidential. All materials containing any such trade secret and confidential information are the property of the Company and/or the Company’s client and/or prospective client, and shall be returned to the Company and/or the Company’s client and/or prospective client upon expiration or earlier termination of this Agreement. The Employee shall not directly or indirectly disclose or use any such trade secret or confidential information, except as required in the performance of the Employee’s duties in connection with the Employment, or pursuant to applicable law.
During and after the Employment, the Employee shall hold the Trade Secrets in strict confidence; the Employee shall not disclose these Trade Secrets to anyone except other employees of the Company who have a need to know the Trade Secrets in connection with the Company’s business. The Employee shall not use the Trade Secrets other than for the benefits of the Company.
“ Trade Secrets ” means information deemed confidential by the Company, treated by the Company or which the Employee know or ought reasonably to have known to be confidential, and trade secrets, including without limitation designs, processes, pricing policies, methods, inventions, conceptions, technology, technical data, financial information, corporate structure and know-how, relating to the business and affairs of the Company and its subsidiaries, affiliates and business associates, whether embodied in memoranda, manuals, letters or other documents, computer disks, tapes or other information storage devices, hardware, or other media or vehicles. Trade Secrets do not include information generally known or released to public domain through no fault of yours.
This Section 8 shall survive the termination of this Agreement for any reason. In the event the Employee breaches this Section 8, the Company shall have right to seek remedies permissible under applicable law.
| 9 | INVENTIONS ASSIGNMENT |
The Employee understands that the Company engages in research and development and other activities in connection with its business and that, as an essential part of the Employment, The Employee is expected to make new contributions to and create inventions of value for the Company.
From and after the Effective Date, the Employee shall disclose in confidence to the Company all inventions, improvements, designs, original works of authorship, formulas, processes, compositions of matter, computer software programs, databases, mask works and trade secrets (collectively, the “ Inventions ”), which the Employee may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of the Employee’s
Employment at the Company. The Employee acknowledges that copyrightable works prepared by the Employee within the scope of and during the period of the Employee’s Employment with the Company are “works for hire” and that the Company will be considered the author thereof. The Employee agrees that all the Inventions shall be the sole and exclusive property of the Company and the Employee hereby assign all his or her right, title and interest in and to any and all of the Inventions to the Company or its successor in interest without further consideration.
The Employee agrees to assist the Company in every proper way to obtain for the Company and enforce patents, copyrights, mask work rights, trade secret rights, and other legal protection for the Inventions. The Employee will execute any documents that the Company may reasonably request for use in obtaining or enforcing such patents, copyrights, mask work rights, trade secrets and other legal protections. The Employee’s obligations under this paragraph will continue beyond the termination of the Employment with the Company, provided that the Company will compensate the Employee at a reasonable rate after such termination for time or expenses actually spent by the Employee at the Company’s request on such assistance. The Employee appoints the Secretary of the Company as the Employee’s attorney-in-fact to execute documents on the Employee’s behalf for this purpose.
This Section 9 shall survive the termination of this Agreement for any reason. In the event the Employee breaches this Section 9, the Company shall have right to seek remedies permissible under applicable law.
| 10 | NON-COMPETITION |
In consideration of the salary paid to the Employee by the Company, the Employee agrees that during the term of the Employment and for a period of one year following the termination of the Employment for whatever reason:
| (a) | the Employee will not approach clients, customers or contacts of the Company or other persons or entities introduced to the Employee in the Employee’s capacity as a representative of the Company for the purposes of doing business with such persons or entities which will harm the business relationship between the Company and such persons and/or entities; |
| (b) | unless expressly consented to by the Company, the Employee will not assume employment with or provide services as a director or otherwise for any Competitor in the People’s Republic of China or such other territories where the Company carries on its business or part thereof (the “ Territory ”), or engage, whether as principal, partner, licensor or otherwise, in any Competitor that carries on its business or part thereof in the Territory; and |
| (c) | unless expressly consented to by the Company, the Employee will not seek directly or indirectly, by the offer of alternative employment or other inducement whatsoever, to solicit the services of any employee of the Company employed as at or after the date of such termination, or in the year preceding such termination. |
For purposes of this Section 10, a “Competitor” of the Company shall not include an entity that generates 10% or less of its revenues from battery products and services
similar to those provided by the Company, except that if the Employee is employed by, or provides services as a director or otherwise to, a subsidiary or divisional business of such an entity, such subsidiary or divisional business shall be deemed a “Competitor” if it generates more than 10% of its revenues from battery products and services similar to those provided by the Company. The provisions provided in Section 10 shall be separate and severable, enforceable independently of each other, and independent of any other provision of this Agreement.
The provisions contained in Section 10 are considered reasonable by the Employee and the Company. In the event that any such provisions should be found to be void under applicable laws but would be valid if some part thereof was deleted or the period or area of application reduced, such provisions shall apply with such modification as may be necessary to make them valid and effective.
This Section 10 shall survive the termination of this Agreement for any reason. In the event the Employee breaches this Section 10, the Company shall have right to seek remedies permissible under applicable law.
| 11 | ENTIRE AGREEMENT |
This Agreement constitutes the entire agreement and understanding between the Employee and the Company regarding the terms of the Employment and supersedes all prior or contemporaneous oral or written agreements concerning such subject matter. The Employee acknowledges that he or she has not entered into this Agreement in reliance upon any representation, warranty or undertaking which is not set forth in this Agreement. Any amendment to this Agreement must be in writing and signed by the Employee and the Company.
| 12 | GOVERNING LAW; CONSENT TO JURISDICTION |
This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The parties hereto irrevocably submit to the non-exclusive jurisdiction of the U.S. federal courts or New York state courts, each located in The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement. To the fullest extent they may effectively do so under applicable law, the parties hereto irrevocably waive and agree not to assert, by way of motion, as a defense or otherwise, any claim that they are not subject to the jurisdiction of any such New York court, any objection that they may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such New York court and any claim that any such suit, action or proceeding brought in any such New York court has been brought in an inconvenient forum.
(SIGNATURE PAGE FOLLOWS)
IN WITNESS WHEREOF, this Agreement has been executed June 30, 2006.
| China Bak Battery Inc. | Employee | |||||||
| Signature: | Signature: | |||||||
| Name: | Name: | Xiangqian Li | ||||||
| Title: | ||||||||
Schedule A
Cash Compensation
|
Amount |
Pay Period |
|||
|
Salary |
RMB 240,000 annually | Monthly | ||
|
Bonus |
Discretionary based on performance | |||
Exhibit 10.5
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the “ Agreement” ), is entered into as of June 30, 2006 by and between China BAK Battery, Inc., a corporation incorporated under the laws of the State of Nevada, U.S. (the “Company”) and _____________ (the “ Employee” ).
RECITALS
A. The Company has appointed the Employee as its _____________ and the Employee has accepted such appointment for the term of Employment (as defined below).
B. In connection with such appointment, the Company and the Employee desire to enter into this Agreement setting forth the terms and conditions of the Employment
AGREEMENT
The parties hereto agree as follows:
| 1 | POSITION |
The Employee hereby accepts a position of _____________ (the “ Employment ”) of the Company.
| 2 | TERM |
Subject to the terms and conditions of this Agreement, the initial term of the Employment shall be two years, commencing on June 30, 2006 (the “ Effective Date ”), until June 30, 2008, unless terminated sooner pursuant to the terms of this Agreement. Upon expiration of the initial two-year term, the Employment shall be automatically extended for successive one-year terms unless either party gives the other party hereto a one-month prior written notice to terminate the Employment prior to the expiration of such term or unless terminated sooner pursuant to the terms of this Agreement.
| 3 | PROBATION |
No probationary period.
| 4 | DUTIES AND RESPONSIBILITIES |
The Employee’s duties at the Company will include all jobs assigned by the Company’s Board of the Directors (the “Board”) or officers senior to the Employee.
The Employee shall devote all of his or her working time, attention and skills to the performance of his or her duties at the Company and shall faithfully and diligently serve the Company in accordance with this Agreement, the articles of association and by-laws of the Company, and the guidelines, policies and procedures of the Company approved from time to time by the Board.
The Employee shall use his or her best endeavor to perform his or her duties hereunder. The Employee shall not, without the prior written consent of the Board,
become an employee of any entity other than the Company and any subsidiary or affiliate of the Company, and shall not be concerned or interested in any business or entity that competes with that carried on by the Company (any such business or entity, a “ Competitor ”), provided that nothing in this clause shall preclude the Employee from holding less than 5% of any class of equity securities of any Competitor that are listed on any securities exchange or recognized securities market anywhere. The Employee shall notify the Company in writing of his or her interest in such shares or securities in a timely manner and with such details and particulars as the Company may reasonably require.
| 5 | LOCATION |
The Employee will be based in Shenzhen, China. The Company reserves the right to transfer or second the Employee to any location in China or elsewhere in accordance with its operational requirements.
| 6 | COMPENSATION AND BENEFITS |
| (a) | Cash Compensation . The Employee’s cash compensation (including salary) shall be provided by the Company pursuant to Schedule A hereto, subject to annual review and adjustment by the Company. |
| (b) | Equity Incentives . To the extent the Company adopts and maintains a share incentive plan, the Employee will be eligible for participating in such plan pursuant to the terms thereof as determined by the Company. |
| (c) | Benefits . The Employee is eligible for participation in any standard employee benefit plan of the Company that currently exists or may be adopted by the Company in the future, including, but not limited to, any retirement plan, life insurance plan, health insurance plan, disability insurance plan and travel/holiday plan. If the Employee elects, the Company shall pay the reasonable cost of membership for the Employee, his or her spouse and dependent children not greater than twenty-one (21) years of age, for a private patient medical plan, with a reputable medical expense insurance scheme as the Company shall decide from time to time. |
| 7 | TERMINATION OF THE AGREEMENT |
| (a) | By the Company . |
(i) The Company may terminate the Employment for cause, at any time, without notice or remuneration, if (1) the Employee is convicted or pleads guilty to a felony or to an act of fraud, misappropriation or embezzlement, (2) the Employee has been negligent or acted dishonestly to the detriment of the Company, or (3) the Employee has engaged in actions amounting to misconduct or failed to perform his or her duties hereunder and such failure continues after the Employee is afforded a reasonable opportunity to cure such failure.
(ii) In addition, the Company may terminate the Employment without cause, at any time, upon one-month written notice. The Company shall have the option, in its sole discretion, to make the Employee’s termination effective
2
at any time prior to the end of such notice period as long as the Company pays the Employee all compensation to which the Employee is entitled up through the last day of the one-month notice period.
(iii) If the Employee’s employment is terminated by the Company without cause (other than by reason of disability or death), the Employee shall receive, within 30 days following termination, a lump sum payment of (i) any earned but unpaid salary through the date of termination, and (ii) any earned but unpaid bonus for any calendar year preceding the year in which the termination occurs. In addition, subject to the Employee having completed the probation period, if any, and the Employee’s compliance with Sections 8, 9 and 10 below, the Employee shall receive continued payments of his or her salary: (i) for one month following a termination effective prior to the first anniversary of the Effective Date; (ii) for two months following a termination effective prior to the second anniversary of the Effective Date; (iii) for three months following a termination effective prior to the third anniversary of the Effective Date; and (iv) for three months following a termination effective at any time after the third anniversary of the Effective Date. The Employee shall have no further rights to any compensation (including any salary or bonus) or any other benefits under this Agreement. If the Employee is terminated for cause pursuant to this Section 7(a), he or she shall be entitled to receive only his or her salary through the date of termination and he shall have no further rights to any compensation (including any salary or bonus) or any other benefits under this Agreement.
(iv) All other benefits, if any, due to the Employee following a termination with or without cause shall be determined in accordance with the plans, policies and practices of the Company; provided , however , that the Employee shall not participate in any severance plan, policy or program of the Company.
| (b) | By the Employee . The Employee may terminate the Employment at any time with a one-month prior written notice to the Company, if (1) there is a material reduction in the Employee’s authority, duties and responsibilities, or (2) there is a material reduction in the Employee’s annual salary before the next annual salary review. In addition, the Employee may resign prior to the expiration of the Agreement if such resignation is approved by the Board of Directors of the Company (the “Board”) or an alternative arrangement with respect to the Employment is agreed to by the Board. Upon a termination by the Employee pursuant to this Section 7(b), the Employee shall be entitled to his or her salary through the date of such termination and he shall have no further rights to any compensation (including any salary or bonus) or any other benefits under this Agreement. All other benefits, if any, due to the Employee following termination pursuant to this Section 7(b) shall be determined in accordance with the plans, policies and practices of the Company; provided , however , that the Employee shall not participate in any severance plan, policy or program of the Company. |
| 8 | CONFIDENTIALITY AND NONDISCLOSURE |
In the course of the Employee’s services, the Employee may have access to the Company and/or the Company’s client’s and/or prospective client’s trade secrets and confidential information, including but not limited to those embodied in memoranda,
3
manuals, letters or other documents, computer disks, tapes or other information storage devices, hardware, or other media or vehicles, pertaining to the Company and/or the Company’s client’s and/or prospective client’s business. All such trade secrets and confidential information are considered confidential. All materials containing any such trade secret and confidential information are the property of the Company and/or the Company’s client and/or prospective client, and shall be returned to the Company and/or the Company’s client and/or prospective client upon expiration or earlier termination of this Agreement. The Employee shall not directly or indirectly disclose or use any such trade secret or confidential information, except as required in the performance of the Employee’s duties in connection with the Employment, or pursuant to applicable law.
During and after the Employment, the Employee shall hold the Trade Secrets in strict confidence; the Employee shall not disclose these Trade Secrets to anyone except other employees of the Company who have a need to know the Trade Secrets in connection with the Company’s business. The Employee shall not use the Trade Secrets other than for the benefits of the Company.
“ Trade Secrets ” means information deemed confidential by the Company, treated by the Company or which the Employee know or ought reasonably to have known to be confidential, and trade secrets, including without limitation designs, processes, pricing policies, methods, inventions, conceptions, technology, technical data, financial information, corporate structure and know-how, relating to the business and affairs of the Company and its subsidiaries, affiliates and business associates, whether embodied in memoranda, manuals, letters or other documents, computer disks, tapes or other information storage devices, hardware, or other media or vehicles. Trade Secrets do not include information generally known or released to public domain through no fault of yours.
This Section 8 shall survive the termination of this Agreement for any reason. In the event the Employee breaches this Section 8, the Company shall have right to seek remedies permissible under applicable law.
| 9 | INVENTIONS ASSIGNMENT |
The Employee understands that the Company engages in research and development and other activities in connection with its business and that, as an essential part of the Employment, The Employee is expected to make new contributions to and create inventions of value for the Company.
