Exhibit 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Bonson Information Technology Holdings Limited
We have audited the accompanying consolidated balance sheet of Bonson
Information Technology Holdings Limited (the "Company") and its subsidiaries as
of December 31, 2001 and the related consolidated statements of income and
comprehensive income, stockholders' equity, and cash flows for the year then
ended (all expressed in Chinese Renminbi). These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 2001 and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 15 to the consolidated financial statements, on January 20,
2002, the Company and its shareholders entered into a purchase and sale
agreement, whereby AsiaInfo Holdings, Inc. agreed to purchase all of the
Company's outstanding common and preference shares.
Deloitte Touche Tohmatsu Shanghai CPA
Beijing, China
February 10, 2002
BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2001
RMB'000 US$'000
ASSETS
Current Assets:
Cash...................................................................... 11,790 1,424
Restricted cash (note 7).................................................. 32,061 3,874
Accounts receivable, net of allowance
for doubtful accounts of RMB2,603,000................................ 44,420 5,367
Costs and estimated earnings in excess of billings on
contracts in progress (note 4)....................................... 79,154 9,564
Inventories............................................................... 7,710 932
Advances to suppliers..................................................... 8,891 1,074
Amounts due from related parties (note 5)................................. 5,382 650
Loans to employees........................................................ 521 63
Other receivables......................................................... 3,148 380
Prepaid expenses and other current assets................................. 2,411 291
-------- -------
Total Current Assets.................................................. 195,488 23,619
Property and equipment, net (note 6)....................................... 7,394 893
Deferred income taxes...................................................... 26 3
-------- -------
Total Assets.......................................................... 202,908 24,515
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings (note 7)........................................... 70,678 8,539
Accounts payable......................................................... 24,280 2,933
Amount due to related parties (note 5)................................... 124 15
Billings in excess of costs and estimated earnings on
contracts in progress (note 4)......................................... 3,222 389
Other taxes payable...................................................... 8,906 1,076
Other payables........................................................... 3,095 374
Accrued employee benefits.............................................. 4,066 491
Deferred income tax liability (note 8)................................. 282 34
Other accrued expenses................................................... 2,482 300
-------- -------
Total Current Liabilities.............................................. 117,135 14,151
-------- -------
Commitments (note 9)
Stockholders' Equity:
Convertible preferred stock, Series A, 36,375,000 shares authorized,
issued and outstanding, US$0.01 par value............................... 3,016 364
Ordinary shares, 1,000,000,000 shares authorized, 113,625,000
shares issued and outstanding US$0.01 par value......................... 9,423 1,136
Additional paid-in capital............................................... 27,615 3,339
Retained earnings........................................................ 45,871 5,543
Accumulated other comprehensive loss..................................... (152) (18)
-------- -------
Total Stockholders' Equity................................................ 85,773 10,364
-------- -------
Total Liabilities and Stockholders' Equity............................... 202,908 24,515
======== =======
See notes to the consolidated financial statements.
-2-
BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001
RMB'000 US$'000
Revenue..................................... 224,007 27,065
Costs of revenue............................ (158,570) (19,159)
-------- -------
Gross profit................................ 65,437 7,906
-------- -------
Operating expenses:
Sales and marketing....................... (6,343) (766)
General and administrative................ (19,259) (2,327)
Research and development.................. (21,623) (2,612)
-------- -------
Total operating expenses............... (47,225) (5,705)
-------- -------
Income from operations...................... 18,212 2,201
Other income (expense):
Interest income........................... 1,018 123
Interest expense.......................... (2,136) (258)
Other..................................... (186) (23)
-------- -------
Income before income taxes.................. 16,908 2,043
Income tax expense (note 8)................. 256 31
-------- -------
Net income.................................. 16,652 2,012
Other comprehensive loss:
Foreign currency translation adjustments.. (152) (18)
-------- -------
Comprehensive income........................ 16,500 1,994
======== =======
See notes to the consolidated financial statements.
