SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-17601
BONSO ELECTRONICS INTERNATIONAL INC.
------------------------------------
(Exact name of Registrant as specified in its charter)
British Virgin Islands
(Jurisdiction of incorporation or organization)
Unit 1106 - 1110
11/F, Star House
3 Salisbury Road
Tsimshatsui
Kowloon, Hong Kong
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the
Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.003
WARRANTS TO PURCHASE COMMON STOCK
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act:
NONE
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report:
5,584,859 shares of common stock, $0.003 par value, at March 31, 2002.
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 which financial statement item the Registrant has elected
to follow:
Item 17 [ ] Item 18 [X]
TABLE OF CONTENTS
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Page
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PART I
Item 1. Identity of Directors, Senior Management and Advisers............ 2
Item 2. Offer Statistics and Expected Timetable.......................... 2
Item 3. Key Information.................................................. 2
Item 4. Information on the Company....................................... 11
Item 5. Operating and Financial Review and Prospects..................... 21
Item 6. Directors, Senior Management and Employees....................... 34
Item 7. Major Shareholders and Related Party Transactions................ 41
Item 8. Financial Information............................................ 43
Item 9. The Offer and Listing............................................ 43
Item 10. Additional Information........................................... 44
Item 11. Quantitative and Qualitative Disclosures about Market Risk....... 48
Item 12. Description of Securities Other Than Equity Securities........... 50
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.................. 51
Item 14. Material Modifications to the Rights of Security Holders and
Use of Proceeds.................................................. 51
Item 15. Reserved......................................................... 51
Item 16. Reserved......................................................... 51
PART III
Item 17. Financial Statements............................................. 51
Item 18. Financial Statements............................................. 51
Item 19. Exhibits......................................................... 51
SIGNATURES
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 20-F contains forward-looking statements. These
forward-looking statements could involve known and unknown risks, uncertainties,
and other factors that might materially alter the actual results suggested by
the statements. In other words, our performance might be quite different from
what the forward-looking statements imply. Factors that might cause such a
difference include, but are not limited to, those discussed in the section
entitled "Risk Factors" under Item 3. - Key Information.
You should rely only on the forward-looking statements that reflect
management's view only as of the date of this Report. We undertake no obligation
to publicly revise these forward-looking statements to reflect subsequent events
or circumstances. You should also carefully review the risk factors described in
other documents we file from time to time with the Securities and Exchange
Commission (the "SEC").
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
We prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America and
publish our financial statements in United States Dollars.
REFERENCES
In this Annual Report, "China" refers to all parts of the People's Republic
of China other than the Special Administrative Region of Hong Kong. The terms
"we," "us," and the "Company" refer to Bonso Electronics International Inc. and,
where the context so requires or suggests, our direct and indirect subsidiaries.
References to "dollars" or "$" are to United States Dollars. "HK$" are to Hong
Kong Dollars, "Euros" or "E" are to the European Monetary Union's Currency, "DM"
are to the German Deutsch Mark, and references to "RMB" are to Chinese Renminbi.
1
PART I
Item 1. Identity of Directors, Senior Management and Advisors
Not Applicable.
Item 2. Offer Statistics and Expected Timetable
Not Applicable.
Item 3. Key Information
A. Selected financial data.
The selected consolidated financial data as of March 31, 2001 and 2002 and
for each of the three fiscal years ended March 31, 2002 are derived from the
audited Consolidated Financial Statements and notes that are included in this
Annual Report, are prepared in accordance with generally accepted accounting
principles in the United States of America in United States Dollars, and which
appear elsewhere in this Annual Report. The selected consolidated financial data
set forth below as of March 31, 1998, 1999 and 2000, and for each of the two
fiscal years in the period ended March 31, 1999 have been derived from our
audited consolidated financial statements that are not included in this Annual
Report. The selected consolidated financial data are qualified in their entirety
by reference to, and should be read in conjunction with, the Consolidated
Financial Statements and related notes and Item 5 - "Operating and Financial
Review and Prospects" included in this Annual Report. The consolidated financial
data as of March 31, 2002 reflects the acquisition of KORONA Haushaltswaren GmbH
& Co. KG ("Korona"), which was effective as of May 1, 2001. Data for the earlier
fiscal years does not include information relating to Korona.
2
SELECTED CONSOLIDATED FINANCIAL DATA
Year ended March 31,
-----------------------------------------------------------------------
Income Statement Data 1998 1999 2000 2001 2002(1)
----------- ----------- ----------- ----------- -----------
(In thousands of United States Dollars, except per share data)
Net sales $ 23,716 $ 13,046 $ 15,380 $ 29,567 $ 53,303
Cost of sales (17,071) (8,812) (11,118) (22,400) (40,192)
----------- ----------- ----------- ----------- -----------
Gross margin 6,645 4,234 4,262 7,167 13,111
Selling expenses (420) (197) (261) (382) (2,476)
Salaries and related costs (1,897) (1,626) (1,899) (2,334) (3,880)
Research and development expenses (159) (566) (186) (298) (427)
Administration and general expenses (1,815) (1,601) (1,646) (2,411) (3,411)
Amortization of brand name -- -- -- -- (203)
----------- ----------- ----------- ----------- -----------
Income from operations 2,354 244 270 1,742 2,714
Interest income 73 63 130 458 22
Interest expenses (503) (445) (261) (338) (645)
Foreign exchange (losses)/gains 35 38 14 43 (40)
Other income 243 53 192 205 326
Consultancy fee -- -- -- (381) (381)
----------- ----------- ----------- ----------- -----------
Income/(loss) before income taxes 2,248 (22) 345 1,729 1,996
Income tax benefit/(expense) 27 36 3 (125) (190)
----------- ----------- ----------- ----------- -----------
Net income $ 2,275 $ 14 $ 348 $ 1,604 $ 1,806
----------- ----------- ----------- ----------- -----------
Earnings per share - Basic $ 0.8042 $ 0.0045 $ 0.0989 $ 0.2882 $ 0.3232
- Diluted $ 0.7259 $ 0.0037 $ 0.0874 $ 0.2824 $ 0.3194
Weighted average shares 2,829,448 3,079,219 3,515,690 5,564,536 5,586,920
Diluted weighted average
shares 3,134,372 3,674,303 3,978,079 5,679,911 5,652,852
Dividends declared per share -- -- -- $ 0.1 $ 0.1
As of March 31,
-----------------------------------------------
Balance Sheet Data 1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Working capital $ 3,184 $ 3,316 $12,765 $ 9,323 $ 9,599
Total assets 20,647 18,660 33,793 37,497 44,451
Long-term debt and capital lease
obligations, net of current maturities 243 42 865 404 317
Deferred income tax assets 74 112 126 97 112
Common stock $ 8,485 $ 9,353 $17,133 $16,484 $16,208
Shareholders' equity $14,479 $14,626 $27,022 $27,673 $29,200
- --------------
(1) Includes financial results of the acquisition of Korona that was effective
as of May 1, 2001.
Exchange Rate Information
The Hong Kong Dollar and the United States Dollar have been fixed at
approximately 7.80 Hong Kong Dollars to 1.00 U.S. Dollars since 1983. The
Chinese government expressed its intention in the Basic Law to maintain the
stability of the Hong Kong currency after the sovereignty of Hong Kong (the
"Basic Law") was transferred to China.
The currency adopted by our newly acquired subsidiary in Germany changed
from DM to Euro on January 1, 2002.
3
The noon buying rates in New York City for cable transfers as certified for
customs purposes by the Federal Reserve Bank of New York were US$1.00 = RMB
8.2772, US$1.00 = E.9646, and US$1.00 = HK$7.80, respectively, on June 20, 2002.
The following table sets forth the high and low noon buying rates between
Chinese Renminbi and U.S. Dollars, Hong Kong Dollars and U.S. Dollars, and
between Euros and U.S. Dollars for each month during the five month period ended
May 31, 2002:
NOON BUYING RATE
----------------
RMB PER US$1 HK$ PER US$1 EURO PER US$1
--------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW
--------------- --------------- ---------------
January 2002 8.2768 8.2765 January 2002 7.8000 7.7970 January 2002 0.9031 0.8594
February 2002 8.2770 8.2765 February 2002 7.7999 7.7991 February 2002 0.8778 0.8613
March 2002 8.2770 8.2766 March 2002 7.8000 7.7993 March 2002 0.8778 0.8613
April 2002 8.2780 8.2769 April 2002 7.8095 7.7992 April 2002 0.8836 0.8652
May 2002 8.2775 8.2765 May 2002 7.8001 7.7990 May 2002 0.9373 0.9032
The following table sets forth the average noon buying rates between
Chinese Renminbi and U.S. Dollars, between Hong Kong Dollars and U.S. Dollars,
and between Euros and U.S. Dollars for each of 1997, 1998, 1999, 2000 and 2001,
calculated by averaging the noon buying rates on the last day of each month
during the relevant year.
AVERAGE NOON BUYING RATE
------------------------
RMB PER US$1 HK$ PER US$1 EURO PER US$1
------------ ------------ -------------
1997 8.3193 7.7440 not applicable
1998 8.2991 7.7465 not applicable
1999 8.2785 7.7599 not applicable
2000 8.2784 7.7936 not applicable
2001 8.2772 7.7996 0.8909
B. Risk factors.
Forward-Looking Statements
Important Factors Related to Forward-Looking Statements and Associated
Risks. This Annual Report contains disclosures that are forward-looking
statements. These statements address our expectations, intentions, and
strategies for the future, are "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These statements may be identified by such words or phrases as
"anticipate," "believe," "estimate," "expect," "intend," "project," "will likely
result," "are expected to," "will continue," "is anticipated," "estimated,"
"projected" or similar expressions. These statements are based on information
available to us on the date of this Annual Report and we assume no obligation to
update them. These forward-looking statements reflect our current views with
respect to future events and are not a guarantee of future performance. Several
factors could cause future results to differ materially from those expressed in
any forward-looking statements in this report including, but not limited to:
4
o Timely development, market acceptance and warranty performance of new
products
o Impact of competitive products and pricing
o Continuity of trends
o Customers' financial condition
o Continuity of sales to major customers
o Interruptions of suppliers' operations affecting availability of component
materials at reasonable prices
o Potential emergence of rival technologies
o Success in identifying, financing and integrating acquisition candidates
o Fluctuations in foreign currency exchange rates
o Uncertainties of doing business in China and Hong Kong
o Such additional risks and uncertainties as are detailed from time to time
in our reports and filings with the SEC.
Political, Legal, Economic and Other Uncertainties of Operations in China and
Hong Kong
We Could Face Increased Currency Risks If China Does Not Maintain The
Stability Of The Hong Kong Dollar. The Hong Kong Dollar and the United States
Dollar have been fixed at approximately 7.80 Hong Kong Dollars to 1.00 U.S.
Dollars since 1983. The Chinese government expressed its intention in the Basic
Law to maintain the stability of the Hong Kong currency after the sovereignty of
Hong Kong was transferred to China. If the current exchange rate mechanism is
changed, we face increased currency risks.
We Face Significant Risks If The Chinese Government Changes Its Policies,
Laws, Regulations, Tax Structure, Or Its Current Interpretations Of Its Laws,
Rules And Regulations Relating To Our Operations In China. Our manufacturing
facility is located in China. As a result, our operations and assets are subject
to significant political, economic, legal and other uncertainties. Changes in
policies by the Chinese government resulting in changes in laws or regulations
or the interpretation of laws or regulations, confiscatory taxation,
restrictions on imports and sources of supply, import duties, corruption,
currency revaluation or the expropriation of private enterprise could materially
and adversely affect us. Over the past several years, the Chinese government has
pursued economic reform policies including the encouragement of private economic
activity and greater economic decentralization. If the Chinese government does
not continue to pursue its present policies that encourage foreign investment
and operations in China, or if these policies are either not successful or are
significantly altered, then our business operations in China could be adversely
affected. We could even be subject to the risk of nationalization, which could
result in the total loss of investment in that country. Following the Chinese
government's policy of privatizing many state-owned enterprises, the Chinese
government has attempted to augment its revenues through increased tax
collection. Continued efforts to increase tax revenues could result in increased
taxation expenses being incurred by us. Economic development may be limited as
well by the imposition of austerity measures intended to reduce inflation, the
inadequate development of infrastructure and the potential unavailability of
adequate power and water supplies, transportation and communications. If for any
5
reason we were required to move our manufacturing operations outside of China,
our profitability would be substantially impaired, our competitiveness and
market position would be materially jeopardized and we might have to discontinue
our operations.
We Face Risks By Operating In China, Because The Chinese Legal System
Relating To Foreign Investment And Foreign Operations Like Bonso's Is New And
Evolving And The Application Of Chinese Laws Is Uncertain. The legal system of
China relating to foreign investments is both new and continually evolving, and
currently there can be no certainty as to the application of its laws and
regulations in particular instances. The Chinese legal system is a civil law
system based on written statutes. Unlike common law systems, it is a system in
which decided legal cases have little precedential value. In 1979, the Chinese
government began to promulgate a comprehensive system of laws and regulations
governing economic matters in general. Legislation over the past 20 years has
significantly enhanced the protections afforded to various forms of foreign
investment in Mainland China. Enforcement of existing laws or agreements may be
sporadic and implementation and interpretation of laws inconsistent. The Chinese
judiciary is relatively inexperienced in enforcing the laws that exist, leading
to a higher than usual degree of uncertainty as to the outcome of any
litigation. Even where adequate law exists in China, it may not be possible to
obtain swift and equitable enforcement of that law.
We Could Be Adversely Affected If China Changes Its Economic Policies In
The Shenzhen Special Economic Zone Where We Operate. As part of its economic
reform, China has designated certain areas, including Shenzhen where our
manufacturing complex is located, as Special Economic Zones. Foreign enterprises
in these areas benefit from greater economic autonomy and more favorable tax
treatment than enterprises in other parts of China. Changes in the policies or
laws governing Special Economic Zones could have a material adverse effect on
us. Moreover, economic reforms and growth in China have been more successful in
certain provinces than others, and the continuation or increase of these
disparities could affect the political or social stability of China.
If China Becomes Involved In Trade Controversies With The United States,
The United States May Impose Higher Duties Or Taxes On Goods Manufactured In
China And Imported Into The United States, Which Would Result In The Prices Of
Our Products In The United States Increasing. In 2000, China concluded bilateral
negotiations of the major terms for its entry into the World Trade Organization
("WTO") with a number of countries, including the United States, and the
European Union. The United States Congress voted to make China's trade status as
a most favored nation ("MFN") permanent when it formally entered the WTO. China
entered the WTO in December 2001. In the past, various interest groups have
urged that the United States not renew MFN for China. Controversies between the
United States and China may arise in the future that threaten the status quo
involving trade between the United States and China. These controversies could
adversely affect our business by, among other things, causing our products in
the United States to become more expensive, which could result in a reduction in
the demand for our products by customers in the United States. Trade friction
between the United States and China, whether or not actually affecting our
business, could also adversely affect the prevailing market price of our common
shares and warrants.
6
If Our Sole Factory Were Destroyed Or Significantly Damaged As A Result of
Fire Or Some Other Natural Disaster, We Would Be Adversely Affected. All of our
products are currently manufactured at our manufacturing facility located in
Shenzhen, China. Fire fighting and disaster relief or assistance in China may
not be as developed as in Western countries. We currently maintain property
damage insurance aggregating approximately $23,000,000 covering our stock in
trade, goods and merchandise, furniture and equipment and buildings. We do not
maintain business interruption insurance. Investors are cautioned that material
damage to, or the loss of, our factory due to fire, severe weather, flood or
other act of God or cause, even if insured against, could have a material
adverse effect on our financial condition, results of operations, business and
prospects.
Risk Factors Relating to Our Business
We Depend Upon Our Largest Customers For A Significant Portion Of Our Sales
Revenue, And We Cannot Be Certain That Sales To These Customers Will Continue.