From and after the Effective Date, the Employee shall disclose in confidence to the Company all inventions, improvements, designs, original works of authorship, formulas, processes, compositions of matter, computer software programs, databases, mask works and trade secrets (collectively, the “ Inventions ”), which the Employee may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of the Employee’s Employment at the Company. The Employee acknowledges that copyrightable works prepared by the Employee within the scope of and during the period of the Employee’s Employment with the Company are “works for hire” and that the Company will be considered the author thereof. The Employee agrees that all the Inventions shall be the sole and exclusive property of the Company and the Employee
4
hereby assign all his or her right, title and interest in and to any and all of the Inventions to the Company or its successor in interest without further consideration.
The Employee agrees to assist the Company in every proper way to obtain for the Company and enforce patents, copyrights, mask work rights, trade secret rights, and other legal protection for the Inventions. The Employee will execute any documents that the Company may reasonably request for use in obtaining or enforcing such patents, copyrights, mask work rights, trade secrets and other legal protections. The Employee’s obligations under this paragraph will continue beyond the termination of the Employment with the Company, provided that the Company will compensate the Employee at a reasonable rate after such termination for time or expenses actually spent by the Employee at the Company’s request on such assistance. The Employee appoints the Secretary of the Company as the Employee’s attorney-in-fact to execute documents on the Employee’s behalf for this purpose.
This Section 9 shall survive the termination of this Agreement for any reason. In the event the Employee breaches this Section 9, the Company shall have right to seek remedies permissible under applicable law.
| 10 | NON-COMPETITION |
In consideration of the salary paid to the Employee by the Company, the Employee agrees that during the term of the Employment and for a period of one year following the termination of the Employment for whatever reason:
| (a) | the Employee will not approach clients, customers or contacts of the Company or other persons or entities introduced to the Employee in the Employee’s capacity as a representative of the Company for the purposes of doing business with such persons or entities which will harm the business relationship between the Company and such persons and/or entities; |
| (b) | unless expressly consented to by the Company, the Employee will not assume employment with or provide services as a director or otherwise for any Competitor in the People’s Republic of China or such other territories where the Company carries on its business or part thereof (the “ Territory ”), or engage, whether as principal, partner, licensor or otherwise, in any Competitor that carries on its business or part thereof in the Territory; and |
| (c) | unless expressly consented to by the Company, the Employee will not seek directly or indirectly, by the offer of alternative employment or other inducement whatsoever, to solicit the services of any employee of the Company employed as at or after the date of such termination, or in the year preceding such termination. |
For purposes of this Section 10, a “Competitor” of the Company shall not include an entity that generates 10% or less of its revenues from battery products and services similar to those provided by the Company, except that if the Employee is employed by, or provides services as a director or otherwise to, a subsidiary or divisional business of such an entity, such subsidiary or divisional business shall be deemed a “Competitor” if it generates more than 10% of its revenues from battery products and services similar to those provided by the Company. The provisions provided in
5
Section 10 shall be separate and severable, enforceable independently of each other, and independent of any other provision of this Agreement.
The provisions contained in Section 10 are considered reasonable by the Employee and the Company. In the event that any such provisions should be found to be void under applicable laws but would be valid if some part thereof was deleted or the period or area of application reduced, such provisions shall apply with such modification as may be necessary to make them valid and effective.
This Section 10 shall survive the termination of this Agreement for any reason. In the event the Employee breaches this Section 10, the Company shall have right to seek remedies permissible under applicable law.
| 11 | ENTIRE AGREEMENT |
This Agreement constitutes the entire agreement and understanding between the Employee and the Company regarding the terms of the Employment and supersedes all prior or contemporaneous oral or written agreements concerning such subject matter. The Employee acknowledges that he or she has not entered into this Agreement in reliance upon any representation, warranty or undertaking which is not set forth in this Agreement. Any amendment to this Agreement must be in writing and signed by the Employee and the Company.
| 12 | GOVERNING LAW; CONSENT TO JURISDICTION |
This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The parties hereto irrevocably submit to the non-exclusive jurisdiction of the U.S. federal courts or New York state courts, each located in The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement. To the fullest extent they may effectively do so under applicable law, the parties hereto irrevocably waive and agree not to assert, by way of motion, as a defense or otherwise, any claim that they are not subject to the jurisdiction of any such New York court, any objection that they may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such New York court and any claim that any such suit, action or proceeding brought in any such New York court has been brought in an inconvenient forum.
(SIGNATURE PAGE FOLLOWS)
6
IN WITNESS WHEREOF, this Agreement has been executed June 30, 2006.
| China Bak Battery Inc. | Employee | |||||||
| Signature: | Signature: | |||||||
| Name: | Name: | |||||||
| Title: | ||||||||
7
Schedule A
Cash Compensation
|
Amount |
Pay Period |
|||
|
Salary |
RMB ___________ annually | Monthly | ||
|
Bonus |
Discretionary based on performance | |||
Exhibit 10.6
Summary of Comprehensive Credit Facility Agreement between Shenzhen BAK Battery Co., Ltd. and Shuibei Branch, Shenzhen Commercial Bank (“Commercial Bank”) dated April 21, 2006.
| • | Contract number: Shen Shangyin (Shuibei) Shouxinzi (2006) A110020600006 |
| • | Maximum amount for credit facilities to be provided: RMB50 million; |
| • | Term: from April 21, 2006 to April 21, 2007; |
| • | Interest rate of loan shall be the base rate announced by the People’s Bank of China less 10%; |
| • | Adjustment of credit can be made by the Commercial Bank under the any of the following: |
| • | The Company suffers severe operational risk or its financial situation severely deteriorates; |
| • | The Guarantor’s payment ability is obviously weakened or value of pledged collaterals decreases obviously; |
| • | Occurrence of other instances which make the Commercial Bank think adjustment of credit facility is necessary; |
| • | Breach of contract penalty: adjustment of credit, cancellation of unused credit, imposition of punitive interest, demand prepayment of loan and other measures; |
| • | Special term: |
| • | Credit facilities under the Comprehensive Agreement can only be used for technical innovation, production equipments improvement and purchase of equipments and raw materials. |
Summary of the articles omitted
| • | Types of line of credit |
| • | The use of the line of credit |
| • | Repayment of the loan under the line of credit |
| • | Representation and warranty of the lender |
| • | Miscellaneous |
| • | Applicable law |
| • | Validity |
Exhibit 10.7
Guaranty Contract of Maximum Amount
No. Shen Shangyin (Shuibei) Shouxin Gebao Zi (2006) A110020600006
Guarantor: BAK International Limited
Address: Rm1201, Wing On Centre, 111 Connaught Road Central, Hong Kong
Creditor: Shuibei Branch, Shenzhen Commercial Bank
Address: 2028, Wenjin Bei Rd, Shenzhen
The Creditor and the Guarantor have reached the following agreement in accordance with the Guarantee Law of People’s Republic of China and other relevant laws and regulations:
Article I. Guaranty
| 1.1 | Shenzhen BAK Battery Co., Ltd. (hereinafter referred to as “Obligor”) and the Creditor have entered into the Comprehensive Credit Facilities Agreement (reference no.: Shen Shangyin (Shuibei) Shouxin Zi (2006) A11002060006, hereinafter referred to as “Master Agreement”). As requested by the Obligor, the Guarantor undertakes to provide guaranty for the indebtedness of the Obligor under the Master Agreement. The guaranty shall cover all of the loan principal, interest, penalty interest, breach of contract compensation, damages, undertaking fee and all the expenses such as litigation cost, lawyer’s fee, notification cost and public notice cost etc. which is incurred to the Creditor in realizing its creditor’s right. |
| 1.2 | The maximum loan principal shall be RMB 50 million. |
| 1.3 | The guaranty under this Contract shall be guaranty with joint and several liability. |
| 1.4 | The guaranty period is from the effective date of this Contract to two years after the expiry of the term of the Master Agreement and relevant agreement entered into under the Master Agreement. |
| 1.5 | The guaranty under this Contract is independent. In case that any third party provide guaranty to the Creditor, the Guarantor shall continue to assume the full obligation of guaranty for all indebtedness as stated in clause 1.1 of this Contract. |
| 1.6 | This Contract is irrevocable. This Contract shall remain valid in case of invalidity of the Master Agreement or relevant agreements entered into under the Master Agreement. This Contract shall not be influenced by any documentation or agreement entered into by the Obligor and any party, and shall not be influenced by the misuse of the credit facilities, insolvency, bankruptcy, loss of legal person status, amendment of articles of association, cease of business operation, acquisition, division and merger etc. of the Obligor, nor any change of the profession, position or financial capacity of the Guarantor. |
Article II. Undertakings and Representations of the Guarantor
| 2.1 | The Guarantor has read the Master Agreement carefully and accepts all clauses of the Master Agreement. The relevant agreements entered into by the Creditor and the Obligor under the Master Agreement do not need the confirmation of the Guarantor. |
| 2.2 | The Creditor is entitled to examine the Guarantor’s financial capacity during the term of this Contract and the Guarantor shall give necessary assistance. The Guarantor shall provide truthful, comprehensive and effective financial reports and other relevant materials and information to the Creditor. |
| 2.3 | The Guarantor shall notify the Creditor immediately upon the occurrence of the following events: |
| (1) | The Guarantor changes its capital structure or management system, which includes (without limitation) contractual management, lease, share structure transformation, joint venture, merger, acquisition, division, application for cease of business operation, application for dissolution, application for bankruptcy etc; |
| (2) | The Guarantor changes its articles of association, legal representative, reduce its registration capital, or change its financial directors; |
| (3) | The Guarantor sells, leases, transfers or in any other way, disposes most of or all of its assets; |
| (4) | The Guarantor provide guaranty for any other third party for the benefit of any other third party which may affect its performance of obligation of guaranty under this Contract; |
| (5) | The Guarantor is involved in major litigation, or its major assets are subject to such mandatory proceedings as property preservation. |
| (6) | Any other event of the Guarantor that may materially affect its financial status or its debt paying ability. |
| 2.4 | The Guarantor undertakes that the Guarantor shall continue to assume the obligation of guaranty in case of the amendment of the Master Agreement by the Creditor and the Obligor and such amendment does not need the consent of the Guarantor. Without prejudice to the above, the Guarantor shall assume the obligation of guaranty for the indebtedness under the Master Agreement before the amendment if such amendment increases the indebtedness of the Obligor and such amendment has not been approved by the Guarantor in writing. |
| 2.5 | The Guarantor undertakes: |
| (1) | has obtained all necessary authorization or approval to execute and perform this Contract; |
| (2) | the execution and performance of this Contract by the Guarantor does not violate its articles of corporation or the government regulations; |
| (3) | it is not involved in any adverse legal litigation; |
| (4) | all application materials submitted by the Guarantor to the Creditor are truthful, lawful, effective and with no serious errors or omissions. |
Article III. Performance of Guaranty
| 3.1 | In case of default by the Obligor upon the expiry of the term under the Master Agreement (or expiry date as declared by the Creditor), the Guarantor shall unconditionally pay the relevant amount to the Creditor after the Creditor has notified the Guarantor in writing to do so. Any statement signed by the authorized representative of the Creditor which can prove the default of the Obligor (unless otherwise proved to be obviously wrong) shall be deemed as the notification of the Creditor demanding the Guarantor to pay the relevant amount. |
| 3.2 | The Guarantor irrevocably authorizes the Creditor to transfer directly any defaulting amount of money from the bank account of the Guarantor to the account of Creditor. The Creditor shall notify the Guarantor in writing of such transfer and is entitled to demand the Guarantor to pay for the unsettled indebtedness. |
Article IV. Other Issues Agreed by Both Parties
N/A
Article V Miscellaneous
| 5.1 | Any dispute arising from this Contract shall be submitted to the People’s Court of the place of the Creditor and the laws of People’s Republic of China shall be the governing law. |
| 5.2 | This Contract shall come into effect once it is signed by the Guarantor and the legal representative/authorized representative of the Creditor and stamped with the company chop of the Guarantor. |
| 5.3 | This Contract has five originals, the Creditor shall retain two originals, the Obligor shall retain one original and the Guarantor shall retain one original. |
|
Guarantor (Company Chop): [Company chop of Bak International Limited] |
|
Legal Representative: /s/ |
|
Date: 21 April 2006 |
|
Venue: Shenzhen |
|
Creditor (Company Chop): [Company chop of Shuibei Branch, Shenzhen Commercial Bank] |
|
Legal Representative/Authorized Representative: /s/ |
|
Date: 21 April 2006 |
|
Venue: Shenzhen |
Exhibit 10.8
Individual Guaranty Contract of Maximum Amount
No. Shen Shangyin (Shuibei) Shouxin Gebao Zi (2006) A110020600006
| Creditor: Shuibei Branch, Shenzhen Commercial Bank |
| Address: 2028, Wenjin Bei Rd, Shenzhen |
| Guarantor: Li Xiangqian |
| I.D number: 620105196808081078 |
| Address: Dormitory Building, BAK Company, Kuichong Town, Longgang, Shenzhen |
| Post Code: 518119 Telephone: 0755-89770003 |
The Creditor and the Guarantor have reached the following agreement in accordance with the Guarantee Law of People’s Republic of China and other relevant laws and regulations:
Article I. Guaranty