-3-
BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2001
Preferred stock Ordinary shares
--------------------- -------------------------
Additional Retained
Shares Amount Shares Amount paid-in capital earnings
---------- ---------- ----------- ------------ ----------------- ------------
RMB'000 RMB'000 RMB'000 RMB'000
Balance at January 1, 2001.................... 36,375,000 3,016 113,625,000 9,423 27,615 29,219
Foreign currency translation adjustments...... - - - - - -
Net income.................................... - - - - - 16,652
---------- --------- ----------- ---------- ------------- ---------
Balance at December 31, 2001.................. 36,375,000 3,016 113,625,000 9,423 27,615 45,871
========== ========= =========== ========== ============= =========
Equivalent to US$000.......................... 364 1,136 3,339 5,543
========= ========== ============= =========
Accumulated other Total stockholders
comprehensive loss equity
-------------------- --------------------
RMB'000 RMB'000
Balance at January 1, 2001.................... - 69,273
Foreign currency translation adjustments......
Net income.................................... (152) (152)
Balance at December 31, 2001.................. - 16,652
---------------- -------------------
Equivalent to US$000.......................... (152) 85,773
================ ===================
(18) 10,364
================ ===================
See notes to the consolidated financial statements.
-4-
BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
For the year ended
December 31, 2001
---------------------------
RMB'000 US$'000
Cash flows from operating activities:
Net income........................................................... 16,652 2,012
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation...................................................... 4,399 532
Provision for doubtful accounts................................... 300 36
Deferred income taxes............................................. 256 31
Changes in operating assets and liabilities:
Accounts receivable.............................................. (23,363) (2,823)
Costs and estimated earnings in excess of billings on contracts
in progress.................................................... (23,957) (2,895)
Inventories...................................................... (3,101) (375)
Advances to suppliers............................................ (4,624) (558)
Loans to employees............................................... 50 6
Other receivables............................................... (1,465) (177)
Prepaid expenses and other current assets........................ 273 33
Accounts payable................................................. 864 104
Bills payable.................................................... (2,350) (284)
Billings in excess of costs and estimated earnings on contracts
in progress..................................................... 2,545 309
Other taxes payable.............................................. 2,587 312
Other payables................................................... (1,363) (165)
Accrued employee benefits........................................ 3,143 379
Other accrued expenses........................................... 1,801 218
------- ------
Net cash used in operating activities.................................. (27,353) (3,305)
------- ------
Cash used in investing activities:
Purchase of property and equipment................................... (5,593) (676)
------- ------
Cash flows from financing activities:
Increase in restricted cash.......................................... (8,395) (1,015)
Short-term borrowings................................................ 82,478 9,965
Repayment of short-term borrowings................................... (37,950) (4,585)
Advances to related parties.......................................... (4,786) (578)
Repayment of advances to related parties............................. 1,026 124
Repayment of amounts due to related parties.......................... (2,360) (285)
Advance from a related party......................................... 124 15
------- ------
Net cash provided by financing activities.............................. 30,137 3,641
------- ------
Net increase in cash................................................... (2,809) (340)
Cash at beginning of year.............................................. 14,751 1,782
Effect of exchange rate changes on cash................................ (152) (18)
------- ------
Cash at end of year.................................................... 11,790 1,424
======= ======
Supplemental cash flow information:
Cash paid during the year:
Bank interest paid................................................. 1,931 233
Interest paid to a related party................................... 205 25
======= ======
See notes to the consolidated financial statements.
-5-
BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Bonson Information Technology Holdings Limited (the "Company") was
incorporated and registered as an exempted company with limited liability
in the Cayman Islands on September 1, 2000. The Company is an investment
holding company and operates through two wholly owned subsidiaries: Bonson
Information Technology Limited ("Bonson BVI") and Guangzhou Bonson
Technology Co., Ltd. ("Guangzhou Bonson").
Bonson BVI is incorporated in the British Virgin Islands and acts an
investment holding company and sells communications hardware and holds the
entire interest in Guangzhou Bonson.