If Sales To These Customers Do Not Continue, Then Our Sales Will Decline And Our
Business Will Be Negatively Impacted. Three major customers accounted for
approximately 34% of our sales in the fiscal year ended March 31, 2000, and four
major customers accounted for approximately 44% of our sales in the fiscal year
ended March 31, 2001, and a major customer accounted for approximately 22% of
our sales in the fiscal year ended March 31, 2002. We do not enter into
long-term contracts with our customers, but manufacture based upon purchase
orders and therefore cannot be certain that sales to these customers will
continue. The loss of any of these major customers could have a material
negative impact on our sales revenue and our business.
Our Exclusive Arrangements With Some Customers May Restrict Our Ability To
Pursue Market Opportunities And May Result in Loss of Sales. We have granted
some of our customers exclusivity on specific products, which precludes us from
selling those products to other potential customers. We expect that in some
cases our existing customers and new customers may require us to give them
exclusivity on certain products, which may force us to forego opportunities to
supply these products to other prospective customers. In addition, if we enter
into exclusive relationships with customers who are unsuccessful, our net sales
will be negatively affected.
If We Are Not Able To Increase Our Manufacturing Capacity, We May Not Be
Able To Meet The Demands Of Our Customers, Which Could Result In The Loss Of
Sales And Our Customer Base. Our long-term competitive position will depend to a
significant extent on our ability to increase our manufacturing capacity. We
will need to invest in additional plant and equipment to expand capacity in our
current facilities or obtain additional capacity through acquisitions. Either of
these alternatives will require additional capital, which we may not be able to
obtain on favorable terms, or at all. Further, we may not be able to acquire
sufficient capacity or successfully integrate and manage additional facilities.
The failure to obtain capacity when needed or to successfully integrate and
manage additional manufacturing facilities could adversely impact our
relationships with our customers and materially harm our business and results of
operations.
7
Defects In Our Products Could Impair Our Ability To Sell Our Products Or
Could Result In Litigation And Other Significant Costs. Detection of any
significant defects in our products may result in, among other things, delay in
time-to-market, loss of market acceptance and sales of our products, diversion
of development resources, injury to our reputation, or increased warranty costs.
Because our products are complex, they may contain defects that cannot be
detected prior to shipment. These defects could harm our reputation, which could
result in significant costs to us and could impair our ability to sell our
products. The costs we may incur in correcting any product defects may be
substantial and could decrease our profit margins.
Since certain of our products are used in applications that are integral to
our customers' businesses, errors, defects, or other performance problems could
result in financial or other damages to our customers. Product liability
litigation, even if it were unsuccessful, would be time consuming and costly to
defend. Our product liability insurance may not be adequate to cover claims.
Our Sales Through Retail Merchants Result In Seasonality And Susceptibility
To A Downturn In The Retail Economy And Sales Variances Resulting From Retail
Promotional Programs. With the acquisition of Korona, a significant portion of
our net sales involve sales of bathroom and kitchen scales to retail merchants
in Europe such as the Metro Group, Media-Saturn, Frigicoll, Quelle, and
Rewe-Markte. In addition, many of our other customers sell to retail merchants.
Accordingly, these portions of our customer base are susceptible to a downturn
in the retail economy. Sales of certain of our scale and telecommunications
products are seasonal, with sales of our scale products declining in the summer
months and sales of our telecommunications products increasing during the
summer. A significant portion of our sales in Europe are attributable to the
promotional programs of our retail industry customers. These promotional
programs result in significant orders by customers who do not carry our products
on a regular basis. Promotional programs often involve special pricing terms or
require us to spend funds to have our products promoted. We cannot assure you
that promotional purchases by our retail industry customers will be repeated
regularly, or at all. Our promotional sales could cause our quarterly results to
vary significantly.
Customer Order Estimates May Not Be Indicative Of Actual Future Sales. Some
of our customers have provided us with forecasts of their requirements for our
products over a period of time. We make many management decisions based on these
customer estimates, including purchasing materials, hiring personnel, and other
matters that may increase our production capacity and costs. If a customer
reduces its orders from prior estimates after we have increased our production
capabilities and costs, this reduction may decrease our net sales and we may not
be able to reduce our costs to account for this reduction in customer orders.
Many customers do not provide us with forecasts of their requirements for our
products. If those customers place significant orders, we may not be able to
increase our production quickly enough to fulfill the customers' orders. The
inability to fulfill customer orders could damage our relationships with
customers and reduce our net sales.
Pressure By Our Customers To Reduce Prices And Agree To Long-Term Supply
Arrangements May Cause Our Net Sales Or Profit Margins To Decline. Our customers
are under pressure to reduce prices of their products. Therefore, we expect to
experience pressure from our customers to reduce the prices of our products. Our
customers frequently negotiate supply arrangements with us well in advance of
delivery dates, thereby requiring us to commit to price reductions before we can
determine if we can achieve the assumed cost reductions. We believe we must
reduce our manufacturing costs and obtain higher volume orders to offset
declining average sales prices. If we are unable to offset declining average
sales prices, our gross profit margins will decline.
8
We Depend Upon Our Key Personnel And The Loss Of Any Key Personnel, Or Our
Failure To Attract And Retain Key Personnel, Could Adversely Affect Our Future
Performance, Including Product Development, Strategic Plans, Marketing And Other
Objectives. The loss or failure to attract and retain key personnel could
significantly impede our performance, including product development, strategic
plans, marketing and other objectives. Our success depends to a substantial
extent not only on the ability and experience of our senior management, but
particularly upon Anthony So our President, Secretary, Treasurer and Chairman of
the Board. We do not have an employment contract with Mr. So, and we do not have
key man life insurance on Mr. So. To the extent that the services of Mr. So
would be unavailable to us, we would be required to obtain another person to
perform the duties Mr. So otherwise would perform. We may be unable to employ
another qualified person with the appropriate background and expertise to
replace Mr. So on terms suitable to us.
We Face The Pressures Of A Competitive Industry. Our business is in an
industry that is highly competitive, and many of our competitors, both local and
international, have substantially greater technical, financial and marketing
resources than we have. We compete with scale manufacturers in the Far East, the
United States, and Europe. We believe that our principal competitor in the scale
market is Measurement Specialties, Inc.; however, as a contract and original
equipment manufacturer and original design manufacturer, we compete with all
companies engaged in the contract and original equipment manufacturing business.
Further, subsequent to the acquisition of Korona, we compete with distributors
of scales in Europe. Our principal competitors in the distribution of scales in
Europe are Soehnle and EKS. Both the scale and the telecommunications markets
are highly competitive and we face pressures on pricing and lower margins as
evidenced by the decline in margins that we have experienced with our
telecommunications products. Lower margins may effect our ability to cover our
costs which could have a material negative impact on our operations and our
business.
We Are Controlled By Our Management, Whose Interest May Differ From Those
Of The Other Shareholders. At the present time, Mr. Anthony So, our founder and
President, beneficially owns approximately 34.01% of the outstanding shares of
common stock, including shares underlying his outstanding options, or 29.12%
without including his outstanding options. Due to his stock ownership, Mr. So
may be in a position to elect the board of directors and, therefore, to control
our business and affairs including certain significant corporate actions such as
acquisitions, the sale or purchase of assets and the issuance and sale of our
securities. Mr. So may be able to prevent or cause a change in control. We also
may be prevented from entering into transactions that could be beneficial to us
without Mr. So's consent. The interest of our largest shareholder may differ
from the interests of other shareholders.
Our Operating Results Are Subject To Wide Fluctuations. Our quarterly and
annual operating results are affected by a wide variety of factors that could
materially and adversely affect net sales, gross profit and profitability. This
could result from any one or a combination of factors, many of which are beyond
our control. Results of operations in any period should not be considered
indicative of results to be expected in any future period, and fluctuations in
operating results may also result in fluctuations in the market price of our
common stock.
9
Certain Legal Consequences of Foreign Incorporation and Operations
Judgments Against Us And Our Management May Be Difficult To Obtain Or
Enforce. We are a holding corporation organized as an International Business
Company under the laws of the British Virgin Islands and our principal operating
subsidiary is organized under the laws of Hong Kong. Our principal executive
offices are located in Hong Kong and our second operating subsidiary is located
in Germany. Outside the United States, it may be difficult for investors to
enforce judgments obtained against us in actions brought against us in the
United States, including actions predicated upon the civil liability provisions
of federal securities laws. In addition, most of our officers and directors
reside outside the United States and the assets of these persons and of the
Company are located outside of the United States. As a result, it may not be
possible for investors to effect service of process within the United States
upon these persons, or to enforce against the Company or these persons judgments
predicated upon the liability provisions of United States securities laws. Our
Hong Kong counsel and our British Virgin Islands counsel have advised that there
is substantial doubt as to the enforceability against us or any of our directors
or officers in original actions or in actions for enforcement of judgments of
United States courts in claims for liability based on the civil liability
provisions of federal securities laws.
Because We Are Incorporated In The British Virgin Islands, You May Not Have
The Same Protections As Shareholders Of U.S. Corporations. We are organized
under the laws of the British Virgin Islands. Principles of law relating to
matters affecting the validity of corporate procedures, the fiduciary duties of
our management, directors and controlling shareholders and the rights of our
shareholders differ from, and may not be as protective of shareholders as, those
that would apply if we were incorporated in a jurisdiction within the United
States. Our directors have the power to take certain actions without shareholder
approval, including an amendment of our Memorandum or Articles of Association
and certain fundamental corporate transactions, including reorganizations,
certain mergers or consolidations and the sale or transfer of assets. In
addition, there is doubt that the courts of the British Virgin Islands would
enforce liabilities predicated upon United States securities laws.
Our Shareholders Do Not Have The Same Protections Or Information Generally
Available To Shareholders Of U.S. Corporations Because The Reporting
Requirements For Foreign Private Issuers Are More Limited Than Those Applicable
To Public Corporations Organized In The United States. We are a foreign private
issuer within the meaning of rules promulgated under the Exchange Act. We are
not subject to certain provisions of the Exchange Act applicable to United
States public companies including: the rules under the Exchange Act requiring
the filing with the Securities and Exchange Commission of quarterly reports on
Form 10-Q or current reports on Form 8-K, the sections of the Exchange Act
regulating the solicitation of proxies, consents or authorizations in respect to
a security registered under the Exchange Act and the sections of the Exchange
Act requiring insiders to file public reports of their stock ownership and
trading activities and establishing insider liability for profits realized from
any "short-swing" trading transaction (i.e., a purchase and sale, or sale and
purchase, of the issuer's equity securities within six months or less). Because
we are not subject to these rules, our shareholders are not afforded the same
protections or information generally available to investors in public companies
organized in the United States.
10
Dispute With Augusta Technologie AG ("Augusta") Regarding Repurchase
Obligation May Result In Obligation For The Company To Redeem Certain Shares.
Effective May 1, 2001, we acquired Korona from Augusta. Part of the purchase
price was paid to Augusta by the issue of 180,726 shares of our restricted
common stock based on an agreed-upon price of $8.00 per share pursuant to the
Stock Purchase Agreement (the "Agreement") with Augusta. For accounting
purposes, the issue of the shares was originally recorded at the value of $5.00
per share, based on the average price per share for a total of 5 days before and
after the completion date of the acquisition. Under the terms of the Agreement
we had an obligation to register the common stock with the SEC. The Agreement
gave Augusta the right to have us redeem the common stock if the registration of
the stock had not been declared effective by the SEC on or before January 31,
2002. We filed a registration statement to register the common stock held by
Augusta which was declared effective by the SEC on March 7, 2002. In March 2002,
Augusta exercised the repurchase obligation requesting to return the 180,726
shares of common stock to us in exchange for a promissory note of $1,445,808,
repayable in nine monthly payments which would have commenced April 1, 2002 and
bearing interest at a rate of 8% per annum which would result in an interest
cost of approximately $50,000 for the whole period of the promissory note. We
are currently in negotiations with Augusta regarding the redemption. Although we
are optimistic that we will be successful in these negotiations, there can be no
assurance that this will occur. Further, if this matter goes to arbitration,
there can be no assurance that we will succeed in any such proceeding. If the
issue is arbitrated, there will be legal fees, travel expenses and other costs
related to the arbitration that will be incurred by us in defending the matter.
If we do not succeed we will be obligated to return the stock and repay the
promissory note, plus accrued interest, over a nine-month period of time.
Item 4. Information on the Company
A. History and Development of the Company.
Bonso Electronics International Inc. was formed on August 8, 1988 as a
limited liability International Business Company under the laws of the British
Virgin Islands under the name "Golden Virtue Limited." On September 14, 1988, we
changed our name to Bonso Electronics International, Inc. We operate under the
International Business Companies Ordinance, 1984, of the British Virgin Islands.
As part of our ongoing expansion of the sensor-based product business,
effective as of May 1, 2001 we acquired 100% of the equity of KORONA
Haushaltswaren GmbH & Co. KG, formerly a wholly-owned subsidiary of Augusta
Technologie AG, Frankfurt am Main, Germany. We originally acquired Korona for
approximately $3,634,000. Augusta exercised its option to redeem the stock it
received as part of the purchase price for a promissory note. While Augusta's
exercise of the option is disputed, the purchase price has been increased by
$542,178 for accounting purposes to reflect the possible redemption.
11
Korona had sales of approximately $16 million consolidated for the period
from May 1, 2001 to March 31, 2002. Korona markets consumer scale products
throughout Europe to retail merchandisers and distributors. These products
feature contemporary designs using the latest materials and attractive
packaging. Since 2000, we have manufactured a portion of Korona's product line
under an Original Equipment Manufacturers agreement and are very familiar with
Korona's stature in Europe and its potential for wider global distribution.
Our corporate administrative matters are conducted through our registered
agent, HWR Services Limited, P.O. Box 71, Road Town, Tortola, British Virgin
Islands. Our principal executive offices are located at Unit 1106 - 1110, 11/F,
Star House, 3 Salisbury Road, Tsimshatsui, Kowloon, Hong Kong. Our telephone
number is 852-2605-5822, our facsimile number is 852-2691-1724, our e-mail
address is info@bonso.com and our website is www.bonso.com. Our registered agent
in the United States is Henry F. Schlueter, Esq., 1050 Seventeenth Street, Suite
1700, Denver, Colorado 80265.
B. Business Overview.
Bonso Electronics International Inc. designs, develops, produces and sells
electronic sensor-based and wireless products for private label Original
Equipment Manufacturers (individually "OEM" or collectively "OEMs") and Original
Design Manufacturers (individually "ODM" or collectively "ODMs").
Since 1989, we have manufactured all of our products in China in order to
take advantage of the lower overhead costs and competitive labor rates. Our
factory is located in Shenzhen, China, about 50 miles from Hong Kong. The
convenient location permits us to easily manage manufacturing operations from
Hong Kong and facilitates transportation of our products out of China through
the port of Hong Kong.
Business Strategy
We believe that our continued growth depends upon our ability to strengthen
our customer base by enhancing and diversifying our products, increasing the
number of customers and expanding into additional markets, while maintaining or
increasing sales of our products to existing customers. Our continued growth and
profitability is also dependent upon our ability to control production costs and
increase production capacity. Our strategy to achieve these goals is as follows:
Product Enhancement And Diversification. We continually seek to improve and
enhance our existing products in order to provide a longer product life-cycle
and to meet increasing customer demands for additional features. Our research
and development staff are currently working on a variety of projects to enhance
our existing scale products and for the telecommunications industry and in the
postal scale/meter area. See "Products" below.
12
Maintaining And Expanding Business Relations With Existing Customers. We
promote relationships with our significant customers through regular
communication with them, including visiting certain of our customers in their
home countries and providing direct access to our manufacturing and quality
control personnel. This access, together with our concern for quality, has
resulted in a relatively low level of defective products. Moreover, we believe
that our emphasis on timely delivery, good service and low cost has contributed
and will continue to contribute to good relations with our customers and
increased orders. Further, we solicit suggestions from our customers for product
enhancement and when feasible plan to develop and incorporate the enhancements
suggested by our customers into our products.
Market And Product Expansion. We have significantly expanded our marketing
efforts in the United States and Europe. We have done this through the
acquisition of Korona and in the establishment of a new company to market the
Korona products into the United States. Further, we have taken significant steps
to expand the products that we sell and to position ourselves as both ODMs and
OEMs for other companies that require a manufacturing partner with our
capabilities. We intend to increase our marketing and sales efforts with both
existing and potential customers.