| 1.7 | Shenzhen BAK Battery Co., Ltd. (hereinafter referred to as “Obligor”) and the Creditor have entered into the Comprehensive Credit Facilities Agreement (reference no.: Shen Shangyin (Shuibei) Shouxin Zi (2006) A11002060006, hereinafter referred to as “Master Agreement”). As requested by the Obligor, the Guarantor undertakes to provide guaranty for the indebtedness of the Obligor under the Master Agreement based upon all personal assets, interests and rights, current and future income etc. which are independently owned or jointly owned by the Guarantor. The guaranty shall cover all of the loan principal, interest, penalty interest, breach of contract compensation, damages, undertaking fee, advances paid by the Creditor and all the expenses such as litigation cost, lawyer’s fee, notification cost and public notice cost etc. which is incurred to the Creditor in realizing its creditor’s right. The maximum loan principal shall be RMB 50 million. |
| 1.8 | The guaranty under this Contract shall be guaranty with joint and several liability. |
| 1.9 | The guaranty period is from the effective date of this Contract to two years after the expiry of the term of the Master Agreement and relevant agreement entered into under the Master Agreement. |
| 1.10 | The guaranty under this Contract is independent. In case that any third party provide guaranty to the Creditor, the Guarantor shall continue to assume the full obligation of guaranty for all indebtedness as stated in clause 1.1 of this Contract. |
| 1.11 | This Contract is irrevocable. This Contract shall remain valid in case of invalidity of the Master Agreement or relevant agreements entered into under the Master Agreement. This Contract shall not be influenced by any documentation or agreement entered into by the Obligor and any party, and shall not be influenced by the misuse of the credit facilities, insolvency, bankruptcy, loss of legal person status, amendment of articles of association, cease of business operation, acquisition, division and merger etc. of the Obligor, nor any change of the profession, position or financial capacity of the Guarantor. |
Article II. Undertakings and Representations of the Guarantor
| 2.1 | The Guarantor has read the Master Agreement carefully and accepts all clauses of the Master Agreement. The relevant agreements entered into by the Creditor and the Obligor under the Master Agreement do not need the confirmation of the Guarantor. |
| 2.6 | The Creditor is entitled to examine the Guarantor’s financial capacity during the term of this Contract and the Guarantor shall give necessary assistance. |
| 2.7 | The Guarantor undertakes that the Guarantor shall continue to assume the obligation of guaranty in case of the amendment of the Master Agreement by the Creditor and the Obligor and such amendment does not need the consent of the Guarantor. Without prejudice to the above, the Guarantor shall assume the obligation of guaranty for the indebtedness under the Master Agreement before the amendment if such amendment increases the indebtedness of the Obligor and such amendment has not been approved by the Guarantor in writing. |
Article III. Performance of Guaranty
| 3.3 | In case of default by the Obligor upon the expiry of the term under the Master Agreement (or expiry date as declared by the Creditor), the Guarantor shall unconditionally pay the relevant amount to the Creditor after the Creditor has notified the Guarantor in writing to do so. Any statement signed by the authorized representative of the Creditor which can prove the default of the Obligor (unless otherwise proved to be obviously wrong) shall be deemed as the notification of the Creditor demanding the Guarantor to pay the relevant amount. |
| 3.4 | The Guarantor irrevocably authorizes the Creditor to transfer directly any defaulting amount of money from the bank account of the Guarantor to the account of Creditor. The Creditor shall notify the Guarantor in writing of such transfer and is entitled to demand the Guarantor to pay for the unsettled indebtedness. |
Article IV. Other Issues Agreed by Both Parties
N/A
Article V Miscellaneous
| 5.4 | This Contract is the subsidiary agreement and an integral part to the Master Agreement (reference no.: Shen Shangyin (Shuibei) Shouxin Zi (2006) A11002060006). |
| 5.5 | Any dispute arising from this Contract shall be submitted to the People’s Court of the place of the Creditor and the laws of People’s Republic of China shall be the governing law. |
| 5.6 | This Contract shall come into effect once it is signed by the Guarantor and the legal representative/authorized representative of the Creditor and stamped with the company chop of the Guarantor. |
| 5.7 | This Contract has four originals, the Creditor shall retain two originals, the Obligor shall retain one original and the Guarantor shall retain one original. |
|
Guarantor (Signature): /s/ |
|
Date: 21 April 2006 |
|
Venue: Shenzhen |
|
Creditor (Company Chop): [Company chop of Shubei Branch, Shenzhen Commercial Bank] |
|
Legal Representative/Authorized Representative: /s/ |
|
Date: 21 April 2006 |
|
Venue: Shenzhen |
Exhibit 10.9
Pledge Contract of Maximum Amount
No. Shen Shangyin (Shuibei) Shouxin Zhi Zi (2006) A110020600008
Pledger: Shenzhen BAK Battery Co., Ltd
Address: BAK Industry Zone, Kuichong, Longgang, Shenzhen
Creditor: Shuibei Branch, Shenzhen Commercial Bank
Address: No. 2028, Wenjin Bei Rd, Shenzhen
The Creditor and the Pledger have reached the following agreement in accordance with the Guarantee Law of People’s Republic of China and other relevant laws and regulations:
Article I. Pledge
| 1.1 | Shenzhen BAK Battery Co., Ltd. and Shuibei Division, Shenzhen Commercial Bank have entered into the Comprehensive Credit Facilities Agreement (reference no: Shen Shangyin (Shuibei) Shouxin Zi (2006) A110020600008, hereinafter referred to as “Master Agreement”). As requested by the Creditor, the Pledger undertakes to provide certificate of fixed deposit as pledge (hereinafter referred to as “Pledged Collateral”) for the indebtedness of the Pledger under the Master Agreement. |
| The details of the Pledged Collateral are described in the attached “Statement of Pledged Collateral” and relevant certificate, which are integral parts to this Contract. |
| The co-owner (if any) agrees to provide the aforesaid guaranty for the indebtedness of the Pledger under the Master Agreement. |
| 1.2 | The pledge shall cover all of the loan principal, interest, penalty interest, compound interest, breach of contract compensation, damages, undertaking fee and all the expenses such as litigation/arbitration cost, lawyer’s fee, travel cost etc. which is incurred to the Creditor in realizing its Creditor’s right. |
| The maximum loan principal shall be RMB 50 million yuan. The interest, compound interest, penalty interest and other expenses shall be determined in accordance with actual circumstances. |
| 1.3 | The value of the Pledged Collateral shall be determined when realizing the pledge. Party A shall bear the obligation of guaranty for the indebtedness under the Master Agreement within the limit of the value of the Pledged Collateral. In case of discrepancy between Clause 1.2 and this Clause 1.3, this Clause 1.3 shall prevail. |
| 1.4 | The guaranty of pledge provided by the Pledger is independent from other forms of guaranty. It shall not be replaced by other forms of guaranty either. |
| 1.5 | This Contract is irrevocable. This Contract shall not be influenced by any documentation or agreement entered into by the Pledger and any party, and shall not be influenced by the misuse of the credit facilities, insolvency, bankruptcy, loss of legal person status, amendment of articles of association, cease of business operation, acquisition, division and merger etc. of the Pledger, nor any change of the profession, position or financial capacity of the Pledger. |
| 1.6 | This Contract shall remain valid in case of invalidity of the Master Agreement or relevant agreements entered into under the Master Agreement. |
| 1.7 |
The Pledger shall deliver the Pledged Collateral, accessory of the Pledged Collateral and relevant original certificates of the Pledged Collateral to the |
Creditor. Once the indebtedness under the Master Agreement has been settled, the guaranty of pledge shall be automatically terminated and the Creditor shall return the aforesaid Pledged Collateral, accessory of the Pledged Collateral and relevant original certificates of the Pledged Collateral to the Pledger.
Article II. Delivery of the Pledged Collateral
| 2.1 | The Pledger should deliver the accessory of the Pledged Collateral and relevant original certificates of the Pledged Collateral to the Creditor before May 8, 2006. |
| The delivery of the Pledged Collateral shall be recorded and confirmed by the statement signed by both Parties. |
| 2.2 | In case that registration of pledge or endorsement of bill is required, the Pledger shall complete all the required legal formalities and provide the original documentations to the Creditor. |
| 2.3 | The Creditor is entitled to demand the Pledger to conduct notary with enforcement power for this Contract. |
Article III. Insurance
| 3.1 | The Creditor is entitled to demand the Pledger to underwrite insurance for the Pledged Collateral and the first beneficiary under such insurance shall be the Creditor. The insured amount shall be (remaining balance of the bank loan principal + estimated interest within the credit facility term) X 110% and the insurance period shall be credit facility term + 5 months. |
| 3.2 | The Pledger shall pay the insurance fee timely and shall perform all the obligations under the insurance agreement. |
| 3.3 | The Pledger shall renew the insurance before all indebtedness under the Master Agreement has been settled. In case of Pledger’s failure to renew the insurance in time, the Creditor is entitled to renew the insurance at the cost of the Pledger. |
| 3.4 | In case of loss or damage of the Pledged Collateral, the insurance compensation shall first be paid to the Creditor for the settlement of the indebtedness under the Master Agreement. |
| 3.5 | The original insurance policy shall be kept by the Creditor before all the indebtedness under the Master Agreement has been settled. |
Article IV. Undertakings and Representations of the Pledger
| 4.1 | The Pledger has read the Master Agreement carefully and accepts all clauses of the Master Agreement. The Pledger agrees to sign this Contract of its own will. |
| 4.2 | The execution and alteration of the relevant agreements entered into by the Creditor and the Pledger under the Master Agreement do not need the confirmation of the Pledger unless such agreements are in conflict with the Master Agreement. The Pledger undertakes that the Pledger shall continue to assume the obligation of pledge in case of the amendment of the Master Agreement by the Creditor and the Pledger and such amendment does not need the consent of the Pledger. Without prejudice to the above, the Pledger shall assume the obligation of pledge for the indebtedness under the Master Agreement before the amendment if such amendment increases the indebtedness of the Pledger and such amendment has not been approved by the Pledger in writing. |
| 4.3 | The Pledger undertakes that all the documentation, materials and information provided by the Pledger to the Creditor are authentic, accurate, complete and valid. |
| 4.4 | The Pledged Collateral is owned by the Pledger and there is no legal dispute over the ownership of the Pledged Collateral. The Pledged Collateral has not been pledged to any other party. The Pledger has obtained all necessary authorization or approval to execute and perform this Contract. |
| 4.5 | The Pledger shall not transfer, donate, allow any other party to use or create any other security right over the Pledged Collateral or dispose of the Pledged Collateral in any other form without written consent by the Creditor. |
| 4.6 | The Pledger agrees that the Creditor may designate a third party to keep the Pledged Collateral as deemed necessary by the Creditor. |
Article V. Performance of Pledge
| 5.1 | The Creditor is entitled to execute the pledge rights under one of the following circumstances: |
| (1) | the Pledger fails to pay the principal/interest or any cost under the Master Agreement upon expiry of such indebtedness (or upon expiry date as declared by the Creditor); |
| (2) | The Pledger transfers, donates, allows any other party to use or creates any other security right over the Pledged Collateral or disposes of the Pledged Collateral in any other form without written consent by the Creditor; |
| (3) | The Pledger is dissolved, terminated or declared bankruptcy; |
| (4) | The Pledged Collateral is damaged or devaluates to the detriment of the Creditor without any fault of the Creditor and the Pledger fails to provide any other security as required by the Creditor; |
| (5) | Any other circumstances as determined by laws. |
| 5.2 | Under the abovementioned circumstances, the Creditor is entitled to sell the Pledged Collateral by auction or by any other ways or directly offset the indebtedness by agreements with the Pledger. |
| 5.3 | The Pledger irrevocably authorizes the Creditor to have the interests of pledge (including but not limited to interests, dividends, charge for use) after the second month of Pledger violates the Master Agreement and the Creditor shall assistant the Pledger to execute the above rights unconditionally. |
Article VI Breach of Contract
| 6.1 | In case that this Contract or the pledge under this Contract become invalid, terminated due to failure of the Pledger to perform any obligations under this Contract, and the Pledger fails to provide any other form of guaranty as required by the Creditor, then the Pledger shall bear the following liabilities for breach of contract: |
| The Pledger shall pay all the indebtedness under the Master Agreement and pay a breach of compensation equivalent to 10% of the remaining balance of the principal under the Master Agreement. |
| 6.2 | In case that the value of the Pledged Collateral is decreased due to failure of the Pledger to perform any obligations under this Contract, and the Pledger fails to recover the value of the Pledged Collateral or provide any other form of guaranty as required by the Creditor, then the Pledger shall bear the following liabilities for breach of contract: |
| The Pledger shall pay all the indebtedness under the Master Agreement and pay a breach of compensation equivalent to 5% of the remaining balance of the principal under the Master Agreement. |
Article VII. Other Issues Agreed by Both Parties
N/A
Article VIII. Miscellaneous
| 8.1 | The Pledger shall bear all the cost for the assessment, registration, notary, maintenance, storage, repair, insurance, transportation for the Pledged Collateral. |
| 8.2 | Any dispute arising from this Contract shall be submitted to the People’s Court of the place of the Creditor and the laws of People’s Republic of China shall be the governing law. |
| 8.3 | This Contract shall come into effect once it is signed by the Pledger and the legal representative/authorized representative of the Creditor and stamped with the company stamp of the Pledger and the pledge is delivered to the Creditor by the Pledger. If the pledge is required to be registered or the relevant bill is required to be endorsed, this Contract shall come into effect once the pledge has been registered or bill endorsement has been accomplished. The Contract shall be terminated once all indebtedness, its interests and other expenses have been fully paid off. |
| 8.4 | This Contract has five originals, the Creditor shall retain two originals, the Pledger shall retain one original, the Obligator shall retain one original and the registered bureau shall retain one original. |
|
Pledger (Stamp): [Company chop of Shenzhen BAK Battery Co., Ltd.] |
|
Legal Representative/Authorized Representative (Signature): /s/ |
|
Date: 8 May 2006 |
|
Venue: Shenzhen |
|
Creditor (Stamp): [Company chop of Shubei Branch, Shenzhen Commercial Bank] |
|
Legal Representative/Authorized Representative (Signature): /s/ |
|
Date: 8 May 2006 |
|
Venue: Shenzhen |
Appendix: Statement of Pledged Collateral
No. Shen Shangyin (Shuibei) Shouxin Zhi Zi (2006) A110020600008
May 8, 2006
Name : Certificate of Fixed Deposit
No. of Certificate : XX00004184
Quantity : 1
Unit : RMB Yuan
Original Value : RMB 50,000,000 yuan
Assessed Gross Valuation : RMB 50,000,000 yuan
Delivered by : [company chop of Shenzhen BAK Battery Co., Ltd.]