Guangzhou Bonson is incorporated in the People's Republic of China (the
"PRC") and develops and sells communications hardware and software and
provides related technology services. Guangzhou Bonson has an initial
operating term of 30 years expiring in 2030.
2. BASIS OF PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America ("US GAAP"). This basis of accounting differs from that
used in the accounting records of Guangzhou Bonson, which are prepared in
accordance with the accounting principles and the relevant financial
regulations applicable to enterprises with foreign investment as
established by the Ministry of Finance of the PRC ("PRC GAAP").
The principal adjustments made to conform the financial statements of
Guangzhou Bonson to US GAAP included the following:
(i) Adjustment of depreciation expense for property and equipment to
reflect more accurately the economic useful life of the assets;
(ii) Adjustment to recognize revenues and costs of revenue in accordance
with the Company's revenue accounting policy;
(iii) Adjustment to provide allowances for doubtful accounts and
inventories.
-6-
BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The accompanying consolidated financial
statements include the financial statements of the Company and its
subsidiaries. All significant inter-company transactions and balances have
been eliminated on consolidation.
Restricted cash - Restricted cash represents US dollar bank deposits, which
have been pledged as collateral for short-term bank borrowings.
Inventories - Inventories comprise hardware and parts and are stated at the
lower of cost, determined principally by the specific identification
method, or market.
Property and equipment - Property and equipment is stated at cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives, as follows:
Furniture, fixtures and electronic equipment 5 years
Computer equipment 3 years
Computer software 2 years
Motor vehicles 5 years
Leasehold improvements Shorter of lease term or 3 years
Software for internal use is primarily acquired from third-party vendors
and is in ready to use condition.
Impairment - The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may no longer be recoverable. An impairment loss,
measured based on the fair value of the asset, is recognized if expected
future undiscounted cash flows are less than the carrying amount of the
asset.
Revenue recognition - Revenue from network solutions contracts, which
includes the procurement of hardware on behalf of customers, systems
design, planning, consulting, systems integration services, software
implementation and maintenance is recognized based on the percentage of
completion method. Labor costs are used to determine the stage of
completion except for revenues associated with the procurement of hardware.
Such hardware related revenues are recognized upon delivery. Estimates of
hardware warranty costs are included in determining project costs. For the
year ended December 31, 2001, no warranty costs were incurred as most of
the hardware warranty is fully covered by original hardware vendor
contracts. The Company has not experienced any significant warranty claims
from its customers. Revisions in estimated profits are made in the period
in which the circumstances requiring the revision become known. Provisions
for anticipated losses on contracts in progress if any, are recorded in the
period in which the losses are determined.
-7-
BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES - continued
Revenue in excess of billings is recorded as an asset and included in costs
and estimated earnings in excess of billings on contracts in progress.
Billings in excess of revenues are recorded as deferred income and included
in billings in excess of costs and estimated earnings on contracts in
progress. Revenue includes the benefit of the rebate of value added taxes
on sales of software received from the tax authorities as part of the PRC
government's policy of encouragement of software development in the PRC.
The rebate was RMB3,867,000 for the year ended December 31, 2001.
Costs of revenue - Costs of revenue include all direct material and labor
costs and those indirect costs related to contract performance, such as
indirect labor, supplies, tools, repairs and depreciation costs.
Research and development costs - Research and development costs are
expensed when incurred. Subsidies received from local government
authorities towards research and development activities are deducted from
the related expense. Any unutilized amounts, if any, are deferred on the
balance sheet. In 2001, the Company received special purpose funds for
research and development projects amounting to RMB1,600,000 from a local
government authority. The entire amount of these funds was used in the
specified research and development projects during the year.
Foreign currency translation - The Company maintains its accounting records
in Renminbi ("RMB"), which is its functional currency. Monetary assets and
liabilities denominated in currencies other than RMB are translated into
RMB at the rates of exchange ruling at the balance sheet date. Non-monetary
balance sheet amounts are recorded at historical exchange rates.