Controlling Production Costs. In 1989, recognizing that labor cost is a
major factor permitting effective competition in the consumer electronic
products industry, we relocated all of our manufacturing operations to China to
take advantage of the large available pool of lower cost manufacturing labor. We
located our manufacturing facilities within 50 miles of Hong Kong in order to
facilitate transportation of our products to markets outside of China, while
benefiting from the advantages associated with manufacturing in China.
We are actively seeking to control production costs by such means as
redesigning our existing products in order to decrease material and labor costs,
controlling the number of our employees, increasing the efficiency of workers by
providing regular training and tools and redesigning the flow of our production
lines.
Increasing Production Capacity. We have significantly expanded our
production capacity by leasing additional factory and dormitory buildings
immediately adjacent to our factory in China. We have the opportunity to
increase our capacity through the construction and/or leasing of additional
factory and dormitory space near our factory in China. We intend to carefully
monitor our capacity needs and to expand capacity as necessary.
Products
Our sensor-based scale products are comprised of bathroom, kitchen, office,
jewelry, laboratory, postal and industrial scales that are used in consumer,
commercial and industrial applications. These products accounted for 82% of
revenue for the fiscal year ended March 31, 2000, 65% for 2001 and 63% for 2002.
Our sensor-based healthcare products are comprised primarily of
thermometers and blood pressure meters used by consumers. These products
accounted for 8% of revenue for the fiscal year ended March 31, 2000, 2% for
2001 and 0% for 2002.
13
Our wireless telecommunications products are primarily comprised of two-way
radios and cordless telephones that are used in consumer and commercial
applications. These products accounted for 5% of revenue for the fiscal year
ended March 31, 2000, 29% for 2001 and 33% for 2002.
We also receive revenue from certain customers for the development and
manufacture of tooling and moulding for scales and telecommunication products.
Generally these tools and moulds are used by us for the manufacture and sale of
products. We also generate some sales of spare parts for repair work by our
customers and from repair work performed by us for our customers. These revenues
accounted for approximately 5% of net sales for the fiscal year ended March 31,
2000, 4% for 2001 and 4% for 2002.
The following table sets forth the percentage of net sales for each of the
product lines mentioned above, for the fiscal years ended March 31, 2000, 2001,
and 2002.
Year ended March 31,
---------------------------------------
Product Line 2000 2001 2002
- ------------ ---- ---- ----
Scales 82% 65% 63%
Healthcare products 8 2 0
Telecommunications products 5 29 33
Other products and services 5 4 4
- - -
Total 100% 100% 100%
==== ==== ====
Customers and Marketing
We sell our products primarily in the United States and Europe. Customers
for our products are primarily OEMs and ODMs, which market the products under
their own brand names. With the acquisition of Korona, we began to distribute
scale products directly to the retail and catalogue markets in Europe.
Net export sales to customers by geographic area consisted of the following
for each of the three years ended March 31, 2000, 2001 and 2002.
Year ended March 31,
--------------------------------------------------------------
2000 2001 2002
- --------------- ------------------- -------------------- ------------------
North America $ 7,339,473 48% $13,531,782 46% $24,553,379 46%
- --------------- ------------------- -------------------- ------------------
Europe $ 6,330,064 41% $14,160,371 48% $25,641,446 48%
- --------------- ------------------- -------------------- ------------------
Asia $ 1,568,635 10% $ 1,538,650 5% $ 2,223,602 4%
- --------------- ------------------- -------------------- ------------------
Others $ 142,114 1% $ 335,877 1% $ 884,674 2%
- --------------- ------------------- -------------------- ------------------
Total $15,380,286 100% $29,566,680 100% $53,303,101 100%
- --------------- ------------------- -------------------- ------------------
14
We maintain a marketing team of five people in Hong Kong, a marketing and
sales team of five people in China, and a marketing team of two people and a
sales team at Korona in Germany of fourteen people (including 8 persons acting
as sales representatives and 6 persons who are directly employed by Korona).
Also, our experienced engineering teams work directly with our customers to
develop and tailor our products to meet the customer's specific needs. We market
our products primarily through a combination of direct contact by our
experienced in-house technical sales staff and our sales representatives, and
through the use of direct mail catalogues and product literature. Korona sells
its products primarily through direct contact by sales agents/employees with
customers. In addition, our marketing teams contact existing and potential
customers by telephone, mail, facsimile and in person.
A list of our customers representing over 7% of sales for each of the prior
three fiscal years follows:
Percent of Sales - Year ended March 31,
- ------------------------------------ ---------- ---------- ------------
Electronics Sensor Customers 2000 2001 2002(1)
- ------------------------------------ ---------- ---------- ------------
Ohaus Corporation (USA) 11% 10% 4%
- ------------------------------------ ---------- ---------- ------------
Gram Precision (Canada) 7% 10% 6%
- ------------------------------------ ---------- ---------- ------------
Gottl Kern & Sohn GmbH (Germany) 11% 8% 4%
- ------------------------------------ ---------- ---------- ------------
Werner Dorsch GmbH & Co. (Germany) 12% 6% 4%
- ------------------------------------ ---------- ---------- ------------
Pitney Bowes, Inc. (USA) 7% 1% 4%
- ------------------------------------ ---------- ---------- ------------
(1) The inclusion of Korona's sales has a dilutive effect on sales percentage.
Percent of Sales - Year ended March 31,
- ------------------------------------- ---------- ---------- ------------------
Telecommunications 2000 2001 2002
Customer
- ------------------------------------- ---------- ---------- ------------------
Trisquare Communications (HK) 0% 0% 22%
Company Ltd.
- ------------------------------------- ---------- ---------- ------------------
Telson Information & Communications 3% 12% Less Than 1%
Co., Ltd. (Korea)
- ------------------------------------- ---------- ---------- ------------------
Telson Telecommunication Technology 3% 12% 0%
Co., Ltd. (Korea)
- ------------------------------------- ---------- ---------- ------------------
15
Sales of our products to OEMs accounted for approximately 95% of our total
net sales in the year ended March 31, 2000, 97% in the year ended March 31, 2001
and 65% for the year ended 2002. Korona contributed $16,039,000 of our total net
sales or 30% of total net sales.
Component Parts and Suppliers
We purchase over 1,000 different component parts from more than 100 major
suppliers and are not dependent upon any single supplier for key components. We
purchase components for our products primarily from suppliers in Japan, Taiwan,
South Korea, Hong Kong and the PRC. We have not experienced and don't expect to
experience any difficulty in obtaining needed component parts for our products.
Quality Control
We have received ISO 9001: 2000 certification from Det Norske Veritas
Certification B.V., the Netherlands. The ISO 9001: 2000 certification was
awarded to our subsidiary, Bonso Electronics Limited ("BEL") and to BEL's
subsidiary Bonso Electronics (Shenzhen) Company Limited, the manufacturing
plant. Further, we have received TL 9000 certification for our
telecommunications products.
ISO 9001 is one of the ISO 9000 series of quality system standards
developed by the International Organization for Standardization, a worldwide
federation of national standards bodies. ISO 9001 provides a model for quality
assurance (and continuous improvement) in product development, manufacturing,
installation and servicing that focuses on meeting customer requirements. The TL
9000 standard was developed by the Quality Excellence for Suppliers of
Telecommunications (QuEST) Leadership Forum. The TL 9000 certification process
was developed exclusively to address the quality of products and services
provided by suppliers to the telecommunications industry.
Patents, Licenses, Trademarks, Franchises, Concessions and Royalty Agreements
Except for the trademark for the KORONA mark, we have no patents, licenses,
franchises, concessions or royalty agreements that are material to our business.
We have obtained a trademark registration in Hong Kong and China for the marks
BONSO and MODUS in connection with certain electronic apparatus. Also, we have
acquired the trademark registration rights to the KORONA mark for 16 European
countries and have applied for a registration in the United States.
Product Research and Development/Competition
The major responsibility of the product design, research and development
personnel is to develop and produce designs to the satisfaction of and in
accordance with the specifications provided by the OEMs and ODMs. We believe our
engineering and product development capabilities are important to the future
success of our business. As an ODM or original design manufacturer, we take
specifications that are provided to us by the customer and design a product to
meet those specifications. Some of our product design, research, and development
activities are customer funded and are under agreements with specific customers
for specific products. We have successfully lowered the costs for our research
and development team by moving most research and development activities to our
facility in China. We principally employ Chinese engineers and technicians at
costs that are substantially lower than that would be required in Hong Kong.
16
Both the electronic sensor-based and wireless products are highly
competitive. Competition is primarily based upon unit price, product quality,
reliability, product features and management's reputation for integrity.
Accordingly, reliance is placed on research and development of new products,
line extensions and technological, quality and other continuous product
improvement. There can be no assurance that we will enjoy the same degree of
success in these efforts in the future. Research and development expenses,
aggregated $186,000 for 2000, $298,000 for 2001 and $427,000 for 2002.
Seasonality
The first calendar quarter of each year is typically the slowest sales
period because our manufacturing facilities in China are closed for two weeks
for the Chinese New Year holidays to permit employees to travel to their homes
in China. Throughout the remainder of the year, our products do not appear to be
subject to significant seasonal variation.
The summer months are generally the lowest sales point of the calendar year
for Korona; however, sales of telecommunication products are generally higher in
the summer months off-setting Korona's decline in sales.
Employee incentive compensation is conditioned on the employee's return to
work following the Chinese New Year and is paid to employees following the
reopening of the factory after the holidays. We believe that this method has
resulted in lower employee turnover than might otherwise have occurred.
Government Regulation
We are subject to comprehensive and changing foreign, federal, state and
local environmental requirements, including those governing discharges to the
air and water, the handling and disposal of solid and hazardous waste, and the
remediation of contamination associated with releases of hazardous substances.
We believe that we are in compliance with current environmental requirements.
Nevertheless, we use hazardous substances in our operations and as is the case
with manufacturers in general, if a release of hazardous substances occurs on or
from our properties we may be held liable and may be required to pay the cost of
remediation. The amount of any resulting liability could be material.
Foreign Operations
The Chinese government has continued to pursue economic reforms hospitable
to foreign investment and free enterprise, although the continuation and success
of these efforts is not assured. United States Congress voted to make China's
trade status as a most favored nation ("MFN") permanent when it formally entered
the WTO. China entered the WTO in December 2001. In the past, various interest
groups have urged that the United States not renew MFN for China. Controversies
17
between the United States and China may arise in the future that threaten the
status quo concerning trade between the United States and China. These
controversies could adversely affect our business by, among other things,
causing our products in the United States to become more expensive, which could
result in a reduction in the demand for our products by customers in the United
States. Our operations could be adversely affected by changes in Chinese laws
and regulation, including those relating to taxation and currency exchange
controls, by the imposition of economic austerity measures intended to reduce
inflation, and by social and political unrest.
Sovereignty over Hong Kong reverted to China on July 1, 1997. The 1984
Sino-British Joint Declaration, the 1990 Basic Law of Hong Kong, the 1992 United
States-Hong Kong Policy Act and other agreements provide some indication of the
business climate we believe will continue to exist in Hong Kong. Hong Kong
remains a Special Administrative Region ("SAR") of China, with certain
autonomies from the Chinese government. Hong Kong is a full member of the WTO.
It has separate customs territory from China, with separate tariff rates and
export control procedures. It has a separate intellectual property registration
system. The Hong Kong Dollar is legal tender in the SAR, freely convertible and
not subject to foreign currency exchange controls by China. The SAR government
has sole responsibility for tax policies, though the Chinese government must
approve the SAR's budgets. Notwithstanding the provisions of these international
agreements, we cannot be assured of the continued stability of political, legal,
economic or other conditions in Hong Kong. No treaty exists between Hong Kong
and the United States providing for the reciprocal enforcement of foreign
judgments. Accordingly, Hong Kong courts might not enforce judgments predicated
on the federal securities laws of the United States, whether arising from
actions brought in the United States or, if permitted, in Hong Kong.
Generally, our revenues are collected in United States Dollars, German
Marks and Euros. Our costs and expenses are paid in United States Dollars, Hong
Kong Dollars, German Marks, Euros and Chinese Renminbi. Accordingly, the
competitiveness of our products relative to locally produced products may be
affected by the performance of the United States Dollar compared with that of
our foreign customers' currencies. Fluctuations in the value of the Hong Kong
Dollar have not been significant since October 17, 1983, when the Hong Kong
government pegged the value of the Hong Kong Dollar to that of the United States
Dollar. However, there can be no assurance that the value of the Hong Kong
Dollar will continue to be tied to that of the United States Dollar. The value
of the Chinese Renminbi has been fairly stable for the last few years and it is
unlikely that there will be material fluctuation in the coming years. A
significant portion of Korona's costs and expenses are paid in United States
Dollars. The fluctuation of the value of the Euro compared to the United States
Dollar could expose us to additional risk of foreign currency transaction and
translation losses. We cannot be assured that these currencies will remain
stable or will fluctuate to our benefit. To manage our exposure to these risks,
we may, but have not yet purchased, currency exchange forward contracts,
currency options or other derivative instruments.
18
C. Organizational Structure.
We have one wholly-owned subsidiary - Bonso Electronics Limited ("BEL").
BEL was organized under the laws of Hong Kong and is responsible for the design,
development, manufacture and sale of our products.
BEL has one active Hong Kong subsidiary - Bonso Investment Limited ("BIL").
BIL was organized under the laws of Hong Kong and has been used to acquire and
hold our real estate investments in Hong Kong and China.
BEL also has one active PRC subsidiary - Bonso Electronics (Shenzhen)
Company Limited, which is organized under the laws of the PRC, and is used to
manufacture all of our products.
Bonso Electronics has a wholly-owned British Virgin Islands subsidiary -
Modus Enterprise International Inc., which owns 100% of KORONA Haushaltswaren
GmbH & Co. KG, which is organized under the laws of Germany. Korona is engaged
in marketing, distributing and retailing of consumer scale products throughout
Europe.
D. Property, plant and equipment.
British Virgin Islands
Our offices are located at Cragmuir Chambers, Road Town, Tortola, British
Virgin Islands. Only corporate administrative matters are conducted at such
offices, through our registered agent, HWR Services Limited.
Hong Kong
In July 2000, we purchased approximately 5,000 square feet of office space
located at Unit 1106 - 1110, 11/F, Star House, 3 Salisbury Road, Tsimshatsui,
Kowloon, Hong Kong as our principal executive office.
We own approximately 9,185 square feet on the 8th floor of the Universal
Industrial Centre, 23-25 Shan Mei Street, Fo Tan, Shatin, New Territories, Hong
Kong. This facility, which previously housed our principal office, now is used
exclusively as warehouse space.
We own a residential property in Hong Kong, which is located at Savanna
Garden, House No. 27, Tai Po, New Territories, Hong Kong. House No. 27 consists
of approximately 2,475 square feet plus a 177 square foot terrace and a 2,308
square foot garden area. The use of House No. 27 is provided to Mr. Anthony So
as part of his compensation. See Item 6 - "Directors, Senior Management and
Employees -- Compensation."
China
Our existing factory in China is located at Shenzhen in the DaYang
Synthetical Development District, close to the border between Hong Kong and
China. This factory consists of three factory buildings, which contain
approximately 245,000 square feet, three workers' dormitories, containing
approximately 155,000 square feet, a canteen and recreation center of
approximately 25,500 square feet, an office building, consisting of
approximately 25,500 square feet, and staff quarters for our supervisory
employees, consisting of approximately 35,000 square feet, for a total of
approximately 486,000 square feet.
19
All of the facilities noted above are wholly-owned, except one factory
building and one workers' dormitory. These facilities were initially used by us
pursuant to a Contract on the Use of Land and Supply of Workers with Shenzhen
Baoan Fuan Industrial Company; however, we were granted title to the land on
which these buildings are situated by the PRC in May 2001. Prior to being
granted title, the Contract on the Use of Land and Supply of Workers provided
that we could use approximately 269,000 square feet of land for a period of 50
years, commencing May 10, 1994. To obtain the land lease, we paid $1,810,344
plus a monthly management fee in the amount of $2,750. In April 2000, we
increased our production capacity by leasing a third factory building and a
third workers' dormitory.