Date:
Received by [company chop of Shuibei Branch, Shenzhen Commercial Bank]
Date:
Exhibit 10.10
Comprehensive Credit Facilities Agreement
Parties
| • | Longgang Branch, Shenzhen Development Bank |
| • | Shenzhen BAK Battery Co., Ltd. |
Summary of the main articles
| • | Contract number: is Shenfa Longgang zongzi NO.20060329001. |
| • | Contract term: from April 29, 2006 to April 29, 2007, and the amount of credit to be extended by Development Bank is RMB 150 million. |
| • | Remedies in the event of breach of contract include adjustment of the credit amount, suspension of credit, imposition of punitive interest and overdue interest, an increase of guarantee deposit and the call back of loan principal and interest before maturity. |
| • | Special terms: |
| • | The maximum amount for credit facilities will be extended to RMB150 yuan after the two new production lines are pledged as collateral for this Comprehensive Agreement; |
| • | Credit facilities under Comprehensive Agreement can only be used for making up working capital; |
| • | In case the credit of the Company is rated as bad by other banks or the Company is involved in any material adverse litigation, Development Bank is entitled to declare the credit facilities granted to the Company become mature in advance to its original expiry date; |
| • | The Company undertakes that after getting the land use right of the BAK Industrial Park, the Company will pledge the construction under BAK Industrial Park Phrase I in a proportion of the credit facilities under the Comprehensive Agreement to Development Bank. And the Company will deposit 50% of its sales amount incurred during the term of the Comprehensive Agreement. The deposits will be first used for repayment of the credit facilities, or Development Bank is entitled to declare the credit facilities granted to the Company become mature in advance to its original expiry date; |
| • | If the asset liability ratio of the company exceeds 70%, the current asset/current liability of the Company less than 0.8, the sales revenue or net asset of the Company declines by 10% when compared with the same period of the previous year, Development Bank is entitled to deem the credit facilities matured before expiration of their term. |
| • | In case that the value of the collateral determined at the lower of its market price or factory-gate price falls below 90% of the original value, the Company shall make up for the discrepancy within 3 working days. If the Company fails to perform the above obligation within the said period, the Development Bank is entitled to declare the credit facilities granted to the Company become mature in advance to its original expiry date; |
| • |
The Company shall redeem the collateral with cash within three months after the expiration of the Comprehensive Agreement, if not doing so, or in case |
|
the market price of the collateral reduces materially that may have a severe negative impact upon the Development Bank’s ability to collect its credit in due time and due amount, the Development Bank is entitle to cease the grant of credit facilities. |
Summary of the articles omitted:
| • | Mode of the comprehensive credit |
| • | The use of the comprehensive credit |
| • | The guarantee of the comprehensive credit |
| • | Expense and fees for the comprehensive credit |
| • | Declaration and warranty of the lender |
| • | Special covenant in respect of group client credit and affiliated transaction |
| • | Applicable law and dispute settlement |
| • | Validity |
Exhibit 10.11
Guaranty Contract of Maximum Amount
Shenfa Longgang E’bao Zi 20060329001-2
|
Party A: Longgang Branch, Shenzhen Development Bank (Creditor) |
||
|
Address: A1, Xinyazhou Park, Central Town, Longgang District, Shenzhen |
||
|
Telephone: 28952003 |
Fax: 28952004 | |
|
Person in charge: Yu Bo |
Position: President of Longgang Branch | |
| Party B: Li Xiangqian (Guarantor) | ||
|
Address: 21D, Yijin’ge, Tian’an Golf Park, Futian District, Shenzhen |
||
|
Telephone: 83841596 |
Fax: 89770026 | |
In order to secure the indebtedness of Shenzhen BAK Battery Co., Ltd. (hereinafter referred to as Obligor) under the Comprehensive Credit Facilities Agreement (reference no. Shenfa Longgang Zongzi 20060329001, hereinafter referred to as Master Agreement) entered into by Creditor and Obligor on 5 April 2006, the Guarantor agrees to provide guaranty to the Creditor as the guarantor of the Obligor. Through friendly negotiation, both parties agree to enter into this Contract:
I. Scope of Guaranty
The scope of guaranty covers all loan principal, interest, penalty interest and all the expenses incurred to the Creditor in realizing its creditor’s right. The maximum loan principal shall not exceed RMB 150 Million yuan.
II. Guaranty Period
The guaranty period under this Contract is from the date of effectiveness of this Contract to 2 years after the expiry of each credit facilities under the Master
Agreement. In case that the Creditor lawfully transfer its creditor’s right to a third party during the guaranty period, the Guarantor shall continue to perform its obligation of guaranty as originally agreed.
III. Obligation of Guaranty
The Guarantor shall bear the joint and several liability to repay all indebtedness of the Obligor within the scope of the guaranty. In case of default by the Obligor, the Creditor is entitled to demand the Obligor to repay or demand the Guaranty. The Guarantor irrevocably authorizes the Creditor to transfer directly the relevant amount of money from the account of Guarantor to the account of Creditor in case of default of the Obligor upon mature of its indebtedness.
IV. The guaranty of pledge provided by the Guarantor is independent from and shall not be replaced by any other guaranty provided by other guarantors.
V. The guaranty under this Contract is irrevocable and shall not be affected by any documentations or agreements entered into by the Guarantor and other parties, nor be affected by the insolvency, bankruptcy, cancellation of corporate status, or amendment of articles of association of the Obligor.
VI. In case that part or whole of the Master Agreement or agreement entered into under the Master Agreement become invalid due to any reason, the Obligor shall nevertheless perform its obligation of repayment and the Guarantor shall perform its obligation of guaranty for the Obligor’s obligation of repayment in accordance with this Contract.
VII. Undertakings and Representations of the Guarantor
The Guarantor is legally qualified to execute and perform this Contract, and has obtained all necessary authorization by the board of directors or other competent authorities (as the case may be).
The Guarantor undertakes that all application materials submitted by it to the Creditor are truthful, lawful, effective and with no serious errors or omissions.
The Guarantor also undertakes that all application materials submitted by the Obligor to the Creditor are truthful, lawful, effective and with no serious errors or omissions.
The Guarantor shall notify the Creditor in writing within 10 days after it has changed its address, contact details, liaison telephone, business scope or legal representative etc.
The Guarantor has fully understood all provisions of this Contract and both parties execute this Contract of their free will.
VIII. Amendment and Termination of Contract
| 1. | In case that any party intends to amend or terminate this Contract, it shall notify the other party in writing and a written agreement shall be reached by both parties. This Contract shall remain valid until the written agreement to amend or terminate this Contract has been reached. |
| 2. | Any waiver or tolerance of the Creditor shall not be deemed as amendment or termination of this Contract except that a written agreement has been reached in accordance with the above provision. |
| 3. | In case that the Master Agreement has been amended, the Creditor shall seek the approval of the Guarantor immediately. The Guarantor shall continue to bear the responsibility of guaranty for the indebtedness of the Obligor under the Master Agreement (before and after the amendment) only after it has approved such amendment. However, the Creditor does not need to seek the approval of the Guarantor for amendment of the Master Agreement which decreases the indebtedness of the Obligor. |
IX. Applicable Law and Dispute Settlement
| 1. | The execution and performance of this Contract shall be governed by the laws of People’s Republic of China; |
| 2. | The method of dispute settlement for this Contract shall be the same with that of the Master Agreement. |
X. This Contract shall be signed and stamped by both parties (only signature is needed for party of natural person). This Contract shall become effective upon the delivery of the pledged collaterals to the Creditor. If the pledge shall be registered or recorded in accordance with article 78 or 79 of the Guarantee Law of People’s Republic of China, this Contract shall become effective upon the registration or record.
XI. Other Issues
N/A
XII. This Contract has four originals, the Creditor shall retain two originals, the Obligor shall retain one original and the Guarantor shall retain one original.
|
Party A (Company Chop): [company chop of Longgang Branch, Shenzhen Development Bank] |
|
Authorized Representative: /s/ |
|
Date: 5 April 2006 |
|
Party B: /s/ |
|
Date: 5 April 2006 |
Exhibit 10.12
Pledge Contract of Maximum Amount
No. Shenfa Longgang E’zhi Zi 20060329001-1
| Party A: Longgang Branch, Shenzhen Development Bank (Creditor) | ||
|
Address: A1, Xinyazhou Park, Central Town, Longgang District, Shenzhen |
||
| Telephone: 28952003 | Fax: 28952004 | |
| Person in charge: Yu Bo | Position: President of Longgang Branch | |
| Party B: Shenzhen BAK Battery Co., Ltd. (Pledger) | ||
| Address: BAK Industrial Zone, Kuichong, Longgang District, Shenzhen | ||
| Telephone: 89770025 | Fax: 89770026 | |
| Legal Representative: Li Xiangqian | Position: Chairman of the Board | |
In order to secure the indebtedness of Shenzhen BAK Battery Co., Ltd. (hereinafter referred to as Obligor) under the Comprehensive Credit Facilities Agreement (reference no. Shenfa Longgang Zongzi 20060329001, hereinafter referred to as Master Agreement) entered into by Creditor and Obligor on 5 April 2006, the Pledger agrees to provide its assets to the Creditor as the pledge. Through friendly negotiation, both parties agree to enter into this Contract:
I. Scope of Guaranty
The scope of guaranty covers all loan principal, interest, penalty interest and all the expenses incurred to the Creditor in realizing its creditor’s right. The maximum loan principal shall not exceed RMB 150 Million yuan.
II. Pledged Collaterals
The detail information of the pledged collaterals is described in the Statement of Pledged Collaterals attached to this Contract.
After the Pledger has pledged the abovementioned collaterals, the Pledger shall not transfer such pledged collaterals or allow any third party to use such pledged collaterals without the approval of the Creditor. In case that the Creditor and Pledger agree to transfer the pledged collaterals, the payment received by the Pledger from such transaction shall be used to settle the indebtedness owed to the Creditor in advance to expiry or be deposited in a third party designated by both parties.
III. The Creditor is entitled to dispose of the pledged collaterals by means of settlement of the indebtedness in kind, auction or sale and use the payment derived from such disposal to repay the indebtedness owed to it if any of the following occurs:
| (1) | The Obligor fails to pay its debts upon maturity of such debt (as originally agreed or put forward); |
| (2) | The legal successor of the Pledger or the legatee of the Pledger refuse to perform their obligations; |
| (3) | The Obligor is declared dissolved or bankrupt; |
| (4) | The value of the pledged collaterals is likely to be obviously decreased so that the interest of the Creditor is endangered and the Pledger fails to provide additional collateral as requested by the Creditor; |
| (5) | Other events which may have negative impact upon the realization of the Creditor’s rights under the Master Agreement. |
IV. Undertakings and Representations of the Pledger
The Pledger is legally qualified to execute and perform this Contract, and has obtained all necessary authorization by the board of directors or other competent authorities (as the case may be).
The Pledger undertakes that all application materials submitted by it to the Creditor are truthful, lawful, effective and with no serious errors or omissions. The Pledger has the lawful and undisputed right to pledge the pledged collaterals under this Contract. The execution and performance of this Contract by the Pledger do not violate any other contracts entered into or being performed by the Pledger.
The Pledger also undertakes that all application materials submitted by the Obligor to the Creditor are truthful, lawful, effective and with no serious errors or omissions.
The Pledger shall notify the Creditor in writing within 10 days after it has changed its address, contact details, liaison telephone, business scope or legal representative etc.
The Pledger has fully understood all provisions of this Contract and both parties execute this Contract of their free will.
V. The guaranty of pledge provided by the Pledger is independent from and shall not be replaced by any other guaranty provided by other guarantors.
VI. In case that part or whole of the Master Agreement or agreement entered into under the Master Agreement become invalid due to any reason, the Obligor shall nevertheless perform its obligation of repayment and the Pledger shall perform its obligation of guaranty for the Obligor’s obligation of repayment in accordance with this Contract.
VII. The expenses incurred during the course of execution and performance of this Contract by both parties such as notarial or testimonial fee, registration fee, auction or sell cost etc. shall all be born by the Pledger.
VIII. Amendment and Termination of Contract
| 1. | In case that any party intends to amend or terminate this Contract, it shall notify the other party in writing and a written agreement shall be reached by both parties. This Contract shall remain valid until the written agreement to amend or terminate this Contract has been reached. |
| 2. | Any waiver or tolerance of the Creditor shall not be deemed as amendment or termination of this Contract except that a written agreement has been reached in accordance with the above provision. |
| 3. | In case that the Master Agreement has been amended, the Creditor shall seek the approval of the Pledger immediately. The Pledger shall continue to bear the responsibility of guaranty for the indebtedness of the Obligor under the Master Agreement (before and after the amendment) only after it has approved such amendment. However, the Creditor does not need to seek the approval of the Pledger for amendment of the Master Agreement which decreases the indebtedness of the Obligor. |
IX. Applicable Law and Dispute Settlement
| 1. | The execution and performance of this Contract shall be governed by the laws of People’s Republic of China; |
| 2. | The method of dispute settlement for this Contract shall be the same with that of the Master Agreement. |
X. This Contract shall be signed and stamped by both parties (only signature is needed for party of natural person). This Contract shall become effective upon the delivery of the pledged collaterals to the Creditor. If the pledge shall be registered or recorded in accordance with article 78 or 79 of the Guarantee Law of People’s Republic of China, this Contract shall become effective upon the registration or record.
XI. Other Issues
| 1. | The collateral list and the storage certificate (out and in) shall also be attached to this Contract if the Pledger replaces any pledged collateral during the term of the credit facilities. The replaced collateral shall automatically become the pledged collateral under this Contract without further agreement between the parties. |
| 2. |
A rent agreement will be signed by and between the Pledger and a third party. |
Under the rent agreement, the third party will rent the Pledger’s warehouse to lay aside the pledged collateral. The warehouse should be independent from any other warehouse of the company.
| 3. | The value of the pledged collaterals determined at the factory-gate price of the same product shall be no less than RMB 80 million, and related quality grade certificate and price list shall also be attached. 60% of the pledged battery cells’ quality should be over A3; |
| 4. | In case that the value of the collateral determined at the lower of its market price or factory-gate price falls below 90% of the original value, the Pledger shall make up for the discrepancy within 3 working days. If the Pledger fails to perform the above obligation within the said period, the Creditor is entitled to declare the credit facilities granted to the Obligor become mature in advance to its original expiry date; |
| 5. | The Pledger shall redeem the collateral with cash within three months after the expiration of the Master agreement, if not doing so, or in case the market price of the collateral reduces materially that may have a severe negative impact upon the Creditor’s ability to collect its credit in due time and due amount., the Creditor is entitle to cease the grant of credit facilities. |
XII.
This Contract has four originals, the Creditor shall retain two originals, the Obligor shall retain one original and the Pledger shall retain one
Statement of Pledged Collaterals
| Name, Quality and Quantity of the Pledged Collaterals | Battery cells worthy of no less than RMB 82 million yuan | |
| Title and Title Certificate | N/A | |
| Place of the Pledged Collaterals | BAK Industrial Park, Kuichong Street, Longgang District, Shenzhen | |
| Value of the Pledged Collaterals | RMB 80 million yuan | |
| Ownership of the Pledged Collaterals | 100% owned by Pledger | |
| Other issues | N/A | |
| Mark | N/A | |
The Pledger undertakes that the above statement is truthful. The Pledger shall bear the joint and several liability for the indebtedness of the Obligor under the Master Agreement if the pledge is invalid or the value of the pledged collaterals is not sufficient to cover the indebtedness due to false statement by the Pledger.
| Party A (Company Chop): [company chop of Longgang Branch, Shenzhen Development Bank] |
| Authorized Representative: /s/ |
| Date: 5 April 2006 |
| Party B (Company Chop): [company chop of Shenzhen BAK Battery Co., Ltd.] |
| Authorized Representative: /s/ : |
| Date: 5 April 2006 |
Exhibit 10.13
Pledge Contract of Maximum Amount
No. Shenfa Longgang E’zhi Zi 20060329001-2
|
Party A: Longgang Branch, Shenzhen Development Bank (Creditor) |
||
|
Address: A1, Xinyazhou Park, Central Town, Longgang District, Shenzhen |
||
|
Telephone: 28952003 |
Fax: 28952004 | |
|
Person in charge: Yu Bo |
Position: President of Longgang Branch | |
|
Party B: Li Xiangqian (Pledger) |
||
|
Address: 21D, Yijin’ge, Tian’an Golf Park, Futian District, Shenzhen |
||
|
Telephone: 83841596 |
Fax: 89770026 | |
In order to secure the indebtedness of Shenzhen BAK Battery Co., Ltd. (hereinafter referred to as Obligor) under the Comprehensive Credit Facilities Agreement (reference no. Shenfa Longgang Zongzi 20060329001, hereinafter referred to as Master Agreement) entered into by Creditor and Obligor on 5 April 2006, the Pledger agrees to provide its assets to the Creditor as the pledge. Through friendly negotiation, both parties agree to enter into this Contract:
I. Scope of Guaranty
The scope of guaranty covers all loan principal, interest, penalty interest and all the expenses incurred to the Creditor in realizing its creditor’s right. The maximum loan principal shall not exceed RMB 150 Million yuan.