Transactions in currencies other than RMB during the period are translated
into RMB at the rates of exchange ruling at the transaction dates.
Transaction differences are recorded in the statement of income.
Convenience translation into United States dollars - The financial
statements are presented in Renminbi. The Renminbi is not fully convertible
into United States dollars or other foreign currencies. The translation of
Renminbi amounts into United States dollars has been made for the
convenience of the reader and has been made at the rate of exchange quoted
by the People's Bank of China on December 31, 2001 of RMB8.2766 to US$1.00.
Such translation amounts should not be construed as representations that
the Renminbi amounts could be converted into United States dollars at that
rate or any other rate.
Income taxes - Deferred income taxes are recorded using the asset and
liability method. Under this method, deferred income taxes are recognized
for all significant temporary differences and net operating losses
available for carry forward. These amounts are classified as current or
non-current based upon the classification of the related asset or liability
in the financial statements or their expected reversal if they do not
relate to an asset or liability. A valuation allowance is provided to
reduce the amount of deferred tax assets if it is considered more likely
than not that some portion, or all, of the deferred tax asset will not be
realized.
-8-
BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES - continued
Use of estimates - The preparation of financial statements in conformity
with US GAAP requires management to make estimates and assumptions that
affect the amounts reported therein. Due to the inherent uncertainty
involved in making estimates, actual results reported in future periods
might differ from those estimates.
Stock-based compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees". Under APB No. 25, compensation cost is recognized over the
vesting period based on the difference, if any, on the date of grant
between the fair value of the Company's shares and the amount an employee
must pay to acquire the shares.
Comprehensive income - Comprehensive income is defined to include all
changes in equity except those resulting from investments by and
distributions to investors.
Financial instruments - The carrying value of financial instruments, which
consists of cash, trade receivables, accounts and other payables, amounts
due from/to related parties and short-term borrowings are carried at cost
which approximates fair value due to the short-term nature of these
instruments.
New accounting standards not yet adopted - In July 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 provides that goodwill and other intangible assets
with indefinite lives will not be amortized, but will be tested for
impairment on an annual basis. This standard is effective for fiscal years
beginning after December 15, 2001.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires an asset retirement obligation to be
measured at fair value. The liability is discounted and accretion expense
is recognized using the credit - adjusted risk-free interest rate in effect
when the liability was initially measured. SFAS No. 143 is required to be
applied starting with fiscal years beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that an
impairment loss be recognized at the date a long-lived asset is exchanged
for a similar productive asset, or distributed to owners in a spin off if
the carrying amount of the asset exceeds its fair value. SFAS No. 144 is
required to be applied starting with fiscal years beginning after December
15, 2001.
The Company does not expect that the adoption of the above new standards
will have a material impact on the Company's results of operations,
financial position or cash flows.
-9-
BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROGRESS
December 31, 2001
-------------------
RMB'000 US$'000
Costs incurred on contracts in progress plus
estimated earnings.................................. 499,752 60,381
Less: Billings to date................................ (423,820) (51,207)
-------- -------
75,932 9,174
======== =======
Included in the consolidated balance sheet as:
Costs and estimated earnings in excess of billings
on contracts in progress.......................... 79,154 9,564
Billings in excess of costs and estimated earnings
on contracts in progress.......................... (3,222) (390)
-------- -------
75,932 9,174
======== =======
5. RELATED PARTY TRANSACTIONS
At December 31, 2001 balances with related parties, which are unsecured,
interest-free and repayable on demand, are as follows:
December 31, 2001
-----------------
RMB'000 US$'000
Due from:
Jin Xisheng..................... 2,397 291
Huang Jianqiang................. 2,086 252
Chen Ren........................ 732 88
Lu Zhijie....................... 120 14
Maple Tree Group Limited........ 12 1
Inter-Connect Tech. Limited..... 15 2
Smartaction Technology Limited.. 20 2
------ ------
Total.............................. 5,382 650
====== ======
Due to:
Zou Juntang..................... 124 15
------ ------
Total.............................. 124 15
====== ======
The related parties are either direct or indirect shareholders of the
Company.