We also own four residential properties described as follows:
o Lijingge Court, Unit F, 15th Floor, Hai Li Building, Shenzhen, China,
consisting of approximately 1,000 square feet.
o The 12th floor, Yuk Yui Court, Gui Hua Garden, Shenzhen Bay, China,
consisting of approximately 1,125 square feet.
o Lakeview Mansion, B-20C, Hujinju Building No. 63, Xinan Road, Boacheng
Baoan Shenzhen, China, consisting of approximately 1,591 square feet.
o Lakeview Mansion, B-11B, Hujinju Building No. 63, Xinan Road, Boacheng
Baoan Shenzhen, China, consisting of approximately 1,335 square feet.
The property in the Hai Li Building is rented to an unaffiliated third
party for RMB 2,500 per month (approximately $301) and the property at Yuk Yui
Court is rented to an unaffiliated third party for RMB 3,400 per month
(approximately $410). The Lakeview Mansion properties are utilized by directors
when they require accommodations in China.
We also own two office units in Beijing, namely Units 12 and 13 on the 3rd
floor, Block A of Sunshine Plaza in Beijing, China. Unit 12 consists of 1,102
square feet and Unit 13 consists of 1,860 square feet. Both Units are rented to
unaffiliated third parties for an aggregate monthly rental of RMB 21,000, or
approximately $2,537.
Adequacy of Facilities
We believe the manufacturing complex, including the newly leased space,
will be adequate for our reasonably foreseeable needs.
20
Item 5. Operating and Financial Review and Prospects
This section contains forward-looking statements that involve risks and
uncertainties. The actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under Item 3 - "Key Information - Risk Factors." The following
discussion and analysis should be read in conjunction with Item 3 - "Key
Information - Selected Financial Data" and the Consolidated Financial Statements
and Notes to Consolidated Financial Statements attached elsewhere in this Annual
Report.
Financial information as of and for the year ended March 31, 2002 reflects
the impact of the acquisition of Korona effected May 1, 2001 and therefore will
not be comparable with the financial information as of or for any past dates or
periods and will not be indicative of results of operations for future periods.
Critical Accounting Policies
The methods, estimates and judgments we use in applying our most critical
accounting policies have a significant impact on the results we report in our
financial statements. The United States Securities and Exchange Commission has
defined the most critical accounting policies as the ones that are most
important to the portrayal of our financial condition and results, and require
us to make our most difficult and subjective judgments, often as a result of the
need to make estimates of matters that are inherently uncertain. Based on this
definition, our most critical policies include inventories, trade receivables,
brand name and impairment.
Below, we discuss these policies further, as well as the estimates and
judgments involved. We also have other key accounting policies, such as revenue
recognition and deferred income taxes. We believe that these other policies
either do not generally require us to make estimates and judgments that are as
difficult or as subjective, or it is less likely that they would have a material
impact on our reported results of operations for a given period.
Inventories
Inventories are stated at the lower of cost or net realizable value with
cost determined on a first-in, first-out basis. Net realizable value is the
price at which inventories can be sold in the normal course of business after
allowing for the costs of completion and disposal. Inventories are reduced by
reserves for obsolescence and slow moving parts, which are determined based on
management's assessment of their current status.
This provision requires judgment regarding the marketability of certain
inventories as certain inventories may be identified as in good condition that
are subsequently obsolete and which could result in a subsequent write-off of
the related inventories to the statement of operations. Any change in the
marketability of inventories that were not previously provided for could
significantly change the calculation of reserves and the results of our
operations.
Impairment
Long-lived assets held and used by us and intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable.
21
If a triggering event occurs indicating that the carrying amount of an
asset may not be recoverable, an assessment of the carrying amount of that asset
is required. Triggering events include significant adverse changes in the market
value of an asset, business plans, legal factors, and the business or the
regulatory environment. The interpretation of such events requires judgement
from management, whether such an event has occurred and whether management feels
that assessment of the carrying value of the asset is required. If an event
occurs that could affect the carrying value of the asset and management does not
identify it as a triggering event, future operations could be adversely affected
if this asset is subsequently written off due to sudden downturns in the
business environment or sold for less than its carrying value and the asset had
not previously been identified as impaired.
Based on occurrence of triggering events the carrying amounts of fixed
assets are reviewed to assess whether their recoverable amounts have declined
below their carrying amounts. The recoverable amount is the present value of
estimated net future cash flows which we expect to recover from the future use
of the asset, undiscounted and without interest, plus the asset's residual value
on disposal. Where the recoverable amount of fixed and other long-lived assets
is less than carrying value, an impairment loss is recognized to write the
assets down to their fair value which is based on discounted estimated cash
flows from the future use of the asset.
The estimated cash flows arising from future use of the asset that are used
in the impairment analysis requires judgment regarding what we expect to recover
from future use of the asset and includes consideration of the change of our
market share and customer base, market competition, change in cost structure and
change in technology. In addition, the residual value of the asset on disposal
requires judgment based on the estimated fair value of the asset at the time of
disposal which could change due to changing market conditions and change in
expected use of the asset prior to disposal. Any changes in the estimates of
cash flows arising from future use of the asset or the residual value of the
asset on disposal based on changes in the market conditions, changes in the use
of the assets, management's plans, the determination of the useful life of the
assets and technology change in the industry could significantly change the
calculation of the fair value or recoverable amount of the asset and the
resulting impairment loss, which could significantly affect the results of our
operations.
Brand name
Brand name acquired as part of the purchase of a business is capitalized
based on the estimated fair value as at the date of acquisition and amortized
using the straight line method over the related estimated useful life of 15
years.
Expected useful lives are reviewed at each balance sheet date and, where
these differ significantly from previous estimates, amortization periods are
changed accordingly. Where an indication of impairment exists, such as the down
turn of economic inflow from the brand name, changes in business plan and so on,
the carrying amounts of brand name is assessed and written down to their
recoverable amounts. The measurement of the fair value of brand name is subject
to management's assumptions regarding future estimated cash flows, discount
rates, etc. Changes in these assumptions could significantly affect the
recording of an impairment charge related to this asset.
22
Trade receivables
Provision is made against trade receivables to the extent that collection
is considered to be doubtful as identified by management. This provision
requires judgment regarding the collectability of certain receivables as certain
receivables may be identified as collectible that are subsequently uncollectible
and which could result in a subsequent write-off of the related receivable to
the statement of operations. Any change in the collectibility of accounts
receivable that were not previously provided for could significantly change the
calculation of such provision and the results of our operations.
Overview
We derive our revenues principally from the sale of sensor-based and
wireless products manufactured in China, which represent 63% and 33% of total
sales for fiscal year ended March 31, 2002 respectively. For the fiscal year
ended March 31, 2000, we had net sales of approximately $15,380,000 and net
income of approximately $348,000. In the fiscal year ended March 31, 2001, net
sales increased to approximately $29,567,000 and net income increased to
approximately $1,604,000. In the fiscal year ended March 31, 2002, net sales
increased to approximately $53,303,000 and net income increased to approximately
$1,806,000.
We were operating at full capacity in our prior manufacturing facility and
in January 1997, moved our manufacturing operations to a new facility, almost
tripling our manufacturing capacity. In April 2000, we leased an additional
90,000 square feet of space on land adjacent to our manufacturing facility.
Management believes that we will be able to increase sales to take advantage of
our increased manufacturing capacity and improve margins and financial
performance. Increased revenue and net income in future periods will depend on
our ability to (i) strengthen our customer base by enhancing and diversifying
our products; (ii) increase the number of customers; (iii) expand into
additional markets; (iv) maintain or increase sales of our products to existing
customers; (v) increase production; and (vi) control all of our costs.
Although labor costs are increasing in China, our labor costs continue to
represent a relatively small percentage of our total production costs. We
believe that increased labor costs in China will not have a significant effect
on our total production costs or results of operations, and that we will be able
to continue to increase our production at our manufacturing facility without
substantially increasing our non-production salaries and related costs. In
addition, we have not experienced significant difficulties in obtaining raw
materials for our products and management does not anticipate any such
difficulties in the foreseeable future.
As part of our ongoing expansion of the sensor-based product business,
effective as of May 1, 2001 we, through a wholly-owned subsidiary, acquired 100%
of the equity of KORONA Haushaltswaren GmbH & Co. KG, formerly a wholly-owned
subsidiary of Augusta Technologie AG, Frankfurt am Main, Germany. Korona had
sales of approximately $16 million for the fiscal year ended March 31, 2002.
Korona markets consumer scale products throughout Europe to retail merchandisers
and distributors. These products feature contemporary designs using the latest
materials and attractive packaging. Since 2000, we have manufactured
approximately 20% of Korona's product line under an OEM agreement and are very
familiar with Korona's stature in Europe and its potential for wider global
distribution.
23
A. Operating results
The following table sets forth selected income data as a percentage of net
sales for the periods indicated.
Year ended March 31,
--------------------------------
Income Statement Data 2000 2001 2002
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales (72.3) (75.8) (75.4)
Gross margin 27.7 24.2 24.6
Selling expenses (1.7) (1.3) (4.6)
Salaries and related costs (12.3) (7.9) (7.3)
Research and development expenses (1.2) (1.0) (0.8)
Administration and general expenses (10.7) (8.1) (6.4)
Amortization of brand name -- -- (0.4)
Income from operations 1.8 5.9 5.1
Interest income 0.8 1.5 0
Interest expense (1.7) (1.1) (1.2)
Foreign exchange gains/(loss) 0.1 0.1 (0.1)
Other income 1.2 0.7 0.6
Consultancy fee -- (1.3) (0.7)
----- ----- -----
Income before income taxes 2.2 5.8 3.7
Income tax benefit/(expense) -- (0.4) (0.4)
----- ----- -----
Net income 2.2 5.4 3.3
===== ===== =====
Fiscal year ended March 31, 2002 compared to fiscal year ended March 31, 2001
Net Sales. Our sales increased 80% from approximately $29,567,000 for the
fiscal year ended March 31, 2001, to approximately $53,303,000 for the fiscal
year ended March 31, 2002, primarily as a result of the contribution from our
newly acquired subsidiary Korona and more sales of telecommunications products.
Korona had $16,039,000 in sales consolidated since May 1, 2001 representing 30%
of total sales of the group. Another source of contribution was originated from
additional telecommunications products sales of $9,016,000 as a result of
increased marketing efforts.
Gross Margin. Gross margin remained fairly stable at 24.6% for the fiscal
year ended March 31, 2002, as compared with 24.2% in the prior year. The gain
from higher gross margin of Korona products is offset by the loss from lower
gross margin of telecom products.
Selling Expenses. Selling expenses increased by 548% from approximately
$382,000 for the fiscal year ended March 31, 2001 to approximately $2,476,000
for the fiscal year ended March 31, 2002. This increase was attributable
primarily to the addition of Korona's selling expenses such as sales commissions
and advertising, which amounted to approximately $1,904,000 during the year.
24
Salaries And Related Costs. Salaries and related costs increased by 66%
from approximately $2,334,000 for the fiscal year ended March 31, 2001 to
approximately $3,880,000 for the fiscal year ended March 31, 2002. This increase
was primarily due to the inclusion of Korona's salaries of $1,287,000, which
constituted 55% of the increase. Further, there was an increase of three people
in the production management team.
Research And Development. Research and development expenses increased 43%
from approximately $298,000 for the fiscal year ended March 31, 2001 to
approximately $427,000 for the fiscal year ended March 31, 2002 due to the
increased research and development activities for telecommunications products.
Administration And General Expenses. Administration and general expenses
increased by 41% from approximately $2,411,000 for the fiscal year ended March
31, 2001 to approximately $3,411,000 for the fiscal year ended March 31, 2002.
This increase was primarily due to inclusion of Korona's general and
administrative expenses. Further, there was an increase in the allowance for
doubtful trade receivables provision of approximately $221,000 in the fiscal
year ended March 31, 2002, compared to a nil provision in the fiscal year ended
March 31, 2001.
Amortization Of Brand Name. We amortized approximately $203,000 relating to
the brand name acquired upon the acquisition of Korona during the fiscal year
ended March 31, 2002. The brand name is amortized using the straight line method
over the related estimated useful life of 15 years.
Income From Operations. As a result of the above changes, income from
operations increased by 56% from approximately $1,742,000 for the fiscal year
ended March 31, 2001 to $2,714,000 for the fiscal year ended March 31, 2002.
Interest Income. Interest income decreased by 95% from approximately
$458,000 in the fiscal year ended March 31, 2001, to approximately $167,000 for
the fiscal year ended March 31, 2002. This decrease was primarily the result of
a reduction of cash balances with our banks and the reduction of interest rates
in Hong Kong.
Interest Expenses. Interest expenses increased 91% from approximately
$338,000 for the fiscal year ended March 31, 2001 to approximately $645,000 for
the fiscal year ended March 31, 2002. This increase was primarily the result of
increased borrowings by Korona (i.e., short term loan and overdraft of
approximately $2,847,000 at March 31, 2002). These borrowings incurred an
interest expense of approximately $241,000 representing 79% of the increase.
Foreign Exchange Losses/Gains. Foreign exchange rates produced a gain of
approximately $43,000 for the fiscal year ended March 31, 2001 and a loss of
approximately $40,000 for the fiscal year ended March 31, 2002. The loss was
primarily attributable to the increased strength of the RMB in the People's
Republic of China against the U.S. Dollar, which arose when translating U.S
Dollars or H.K. Dollars to RMB for the purchase of raw materials and payments of
salaries and wages in the People's Republic of China.
25
Other Income. Other income increased 59% from approximately $205,000 for
the fiscal year ended March 31, 2001 to approximately $326,000 for the fiscal
year ended March 31, 2002. This increase was primarily a result of increased
scrap sales. The increase of scrap sales was mainly due to the increase in
production volume as the scrap mainly represented the remains of steel plate and
plastics after the production process.
Consultancy Fee. We entered into an agreement with a third party to provide
consulting/advisory services relating to our capital structure and fund-raising
activities. The period of service is from July 2000 to January 2003. A total
consultancy fee of $1,144,260 was capitalized in 2000 and is being amortized
over three years of the contract, resulting in a non-cash consultancy fee of
approximately $381,000 for the fiscal year ended March 31, 2002, relating to
warrants that were issued to the consultant.
Income Tax Expense. Income tax expense increased from approximately
$125,000 for the fiscal year ended March 31, 2001 to $190,000 for the fiscal
year ended March 31, 2002, representing 7% and 10% of net income respectively.
This increase was primarily attributed to an underprovision of income tax for
fiscal year ended March 31, 2001 of approximately $19,000 charged in the fiscal
year ended March 31, 2002.
Net Income. As a result of the above changes, net income increased from
approximately $1,604,000 for the fiscal year ended March 31, 2001 to t$1,806,000
for the fiscal year ended March 31, 2002, an increase of approximately $202,000,
or 13%.
Fiscal year ended March 31, 2001 compared to fiscal year ended March 31, 2000
Net Sales. Our net sales increased 92% from approximately $15,380,000 for
the fiscal year ended March 31, 2000, to approximately $29,567,000 for the
fiscal year ended March 31, 2001, primarily as a result of entering into the new
wireless telecommunications business during fiscal year ended March 31, 2000.
The full year's effect of the sales has contributed an increase in sales of
approximately $7,978,000. In addition, various new and existing customers for
electronic sensor-based products have increased their orders resulting in an
increase of net sales by 52% in this product segment.
Gross Margin. Gross margin decreased from 27.7% to 24.2% primarily due to
the write-off of approximately $570,000 in inventory and the increased
depreciation charges of approximately $721,000 for newly acquired machinery
during the year.
Selling Expenses. Selling expenses increased by 46% from approximately
$261,000 for the fiscal year ended March 31, 2000 to approximately $382,000 for
the fiscal year ended March 31, 2001. This increase was attributable primarily
to increases in freight charges.
Salaries And Related Costs. Salaries and related costs increased by 23%
from approximately $1,899,000 for the fiscal year ended March 31, 2000 to
approximately $2,334,000 for the fiscal year ended March 31, 2001. This increase
was primarily due to increases in administrative staff to support the
diversification in business segments and increased sales.