II. Pledged Collaterals
The detail information of the pledged collaterals is described in the Statement of Pledged Collaterals attached to this Contract.
After the Pledger has pledged the abovementioned collaterals, the Pledger shall not
transfer such pledged collaterals or allow any third party to use such pledged collaterals without the approval of the Creditor. In case that the Creditor and Pledger agree to transfer the pledged collaterals, the payment received by the Pledger from such transaction shall be used to settle the indebtedness owed to the Creditor in advance to expiry or be deposited in a third party designated by both parties.
III. The Creditor is entitled to dispose of the pledged collaterals by means of settlement of the indebtedness in kind, auction or sale and use the payment derived from such disposal to repay the indebtedness owed to it if any of the following occurs:
| (1) | The Obligor fails to pay its debts upon maturity of such debt (as originally agreed or put forward); |
| (2) | The legal successor of the Pledger or the legatee of the Pledger refuse to perform their obligations; |
| (3) | The Obligor is declared dissolved or bankrupt; |
| (4) | The value of the pledged collaterals is likely to be obviously decreased so that the interest of the Creditor is endangered and the Pledger fails to provide additional collateral as requested by the Creditor; |
| (5) | Other events which may have negative impact upon the realization of the Creditor’s rights under the Master Agreement. |
IV. Undertakings and Representations of the Pledger
The Pledger is legally qualified to execute and perform this Contract, and has obtained all necessary authorization by the board of directors or other competent authorities (as the case may be).
The Pledger undertakes that all application materials submitted by it to the Creditor are truthful, lawful, effective and with no serious errors or omissions. The Pledger has the lawful and undisputed right to pledge the pledged collaterals under this Contract. The execution and performance of this Contract by the Pledger do not violate any other contracts entered into or being performed by the Pledger.
The Pledger also undertakes that all application materials submitted by the Obligor to the Creditor are truthful, lawful, effective and with no serious errors or omissions.
The Pledger shall notify the Creditor in writing within 10 days after it has changed its address, contact details, liaison telephone, business scope or legal representative etc.
The Pledger has fully understood all provisions of this Contract and both parties execute this Contract of their free will.
V. The guaranty of pledge provided by the Pledger is independent from and shall not be replaced by any other guaranty provided by other guarantors.
VI. In case that part or whole of the Master Agreement or agreement entered into under the Master Agreement become invalid due to any reason, the Obligor shall nevertheless perform its obligation of repayment and the Pledger shall perform its obligation of guaranty for the Obligor’s obligation of repayment in accordance with this Contract.
VII. The expenses incurred during the course of execution and performance of this Contract by both parties such as notarial or testimonial fee, registration fee, auction or sell cost etc. shall all be born by the Pledger.
VIII. Amendment and Termination of Contract
| 2. | In case that any party intends to amend or terminate this Contract, it shall notify the other party in writing and a written agreement shall be reached by both parties. This Contract shall remain valid until the written agreement to amend or terminate this Contract has been reached. |
| 3. | Any waiver or tolerance of the Creditor shall not be deemed as amendment or termination of this Contract except that a written agreement has been reached in accordance with the above provision. |
| 4. | In case that the Master Agreement has been amended, the Creditor shall seek the approval of the Pledger immediately. The Pledger shall continue to bear the responsibility of guaranty for the indebtedness of the Obligor under the Master Agreement (before and after the amendment) only after it has approved such amendment. However, the Creditor does not need to seek the approval of the Pledger for amendment of the Master Agreement which decreases the indebtedness of the Obligor. |
IX. Applicable Law and Dispute Settlement
| 1. | The execution and performance of this Contract shall be governed by the laws of People’s Republic of China; |
| 2. | The method of dispute settlement for this Contract shall be the same with that of the Master Agreement. |
X. This Contract shall be signed and stamped by both parties (only signature is needed for party of natural person). This Contract shall become effective upon the delivery of the pledged collaterals to the Creditor. If the pledge shall be registered or recorded in accordance with article 78 or 79 of the Guarantee Law of People’s Republic of China, this Contract shall become effective upon the registration or record.
XI. Other Issues
XII. This Contract has four originals, the Creditor shall retain two originals, the Obligor shall retain one original and the Guarantor shall retain one original.
Statement of Pledged Collaterals
|
Name, Quality and Quantity of the Pledged Collaterals |
1911093 equity shares of China BAK Battery Inc., owned by Li Xiangqian | |
|
Title and Title Certificate |
N/A |
|
|
Place of the Pledged Collaterals |
OTCBB, United States |
|
|
Original Value of the Pledged Collaterals |
¥37,837,984.14 |
|
|
Ownership of the Pledged Collaterals |
100% owned by Pledger |
|
|
Other issues |
N/A |
|
|
Mark |
N/A |
|
The Pledger undertakes that the above statement is truthful. The Pledger shall bear the joint and several liability for the indebtedness of the Obligor under the Master Agreement if the pledge is invalid or the value of the pledged collaterals is not sufficient to cover the indebtedness due to false statement by the Pledger.
|
Party A (Company Chop): [company chop of Longgang Branch, Shenzhen Development Bank] |
|
Authorized Representative: /s/ |
|
Date: 5 April 2006 |
|
Party B: /s/ |
|
Date: 5 April 2006 |
Exhibit 10.14
Mortgage Contract of Maximum Amount
Mortgage Contract of Maximum Amount signed by and between Shenzhen BAK Battery Co., Ltd (“the Company”) and Shenzhen Development Bank (“Development Bank”) dated as of April 5, 2006.
Main contents:
| • | Contract number: Shenfa Longgang edi zi NO.20060329001. |
| • | As guarantor, the Company has pledged all its machineries and equipments to Development Bank to secure the indebtedness of the Company under the Comprehensive Credit Facilities Agreement (reference no.: Shenfa Longgang Zongzi 20060329001, hereinafter referred to as “Master Agreement”) which include the loan principal, interest, penalty interest, expenses for the Lender to realize its creditor’s rights, and maximum secured amount for the loan principal is RMB150 million. Purchase price of such machineries and equipments is RMB 97.16million while its current value is RMB79.46 million. |
| • | During the term of Mortgage Contract , the pledged machineries and equipments shall be kept and maintained by the Company; If value of such pledged machineries and equipments is reduced, Development Bank is entitled to request the Company to restore the pledged value or provide additional collateral; |
| • | Title certificates of the pledged machineries and equipments shall be kept by Development Bank; |
| • | Without Development Bank’s consent, the Company is not entitled to transfer registered pledge collaterals, but if transfer consideration is less than the pledge value, Development Bank is entitled to request the Company to provide additional collateral for the difference; otherwise the Company should not transfer the pledged collaterals. |
| • | Proceeds for transfer of pledged collaterals shall be used in priority for advanced repayment of the debts secured or be handed over to the escrow control of a third party agreed by Development Bank. |
| • | The Company should purchase insurance for the pledged collateral during the term of Mortgage Contract; (Insurance has been purchased as required) |
| • | Collaterals under this Contract should be registered with competent authorities; ( Registration has been done.) |
| • | Development Bank is entitled to dispose the pledge collaterals by sale at a discounted price or auction and use such proceeds to repay the loans made under Comprehensive Agreement if any of the following occurs: |
| • | The debtor under Comprehensive Agreement fails to repay its debts upon maturity; |
| • | The debtor under Comprehensive Agreement is declared dissolved or bankrupt; |
| • | The Company or any third party disposes the pledged collaterals without getting Development Bank’s consent; |
| • | Behavior of the Company or any third party severely infringes the lawful rights of Development Bank and has a severe negative impact upon Development Bank’s ability to collect its credit in due time and due amount. |
| • | Occurrence of other instances which might have a negative impact upon the realization of Development Bank’s creditor’s rights under Comprehensive Agreement. |
| • | Guaranty Contract is irrevocable and independently effective. |
Headlines of the articles omitted:
| • | Undertakings and Representations |
| • | Collateral |
| • | Remedial measures and notice requirement of the pledger |
| • | Independence of the contract |
| • | Expenses and service charges |
| • | Amendment of the contract |
| • | Applicable law and dispute settlement |
| • | Effectiveness and registration requirement |
| • | Validity |
| • | Miscellaneous |
| • | Statement of the machines and equipments under pledge |
Exhibit 10.15
Contract of Limit for Discount of Commercial Acceptance Draft
No. Shen Fa (Long Gang) Shang Zi 20060329001
Within the credit facility limit under the Contract of Overall Credit Facility Limit
No. Shen Fa (Long Gang) Zhong Zi 20060329001
| Discounter (Party A): Longgang Branch, Shenzhen Development Bank | ||
| Address: A1, New Asia Park, Long Gang Central Town, Shenzhen | ||
| Telephone: 28952003 | Fax: 28952004 | |
| Person in Charge: Yu Bo | Position: Branch President | |
| Applicant (Party B): Shenzhen BAK Battery Co., Ltd | ||
| Address: BAK Industry Zone, Kuichong, Longgang, Shenzhen | ||
| Telephone: 89770025 | Fax: 89770026 | |
| Legal Representative: Li Xiangqian | Position: Chairman of Board of Directors | |
Party B wishes to apply for discount limit for commercial acceptance draft and Party A agrees to grant Party B the discount limit for commercial acceptance draft (hereinafter referred to as “Discount Limit”). Both Parties have reached this Contract in accordance with relevant laws and regulations.
Article 1 Discount Limit
| 1. | Discount of commercial acceptance draft: Party A agrees to discount the following commercial acceptance draft after examination by Party A in accordance with its rules: commercial acceptance draft issued and accepted by Party B. |
| 2. | Discount Limit is RMB 50 million yuan. |
| 3. | Valid period is from 29 April 2006 to 29 April 2007. Any applicant (or Party B) who holds the commercial acceptance draft issued and accepted/endorsed by Party B may apply for discount of the draft. The Discount Limit is revolving. The applicant shall sign the Contract for Discount of Commercial Draft with the Discounter to determine the amount and term for each discount transaction. The remaining balance for discount shall not exceed the abovementioned Discount Limit. |
The beginning date of the discount transaction shall be within the abovementioned valid period. The expiry date of the discount transaction shall be determined by the relevant Contract for Discount of Commercial Draft.
| 4. | Deposit: Party B shall pay a deposit to Party A which shall be equivalent to 30% of the Discount Limit. The interest rate for the deposit is 1.71%. This clause shall be valid in case of invalidity of other clauses of this Contract. |
Article 2. Commercial Acceptance Draft
The commercial acceptance draft under the Article 1 of this Contract shall be based upon actual and lawful commercial transaction.
Article 3. Discounter
Party A is the discounter under this Contract.
Party A may designate any other branch of Shenzhen Development Bank as the discounter.
Article 4. Applicant for Discount (Draft Bearer)
The applicant for discount shall be the bearer of the commercial acceptance draft issued and accepted by Party B.
Article 5. Confirmation and Inquiry
Party B’s confirmation shall be obtained before Party A discount the abovementioned commercial draft. After Party A receives the application for discount, Party A shall fill in and deliver in person the Letter of Inquiry for Commercial Acceptance Draft to Party B along with the photocopy of the involved commercial draft. Party B shall review the abovementioned documentation and write its opinions and stamp its company chop, chop of its legal representative on the Letter of Inquiry for Commercial Acceptance Draft along with the signature of the responsible person and return in person the Letter of Inquiry to Party A. Party B shall provide the sample of the company chop, chop of legal representative and signature of responsible person to Party A in advance.
Article 6. Liabilities of Party B
For any unsettled discount money which is paid by Party A in accordance with this Contract and specific Contract for Discount of Commercial Draft, Party B shall bear the liability for payment of such money upon expiry (in case that Party B is the applicant for discount) or bear the joint and several liability for payment of such money (in case that Party B is not the applicant). The valid term for the abovementioned liabilities is two years after the expiry of the involved discount money.
Article 7. Security for the Discount Limit
The form of the security for the Discount Limit is pledge. Shenzhen BAK Battery Co., Ltd shall provide the deposit as collateral for the indebtedness of Party B under this Contract and shall sign the Guaranty Contract of Pledge (No. Shen Fa Long Gang E Di/Zhi Zi 20060509001) with Party A.
Article 8 Early Mature
All indebtedness of Party B shall be deemed as become mature under any of the following events and Party A is entitled to demand Party B to settle the indebtedness and cease to grant any credit to Party B:
| 1. | Party B violates any obligations under this Contract or Party B indicates, verbally or by act, that Party B will not perform its obligations under this Contract; |
| 2. | Party B ceases its business operation or is forced to cease its business operation; |
| 3. | Party B provides false materials or conceal material operational or financial facts; |
| 4. | Party B suffers financial loss; |
| 5. | The project plan of Party B is cancelled or cannot be fulfilled; |
| 6. | Party B conspires with its related party to deceive Party A or any other bank into granting bank loan or credit facility by means of discount or pledge of receivable bills which have no actual commercial background; |
| 7. | Party B intentionally avoids to repay the bank loan by means of related transactions or other methods; |
| 8. | Party B is under administrative investigation or punishment due to its unlawful operations; |
| 9. | In case of division, merger, liquidation, regroup, dissolution, bankruptcy of Party B; |
| 10. | Party B use the bank loan for purpose other than agreed by Party A or use the bank loan for illegal or unlawful transaction; |
| 11. | Party B violates any other similar agreements with Party A or any other third party or there is dispute, litigation or arbitration under such agreements; |
| 12. | The controlling shareholder of Party B transfers Party B’s shares held by it, or some major events occurred to the controlling shareholder such as administrative investigation or punishment due to its unlawful operation, litigation or arbitration, financial difficulty, bankruptcy or dissolution of the controlling shareholder of Party B; |
| 13. |
The guarantor under relevant guaranty agreement breaches the guaranty agreement, including but not limited to provision of false materials, violation of the loan agreement, guaranty agreement or other similar agreement by the guarantor, dispute, arbitration or litigation arising out of such agreements, |
|
cease of business operation, major operational mistake, administrative investigation or punishment due to unlawful operation, evade of payment of bank loan, merger, acquisition or regroup of the guarantor, or any other events which may impair its financial capacity etc. |
| 14. | Any other events which may impair the safety of Party A’s rights and interests. |
Article 9 Special Regulations for Group Client
For purpose of this Contract, group client refers to:
| 1. | enterprise which directly or indirectly controls the equity share or business operation of other enterprise or enterprise whose equity share or business operation is controlled by other enterprise; |
| 2. | two enterprises which are controlled by a third enterprise; |
| 3. | enterprises which is controlled directly or indirectly by the similar major investor, crucial manager or their next of kin; |
| 4. | enterprises with other relationship which may affect the fair price for asset transfer or profit distribution. |
In case that Party B is a group client, Party B shall report in writing within 10 days any transaction with value over 10% of its net assets.