During the year, the Company temporarily advanced RMB4,786,000 and received
repayment of RMB1,026,000 from the above and other related parties. The
Company also repaid an interest-bearing loan of RMB1,410,000 from Li Jian,
Chief Executive Officer of Guangzhou Bonson, together with interest of
RMB205,840, and also repaid an advance from another indirect shareholder of
the Company of RMB950,000.
During the year, Zou Juntang advanced RMB124,000 to the Company.
As detailed in note 7, shareholders of the Company have pledged, at no cost
to the Company, part of their holdings of the Company's ordinary shares as
security for loans provided to the Company.
-10-
BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY AND EQUIPMENT, NET
December 31, 2001
-----------------------
RMB'000 US$'000
Furniture, fixtures and electronic equipment.. 883 107
Computer equipment............................ 4,304 520
Computer software............................. 6,075 734
Motor vehicles................................ 957 115
Leasehold improvements........................ 2,268 274
------ -----
Total......................................... 14,487 1,750
Less: Accumulated depreciation................ (7,093) (857)
------ -----
Net book value................................ 7,394 893
====== =====
7. SHORT-TERM BORROWINGS
Short-term borrowings comprise:
December 31, 2001
---------------------
RMB'000 US$'000
Bank loans:
Secured....................................... 17,200 2,078
------ -----
Others:
AsiaInfo Holdings, Inc ("AsiaInfo")........... 52,878 6,389
Other......................................... 600 72
------ -----
Sub-total..................................... 53,478 6,461
------ -----
Total......................................... 70,678 8,539
====== =====
As of December 31, 2001, the Company has a short-term credit facility for
working capital purposes of US$3 million expiring in October 2002. The
facility was secured by cash deposits of US$3.2 million (RMB26,689,000). In
addition, Guangzhou Bonson pledged US$ deposits equivalent of RMB5,372,000
for short-term bank loans. These deposits are presented as restricted cash
in the consolidated balance sheet. At December 31, 2001, unutilized short-
term credit facilities amounted to approximately US$1.5 million.
AsiaInfo has loaned the Company US$6,428,000 collateralized by shares of
the Company held by certain shareholders. The loan is repayable in
September 2002 and bears interest at the London Inter Bank Offered Rate
plus 0.75% per annum (2.4425% at December 31, 2001).
The other loan of RMB600,000 was obtained from Guangzhou City Tianhe High
Technology Management Office and is secured by net assets of Guangzhou
Bonson which approximated RMB70.6 million. This loan carries interest at
approximately 4.8% per annum and is due in December 2002.
-11-
BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. TAXATION
The components of income before income taxes are as follows:
Year ended
December 31, 2001
----------------------------
RMB'000 US$'000
PRC................................................. 14,780 1,786
Outside PRC......................................... 2,128 257
------- ------
16,908 2,043
======= ======
The income tax expense consists of the following:
Year ended
December 31, 2001
----------------------------
RMB'000 US$'000
Current............................................ - -
Deferred........................................... 256 31
------- ------
Total income tax expense .......................... 256 31
======= ======
The components of deferred income tax assets (liabilities) are as follows:
December 31, 2001
----------------------------
RMB'000 US$'000
Deferred tax asset:
Depreciation.......................................... 26 3
======= ======
Deferred tax liabilities:
Allowances and reserves............................... 538 65
Revenue recognition................................... (820) (99)
------- ------
Total deferred tax liabilities, net.................... (282) (34)
======= ======
The Company and its subsidiary, Bonson BVI, are not subject to income tax
under current regulations.
Guangzhou Bonson is treated as a production-oriented enterprise by the
relevant PRC tax authorities. Under the relevant laws and regulations in
the PRC, a production-oriented foreign owned enterprise is entitled to an
exemption from PRC Enterprise Income Tax ("FEIT") for two years starting
from its first profit-making year, followed by a 50% reduction for the next
three years. Guangzhou Bonson has been granted such tax incentives and
accordingly, no provision for PRC FEIT has been made by Guangzhou Bonson
for the year ended December 31, 2001. The exemption expires in 2004.