26
Research And Development. Research and development expenses increased 60%
from approximately $186,000 during the fiscal year ended March 31, 2000 to
approximately $298,000 for the fiscal year ended March 31, 2001. Research and
development costs increased due to development work on our telecommunications
products.
Administration And General Expenses. Administration and general expenses
increased by 46% from approximately $1,646,000 for the fiscal year ended March
31, 2000 to approximately $2,411,000 for the fiscal year ended March 31, 2001.
This increase was primarily due to increased trading activities and the related
increase in administrative overhead to support the higher sales.
Income From Operations. As a net result of the above changes, income from
operations increased by 545% from approximately $270,000 for the fiscal year
ended March 31, 2000 to approximately $1,742,000 for the fiscal year ended March
31, 2001.
Other Income. Other income increased 7% from approximately $192,000 for the
fiscal year ended March 31, 2000 to approximately $205,000 for the fiscal year
ended March 31, 2001. This small increase was primarily a result of increased
scrap sales.
Foreign Exchange Losses/Gains. Foreign exchange rates produced a gain of
approximately $14,000 for the fiscal year ended March 31, 2000 and a gain of
approximately $43,000 for the fiscal year ended March 31, 2001. This difference
was primarily attributable to the pegged exchange rate and the actual
transaction rate.
Interest Income. Interest income increased by 252% from approximately
$130,000 in the fiscal year ended March 31, 2000 to approximately $458,000 in
the fiscal year ended March 31, 2001, because of an increase in funds available
to earn interest resulting from the exercise of warrants in early 2000.
Interest Expenses. Interest expenses increased 30% from approximately
$261,000 in the fiscal year ended March 31, 2000 to approximately $338,000 for
the fiscal year ended March 31, 2001. The increase resulted from the Company's
increased use of its banking facilities to support the growth in sales.
Consultancy Fee. We have entered into an agreement with a third party to
provide consulting/advisory services relating to our capital structure and
fund-raising activities. The period of service is from July 2000 to January 2003
and a consultancy fee of approximately $381,000 was incurred for the fiscal year
ended March 31, 2001, relating to warrants issued to the consultant.
Net Income. As a result of the above changes, net income increased from the
fiscal year ended March 31, 2000 compared to the fiscal year ended March 31,
2001 by approximately $1,256,000.
27
Fiscal year ended March 31, 2000 compared to fiscal year ended March 31, 1999
Net Sales. Our net sales increased 17.9% from approximately $13,046,000 for
the fiscal year ended March 31, 1999, to approximately $15,380,000 for the
fiscal year ended March 31, 2000, because of increased orders from various
existing and new customers.
Gross Margin. Gross margin decreased from 32.5% to 27.7% because of
expenses associated with startup costs with our telecommunications contracts.
Selling Expenses. Selling expenses increased by 32.5% from approximately
$197,000 for the fiscal year ended March 31, 1999 to approximately $261,000 for
the fiscal year ended March 31, 2000. This increase was attributable primarily
to the increase in sales.
Salaries And Related Costs. Salaries and related costs increased by 16.8%
from approximately $1,626,000 for the fiscal year ended March 31, 1999 to
approximately $1,899,000 for the fiscal year ended March 31, 2000. This increase
was primarily due to increases in administrative staff to support the
diversification in business segments.
Research And Development. Research and development expenses decreased 67.1%
from approximately $566,000 during the fiscal year ended March 31, 1999 to
approximately $186,000 for the fiscal year ended March 31, 2000. Research and
development costs decreased due to the maturation of most development projects
in 1998 and the write-off of expenses for a telephone project during the year
ended March 31, 1999.
Administration And General Expenses. Administration and general expenses
remained relatively stable with an insignificant increase for the fiscal year
ended March 31, 2000 compared to the fiscal year ended March 31, 1999.
Income from Operations. As a net result of the above changes, income from
operations also remained relatively unchanged, increasing slightly from
approximately $244,000 for the fiscal year ended March 31, 1999 to approximately
$270,000 for the fiscal year ended March 31, 2000.
Other Income. Other income increased 262.3% from approximately $53,000 for
the fiscal year ended March 31, 1999 to approximately $192,000 for the fiscal
year ended March 31, 2000. This increase was primarily a result of sales of
scrap of $116,000.
Foreign Exchange Losses/Gains. Foreign exchange rates produced a gain of
approximately $38,000 for the fiscal year ended March 31, 1999 and a gain of
approximately $14,000 for the fiscal year ended March 31, 2000. This difference
was primarily attributable to the difference between the pegged exchange rate
and the actual transaction rate.
Interest Income And Interest Expenses. Interest expenses, net of interest
income, decreased by 65.7% from approximately $382,000 in the fiscal year ended
March 31, 1999 to approximately $131,000 in the fiscal year ended March 31,
2000, as a result of reduced bank borrowings due to improvements in cash flow.
28
Net Income. As a result of the above changes, net income increased from the
fiscal year ended March 31, 1999 compared to the fiscal year ended March 31,
2000 by approximately $334,000.
Impact of Inflation
We believe that inflation has not had a material affect on our business
between 2001 and 2002. During the year, Hong Kong has gone through a period of
deflation and Germany has sustained a low inflation period. We have generally
been able to modify and improve our product designs so that we could either
increase the prices of our products or lower the production cost in order to
keep pace with inflation. Although our costs of components used in the
manufacture of our products have been relatively stable, we believe that any
possible significant increase in material costs would affect the entire
electronics industry. Thus it would not have a negative material impact on our
competitive position in the industry. We believe any increases in labor costs
will not materially impact our operations because of the lower labor costs of
operating in China.
Taxation
Under current British Virgin Islands law, we are not subject to tax on our
income. Most of our subsidiaries' profits accrue in Hong Kong and Germany where
the corporate tax rate is currently 16% and 26.375%, respectively. However, as
Korona is a partnership, it is only subject to a local statutory tax rate of
14.17%. There is no tax payable in Hong Kong on offshore profit or on dividends
paid to Bonso Electronics Limited by its subsidiaries or to us by Bonso
Electronics Limited. Therefore, our overall effective tax rate may be lower than
that of most United States corporations; however, this advantage could be
materially and adversely affected by changes in the tax laws of the British
Virgin Islands, Germany, Hong Kong or China.
Our subsidiary Bonso Electronics (Shenzhen) Company Limited was fully
exempt from state income tax in the PRC for the first two years starting from
the first profit-making year followed by a 50% reduction over the ensuing three
years. The first profit-making year of Bonso Electronics (Shenzhen) Company
Limited was deemed to be the fiscal year ended December 31, 1998. Therefore, we
are subject to income tax at the rate of 7.5% in the PRC effective January 1,
2000 to December 31, 2002. As of January 1, 2003, we will be subject to full
taxation from the PRC.
No reciprocal tax treaty regarding withholding taxes exists between the
United States and the British Virgin Islands. Under current British Virgin
Islands law, dividends, interest or royalties paid by us to individuals are not
subject to tax as long as the recipient is not a resident of the British Virgin
Islands. If we were to pay a dividend, we would not be liable to withhold any
tax, but shareholders would receive gross dividends, if any, irrespective of
their residential or national status.
29
Dividends, if any, paid to any United States resident or citizen
shareholder are treated as dividend income for United States federal income tax
purposes. Such dividends are not eligible for the 70% dividends-received
deduction allowed to United States corporations on dividends from a domestic
corporation under Section 243 of the United States Internal Revenue Code of 1986
(the "Internal Revenue Code"). Various Internal Revenue Code provisions impose
special taxes in certain circumstances on non-United States corporations and
their shareholders. You are urged to consult your tax advisor with regard to
such possibilities and your own tax situation.
In addition to United States federal income taxation, shareholders may be
subject to state and local taxes upon their receipt of dividends.
Exchange Rates
We sell most of our products to international customers. Our principal
export markets are North America (mainly the United States), Europe (mainly
Germany) and Asia. Other markets are other European countries (such as the
United Kingdom), Australia and Africa. Sales to international customers are made
directly by us to our customers. We sell all of our products in United States
Dollars and pay for our material components principally in United States Dollars
and Hong Kong Dollars. A very small portion of the components used are paid for
in Japanese Yen. Most factory expenses incurred are paid in Chinese Renminbi.
Because the Hong Kong Dollar is pegged to the United States Dollar, our only
material foreign exchange risk arises from potential fluctuations in the Chinese
Renminbi; however, the Chinese Renminbi was very stable in the past fiscal year
and it is unlikely that there will be material fluctuations in the coming year.
We don't currently engage in hedging transactions, and don't intend to do so in
the future. Our newly acquired subsidiary Korona primarily pays for its products
in United States Dollars and sells its products in German Marks or Euros. As a
result, we may experience greater foreign exchange risk than we have in the
past.
B. Liquidity and capital resources
We have traditionally relied on borrowings to meet our working capital
requirements. These borrowings have been supplemented by internally generated
funds and trade credits from suppliers.
Effective May 1, 2001, we acquired Korona from Augusta. Part of the
purchase price was paid to Augusta by the issue of 180,726 shares of our
restricted common stock based on an agreed-upon price of $8.00 per share
pursuant to the Stock Purchase Agreement (the "Agreement") with Augusta. For
accounting purposes, the issue of the shares was originally recorded at the
value of $5.00 per share, based on the average price per share for a total of 5
days before and after the completion date of the acquisition. Under the terms of
the Agreement we had an obligation to register the common stock with the SEC.
The Agreement gave Augusta the right to have us redeem the common stock if the
registration of the stock had not been declared effective by the SEC on or
before January 31, 2002. We filed a registration statement to register the
common stock held by Augusta but it was not declared effective by the SEC until
March 7, 2002. In March 2002, Augusta exercised the repurchase obligation
requesting to return the 180,726 shares of common stock to us in exchange for a
promissory note of $1,445,808, repayable in nine monthly payments which would
have commenced April 1, 2002 and bearing interest at a rate of 8% per annum
which is approximately $50,000 for the whole period of the promissory note. We
are currently in negotiations with Augusta regarding the redemption. If we are
not successful in resolving the matter favorably through negotiations or in an
arbitration, we may have to pay Augusta $1,445,808 plus interest and attorneys
fees. While this would be a large cash expenditure for us, we do not believe
making that payment to Augusta would have a material adverse effect upon us.
30
The following tables set forth information with respect to our contractual
obligations and commercial commitments as of March 31, 2002.
Contractual Obligations
Payments due by Period
-------------------------------------------------
Total 1 to 3 years 4 to 5 years More than 5 years
----- ------------ ------------ -----------------
Capital Leases 934,279 934,279 0 0
Operating Leases 895,857 442,332 134,604 318,921
Other Commercial Commitments
Payments due by Period
---------------------------------
4 to 5 More than
Total 1 to 3 years years 5 years
----- ------------ ----- -------
Letters of credit 3,308,973 3,308,973 0 0
Short-term loans 3,754,477 3,754,477 0 0
Long-term loans 30,231 30,231 0 0
Acquisitions of Plant & Machineries 17,820 17,820 0 0
As of March 31, 2002, we had in place general banking facilities with four
financial institutions with amounts available aggregating $25,430,340. Such
facilities include the ability to obtain overdrafts, letters of credit,
short-term notes payable, short-term loans and long-term loans. As of March 31,
2002, we had utilized $7,093,681 from these general banking facilities. Interest
on this indebtedness fluctuates with the prime rate and HIBOR as set by the Hong
Kong Bankers Association. The bank credit facilities are collateralized by
certain of our bank deposits, real property located at Savanna Garden in Tai Po,
the warehouse space in Fo Tan, office space in Tsimshatsui, and a bank guarantee
in the amount of $5,129,908. Our bank credit facilities are due for renewal
annually. We anticipate that the banking facilities will be renewed on
substantially the same terms and our utilization in the next year will remain at
a similar level as that in the current year. Excluding the current portion of
long-term debt and capital lease obligations, the amounts of total short-term
bank borrowings outstanding as of March 31, 2002 and 2001 were $6,612,010 and
$4,321,846, respectively. During the fiscal year ended March 31, 2002 we paid a
total of $645,045 in interest on indebtedness.
31
Operating activities provided $5,472,469 of net cash for the fiscal year
ended March 31, 2002 compared to $3,126,892 of net cash for the fiscal year
ended March 31, 2001. The increase from the fiscal year ended March 31, 2001, to
the fiscal year ended March 31, 2002, was primarily due to an increase in net
income before depreciation charges and an increase in receivables collected
during the year due to tight credit control management (excluding the additional
trade receivables acquired from Korona). Investing activities used $4,888,321 of
net cash for the fiscal year ended March 31, 2002, and used $6,718,312 of net
cash for the fiscal year ended March 31, 2001. The decrease in net cash used in
investing activities from the fiscal year ended March 31, 2001, to the fiscal
year ended March 31, 2002, was primarily due to a substantial reduction in the
amount of cash used in acquisition of property, plant and equipment. However, we
expended net cash of $3,044,000 in the acquisition of Korona. Financing
activities used $4,028,389 of net cash for the fiscal year ended March 31, 2002
and provided $954,413 of net cash for the fiscal year ended March 31, 2001. This
net decrease in cash provided was primarily due to repayment of banking
facilities in 2002 versus the increase in utilization of banking facilities in
2001.
As of March 31, 2002, we had $1,878,156 in cash and cash equivalents as
opposed to $5,322,397 as of March 31, 2001. Working capital at March 31, 2002,
was $9,599,000, compared to $9,323,000 at March 31, 2001. There are no other
material unused sources of liquid assets. We believe there are no material
restrictions (including foreign exchange controls) on the ability of our
subsidiaries to transfer funds to us in the form of cash dividends, loans,
advances or product/material purchases. We do not anticipate incurring any
significant capital expenditures during this fiscal year. We believe our working
capital is sufficient for our present requirements.
Our current ratio (current assets divided by current liabilities) decreased
from 1.99 as of March 31, 2001 to 1.71 as of March 31, 2002. Our quick ratio
(cash and cash equivalents, restricted cash deposits and receivables divided by
current liabilities) decreased from 1.43 as of March 31, 2001 to 1.05 as of
March 31, 2002.
C. Research and development, patents and licenses, etc.
We believe that our engineering and product development capabilities are
important to the future success of our business. We have successfully lowered
the costs of our research and development team by moving most research and
development activities to our facility in China and principally employing
Chinese engineers and technicians at costs that are substantially lower than
that would be required in Hong Kong.
At March 31, 2002, we employed three individuals in Hong Kong and 26
individuals (32 for 2001) in China as our engineering staff, who are at various
times engaged in research and development. The major responsibility of the
product design and research and development personnel is to develop and produce
designs of scales products to the satisfaction of and in accordance with the
specifications provided by the ODMs and OEMs. We anticipate hiring additional
research and development personnel to meet the increased demand for scales
products.
32
During the fiscal year ended March 31, 2002, we spent approximately
$427,000 on research and development as opposed to $298,000 for the fiscal year
ended March 31, 2001, and approximately $186,000 during the fiscal year ended
March 31, 2000.
D. Trend information
During the past two years we have expanded into the telecommunications
sector and are manufacturing cordless telephones and family radios
(walkie-talkies). Significant expenditures were made to acquire additional
production facilities and equipment to support our expansion into the
telecommunications market. Although we are optimistic about our future in the
manufacture and sale of telecommunications products, we are dependent upon a
limited number of customers, and the loss of any of these customers could have a
material adverse effect upon us. At May 31, 2002, our backlog of manufacturing
orders was $4,996,530 compared to $9,009,059 at June 30, 2001. We believe that
revenues from telecommunications products as a percentage of sales will decline
in the fiscal year ended March 31, 2003, because management believes that
increases in net sales will primarily be in sales of scales.
In 2001, we acquired Korona, a German company that markets consumer scale
products throughout Europe to retail merchandisers and distributors. These
products feature contemporary designs using the latest materials and attractive
packaging. We have manufactured a portion of Korona's product line under an OEM
agreement since 2000 and are very familiar with Korona's stature in Europe and
its potential for wider global distribution. Further, the acquisition of Korona
is our first step in vertically integrating our manufacturing business with the
marketing and distribution of the products we manufacture under our own brand
name. We intend as part of this expansion strategy to evaluate other acquisition
opportunities.