Article 9. Undertakings and Representatives of Party B
Party B has all the legal rights and power to execute and perform this Contract, and has obtained all authorization from its board of directors or shareholders (if necessary).
Party B undertakes that all the documentation, materials and information provided by it to Party A are authentic, accurate, complete and valid.
Party B shall give 10 day prior written notice to Party A for any alteration of address, contact details, telephone, business scope, legal representative of Party B.
Party B has read this Contract carefully and accepts all clauses of this Contract. Party B agrees to sign this Contract of its own will.
Article 10
The governing law for this Contract is the law of People’s Republic of China. Any dispute arising from this Contract shall be submitted to the People’s Court of the place of Party A.
Article 11 Effectiveness
This Contract shall take effect once it is signed and stamped by both Parties and the relevant Guaranty Agreement has been duly signed and registered.
Article 12 Other Issues
N/A
Article 13
This Contract has 4 originals, Party A shall retain 4 originals, and Party B shall retain 1 original.
| Party A (Stamp): [company chop of Longgang Branch, Shenzhen Development Bank] |
| Legal Representative/Authorized Representative (Signature): /s/ |
| Date: 29 April 2006 |
| Party B (Stamp): [company chop of Shenzhen BAK Battery Co., Ltd.] |
| Legal Representative/Authorized Representative (Signature): /s/ |
| Date: 29 April 2006 |
Exhibit 10.16
Pledge Contract of Maximum Amount
No. Shenfa Longgang E’zhi Zi 20060509001
|
Party A: Longgang Branch, Shenzhen Development Bank (Creditor) |
||
|
Address: A1, Xinyazhou Park, Central Town, Longgang District, Shenzhen |
||
|
Telephone: 28952003 |
Fax: 28952004 |
|
|
Person in charge: Yu Bo |
Position: President of Longgang Branch |
|
|
Party B: Shenzhen BAK Battery Co., Ltd. (Pledger) |
||
|
Address: BAK Industrial Zone, Kuichong, Longgang District, Shenzhen |
||
|
Telephone: 89770025 |
Fax: 89770026 |
|
|
Legal Representative: Li Xiangqian |
Position: Chairman of the Board |
|
In order to secure the indebtedness of Shenzhen BAK Battery Co., Ltd. (hereinafter referred to as Obligor) under the Comprehensive Credit Facilities Agreement (reference no. Shenfa Longgang Shangzi 20060509001, hereinafter referred to as Master Agreement) entered into by Creditor and Obligor on 29 April 2006, the Pledger agrees to provide its assets to the Creditor as the pledge. Through friendly negotiation, both parties agree to enter into this Contract:
I. Scope of Guaranty
The scope of guaranty covers all loan principal, interest, penalty interest and all the expenses incurred to the Creditor in realizing its creditor’s right. The maximum loan principal shall not exceed RMB 50 Million yuan.
II. Pledged Collaterals
The detail information of the pledged collaterals is described in the Statement of Pledged Collaterals attached to this Contract.
After the Pledger has pledged the abovementioned collaterals, the Pledger shall not transfer such pledged collaterals or allow any third party to use such pledged collaterals without the approval of the Creditor. In case that the Creditor and Pledger agree to transfer the pledged collaterals, the payment received by the Pledger from such transaction shall be used to settle the indebtedness owed to the Creditor in advance to expiry or be deposited in a third party designated by both parties.
III. The Creditor is entitled to dispose of the pledged collaterals by means of settlement of the indebtedness in kind, auction or sale and use the payment derived from such disposal to repay the indebtedness owed to it if any of the following occurs:
| (1) | The Obligor fails to pay its debts upon maturity of such debt (as originally agreed or put forward); |
| (2) | The legal successor of the Pledger or the legatee of the Pledger refuse to perform their obligations; |
| (3) | The Obligor is declared dissolved or bankrupt; |
| (4) | The value of the pledged collaterals is likely to be obviously decreased so that the interest of the Creditor is endangered and the Pledger fails to provide additional collateral as requested by the Creditor; |
| (5) | Other events which may have negative impact upon the realization of the Creditor’s rights under the Master Agreement. |
IV. Undertakings and Representations of the Pledger
The Pledger is legally qualified to execute and perform this Contract, and has obtained all necessary authorization by the board of directors or other competent authorities (as the case may be).
The Pledger undertakes that all application materials submitted by it to the Creditor are truthful, lawful, effective and with no serious errors or omissions. The Pledger has the lawful and undisputed right to pledge the pledged collaterals under this Contract. The execution and performance of this Contract by the Pledger do not violate any other contracts entered into or being performed by the Pledger.
The Pledger also undertakes that all application materials submitted by the Obligor to the Creditor are truthful, lawful, effective and with no serious errors or omissions.
The Pledger shall notify the Creditor in writing within 10 days after it has changed its address, contact details, liaison telephone, business scope or legal representative etc.
The Pledger has fully understood all provisions of this Contract and both parties execute this Contract of their free will.
V. The guaranty of pledge provided by the Pledger is independent from and shall not be replaced by any other guaranty provided by other guarantors.
VI. In case that part or whole of the Master Agreement or agreement entered into under the Master Agreement become invalid due to any reason, the Obligor shall nevertheless perform its obligation of repayment and the Pledger shall perform its obligation of guaranty for the Obligor’s obligation of repayment in accordance with this Contract.
VII. The expenses incurred during the course of execution and performance of this Contract by both parties such as notarial or testimonial fee, registration fee, auction or sell cost etc. shall all be born by the Pledger.
VIII. Amendment and Termination of Contract
| 1. | In case that any party intends to amend or terminate this Contract, it shall notify the other party in writing and a written agreement shall be reached by both parties. This Contract shall remain valid until the written agreement to amend or terminate this Contract has been reached. |
| 2. | Any waiver or tolerance of the Creditor shall not be deemed as amendment or termination of this Contract except that a written agreement has been reached in accordance with the above provision. |
| 3. | In case that the Master Agreement has been amended, the Creditor shall seek the approval of the Pledger immediately. The Pledger shall continue to bear the responsibility of guaranty for the indebtedness of the Obligor under the Master Agreement (before and after the amendment) only after it has approved such amendment. However, the Creditor does not need to seek the approval of the Pledger for amendment of the Master Agreement which decreases the indebtedness of the Obligor. |
IX. Applicable Law and Dispute Settlement
| 1. | The execution and performance of this Contract shall be governed by the laws of People’s Republic of China; |
| 2. | The method of dispute settlement for this Contract shall be the same with that of the Master Agreement. |
X. This Contract shall be signed and stamped by both parties (only signature is needed for party of natural person). This Contract shall become effective upon the delivery of the pledged collaterals to the Creditor. If the pledge shall be registered or recorded in accordance with article 78 or 79 of the Guarantee Law of People’s Republic of China, this Contract shall become effective upon the registration or record.
XI. Other Issues
N/A
XII. This Contract has four originals, the Creditor shall retain two originals, the Obligor shall retain one original and the Pledger shall retain one original.
Statement of Pledged Collaterals
|
Name, Quality and Quantity of the Pledged Collaterals |
Deposit 30% of the par value of the commercial acceptance that issued by the Pledger | |
|
Title and Title Certificate |
N/A |
|
|
Place of the Pledged Collaterals |
BAK Industrial Park, Kuichong Street, Longgang District, Shenzhen | |
|
Value of the Pledged Collaterals |
N/A |
|
|
Ownership of the Pledged Collaterals |
N/A |
|
|
Other issues |
N/A |
|
|
Mark |
N/A |
|
The Pledger undertakes that the above statement is truthful. The Pledger shall bear the joint and several liability for the indebtedness of the Obligor under the Master Agreement if the pledge is invalid or the value of the pledged collaterals is not sufficient to cover the indebtedness due to false statement by the Pledger.
|
Party A (Company Chop): [company chop of Longgang Branch, Shenzhen Development Bank] |
|
Authorized Representative: /s/ |
|
Date: 29 April 2006 |
|
Party B (Company Chop): [company chop of Shenzhen BAK Battery Co., Ltd.] |
|
Authorized Representative: /s/ |
|
Date: 29 April 2006 |
Exhibit 14.1
CODE OF BUSINESS ETHICS AND CONDUCTS
OF
CHINA BAK BATTERY, INC.
Adopted May 2006
I. INTRODUCTION
This Code of Business Conduct and Ethics helps ensure compliance with legal requirements and our standards of business conduct. This Code of Business Conduct and Ethics applies to directors, officers and employees of the Company. Therefore, all Company directors, officers and employees are expected to read and understand this Code of Business Conduct and Ethics, uphold these standards in day-to-day activities, comply with all applicable policies and procedures, and ensure that all agents and contractors are aware of, understand and adhere to these standards.
Because the principles described in this Code of Business Conduct and Ethics are general in nature, you should also review all applicable Company policies and procedures for more specific instruction, and contact the Human Resources Department or Law Affairs Department if you have any questions.
Nothing in this Code of Business Conduct and Ethics, in any company policies and procedures, or in other related communications (verbal or written) creates or implies an employment contract or term of employment.
We are committed to continuously reviewing and updating our policies and procedures. Therefore, this Code of Business Conduct and Ethics is subject to modification. This Code of Business Conduct and Ethics supersedes all other such codes, policies, procedures, instructions, practices, rules or written or verbal representations to the extent they are inconsistent.
Please sign the acknowledgment form at the end of this Code of Business Conduct and Ethics and return the form to the Human Resources Department indicating that you have received, read, understand and agree to comply with the Code of Business Conduct and Ethics.
The signed acknowledgment form will be located in your personnel file.
II. COMPLIANCE IS EVERYONE’S BUSINESS
Ethical business conduct is critical to our business. As a director, officer or employee, your responsibility is to respect and adhere to these practices. Many of these practices reflect legal or regulatory requirements. Violations of these laws and regulations can create significant liability for you, the Company, its directors, officers, and other employees.
Part of your job and ethical responsibility is to help enforce this Code of Business Conduct and Ethics. You should be alert to possible violations and report possible violations to the Human Resources Department or the Law Affairs Department.
You must cooperate in any internal or external investigations of possible violations.
Reprisal, threats, retribution or retaliation against any person who has in good faith reported a violation or a suspected violation of law, this Code of Business Conduct or other Company policies, or against any person who is assisting in any investigation or process with respect to such a violation, is prohibited.
Violations of law, this Code of Business Conduct and Ethics, or other Company policies or procedures should be reported to the Human Resources Department or the Law Affairs Department.
1
Violations of law, this Code of Business Conduct and Ethics or other Company policies or procedures by Company directors, officers or employees can lead to disciplinary action up to and including termination.
In trying to determine whether any given action is appropriate, use the following test. Imagine that the words you are using or the action you are taking is going to be fully disclosed in the media with all the details, including your photo. If you are uncomfortable with the idea of this information being made public, perhaps you should think again about your words or your course of action.
In all cases, if you are unsure about the appropriateness of an event or action, please seek assistance in interpreting the requirements of these practices by contacting the Law Affairs Department.
2
III. YOUR RESPONSIBILITIES TO THE COMPANY AND ITS STOCKHOLDERS
A. General Standards of Conduct
The Company expects all directors, officers, employees, agents and contractors to exercise good judgment to ensure the safety and welfare of employees, agents and contractors and to maintain a cooperative, efficient, positive, harmonious and productive work environment and business organization. These standards apply while working on our premises, at offsite locations where our business is being conducted, at Company-sponsored business and social events, or at any other place where you are a representative of the Company. Directors, officers, employees, agents or contractors who engage in misconduct or whose performance is unsatisfactory may be subject to corrective action, up to and including termination. You should review our employment handbook for more detailed information.
B. Applicable Laws
All Company directors, officers, employees, agents and contractors must comply with all applicable laws, regulations, rules and regulatory orders. Company directors, officers and employees located outside of the United States must comply with laws, regulations, rules and regulatory orders of the United States, including the Foreign Corrupt Practices Act, in addition to applicable local laws. Each director, officer, employee, agent and contractor must acquire appropriate knowledge of the requirements relating to his or her duties sufficient to enable him or her to recognize potential dangers and to know when to seek advice from the Law Affairs Department on specific Company policies and procedures. Violations of laws, regulations, rules and orders may subject the director, officer, employee, agent or contractor to individual criminal or civil liability, as well as to discipline by the Company. Such individual violations may also subject the Company to civil or criminal liability or the loss of business.
C. Conflicts of Interest
Each of us has a responsibility to the Company, our stockholders and each other.
Although this duty does not prevent us from engaging in personal transactions and investments, it does demand that we avoid situations where a conflict of interest might occur or appear to occur. The Company is subject to scrutiny from many different individuals and organizations.
We should always strive to avoid even the appearance of impropriety.
What constitutes conflict of interest? A conflict of interest exists where the interests or benefits of one person or entity conflict with the interests or benefits of the Company.
Examples include:
(i) Employment/Outside Employment . In consideration of your appointment or employment with the Company, you are expected to devote your full attention to the business interests of the Company. You are prohibited from engaging in any activity that interferes with your performance or responsibilities to the Company or is otherwise in conflict with or prejudicial to the Company. Our policies prohibit any director, officer or employee from accepting simultaneous employment with a Company supplier, customer, developer or competitor, or from taking part in any activity that enhances or supports a competitor’s position. Additionally, you must disclose to the Company any interest that you have that may conflict with the business of the Company. If you
3
have any questions on this requirement, you should contact your supervisor or the Human Resources Department.
(ii) Outside Directorships . It is a conflict of interest to serve as a director of any company that competes with the Company. Although you may serve as a director of a Company supplier, customer, developer, or other business partner, our policy requires that you first obtain approval from the Company’s Board of Directors before accepting a directorship. Any compensation you receive should be commensurate to your responsibilities.
Such approval may be conditioned upon the completion of specified actions.
(iii) Business Interests . If you are considering investing in a Company customer, supplier or competitor, you must first take great care to ensure that these investments do not compromise your responsibilities to the Company. Many factors should be considered in determining whether a conflict exists, including the size and nature of the investment; your ability to influence the Company’s decisions; your access to confidential information of the Company or of the other company; and the nature of the relationship between the Company and the other company.
(iv) Related Parties . As a general rule, you should avoid conducting Company business with a relative or significant other, or with a business in which a relative or significant other is associated in any significant role. Relatives include spouse, sister, brother, daughter, son, mother, father, grandparents, aunts, uncles, nieces, nephews, cousins, step relationships, and in-laws. Significant others include persons living in a spousal (including same sex) or familial fashion with an employee.