-12-
BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. TAXATION- Continued
The income tax expense for the year can be reconciled to income before
income taxes as follows:
Year ended December 31, 2001
------------------------------------------------
RMB'000 US$'000 %
Income before income taxes............................. 16,908 2,043
============== ============
Tax at the income tax rate of 33%...................... 5,580 674 33
Differences between statutory rate and
foreign effective tax rate............................ (5,122) (619) (30)
Tax effect of expenses that are not deductible
in the PRC in determining taxable profit.............. 776 94 5
Effect of 50% rate reduction........................... (978) (118) (6)
-------------- ------------ --------------
Tax expense and effective tax rate for the year........ 256 31 2
============== ============ ==============
9. COMMITMENTS
As of December 31, 2001, the Company and its subsidiaries were committed
under certain operating leases, which are renewable subject to negotiation,
requiring annual minimum rentals as follows:
RMB'000 US$'000
Year ending December 31:
2002.................................................... 1,382 167
2003.................................................... 1,052 127
2004.................................................... 24 129
------- ------
2,675 323
======= ======
The leased properties are located in the PRC and are used for
administration and research and development. Rental expense for the year
ended December 31, 2001 was RMB1,756,000.
-13-
BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10. EMPLOYEE RETIREMENT BENEFITS
The Company's employees in the PRC are entitled to retirement benefits
calculated with reference to their basic salaries on retirement and their
length of service in accordance with a government managed benefits plan.
The PRC government is responsible for the benefit liability to these
retired employees. The Company is required to make contributions to the
state retirement plan at 21% of the monthly basic salaries of the current
employees. The expense of such arrangements to the Company for the year
ended December 31, 2001 was RMB980,000.
In addition, the Company is required by law to contribute from 0.5% to 8%
of basic salaries of the PRC employees for employee welfare and housing.
The Company's related expense for the year ended December 31, 2001 was
RMB444,000. The Company does not have any post retirement benefit plans.
11. SHARE CAPITAL
The Company's authorized capital is US$10,363,750 represented by
1,000,000,000 ordinary shares of US$0.01 each and 36,375,000 Series A
convertible preferred shares of US$0.01 each.
The holders of the Series A convertible preferred shares are entitled to
participate in all dividends paid to the ordinary shareholders on an as
converted basis. While preferred shares are outstanding, the Company may
not pay any dividend with regard to any share of ordinary shares or other
series of stock of the Company unless and until all declared but unpaid
dividends on the preferred shares have been paid. The holders of the
preferred shares are entitled to the same voting rights as that of ordinary
shareholders on an as converted basis. The preferred shares have a
liquidation preference to the ordinary shares. The holders of the preferred
shares have the right at any time, at the holder's option, to convert the
preferred shares to ordinary shares at such number equal to dividing the
original issue price of the preferred share by the then conversion price
("Conversion Price"). The Conversion Price is defined initially as the
original issue price of the preferred shares, adjusted to a price
reflecting the effect of stock dividends, stock splits, subdivisions, or
other similar transactions, if any. The preferred shares automatically
convert into ordinary shares upon the closing of an initial public offering
provided that certain valuation and other requirements are met.
In the event of a liquidation, dissolution or winding up of the Company,
the holders of preferred shares are entitled to receive in preference to
any distributions of any of the assets or surplus funds of the Company to
the holders of the ordinary shares of the Company or any class of preferred
shares of the Company issued earlier, an amount equal to US$0.10 per
preferred share (US$3,637,500 at December 31, 2001), subject to
adjustments, plus an amount equal to any dividends on such preferred shares
declared and unpaid on the date of that distribution.