Both the scale business and the telecommunication business are subject to
some seasonal variation. Typically the first calendar quarter is our slowest
quarter. This is due in part to the occurrence of the Chinese New Year's holiday
and the fact that our factory workers take leave for the holiday. In addition,
sales during the first calendar quarter of both scales and telecommunications
products usually dip following the increase in sales during the Christmas
season. Retail sales of scales generally decline in the summer, and sales of
telecommunications products generally increase during the summer.
Recent Accounting Pronouncements
In 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS No. 141 also requires that the
Group recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS No. 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations for which the date of acquisition is on or after July 1, 2001. It
also requires, upon adoption of SFAS No. 142, that the Group reclassify the
carrying amounts of intangible assets and goodwill based on the criteria in SFAS
No. 141.
33
SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill impairment at least annually. In
addition, SFAS No. 142 requires that the Group identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS No. 142. SFAS No. 142 is required to be
applied in fiscal years beginning after December 31, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized. Upon adoption of SFAS No.142, anticipated
undiscounted cash flow attributable to the intangible asset and the goodwill
will be reviewed to assess whether there are any impairment losses. The Group
will adopt SFAS No. 142 during the year ended March 31, 2003 and goodwill of the
Group of $204,217 as at March 31, 2002 will no longer be subjected to
amortization.
In 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", but retains its fundamental provisions for recognizing and
measuring impairment of long-lived assets to be held and used. SFAS No. 144
standardizes the accounting and presentation requirements for all long-lived
assets to be disposed of by sale, superceding previous guidance for discontinued
operations of business segments. It requires that all long-lived assets to be
disposed of by sale are carried at the lower of carrying amount or fair value
less costs to sell, and that depreciation should cease to be recorded on such
assets. This standard is effective for fiscal years beginning after December 15,
2001.
We believe that adoption of the new standards will not materially impact
our results of operations and financial position.
Item 6. Directors, Senior Management and Employees
A. Directors and senior management.
Our board of directors and executive officers are listed below:
Name Age Position with Bonso
- ---- --- -------------------
Anthony So 58 President, Chief Executive Officer,
Secretary, Treasurer, Chief Financial Officer,
Chairman of the Board and Director
Kim Wah Chung 44 Director of Engineering and Research and
Development and Director
Cathy Kit Teng Pang 40 Director of Finance and Director
Woo-Ping Fok 53 Director
J. Stewart Jackson, IV 66 Director
George O'Leary 64 Director
Henry F. Schlueter 51 Director and Assistant Secretary
34
ANTHONY SO is the founder of Bonso. He is our Chief Executive Officer and
Chief Financial Officer and has been our President, Chairman of the Board of
Directors and Treasurer since inception, and our Secretary since July 1991. Mr.
So received his BSE degree in civil engineering from National Taiwan University
in 1967 and a masters degree in business administration ("MBA") from the Hong
Kong campus of the University of Hull, Hull, England in 1994. Mr. So has been
Chairman of the Hong Kong GO Association since 1986, and also served as Chairman
of the Alumni Association of National Taiwan University for the 1993-1994
academic year. Mr. So has served as a trustee of the Chinese University of Hong
Kong, New Asia College since 1994.
KIM WAH CHUNG has been a director since September 21, 1994. Mr. Chung has
been employed by us since 1981 and currently holds the position of Director of
Engineering and Research and Development. Mr. Chung is responsible for all
research projects and product development. Mr. Chung's entire engineering career
has been spent with Bonso, and he has been involved in all of our major product
developments. Mr. Chung graduated with honors in 1981 from the Chinese
University of Hong Kong with a Bachelor of Science degree in electronics.
CATHY KIT TENG PANG has been a director of Bonso since January 1, 1998. Ms.
Pang was first employed by us as Financial Controller in December 1996 and was
promoted to Director of Finance on April 1, 1998. Ms. Pang was employed as an
auditor in an international audit firm from 1987 to 1991, at which time she
joined a Hong Kong listed company in the field of magnetic industry as Assistant
Financial Controller. From 1994 until she joined us in 1996, she was employed as
Deputy Chief Accountant in a management and property development company in Hong
Kong and China. Ms. Pang has a Bachelor of Business Administration degree from
York University in Toronto, Canada. She is a member of the American Institute of
Certified Public Accountants and of the Hong Kong Society of Accountants.
WOO-PING FOK was elected to our Board of Directors on September 21, 1994.
Mr. Fok and his firm, Norman M.K. Yeung & Co., have served as our Hong Kong
counsel since 1993. Mr. Fok was admitted to the Canadian Bar as a Barrister &
Solicitor in December 1987 and was a partner in the law firm of Woo & Fok, a
Canadian law firm with its head office in Edmonton, Alberta, Canada. In 1991,
Mr. Fok was qualified to practice as a Solicitor of England & Wales, a Solicitor
of Hong Kong and a Barrister & Solicitor of Australian Capital Territory. Mr.
Fok practices law in Hong Kong and is a partner with Wong & Fok. Mr. Fok's major
areas of practice include conveyancing or real property law, corporations and
business law, commercial transactions and international trade with a special
emphasis in China trade matters.
J. STEWART JACKSON IV has been a director since January 10, 2000. From 1962
until its merger with Republic Industries in 1996, Mr. Jackson served in various
management capacities, including president, of Denver Burglar Alarm Co., Inc., a
business founded by his family. In addition, in the mid-1960's, Mr. Jackson
founded Denver Burglar Alarm Products, a separate company which invented,
patented, manufactured, distributed and installed contained ionization smoke
detectors and which was later sold to a conglomerate manufacturer. After the
merger of Denver Burglar Alarm Co., Inc., Mr. Jackson founded Jackson Burglar
Alarm Co., Inc., of which he is currently president. Mr. Jackson served on the
advisory board of directors for Underwriter's Laboratories for burglar and fire
alarm systems for 25 years and has been an officer in the Central Station
Protection Association, which, along with the National Burglar Alarm
Association, was formed by his family in the late 1940's. Mr. Jackson graduated
from the University of Colorado in 1962 with a degree in Business Management and
Engineering.
35
GEORGE O'LEARY has been a director since January 1997. From November 1994
to the present time, Mr. O'Leary has been President of Pacific Rim Products,
Newport Beach, California, a trading company that provides offshore sourcing
alternatives to U.S. based electronics companies. For eight years prior to 1994,
Mr. O'Leary was President, CEO and a director of Micro General Corporation,
Santa Ana, California, a manufacturer and distributor of mechanical and
electronic scale products. For eight years prior to that, Mr. O'Leary was Vice
President and General Manager of Lanier Business Products, Atlanta, Georgia, a
manufacturer and distributor of office products. Mr. O'Leary has a Bachelor of
Science degree in Electrical Engineering from Northeastern University, Boston,
Massachusetts.
HENRY F. SCHLUETER has been a director since October 2001, and has been our
Assistant Secretary since October 6, 1988. Since 1992, Mr. Schlueter has been
the Managing Director of Schlueter & Associates, P.C., a law firm, practicing in
the areas of securities, mergers and acquisitions, finance and corporate law.
Mr. Schlueter has served as our United States corporate and securities counsel
since 1988. From 1989 to 1991, prior to establishing Schlueter & Associates,
P.C., Mr. Schlueter was a partner in the Denver, Colorado office of Kutak Rock
(formerly Kutak, Rock & Campbell), and from 1984 to 1989, he was a partner in
the Denver office of Nelson & Harding. Mr. Schlueter is a member of the American
Institute of Certified Public Accountants, the Colorado Society of CPA's, the
Colorado and Denver Bar Associations and the Wyoming State Bar.
There are no family relationships between any of our directors and
executive officers.
No arrangement or understanding exists between any such director or officer
and any other persons pursuant to which any director or executive officer was
elected as a director or executive officer. Our directors are elected annually
and serve until their successors take office or until their death, resignation
or removal. The executive officers serve at the pleasure of the Board of
Directors.
B. Compensation.
The aggregate amount of compensation paid by us and our subsidiaries during
the year ended March 31, 2002 to all directors and officers as a group for
services in all capacities was approximately $1,082,564 including compensation
in the form of housing in Hong Kong for our Chairman and Chief Executive Officer
and Director of Engineering and Research and Development consistent with the
practice of other companies in Hong Kong. Total compensation for the benefit of
Anthony So was $559,672, for the benefit of Cathy Kit Teng Pang was $109,497,
for the benefit of K.W. Chung was $140,016, for the benefit of Mr. George
O'Leary was $165,000, and for the benefit of Henry F. Schlueter was an aggregate
of $108,379. The $108,379 listed as having been paid for the benefit of Mr.
Schlueter was paid to his law firm, Schlueter & Associates, P.C. for legal
services rendered and expense incurred.
36
We did not set aside or accrue any amounts to provide pension, retirement
or similar benefits for directors and officers for the fiscal year ended March
31, 2002, other than contributions to our Provident Fund Plan which aggregated
$31,654 for officers and directors during the fiscal year ended March 31, 2002.
Options of Directors and Senior Management
The following table provides information concerning options owned by the
directors and senior management at May 31, 2002. The table excludes our publicly
traded warrants owned by the directors and senior management, information about
which is disclosed in Item 7 of this Report together with information concerning
the beneficial ownership of our common shares by directors and senior management
and major shareholders.
Number of Common Shares Exercise
Subject to Price Per
Name Stock Options Share Expiration Date
---- ------------- ----- ---------------
Anthony So 158,000 $8.00 January 6, 2010
128,000 $3.65 April 9, 2011
128,000 $2.50 March 6, 2012
Kim Wah Chung 20,000 $8.00 January 6, 2010
20,000 $3.65 April 9, 2011
20,000 $2.50 March 6, 2012
Cathy Kit Teng Pang 20,000 $8.00 January 6, 2010
20,000 $3.65 April 9, 2011
20,000 $2.50 March 6, 2012
George O'Leary 10,000 $8.125 January 12, 2010
10,000 $7.875 January 9, 2011
10,000 $2.55 October 15, 2011
Woo Ping Fok 10,000 $8.125 January 12, 2010
10,000 $7.875 January 9, 2011
10,000 $2.55 October 15, 2011
J. Stewart Jackson IV 10,000 $7.875 January 9, 2011
10,000 $2.55 October 15, 2011
Henry F. Schlueter 10,000 $8.00 January 6, 2010
Directors
Except for that mentioned above, our directors do not receive any
additional monetary compensation for serving in their capacities. However,
outside directors receive stock options pursuant to the 1996 Non-Employee
Directors' Stock Option Plan and have been granted other options. (See "Stock
Option Plans -- The 1996 Non-Employee Directors' Stock Option Plan," below.) All
directors are reimbursed for all reasonable expenses incurred in connection with
services as a director.
37
Provident Fund Plan
With effect from January 1, 1988, Bonso Electronics Limited ("BEL"), our
wholly-owned foreign subsidiary, started a Provident Fund Plan (the "Plan") with
a major international assurance company to provide life insurance and retirement
benefits for its employees. All permanent full time employees who joined BEL
before December 2000, excluding factory workers, are eligible to join the Plan.
Members of the Plan are required to contribute 5% of their monthly salary.
The contribution by BEL is as follows:
Years of Service % of salary as BEL's contribution
---------------- ---------------------------------
Less than 5 years 5.0%
5 to 10 years 7.5%
More than 10 years 10.0%
The Mandatory Provident Fund (the "MPF") was introduced by the Hong Kong
Government commencing in December 2000. BEL joined the MPF with a major
international assurance company. All permanent full time employees who joined
BEL in or after December 2000, excluding factory workers, are eligible to join
the MPF. Members' and employers' contributions to the MPF are both at 5% of the
members' monthly salaries and are subject to a maximum contribution of HK$1,000
monthly.
At normal retirement age, death or ill health, the member shall be entitled
to receive from the Plan a lump sum equal to the total of the member's and BEL's
contributions plus a return on their investment. On resignation prior to normal
retirement age, a member shall be entitled to receive from the Plan a lump sum
equal to the member's contributions plus a percentage of the employer's balance
determined in accordance with a predetermined set scale.
BEL's total contributions to the Plan and the MPF for the years ended March
31, 2000, 2001 and 2002 amounted to $64,921, $53,704 and $78,995, respectively.
C. Board practices.
Messrs. Woo Ping Fok, George O'Leary and Henry F. Schlueter are members of
our Audit Committee. Mr. O'Leary acts as chairman of the Audit Committee. The
Audit Committee's responsibilities include recommending to the board the
selection of our independent auditors, reviewing the arrangements and the scope
of the independent audit and reviewing all financial statements. We don't have a
compensation committee.
D. Employees.
At March 31, 2002, we employed 2,064 persons, compared with 2,314 persons
at March 31, 2001; 39 employees in Hong Kong (40 for 2001), 2,001 employees in
China (2,274 for 2001), and 24 employees in Germany. Employees are not covered
by collective bargaining agreements. We consider our global labor practices and
employee relations to be good.
38
E. Share ownership.
The following table shows the number of shares of common stock beneficially
owned by our directors and executive officers as of May 31, 2002:
Total Number of
Shares of Shares of
Common Stock Common Stock Percent of
Owned of Options and Beneficially Beneficial
Name Record Warrants Held Owned Ownership
---- ------ ------------- ----- ---------
Anthony So 1,626,195(1) 414,000(2), (3) 2,040,195 34.01%
Kim Wah Chung 93,700 60,000(4), (5) 153,700 2.72%
Cathy Kit Teng Pang 35,438 60,000(4), (5) 95,438 1.69%
Henry F. Schlueter 34,403 10,000(6) 44,403 0.79%
Woo Ping Fok 61,907 30,000(7), (8) 91,907 1.64%
George O'Leary 17,775 30,000(7), (8) 47,775 0.85%
J. Stewart Jackson IV 463,075 120,000(8) 583,075 10.22%
All Directors and Officers
as a group (7 persons) 2,332,493 724,000 3,056,493 48.45%
- ----------
(1) Includes 1,143,421 shares of common stock owned of record by a corporation
that is wholly owned by a trust of which Mr. So is the sole beneficiary.
(2) Includes options to purchase 158,000 shares of common stock at an exercise
price of $8.00 per share expiring January 6, 2010.
(3) Includes options to purchase 128,000 shares of common stock at an exercise
price of $3.65 per share expiring on April 9, 2011, and options to purchase
128,000 shares of common stock at an exercise price of $2.50 per share
expiring on March 6, 2012.
(4) Includes options to purchase 20,000 shares of common stock at an exercise
price of $8.00 per share expiring January 6, 2010.
(5) Includes options to purchase 20,000 shares of common stock at an exercise
price of $3.65 per share expiring on April 9, 2011, and options to purchase
20,000 shares of common stock at an exercise price of $2.50 per share
expiring on March 6, 2012.
(6) Includes options to purchase 10,000 shares of common stock at an exercise
price of $8.00 per share expiring January 6, 2010.
(7) Includes options to purchase 10,000 shares of common stock at an exercise
price of $8.125 per share expiring January 12, 2010.
(8) Includes options to purchase 10,000 shares of common stock at an exercise
price of $7.875 per share expiring on January 9, 2011, and options to
purchase 10,000 shares of common stock at an exercise price of $2.55 per
share expiring on October 15, 2011.
39
Stock Option Plans
The 1996 Stock Option Plan
In October 1996, our stockholders adopted the 1996 Stock Option Plan (the
"Employees' Plan") which provides for the grant of options to purchase an
aggregate of not more than 400,000 shares of our common stock. In January 2000,
our shareholders approved the proposal of the Board of Directors to increase
from 400,000 to 900,000 in the aggregate the number of options to purchase
common stock under the Employees' Plan. The purpose of the Employees' Plan is to
make options available to management and employees in order to encourage them to
secure or increase on reasonable terms their stock ownership and to encourage
them to remain in our Company.
The Employees' Plan is administered by a committee appointed by the Board
of Directors which determines the persons to be granted options under the
Employees' Plan, the number of shares subject to each option, the exercise price
of each option and the option period, subject to the requirement that no option
may be exercisable more than ten years after the date of grant. The exercise
price of an option may be less than fair market value of the underlying shares
of common stock. No options granted under the Employee Plan are transferable by
the optionee other than by will or the laws of descent and distribution and each
option will be exercisable during the lifetime of the optionee, only by such
optionee.