If such a related party transaction is unavoidable, you must fully disclose the nature of the related party transaction to the Company’s Chief Executive Officer. If determined to be material to the Company by the Chief Executive Officer, the Company’s Corporate Governance Committee must review and approve in writing in advance such related party transactions. The most significant related party transactions, particularly those involving the Company’s directors or executive officers, must be reviewed and approved in writing in advance by the Company’s Board of Directors. The Company must report all such material related party transactions under applicable accounting rules, federal securities laws, and SEC rules and regulations, and securities market rules. Any dealings with a related party must be conducted in such a way that no preferential treatment is given to this business.
The Company discourages the employment of relatives and significant others in positions or assignments within the same department and prohibits the employment of such individuals in positions that have a financial dependence or influence (e.g., an auditing or control relationship, or a supervisor/subordinate relationship). The purpose of this policy is to prevent the organizational impairment and conflicts that are a likely outcome of the employment of relatives or significant others, especially in a supervisor/subordinate relationship. If a question arises about whether a relationship is covered by this policy, the Human Resources Department is responsible for determining whether an applicant or transferee’s acknowledged relationship is covered by this policy. The Human Resources Department shall advise all affected applicants and transferees of this policy. Willful withholding of information regarding a prohibited relationship/reporting arrangement may be subject to corrective action, up to and including termination. If a prohibited relationship exists or develops between two employees, the employee in the senior position must bring this to the attention of his/her supervisor. The Company retains the prerogative to separate the individuals at the earliest possible time, either by reassignment or by termination, if necessary.
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(v) Other Situations . Because other conflicts of interest may arise, it would be impractical to attempt to list all possible situations. If a proposed transaction or situation raises any questions or doubts in your mind you should consult the Law Affairs Department.
D. Corporate Opportunities
Employees, officers and directors may not exploit for their own personal gain opportunities that are discovered through the use of corporate property, information or position unless the opportunity is disclosed fully in writing to the Company’s Board of Directors and the Board of Directors declines to pursue such opportunity.
E. Protecting the Company’s Confidential Information
The Company’s confidential information is a valuable asset. The Company’s confidential information includes [our database of customer contacts; names and lists of customers, suppliers and employees; and financial information]. This information is the property of the Company and may be protected by patent, trademark, copyright and trade secret laws. All confidential information must be used for Company business purposes only. Every director, officer, employee, agent and contractor must safeguard it.
THIS RESPONSIBILITY INCLUDES NOT DISCLOSING THE COMPANY CONFIDENTIAL INFORMATION SUCH AS INFORMATION REGARDING THE COMPANY’S PRODUCTS OR BUSINESS OVER THE INTERNET.
You are also responsible for properly labeling any and all documentation shared with or correspondence sent to the Company’s Law Affairs Department or outside counsel as “Attorney-Client Privileged”. This responsibility includes the safeguarding, securing and proper disposal of confidential information in accordance with the Company’s policy on Maintaining and Managing Records set forth in Section III.I of this Code of Business Conduct and Ethics. This obligation extends to confidential information of third parties, which the Company has rightfully received under Non-Disclosure Agreements. See the Company’s policy dealing with Handling Confidential Information of Others set forth in Section IV.D of this Code of Business Conduct and Ethics.
(i) Proprietary Information and Invention Agreement . When you joined the Company, you signed an agreement to protect and hold confidential the Company’s proprietary information. This agreement remains in effect for as long as you work for the Company and after you leave the Company. Under this agreement, you may not disclose the Company’s confidential information to anyone or use it to benefit anyone other than the Company without the prior written consent of an authorized Company officer.
(ii) Disclosure of Company Confidential Information . To further the Company’s business, from time to time our confidential information may be disclosed to potential business partners. However, such disclosure should never be done without carefully considering its potential benefits and risks. If you determine in consultation with your manager and other appropriate Company management that disclosure of confidential information is necessary, you must then contact the Law Affairs Department to ensure that an appropriate written nondisclosure agreement is signed prior to the disclosure. The Company has standard nondisclosure agreements suitable for most disclosures. You must not sign a third party’s nondisclosure agreement or accept changes to the Company’s standard nondisclosure agreements without review and approval by the Company’s Law Affairs Department. In addition, all Company materials that contain Company
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confidential information, including presentations, must be reviewed and approved by the Company’s Law Affairs Department prior to publication or use.
Furthermore, any employee publication or publicly made statement that might be perceived or construed as attributable to the Company, made outside the scope of his or her employment with the Company, must be reviewed and approved in writing in advance by the Company’s Law Affairs Department and must include the Company’s standard disclaimer that the publication or statement represents the views of the specific author and not of the Company.
(iii) Requests by Regulatory Authorities . The Company and its directors, officers, employees, agents and contractors must cooperate with appropriate government inquiries and investigations. In this context, however, it is important to protect the legal rights of the Company with respect to its confidential information. All government requests for information, documents or investigative interviews must be referred to the Company’s Law Affairs Department. No financial information may be disclosed without the prior approval of the Chief Financial Officer.
(iv) Company Spokespeople . Specific policies have been established regarding who may communicate information to the press and the financial analyst community. All inquiries or calls from the press and financial analysts should be referred to the Chief Executive Officer or [Investor Relations Department]. The Company has designated its CEO [and Investor Relations Department] as official Company spokespeople for financial matters. The Company has designated its [Investor Relations Department] as official Company spokespeople for marketing, technical and other such information. These designees are the only people who may communicate with the press on behalf of the Company.
F. Obligations Under Securities Laws-”Insider” Trading
Obligations under the U.S. securities laws apply to everyone. In the normal course of business, officers, directors, employees, agents, contractors and consultants of the Company may come into possession of significant, sensitive information. This information is the property of the Company — you have been entrusted with it. You may not profit from it by buying or selling securities yourself, or passing on the information to others to enable them to profit or for them to profit on your behalf. The purpose of this policy is both to inform you of your legal responsibilities and to make clear to you that the misuse of sensitive information is contrary to Company policy and U.S. securities laws.
Insider trading is a crime, penalized by fines of up to $5,000,000 and 20 years in jail for individuals. In addition, the SEC may seek the imposition of a civil penalty of up to three times the profits made or losses avoided from the trading. Insider traders must also disgorge any profits made, and are often subjected to an injunction against future violations. Finally, insider traders may be subjected to civil liability in private lawsuits.
Employers and other controlling persons (including supervisory personnel) are also at risk under U.S. securities laws. Controlling persons may, among other things, face penalties of the greater of $5,000,000 or three times the profits made or losses avoided by the trader if they recklessly fail to take preventive steps to control insider trading.
Thus, it is important both to you and the Company that insider-trading violations not occur. You should be aware that stock market surveillance techniques are becoming increasingly sophisticated, and the chance that U.S. federal or other regulatory authorities will detect and prosecute even small-level trading is significant. Insider trading rules are strictly enforced, even
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in instances when the financial transactions seem small. You should contact the Chief Financial Officer or the Law Affairs Department if you are unsure as to whether or not you are free to trade.
The Company has imposed a trading blackout period on members of the Board of Directors, executive officers and certain designated employees who, as a consequence of their position with the Company, are more likely to be exposed to material nonpublic information about the Company. These directors, executive officers and employees generally may not trade in Company securities during the blackout periods.
For more details, and to determine if you are restricted from trading during trading Blackout periods, you should review the Company’s Insider Trading Compliance Program. You can request a copy of this policy from the Law Affairs Department. You should take a few minutes to read the Insider Trading Compliance Program carefully, paying particular attention to the specific policies and the potential criminal and civil liability and/or disciplinary action for insider trading violations. Directors, officers, employees, agents and contractors of the Company who violate this Policy are also be subject to disciplinary action by the Company, which may include termination of employment or of business relationship. All questions regarding the Company’s Insider Trading Compliance Program should be directed to the Company’s Chief Executive Officer or Law Affairs Department.
G. Prohibition against Short Selling of Company Stock
No Company director, officer or other employee, agent or contractor may, directly or indirectly, sell any equity security, including derivatives, of the Company if he or she (1) does not own the security sold, or (2) if he or she owns the security, does not deliver it against such sale (a “short sale against the box”) within twenty days thereafter, or does not within five days after such sale deposit it in the mails or other usual channels of transportation. No Company director, officer or other employee, agent or contractor may engage in short sales. A short sale, as defined in this policy, means any transaction whereby one may benefit from a decline in the Company’s stock price. While securities law does not prohibit employees who are not executive officers or directors from engaging in short sales of Company securities, the Company has adopted as policy that employees may not do so.
H. Use of Company’s Assets
(i) General. Protecting the Company’s assets is a key fiduciary responsibility of every director, officer, employee, agent and contractor. Care should be taken to ensure that assets are not misappropriated, loaned to others, or sold or donated, without appropriate authorization. All Company directors, officers, employees, agents and contractors are responsible for the proper use of Company assets, and must safeguard such assets against loss, damage, misuse or theft.
Directors, officers, employees, agents or contractors who violate any aspect of this policy or who demonstrate poor judgment in the manner in which they use any Company asset may be subject to disciplinary action, up to and including termination of employment or business relationship at the Company’s sole discretion. Company equipment and assets are to be used for Company business purposes only. Directors, officers, employees, agents and contractors may not use Company assets for personal use, nor may they allow any other person to use Company assets. All questions regarding this policy should be brought to the attention of the Company’s Human Resources Department.
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(ii) Physical Access Control . The Company has and will continue to develop procedures covering physical access control to ensure privacy of communications, maintenance of the security of the Company communication equipment, and safeguard Company assets from theft, misuse and destruction. You are personally responsible for complying with the level of access control that has been implemented in the facility where you work on a permanent or temporary basis. You must not defeat or cause to be defeated the purpose for which the access control was implemented.
(iii) Company Funds . Every Company director, officer or employee is personally responsible for all Company funds over which he or she exercises control. Company agents and contractors should not be allowed to exercise control over Company funds. Company funds must be used only for Company business purposes. Every Company director, officer, employee, agent and contractor must take reasonable steps to ensure that the Company receives good value for Company funds spent, and must maintain accurate and timely records of each and every expenditure. Expense reports must be accurate and submitted in a timely manner. Company directors, officers, employees, agents and contractors must not use Company funds for any personal purpose.
(iv) Computers and Other Equipment . The Company strives to furnish directors, officers and employees with the equipment necessary to efficiently and effectively do their jobs. You must care for that equipment and use it responsibly only for Company business purposes. If you use Company equipment at your home or off site, take precautions to protect it from theft or damage, just as if it were your own. If the Company no longer employs you, you must immediately return all Company equipment. While computers and other electronic devices are made accessible to directors, officers and employees to assist them to perform their jobs and to promote Company’s interests, all such computers and electronic devices, whether used entirely or partially on the Company’s premises or with the aid of the Company’s equipment or resources, must remain fully accessible to the Company and, to the maximum extent permitted by law, will remain the sole and exclusive property of the Company.
Directors, officers, employees, agents and contractors should not maintain any expectation of privacy with respect to information transmitted over, received by, or stored in any electronic communications device owned, leased, or operated in whole or in part by or on behalf of the Company. To the extent permitted by applicable law, the Company retains the right to gain access to any information received by, transmitted by, or stored in any such electronic communications device, by and through its directors, officers, employees, agents, contractors, or representatives, at any time, either with or without a director’s, officer’s, employee’s or third party’s knowledge, consent or approval.
(v) Software . All software used by directors, officers and employees to conduct Company business must be appropriately licensed. Never make or use illegal or unauthorized copies of any software, whether in the office, at home, or on the road, since doing so may constitute copyright infringement and may expose you and the Company to potential civil and criminal liability. In addition, use of illegal or unauthorized copies of software may subject the director, officer and employee to disciplinary action, up to and including termination. The Company’s [IT Department] will inspect Company computers periodically to verify that only approved and licensed software has been installed. Any non-licensed/supported software will be removed.
(vi) Electronic Usage . The purpose of this policy is to make certain that directors, officers and employees utilize electronic communication devices in a legal, ethical, and appropriate manner. This policy addresses the Company’s responsibilities and concerns regarding the fair and proper
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use of all electronic communications devices within the organization, including computers, e-mail, connections to the Internet, intranet and extranet and any other public or private networks, voice mail, video conferencing, facsimiles, and telephones. Posting or discussing information concerning the Company’s products or business on the Internet without the prior written consent of the Company’s Chief Financial Officer is prohibited. Any other form of electronic communication used by directors, officers or employees currently or in the future is also intended to be encompassed under this policy. It is not possible to identify every standard and rule applicable to the use of electronic communications devices. Directors, officers and employees are therefore encouraged to use sound judgment whenever using any feature of our communications systems. You are expected to review, understand and follow such policies and procedures.
I. Maintaining and Managing Records
The purpose of this policy is to set forth and convey the Company’s business and legal requirements in managing records, including all recorded information regardless of medium or characteristics. Records include paper documents, CDs, computer hard disks, email, floppy disks, microfiche, microfilm or all other media. Local, state, federal, foreign and other applicable laws, rules and regulations require the Company to retain certain records and to follow specific guidelines in managing its records. Civil and criminal penalties for failure to comply with such guidelines can be severe for directors, officers, employees, agents, contractors and the Company, and failure to comply with such guidelines may subject the director, officer, employee, agent or contractor to disciplinary action, up to and including termination of employment or business relationship at the Company’s sole discretion. All original executed documents that evidence contractual commitments or other obligations of the Company must be forwarded to the Law Affairs Department promptly upon completion. Such documents will be maintained and retained in accordance with the Company’s record retention policies
J. Records on Legal Hold
A legal hold suspends all document destruction procedures in order to preserve appropriate records under special circumstances, such as litigation or government investigations. The Company’s Law Affairs Department determines and identifies what types of Company records or documents are required to be placed under a legal hold. Every Company director, officer, employee, agent and contractor must comply with this policy. Failure to comply with this policy may subject the director, officer, employee, agent or contractor to disciplinary action, up to and including termination of employment or business relationship at the Company’s sole discretion.
The Company’s Law Affairs Department will notify you if a legal hold is placed on records for which you are responsible. You then must preserve and protect the necessary records in accordance with instructions from the Company’s Law Affairs Department.
RECORDS OR SUPPORTING DOCUMENTS THAT HAVE BEEN PLACED UNDER A LEGAL HOLD MUST NOT BE DESTROYED, ALTERED OR MODIFIED UNDER ANY CIRCUMSTANCES.
A legal hold remains effective until it is officially released in writing by the Company’s Law Affairs Department.
If you are unsure whether a document has been placed under a legal hold, you should preserve and protect that document while you check with the Company’s Law Affairs Department. If you have any questions about this policy you should contact the Company’s Law Affairs Department.