-14-
BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTIONS
In the year ended December 31, 2000, the Company adopted a 2000 stock
incentive plan (the "Plan") that permits the Company to grant options to
directors, employees and consultants to purchase up to 15,000,000 ordinary
shares of the Company. Incentive Stock Options, Non-Qualified Stock
Options and Other Stock Options, as defined in the Plan, are generally
exercisable over four years by equal annual installments from the date of
grant. There were no options granted, exercised, cancelled or forfeited in
the year ended December 31, 2001. The number of options outstanding as of
December 31, 2001 was 8 million with an exercise price of US$0.0996 per
share which approximated the fair value of the options at the date of
grant.
The Company accounts for its stock-based awards to employees using the
intrinsic value method in accordance with APB No. 25; however, SFAS No.
123, "Accounting for Stock-Based Compensation", requires the disclosure of
pro forma net income had the Company adopted the fair value method. The
Company's calculations were made using the minimum value pricing model
which requires subjective assumptions, including expected time to exercise,
which affects the calculated values. The following weighted average
assumptions were used: expected life, four years; risk free interest rate
of 3.78%; and no dividends during the expected term. As there is no public
market for the Company's shares, no factor for volatility has been
reflected in the option pricing calculation. The effect of applying SFAS
No. 123's fair value method to the Company's stock options results in net
income that was not materially different from the amount reported.
13. DISTRIBUTION OF PROFITS
As stipulated by the relevant laws and regulations applicable to China's
foreign investment enterprises, the Company's PRC subsidiary, Guangzhou
Bonson, is required to make appropriations from net income as determined
under PRC GAAP to nondistributable reserves which include a general
reserve, an enterprise expansion reserve and a staff welfare and bonus
reserve. Guangzhou Bonson, as a wholly-owned PRC subsidiary is not required
to make appropriations to the enterprise expansion reserve but
appropriations to the general reserve are required to be made at not less
than 10% of the profit after tax as determined under PRC GAAP. The staff
welfare and bonus reserve is determined by the board of directors.
The general reserve is used to offset future extraordinary losses.
Guangzhou Bonson may, upon a resolution passed by the stockholders, convert
the general reserve into capital. The staff welfare and bonus reserve is
used for the collective welfare of the employees of the Company. The
enterprise expansion reserve is used for the expansion of the Company's
operations and can be converted to capital subject to approval by the
relevant authorities. These reserves represent appropriations of retained
earnings determined according to Chinese law. Appropriations to general
reserves by Guangzhou Bonson were RMB3.4 million in 2001. There were no
appropriations to reserves in 2000 or 1999.
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BONSON INFORMATION TECHNOLOGY HOLDINGS LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14. CONCENTRATION OF CREDIT, CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of temporary cash
investments and accounts receivable.
The Company places its temporary cash investments with various financial
institutions in the PRC. The Company believes that no significant credit
risk exists as these investments are placed principally with government-
owned financial institutions in the PRC or with banks with high credit-
ratings.
The Company's business activities, accounts receivable and contracts in
progress are principally with customers in the PRC. The Company believes
that no significant credit risk exists as credit losses, when realized,
have been within the range of management's expectations.
The Company's business growth is indirectly dependent on government
budgetary policy for the telecommunications and internet industries in the
PRC. The laws and regulations applicable to the Internet industry in the
PRC remain unsettled and could have a material adverse effect on the
Company's business. The Company's customer base is concentrated and the
loss of one or more customers could cause the business to suffer.
The Company's business activities and accounts receivable are principally
in the PRC with a limited number of large customers, principally China
Mobile, China Telecom and their respective provincial subsidiaries. Sales
to China Mobile and its subsidiaries amounted to approximately 60% of total
revenues in 2001. Sales to China Telecom and its subsidiaries amounted to
approximately 36% of total revenues in 2001.
15. SUBSEQUENT EVENT
On January 20, 2002, the Company and the Company's shareholders entered
into an agreement (the "Agreement") with AsiaInfo, in which AsiaInfo will
acquire a 100% equity interest of the Company. The aggregate acquisition
price consisted of approximately 830,000 shares of AsiaInfo's common stock
and approximately US$32 million in cash; the final consideration is subject
to adjustment based on the provisions of the Agreement.
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