The exercise price of an option granted pursuant to the Employees' Plan may
be paid in cash, by the surrender of options, in common stock, in other
property, including the optionee's promissory note, or by a combination of the
above, at our discretion.
The 1996 Non-Employee Directors' Stock Option Plan
In October 1996, our stockholders adopted the 1996 Non-Employee Directors'
Stock Option Plan (the "Non-Employee Directors' Plan") which provides for the
grant of options to purchase an aggregate of not more than 100,000 shares of
common stock. In January 2000, our shareholders approved the proposal of the
Board of Directors to increase from 100,000 to 600,000 in the aggregate the
number of options to purchase common stock under the Non-Employee Directors'
Plan. The purpose of the Non-Employee Directors' Plan is to promote the
long-term success of the Company by creating a long-term mutuality of interests
between the non-employee directors and the stockholders, to provide an
additional inducement for such directors to remain with us and to provide a
means through which we may attract able persons to serve as directors. The
Non-Employee Directors' Plan is administered by a committee (the "Committee")
appointed by the Board of Directors.
Under the Non-Employee Directors' Plan, on the third business day following
each Annual Meeting of the stockholders, each director who is not then an
employee of the Company or any of its subsidiaries is automatically granted a
stock option to purchase 10,000 shares of common stock. The exercise price of
all options granted under the Non-Employee Directors' Plan is equal to the fair
market value of the underlying shares on the date of grant, based on guidelines
set forth in the Non-Employee Directors' Plan. The exercise price may be paid in
cash, by the surrender of options, in common stock, in other property, including
the optionee's promissory note, or by a combination of the above, at the
discretion of the Company. The term of each option granted pursuant to the
Non-Employee Directors' Plan is ten years from the date of grant; however, no
such option may be exercised during the first six months of its term. The term
of an option granted pursuant to the Non-Employee Directors' Plan may be reduced
in the event that the optionee ceases to be a director. No option granted
pursuant to the Non-Employee Directors' Plan is transferable otherwise than by
will or the laws of descent and distribution.
40
Item 7. Major Shareholders and Related Party Transactions
A. Major shareholders
We are not directly or indirectly owned or controlled by any foreign
government or by another corporation. The following table sets forth, as of May
31, 2002, beneficial ownership of our common stock by each person known by us to
own beneficially 5% or more of our common stock outstanding as of such date.
Except as otherwise indicated, all shares are owned directly and hold equal
voting rights.
Name Amount Owned
- ---- -----------------------------
Percent of
Shares of Options/Warrants to Class (1)
Common Stock Purchase Common Stock Beneficially Owned
------------ --------------------- ------------------
Anthony So 1,626,195(2) 414,000(3) 34.01%
John Stewart Jackson IV 463,075 120,000(3) 10.22%
W. Douglas Moreland 501,400 0 8.98%
- ---------------
(1) Based on beneficial ownership of both shares of common stock and of options
to purchase common stock that are immediately exercisable.
(2) Includes 1,143,421 shares of common stock owned of record by a corporation
that is wholly owned by a trust of which Mr. So is the sole beneficiary.
(3) See "Share Ownership" for additional information.
There are no arrangements known to us the operation of which may at a
subsequent date result in a change in control of the Company.
Of the 5,584,859 shares of common stock outstanding as of May 31, 2002,
4,220,000 were held in the United States by 238 holders of record. We have 243
shareholders of record and estimate that we have in excess of 840 shareholders
holding their stock in street name (who have not objected to their names being
disclosed to us).
41
B. Related party transactions.
Mr. George O'Leary, a director, is paid a commission on orders placed by
customers which he obtains for us. The amount of the commission is negotiated on
a deal-by-deal basis, without a written agreement. During the fiscal year ended
March 31, 2002, Mr. O'Leary was paid an aggregate of $165,000 as consultancy fee
for provision of support and marketing services such as soliciting customers,
negotiating prices and public relations in the United States.
During the fiscal year ended March 31, 2002, we paid Schlueter &
Associates, P.C. an aggregate of $108,379 for legal fees and expenses. Mr. Henry
F. Schlueter, a director, is the Managing Director of Schlueter & Associates,
P.C.
C. Interests of experts and counsel.
Not Applicable.
D. Legal Proceedings
We are not a party to any legal proceedings other than routine litigation
incidental to our business and there are no material legal proceedings pending
with respect to our property or assets. However, we are involved in a dispute
with Augusta Technologie AG ("Augusta"), relating to the acquisition of Korona
from Augusta. Augusta is based in Frankfurt am Main, Germany. Effective May 1,
2001, we acquired Korona from Augusta. Part of the purchase price was paid to
Augusta by the issue of 180,726 shares of our restricted common stock based on
an agreed-upon price of $8.00 per share pursuant to the Stock Purchase Agreement
(the "Agreement") with Augusta. For accounting purposes, the issue of the shares
was originally recorded at the value of $5.00 per share, based on the average
price per share for a total of 5 days before and after the completion date of
the acquisition. Under the terms of the Agreement we had an obligation to
register the common stock with the SEC. The Agreement gave Augusta the right to
have us redeem the common stock if the registration of the stock had not been
declared effective on or before January 31, 2002. We filed a registration
statement to register the common stock held by Augusta which was declared
effective by the SEC on March 7, 2002. In March 2002, Augusta exercised the
repurchase obligation. Augusta asserts that it has the right to tender the
180,726 shares of common stock to us in exchange for a promissory note of
$1,445,808, repayable in nine monthly payments.
We believe we are not required to accept Augusta's tender of their shares
because Augusta hindered the registration process by refusing to allow Korona's
auditors to update and certify Korona's financial statements. Augusta and Korona
had used the same auditors and under German law Augusta had to consent to the
auditors continuing to work for Korona after the acquisition. Augusta withheld
their consent until October 12, 2001. We believe this delay of approximately
three months was the direct cause of our inability to meet the January 31, 2002
deadline.
We have had various discussions with Augusta about resolving this dispute;
however, we have not reached a resolution of this matter. At this time no
litigation or arbitration is pending between us and Augusta. We believe that we
will be successful if this matter is arbitrated; however, there can be no
assurance that we will succeed in any such proceeding. Management believes that
the outcome of this dispute with Augusta, even if adverse to us, will not have a
material adverse effect upon us.
42
Item 8. Financial Information
Financial Statements
A. Consolidated statements and other financial information.
Please refer to Item 18.
B. Significant changes.
None.
Item 9. The Offer and Listing
A. Offer and listing details.
Our common stock is traded only in the United States over-the-counter
market. It is quoted on the Nasdaq National Market System ("NASDAQ") under the
trading symbol "BNSO." The following table sets forth, for the periods
indicated, the range of high and low closing sales prices per share reported by
NASDAQ. The quotations represent prices between dealers and do not include
retail markup markdown or commissions and may not necessarily represent actual
transactions.
The following table sets forth the high and low closing sale prices as
reported by NASDAQ for each of the last five years:
Period High Low
------ ---- ---
April 1, 1997 to March 31, 1998 $10.125 $1.6875
April 1, 1998 to March 31, 1999 $11.375 $3.5625
April 1, 1999 to March 31, 2000 $19.875 $5.75
April 1, 2000 to March 31, 2001 $17.5625 $6.00
April 1, 2001 to March 31, 2002 $7.625 $2.38
The following table sets forth the high and low closing sale prices as
reported by NASDAQ during each of the quarters in the two-year period ended
March 31, 2002.
43
Period High Low
------ ---- ---
April 1, 2000 to June 30, 2000 $17.5625 $12.125
July 1, 2000 to September 30, 2000 $12.50 $7.9375
October 1, 2000 to December 31, 2000 $11.5625 $6.375
January 1, 2001 to March 31, 2001 $12.875 $6.00
April 1, 2001 to June 30, 2001 $7.625 $3.64
July 1, 2001 to September 30, 2001 $4.85 $2.38
October 1, 2001 to December 31, 2001 $3.42 $2.45
January 1, 2002 to March 31, 2002 $3.15 $2.47
The following table sets forth the high and low closing sale prices as
reported by NASDAQ during each of the most recent six months.
Period High Low
------ ---- ---
December 2001 $3.19 $2.86
January 2002 $3.15 $2.49
February 2002 $2.98 $2.47
March 2002 $3.00 $2.47
April 2002 $3.45 $2.52
May 2002 $3.22 $2.61
Transfer and Warrant Agent
The transfer agent and registrar for the common stock and the warrant agent
for the warrants is U.S. Stock Transfer Corporation, 1745 Gardena Avenue #200,
Glendale, California 91204.
Item 10. Additional Information.
A. Share capital.
Our authorized capital is $170,000 consisting of 23,333,334 shares of
common stock, $0.003 par value per share, and 10,000,000 authorized shares of
preferred stock, $0.01 par value, divided into 2,500,000 shares each of class A
preferred stock, class B preferred stock, class C preferred stock and class D
preferred stock. Information with respect to the number of shares of common
stock outstanding at the beginning and at the end of the last three fiscal
years, is presented in the Consolidated Statements of Changes in Shareholders'
Equity for the years ended March 31, 2000, 2001 and 2002 included herein as Item
18.
44
At May 31, 2002, there were 5,584,859 shares of our common stock
outstanding, all of which were fully paid. At May 31, 2002, we had outstanding
2,174,403 warrants to purchase common stock which are publicly traded and are
exercisable to purchase 1,087,201 shares of common stock at $17.50 per share
until December 31, 2002. In addition, at May 31, 2002, we had outstanding
672,000 options to purchase common stock as follows:
Number of Exercise Price Expiration
Options per Share Date
------- --------- ----
228,000 $8.00 January 6, 2010
20,000 $8.125 January 12, 2010
30,000 $7.875 January 9, 2011
196,000 $3.65 April 9, 2011
30,000 $2.55 October 14, 2011
168,000 2.50 March 6, 2012
At May 31, 2002, there were no shares of our preferred stock outstanding.
B. Memorandum and Articles of Association.
We are registered in the British Virgin Islands and have been assigned
company number 9032 in the register of companies. Our registered agent is HWR
Services Limited and is at Craigmuir Chambers, P.O. Box 71, Road Town, Tortola,
British Virgin Islands. The object or purpose of the Company is to engage in any
act or activity that is not prohibited under British Virgin Islands law as set
forth in Paragraph 4 of our Memorandum of Association. As an International
Business Company, we are prohibited from doing business with persons resident in
the British Virgin Islands, owning real estate in the British Virgin Islands or
acting as a bank or insurance company. We do not believe that these restrictions
materially affect our operations.
Paragraph 57(c) of our Amended Articles of Association (the "Articles")
provides that a director may be counted as one of a quorum in respect of any
contract or arrangement in which the director is materially interested; however,
if the agreement or transaction cannot be approved by a resolution of directors
without counting the vote or consent of any interested director, the agreement
or transaction may only be validated by approval or ratification by a resolution
of the members. Paragraph 53 of the Articles allows the directors to vote
compensation to themselves in respect of services rendered to the Company.
Paragraph 66 of the Articles provides that the directors may by resolution
exercise all the powers of the Company to borrow money and to mortgage or charge
its undertakings and property or any part thereof, to issue debentures,
debenture stock and other securities whenever money is borrowed or as security
for any debt, liability or obligation of ours or of any third party. Such
borrowing powers can be altered by an amendment to the Articles. There is no
provision in the Articles for the mandatory retirement of directors. Directors
are not required to own shares of the Company in order to serve as directors.
Our authorized share capital is $170,000 divided into 23,333,334 shares of
common stock, $0.003 par value, and 10,000,000 authorized shares of preferred
stock, $0.01 par value. Holders of our common stock are entitled to one vote for
each whole share on all matters to be voted upon by shareholders, including the
45
election of directors. Holders of our common stock do not have cumulative voting
rights in the election of directors. All of our common shares are equal to each
other with respect to liquidation and dividend rights. Holders of our common
shares are entitled to receive dividends if and when declared by our board of
directors out of funds legally available under British Virgin Islands law. In
the event of our liquidation, all assets available for distribution to the
holders of our common shares are distributable among them according to their
respective holdings. Holders of our common stock have no preemptive rights to
purchase any additional unissued common shares.
Paragraph 7 of the Memorandum of Association provides that without
prejudice to any special rights previously conferred on the holders of any
existing shares, any share may be issued with such preferred, deferred or other
special rights or such restrictions, whether in regard to dividend, voting,
return of capital or otherwise as the directors may from time to time determine.
Paragraph 10 of the Memorandum of Association provides that if at any time
the authorized share capital is divided into different classes or series of
shares, the rights attached to any class or series may be varied with the
consent in writing of the holders of not less than three-fourths of the issued
shares of any other class or series of shares which may be affected by such
variation.
Paragraph 105 of the Articles of Association provide that our Memorandum
and Articles of Association may be amended by a resolution of members or a
resolution of directors. Thus, our board of directors without shareholder
approval may amend our Memorandum and Articles of Association. This includes
amendments to increase or reduce our authorized capital stock. Our ability to
amend our Memorandum and Articles of Association without shareholder approval
could have the effect of delaying, deterring or preventing a change in control
of the Company, including a tender offer to purchase our common shares at a
premium over the then current market price.
Provisions in respect of the holding of general meetings and extraordinary
general meetings are set out in Paragraphs 68 through 77 of the Articles and
under the International Business Companies Act. The directors may convene
meetings of the members at such times and in such manner and places as the
directors consider necessary or desirable, and they shall convene such a meeting
upon the written request of members holding more than 30% of the votes of our
outstanding voting shares.
British Virgin Islands law and our Memorandum and Articles of Association
impose no limitations on the right of nonresident or foreign owners to hold or
vote our securities. There are no provisions in the Memorandum and Articles of
Association governing the ownership threshold above which shareholder ownership
must be disclosed.
A copy of our Memorandum and Articles of Association, as amended, has been
filed as an exhibit to the Registration Statement on Form F-2 (SEC File No.
333-32524).
46
C. Material contracts.
We have not entered into any material contracts outside of the ordinary
course of business during the last two years except for our Agreement to acquire
Korona. For additional information about the acquisition of Korona, please see
Item 4. - "Information on the Company - History and Development of the Company."
D. Exchange controls.
There are no exchange control restrictions on payments of dividends on our
common stock or on the conduct of our operations either in Hong Kong, where our
principal executive offices are located, or the British Virgin Islands, where we
are incorporated. Other jurisdictions in which we conduct operations may have
various exchange controls. Taxation and repatriation of profits regarding our
China operations are regulated by Chinese laws and regulations. To date, these
controls have not had and are not expected to have a material impact on our
financial results. There are no material British Virgin Islands laws that impose
foreign exchange controls on us or that affect the payment of dividends,
interest or other payments to holders of our securities who are not residents of
the British Virgin Islands. British Virgin Islands law and our Memorandum and
Articles of Association impose no limitations on the right of nonresident or
foreign owners to hold or vote our securities.
E. Taxation.
Under current British Virgin Islands law, we are not subject to tax on our
income. Most of our subsidiaries' profits accrue in Hong Kong and Germany where
the corporate tax rate is currently 16% and 26.375%, respectively. However, as
Korona is a partnership, it is only subject to 14.17% of the local statutory
rate. There is no tax payable in Hong Kong on offshore profit or on dividends
paid to Bonso Electronics Limited by its subsidiaries or to us by Bonso
Electronics Limited. Therefore, our overall effective tax rate may be lower than
that of most United States corporations; however, this advantage could be
materially and adversely affected by changes in the tax laws of the British
Virgin Islands, Germany, Hong Kong or China.
Our subsidiary Bonso Electronics (Shenzhen) Company Limited was fully
exempt from state income tax in the PRC for the first two years starting from
the first profit making year followed by a 50% reduction over the ensuing three
years. The first profit-making year of Bonso Electronics (Shenzhen) Company
Limited was deemed to be the fiscal year ended December 31, 1998. Therefore, we
are subject to income tax at the rate of 7.5% in the PRC effective January 1,
2000 to December 31, 2002.