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K. Payment Practices
(i) Accounting Practices. The Company’s responsibilities to its stockholders and the investing public require that all transactions be fully and accurately recorded in the Company’s books and records in compliance with all applicable laws. False or misleading entries, unrecorded funds or assets, or payments without appropriate supporting documentation and approval are strictly prohibited and violate Company policy and the law.
Additionally, all documentation supporting a transaction should fully and accurately describe the nature of the transaction and be processed in a timely fashion.
(ii) Political Contributions . The Company reserves the right to communicate its position on important issues to elected representatives and other government officials. It is the Company’s policy to comply fully with all local, state, federal, foreign and other applicable laws, rules and regulations regarding political contributions. The Company’s funds or assets must not be used for, or be contributed to, political campaigns or political practices under any circumstances without the prior written approval of the Company’s Law Affairs Department and, if required, the Board of Directors.
(iii) Prohibition of Inducements . Under no circumstances may directors, officers, employees, agents or contractors offer to pay, make payment, promise to pay, or issue authorization to pay any money, gift, or anything of value to customers, vendors, consultants, etc. that is perceived as intended, directly or indirectly, to improperly influence any business decision, any act or failure to act, any commitment of fraud, or opportunity for the commission of any fraud. Inexpensive gifts, infrequent business meals, celebratory events and entertainment, provided that they are not excessive or create an appearance of impropriety, do not violate this policy. Questions regarding whether a particular payment or gift violates this policy should be directed to Human Resources or the Law Affairs Department.
L. Foreign Corrupt Practices Act
The Company requires full compliance with the Foreign Corrupt Practices Act (FCPA) by all of its directors, officers, employees, agents, and contractors.
The anti-bribery and corrupt payment provisions of the FCPA make illegal any corrupt offer, payment, promise to pay, or authorization to pay any money, gift, or anything of value to any foreign official, or any foreign political party, candidate or official, for the purpose of: influencing any act or failure to act, in the official capacity of that foreign official or party; or inducing the foreign official or party to use influence to affect a decision of a foreign government or agency, in order to obtain or retain business for anyone, or direct business to anyone.
All Company directors, officers, employees, agents and contractors whether located in the United States or abroad, are responsible for FCPA compliance and the procedures to ensure FCPA compliance.
All managers and supervisory personnel are expected to monitor continued compliance with the FCPA to ensure compliance with the highest moral, ethical and professional standards of the Company. FCPA compliance includes the Company’s policy on Maintaining and Managing Records in Section III.I of this Code of Business Conduct and Ethics.
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Laws in most countries outside of the United States also prohibit or restrict government officials or employees of government agencies from receiving payments, entertainment, or gifts for the purpose of winning or keeping business. No contract or agreement may be made with any business in which a government official or employee holds a significant interest, without the prior approval of the Company’s Law Affairs Department.
IV. RESPONSIBILITIES TO OUR CUSTOMERS AND OUR SUPPLIERS
A. Customer Relationships
If your job puts you in contact with any Company customers or potential customers, it is critical for you to remember that you represent the Company to the people with whom you are dealing. Act in a manner that creates value for our customers and helps to build a relationship based upon trust. The Company and its employees have provided products and services for many years and have built up significant goodwill over that time. This goodwill is one of our most important assets, and the Company employees, agents and contractors must act to preserve and enhance our reputation.
B. Payments or Gifts from Others
Under no circumstances may directors, officers, employees, agents or contractors accept any offer, payment, promise to pay, or authorization to pay any money, gift, or anything of value from customers, vendors, consultants, etc. that is perceived as intended, directly or indirectly, to influence any business decision, any act or failure to act, any commitment of fraud, or opportunity for the commission of any fraud. Inexpensive gifts, infrequent business meals, celebratory events and entertainment, provided that they are not excessive or create an appearance of impropriety, do not violate this policy. Questions regarding whether a particular payment or gift violates this policy are to be directed to Human Resources or the Law Affairs Department.
Gifts given by the Company to suppliers or customers or received from suppliers or customers should always be appropriate to the circumstances and should never be of a kind that could create an appearance of impropriety. The nature and cost must always be accurately recorded in the Company’s books and records.
C. Publications of Others
The Company subscribes to many publications that help directors, officers and employees do their jobs better. These include newsletters, reference works, online reference services, magazines, books, and other digital and printed works. Copyright law generally protects these works, and their unauthorized copying and distribution constitute copyright infringement. You must first obtain the consent of the publisher of a publication before copying publications or significant parts of them. When in doubt about whether you may copy a publication, consult the Law Affairs Department.
D. Handling the Confidential Information of Others
The Company has many kinds of business relationships with many companies and individuals. Sometimes, they will volunteer confidential information about their products or business plans to induce the Company to enter into a business relationship. At other times, we may request that a third party provide confidential information to permit the Company to evaluate a potential business relationship with that party. Whatever the situation, we must take special care to handle
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the confidential information of others responsibly. We handle such confidential information in accordance with our agreements with such third parties. See also the Company’s policy on Maintaining and Managing Records in Section III.I of this Code of Business Conduct and Ethics.
(i) Appropriate Nondisclosure Agreements . Confidential information may take many forms. An oral presentation about a company’s product development plans may contain protected trade secrets. A customer list or employee list may be a protected trade secret. A demo of an alpha version of a company’s new software may contain information protected by trade secret and copyright laws.
You should never accept information offered by a third party that is represented as confidential, or which appears from the context or circumstances to be confidential, unless an appropriate nondisclosure agreement has been signed with the party offering the information.
THE LAW AFFAIRS DEPARTMENT CAN PROVIDE NONDISCLOSURE AGREEMENTS TO FIT ANY PARTICULAR SITUATION, AND WILL COORDINATE APPROPRIATE EXECUTION OF SUCH AGREEMENTS ON BEHALF OF THE COMPANY.
Even after a nondisclosure agreement is in place, you should accept only the information necessary to accomplish the purpose of receiving it, such as a decision on whether to proceed to negotiate a deal. If more detailed or extensive confidential information is offered and it is not necessary, for your immediate purposes, it should be refused.
(ii) Need-to-Know . Once a third party’s confidential information has been disclosed to the Company, we have an obligation to abide by the terms of the relevant nondisclosure agreement and limit its use to the specific purpose for which it was disclosed and to disseminate it only to other Company employees with a need to know the information. Every director, officer, employee, agent and contractor involved in a potential business relationship with a third party must understand and strictly observe the restrictions on the use and handling of confidential information. When in doubt, consult the Law Affairs Department.
(iii) Notes and Reports . When reviewing the confidential information of a third party under a nondisclosure agreement, it is natural to take notes or prepare reports summarizing the results of the review and, based partly on those notes or reports, to draw conclusions about the suitability of a business relationship. Notes or reports, however, can include confidential information disclosed by the other party and so should be retained only long enough to complete the evaluation of the potential business relationship. Subsequently, they should be either destroyed or turned over to the Law Affairs Department for safekeeping or destruction. They should be treated just as any other disclosure of confidential information is treated: marked as confidential and distributed only to those Company employees with a need to know.
(iv) Competitive Information . You should never attempt to obtain a competitor’s confidential information by improper means, and you should especially never contact a competitor regarding their confidential information. While the Company may, and does, employ former employees of competitors, we recognize and respect the obligations of those employees not to use or disclose the confidential information of their former employers.
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E. Selecting Suppliers
The Company’s suppliers make significant contributions to our success. To create an environment where our suppliers have an incentive to work with the Company, they must be confident that they will be treated lawfully and in an ethical manner. The Company’s policy is to purchase supplies based on need, quality, service, price and terms and conditions. The Company’s policy is to select significant suppliers or enter into significant supplier agreements though a competitive bid process where possible. Under no circumstances should any Company director, officer, employee, agent or contractor attempt to coerce suppliers in any way. The confidential information of a supplier is entitled to the same protection as that of any other third party and must not be received before an appropriate nondisclosure agreement has been signed. A supplier’s performance should never be discussed with anyone outside the Company. A supplier to the Company is generally free to sell its products or services to any other party, including competitors of the Company. In some cases where the products or services have been designed, fabricated, or developed to our specifications the agreement between the parties may contain restrictions on sales.
F. Government Relations
It is the Company’s policy to comply fully with all applicable laws and regulations governing contact and dealings with government employees and public officials, and to adhere to high ethical, moral and legal standards of business conduct. This policy includes strict compliance with all local, state, federal, foreign and other applicable laws, rules and regulations.
If you have any questions concerning government relations you should contact the Company’s Law Affairs Department.
G. Lobbying
Directors, officers, employees, agents or contractors whose work requires lobbying communication with any member or employee of a legislative body or with any government official or employee in the formulation of legislation must have prior written approval of such activity from the Company’s Law Affairs Department. Activity covered by this policy includes meetings with legislators or members of their staffs or with senior executive branch officials. Preparation, research, and other background activities that are done in support of lobbying communication are also covered by this policy even if the communication ultimately is not made.
H. Government Contracts
It is the Company’s policy to comply fully with all applicable laws and regulations that apply to government contracting. It is also necessary to strictly adhere to all terms and conditions of any contract with local, state, federal, foreign or other applicable governments.
The Company’s Law Affairs Department must review and approve all contracts with any government entity.
I. Free and Fair Competition
Most countries have well-developed bodies of law designed to encourage and protect free and fair competition. The Company is committed to obeying both the letter and spirit of these laws. The consequences of not doing so can be severe for all of us.
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These laws often regulate the Company’s relationships with its distributors, resellers, dealers, and customers. Competition laws generally address the following areas: pricing practices (including price discrimination), discounting, terms of sale, credit terms, promotional allowances, secret rebates, exclusive dealerships or distributorships, product bundling, restrictions on carrying competing products, termination, and many other practices.
Competition laws also govern, usually quite strictly, relationships between the Company and its competitors. As a general rule, contacts with competitors should be limited and should always avoid subjects such as prices or other terms and conditions of sale, customers, and suppliers. Employees, agents or contractors of the Company may not knowingly make false or misleading statements regarding its competitors or the products of its competitors, customers or suppliers. Participating with competitors in a trade association or in a standards creation body is acceptable when the association has been properly established, has a legitimate purpose, and has limited its activities to that purpose.
No director, officer, employee, agent or contractor shall at any time or under any circumstances enter into an agreement or understanding, written or oral, express or implied, with any competitor concerning prices, discounts, other terms or conditions of sale, profits or profit margins, costs, allocation of product or geographic markets, allocation of customers, limitations on production, boycotts of customers or suppliers, or bids or the intent to bid or even discuss or exchange information on these subjects. In some cases, legitimate joint ventures with competitors may permit exceptions to these rules as may bona fide purchases from or sales to competitors on non-competitive products, but the Company’s Law Affairs Department must review all such proposed ventures in advance. These prohibitions are absolute and strict observance is required.
Collusion among competitors is illegal, and the consequences of a violation are severe. Although the spirit of these laws, known as “antitrust,” “competition,” or “consumer protection” or unfair competition laws, is straightforward, their application to particular situations can be quite complex. To ensure that the Company complies fully with these laws, each of us should have a basic knowledge of them and should involve our Law Affairs Department early on when questionable situations arise.
J. Industrial Espionage
It is the Company’s policy to lawfully compete in the marketplace. This commitment to fairness includes respecting the rights of our competitors and abiding by all applicable laws in the course of competing. The purpose of this policy is to maintain the Company’s reputation as a lawful competitor and to help ensure the integrity of the competitive marketplace. The Company expects its competitors to respect our rights to compete lawfully in the marketplace, and we must respect their rights equally. Company directors, officers, employees, agents and contractors may not steal or unlawfully use the information, material, products, intellectual property, or proprietary or confidential information of anyone including suppliers, customers, business partners or competitors.
V. WAIVERS
Any waiver of any provision of this Code of Business Conduct and Ethics for a member of the Company’s Board of Directors or an executive officer must be approved in writing by the Company’s Board of Directors and promptly disclosed. Any waiver of any provision of this Code of Business Conduct and Ethics with respect any other employee, agent or contractor must be approved in writing by the Company’s Law Affairs Department.
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VI. DISCIPLINARY ACTIONS
The matters covered in this Code of Business Conduct and Ethics are of the utmost importance to the Company, its stockholders and its business partners, and are essential to the Company’s ability to conduct its business in accordance with its stated values. We expect all of our directors, officers, employees, agents, contractors and consultants to adhere to these rules in carrying out their duties for the Company.
The Company will take appropriate action against any director, officer, employee, agent, contractor or consultant whose actions are found to violate these policies or any other policies of the Company. Disciplinary actions may include immediate termination of employment or business relationship at the Company’s sole discretion. Where the Company has suffered a loss, it may pursue its remedies against the individuals or entities responsible. Where laws have been violated, the Company will cooperate fully with the appropriate authorities.
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VII. ACKNOWLEDGMENT OF RECEIPT OF CODE OF BUSINESS CONDUCT AND ETHICS
I have received and read the Company’s Code of Business Conduct and Ethics. I understand the standards and policies contained in the Company Code of Business Conduct and Ethics and understand that there may be additional policies or laws specific to my job. I further agree to comply with the Company Code of Business Conduct and Ethics.
If I have questions concerning the meaning or application of the Company Code of Business Conduct and Ethics, any Company policies, or the legal and regulatory requirements applicable to my job, I know I can consult my manager, the Human Resources Department or the Law Affairs Department, knowing that my questions or reports to these sources will be maintained in confidence. I acknowledge that I may report violations of the Code of Business Conduct and Ethics to the Human Resources Department.
| Director, Officer or Employee Name |
Date
Please sign and return this form to the Human Resources Department.
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Exhibit 31.1
CERTIFICATION
I, Li Xiangqian, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of China BAK Battery, Inc. for the period ended June 30, 2006; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (c) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 22, 2006
| By: |
/s/ Li Xiangqian |
|
| Li Xiangqian | ||
| Chief Executive Officer | ||
Exhibit 31.2
CERTIFICATION
I, Han Yongbin, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of China BAK Battery, Inc. for the period ended June 30, 2006; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (c) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 22, 2006
| By: |
/s/ Han Yongbin |
|
| Han Yongbin | ||
| Chief Financial Officer |
Exhibit 32.1
Certification Pursuant to
18 U.S.C. Section 1350
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of China BAK Battery, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2006 as filed with the Securities Exchange Commission on the date hereof (the “Report”). I, Li Xiangqian, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: August 22, 2006
|
By: |
/s/ Li Xiangqian |
|
| Li Xiangqian | ||
| Chief Executive Officer |
Exhibit 32.2
Certification Pursuant to
18 U.S.C. Section 1350
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of China BAK Battery, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2006 as filed with the Securities Exchange Commission on the date hereof (the “Report”). I, Han Yongbin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: August 22, 2006
| By: |
/s/ Han Yongbin |
|
| Han Yongbin | ||
| Chief Financial Officer |