No reciprocal tax treaty regarding withholding exists between the United
States and the British Virgin Islands. Under current British Virgin Islands law,
dividends, interest or royalties paid by us to individuals are not subject to
tax as long as the recipient is not a resident of the British Virgin Islands. If
we were to pay a dividend, we would not be liable to withhold any tax, but
shareholders would receive gross dividends, if any, irrespective of their
residential or national status.
47
Dividends, if any, paid to any United States resident or citizen
shareholder are treated as dividend income for United States federal income tax
purposes. Such dividends are not eligible for the 70% dividends-received
deduction allowed to United States corporations on dividends from a domestic
corporation under Section 243 of the United States Internal Revenue Code of 1986
(the "Internal Revenue Code"). Various Internal Revenue Code provisions impose
special taxes in certain circumstances on non-United States corporations and
their shareholders. You are urged to consult your tax advisor with regard to
such possibilities and your own tax situation.
In addition to United States federal income taxation, shareholders may be
subject to state and local taxes upon their receipt of dividends.
F. Dividends and paying agents.
Not Applicable.
G. Statement by experts.
Not Applicable.
H. Documents on display.
You may read and copy documents referred to in this Annual Report on Form
20-F that have been filed with the Securities and Exchange Commission (the
"Commission") at the Commission's Public Reference Room, 450 Fifth Street, N.W.,
Washington, D.C. You may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. You can also obtain
copies of our Commission filings by going to the Commission's website at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with the SEC. This means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered to be part of this Annual Report on Form
20-F.
I. Subsidiary information.
Not Applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a certain level of foreign currency exchange risk and
interest rate risk.
Foreign Currency Risk
The majority of our net sales are priced in United States Dollars. Our
costs and expenses are priced in United States Dollars, Hong Kong Dollars,
Chinese Renminbi, Euros and Japanese Yen. Accordingly, the competitiveness of
our products relative to products produced domestically (in foreign markets) may
be affected by the performance of the United States Dollar compared with that of
our foreign customers' currencies. Additionally, we are exposed to the risk of
foreign currency transaction and translation losses which might result from
adverse fluctuations in the values of the Hong Kong Dollar, the Chinese
48
Renminbi, the Euro and the Japanese Yen. These factors are also applicable as a
result of our acquisition of Korona in the fiscal year ended March 31, 2002. A
significant portion of Korona's net sales were in German Marks prior to January
1, 2002 and are in Euros currently. A significant portion of Korona's costs and
expenses are paid for in United States Dollars. The fluctuation of the value of
the Euro compared to the United States Dollar could expose us to additional risk
of foreign currency transaction and translation losses.
A summary of our debts as at March 31, 2002 which were subjected to foreign
currency risk is as below:
March 31,
Currencies: 2002
- ----------- ----------
Euro $2,846,593
Hong Kong Dollars 1,712,006
Japanese Yen 198,755
Renminbi 30,231
-----------
$4,787,585
-----------
All the balances above are due within one year.
Fluctuations in the value of the Hong Kong Dollar have not been significant
since October 17, 1983, when the Hong Kong government tied the value of the Hong
Kong Dollar to that of the United States Dollar. However, there can be no
assurance that the value of the Hong Kong Dollar will continue to be tied to
that of the United States Dollar. China adopted a floating currency system on
January 1, 1994, unifying the market and official rates of foreign exchange.
China approved current account convertibility of the Chinese Renminbi on July 1,
1996, followed by formal acceptance of the International Monetary Fund's
Articles of Agreement on December 1, 1996. These regulations eliminated the
requirement for prior government approval to buy foreign exchange for ordinary
trade transactions, though approval is still required to repatriate equity or
debt, including interest thereon. There can be no assurance that these
currencies will remain stable or will fluctuate to our benefit.
To manage our exposure to foreign currency and translation risks, we may
purchase currency exchange forward contracts, currency options, or other
derivative instruments, provided such instruments may be obtained at suitable
prices. However, to date we have not done so.
49
Interest Rate Risk
Our interest rate risk primarily arises from our long-term debt and our
general banking facilities. At March 31, 2002, our total long-term debt was nil,
and we had utilized approximately $7,093,681 million of our total banking
facilities of $25,430,340 million. Based on the maturity profile and composition
of our long-term debt and general banking facilities, including the fact that
our banking facilities are at variable interest rates, we estimate that changes
in interest rates will not have a material impact on our operating results or
cash flows. We intend to manage our interest rate risk through appropriate
borrowing strategies. We have not entered into interest rate swap or risk
management agreements; however, it is possible that we may do so in the future.
A summary of our debts as at March 31, 2002 which were subjected to
variable interest rates is as below:
March 31, 2002 Interest rate
-------------- -------------
Notes payable $2,857,533 Prime rate minus
0.25% to prime
or HIBOR + 2.5%
Short-term loans $907,884 Prime rate minus
0.25% to prime
or HIBOR + 2.5%
HIBOR: Hong Kong Interbank Offered Rate
Prime rate: The prime rate as determined by the Hong Kong Bankers Association
All the balances above are due within one year.
For further information concerning our banking facilities the interest
rates payable, and repayment terms please see Note 7 to our Consolidated
Financial Statements.
Item 12. Description of Securities Other Than Equity Securities
Not applicable.
50
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
None.
Item 14. Material Modifications to the rights of Security Holders and Use of
Proceeds.
None.
Item 15. Reserved.
Item 16. Reserved.
PART III
Item 17. Financial Statements.
Not applicable.
Item 18. Financial Statements.
The following Financial Statements are filed as part of this Annual Report:
Page
----
Index to Consolidated Financial Statements F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets as of March 31, 2001 and 2002 F-3
Consolidated Statements of Income and Comprehensive
Income for the years ended March 31, 2000, 2001 and 2002 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended March 31, 2000, 2001 and 2002 F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 2000, 2001 and 2002 F-6 and F-7
Notes to Consolidated Financial Statements F-8 through F-35
Item 19. Exhibits.
23.1 Consent of PricewaterhouseCoopers
51
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Annual Report on its behalf.
BONSO ELECTRONICS INTERNATIONAL INC.
Dated: July 3, 2002 /s/ Anthony So
------------ ------------------------------------
Anthony So, President
52
Bonso Electronics International Inc. and Subsidiaries
Index to Consolidated Financial Statements
March 31, 2002
Contents Pages
-----
Report of Independent Accountants........................................F-2
Consolidated Balance Sheets as of March 31, 2001 and 2002................F-3
Consolidated Statements of Income and Comprehensive Income
for the years ended March 31, 2000, 2001 and 2002.......................F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended March 31, 2000, 2001 and 2002.......................F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 2000, 2001 and 2002.......................................F-6 and F-7
Notes to Consolidated Financial Statements...........................F-8 to F-35
F-1
Report of Independent Accountants
---------------------------------
Board of Directors and Shareholders
Bonso Electronics International Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Bonso
Electronics International Inc. and Subsidiaries (the "Group") as of March 31,
2001 and 2002 and the related consolidated statements of income and
comprehensive income, changes in shareholders' equity and cash flows for each of
the three years in the period ended March 31, 2002. These consolidated financial
statements are the responsibility of the Group's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bonso Electronics
International, Inc. and Subsidiaries as of March 31, 2001 and 2002 and the
results of their operations and cash flows for each of the three years in the
period ended March 31, 2002, in conformity with generally accepted accounting
principles in the United States of America.
/s/ PricewaterhouseCoopers
- ---------------------------
PricewaterhouseCoopers
Hong Kong, June 21, 2002
F-2
Bonso Electronics International Inc. and Subsidiaries
Consolidated Balance Sheets
(Expressed in United States Dollars)
March 31
--------------------------
2001 2002
$ $
Assets
Current assets
Cash and cash equivalents 5,322,397 1,878,156
Restricted cash deposits 2,873,898 3,972,542
Trade receivables, net 3,518,943 6,838,576
Inventories 5,310,889 8,861,952
Notes receivable 1,086,949 686,258
Deferred income tax assets - current 10,190 27,219
Other receivables, deposits and prepayments 619,858 822,646
----------- -----------
Total current assets 18,743,124 23,087,349
----------- -----------
Deposits 70,511 16,038
Deferred income tax assets - non current 87,245 84,422
Goodwill -- 204,217
Brand name, net -- 2,797,392
Property, plant and equipment
Leasehold land and buildings 12,248,784 12,567,309
Plant and machinery 10,766,115 11,995,871
Moulds 2,113,066 --
Furniture, fixtures and equipment 3,291,043 4,239,602
Motor vehicles 304,869 343,068
----------- -----------
28,723,877 29,145,850
Less: accumulated depreciation and amortization (10,128,087) (10,884,191)
----------- -----------
Net property, plant and equipment 18,595,790 18,261,659
----------- -----------
Total assets 37,496,670 44,451,077
=========== ===========
Liabilities and shareholders' equity
Current liabilities
Notes payable 3,234,897 2,857,533
Accounts payable 3,435,626 4,122,443
Accrued charges and deposits 1,029,967 2,022,472
Income taxes payable 95,694 83,614
Short-term loans 1,086,949 3,754,477
Current portion of long-term debt and capital lease obligations 537,029 647,501
----------- -----------
Total current liabilities 9,420,162 13,488,040
----------- -----------
Long-term debt and capital lease obligations, net of
current maturities 403,890 317,009
Commitments and contingencies (Note 6(b) and 11)
Redeemable common stock
Redeemable common stock par value $0.003 per share
- issued and outstanding shares: 2001 - 0; 2002 - 180,726 -- 1,445,808
Table continues on following page.
F-3
Bonso Electronics International Inc. and Subsidiaries
Consolidated Balance Sheets
(Expressed in United States Dollars)
(Continued)
March 31
--------------------------
2001 2002
$ $
Shareholders' equity
Preferred stock par value $0.01 per share
- authorized shares - 10,000,000 in 2002
- issued and outstanding shares: 2001-0; 2002-0 -- --
Common stock par value $0.003 per share
- authorized shares - 23,333,334
- issued and outstanding shares : 2001-5,496,133;
2002-5,404,133 16,484 16,208
Additional paid-in capital 21,854,160 21,152,502
Deferred consultancy fee (762,840) (381,420)
Retained earnings 6,927,842 8,176,958
Accumulated other comprehensive income 235,972 235,972
Common stock held in treasury, at cost (599,000) --
----------- -----------
27,672,618 29,200,220
----------- -----------
Total liabilities and shareholders' equity 37,496,670 44,451,077
=========== ===========
See notes to these consolidated financial statements
F-3(Con't)
Bonso Electronics International Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(Expressed in United States Dollars)
2000 2001 2002
$ $ $
Net sales 15,380,286 29,566,680 53,303,101
Cost of sales 11,117,922 22,400,017 40,192,242
----------- ----------- -----------
Gross margin 4,262,364 7,166,663 13,110,859
Selling expenses 261,297 382,422 2,476,285
Salaries and related costs 1,898,944 2,333,776 3,880,274
Research and development expenses 186,251 297,740 426,364
Administration and general expenses 1,646,320 2,410,872 3,411,336
Amortization of brand name -- -- 202,608
----------- ----------- -----------
Income from operations 269,552 1,741,853 2,713,992
Interest income 129,794 458,328 166,723
Interest expenses (261,288) (337,526) (645,045)
Foreign exchange gains/(losses) 14,449 42,722 (39,954)
Other income 191,790 204,585 181,272
Consultancy fee -- (381,420) (381,420)
----------- ----------- -----------
Income before income taxes 344,297 1,728,542 1,995,568
Income tax benefit/(expense) 3,401 (124,743) (189,962)
----------- ----------- -----------
Net income 347,698 1,603,799 1,805,606
Other comprehensive income, net of tax:
Foreign currency translation adjustments 701 -- --
----------- ----------- -----------
Comprehensive income 348,399 1,603,799 1,805,606
=========== =========== ===========
Earnings per share
Basic $ 0.10 $ 0.29 $ 0.32
=========== =========== ===========
Diluted $ 0.09 $ 0.28 $ 0.32
=========== =========== ===========
See notes to these consolidated financial statements
F-4
Bonso Electronics International Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(Expressed in United States Dollars)
Common stock
--------------------------
Promissory
note
Shares Additional receivable Common
issued and Amount paid-in from stock held
outstanding outstanding capital shareholder at treasury
----------- ----------- ----------- ----------- -----------
$ $ $ $
Balance, March 31, 1999 3,119,159 9,353 10,285,105 (1,430,000) --
Net income -- -- -- -- --
Other comprehensive income, net of tax
Foreign currency adjustments:
Cumulative translation adjustments -- -- -- -- --
Common stock issued upon exercise
of share options 919,675 2,759 52,089 -- --
Common stock issued upon exercis
of warrants, net of expenses 1,673,776 5,021 11,988,306 -- --
----------- ----------- ----------- ----------- -----------
Balance, March 31, 2000 5,712,610 17,133 22,325,500 (1,430,000) --
Net income -- -- -- -- --
Common stock issued upon exercise
of share options 7,023 21 (21) -- --
Deferred consultancy fee (note 15(d)) -- -- 1,144,260 -- --
Amortization of deferred consultancy fee
(note 15(d)) -- -- -- -- --
Common stock issued upon exercise of warrants 50,000 150 399,850 -- --
Cash dividends declared on common stock
($0.1 per share) -- -- -- -- --
Purchase of common stock -- -- -- -- (1,185,249)
Retirement of common stock (73,500) (220) (586,029) -- 586,249
Cancellation of common stock subscribed (200,000) (600) (1,429,400) 1,430,000 --
----------- ----------- ----------- ----------- -----------
Balance, March 31, 2001 5,496,133 16,484 21,854,160 -- (599,000)
Net income -- -- -- -- --
Amortization of deferred consultancy fee
(note 15(d)) -- -- -- -- --
Cash dividends declared on common stock
($0.1 per share) -- -- -- -- --
Purchase of common stock -- -- -- -- (102,934)
Retirement of common stock (92,000) (276) (701,658) -- 701,934
----------- ----------- ----------- ----------- -----------
Balance, March 31, 2002 5,404,133 16,208 21,152,502 -- --
=========== =========== =========== =========== ===========
See notes to these consolidated financial statements
F-5
Bonso Electronics International Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(Expressed in United States Dollars)
(Continued)
Accumulated
other
comprehensive
Deferred income-foreign Total
consultancy Retained currency shareholders'
fee earnings adjustments equity
----------- ----------- ----------- -----------
$ $ $ $
Balance, March 31, 1999 -- 5,525,958 235,271 14,625,687
Net income -- 347,698 -- 347,698
Other comprehensive income, net of tax
Foreign currency adjustments:
Cumulative translation adjustments -- -- 701 701
Common stock issued upon exercise
of share options -- -- -- 54,848
Common stock issued upon exercis
of warrants, net of expenses -- -- -- 11,993,327
----------- ----------- ----------- -----------
Balance, March 31, 2000 -- 5,873,656 235,972 27,022,261
Net income -- 1,603,799 -- 1,603,799
Common stock issued upon exercise
of share options -- -- -- --
Deferred consultancy fee (note 15(d)) (1,144,260) -- -- --
Amortization of deferred consultancy fee
(note 15(d)) 381,420 -- -- 381,420
Common stock issued upon exercise of warrants -- -- -- 400,000
Cash dividends declared on common stock
($0.1 per share) -- (549,613) -- (549,613)
Purchase of common stock -- -- -- (1,185,249)
Retirement of common stock -- -- -- --
Cancellation of common stock subscribed -- -- -- --
----------- ----------- ----------- -----------
Balance, March 31, 2001 (762,840) 6,927,842 235,972 27,672,618
Net income -- 1,805,606 -- 1,805,606
Amortization of deferred consultancy fee
(note 15(d)) 381,420 -- -- 381,420
Cash dividends declared on common stock
($0.1 per share) -- (556,490) -- (556,490)
Purchase of common stock -- -- -- (102,934)
Retirement of common stock -- -- -- --
----------- ----------- ----------- -----------
Balance, March 31, 2002 (381,420) 8,176,958 235,972 29,200,220
=========== =========== =========== ===========
See notes to these consolidated financial statements
F-5(Con't)
Bonso Electronics International Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Expressed in United States Dollars)
2000 2001 2002
$ $ $
Cash flows from operating activities
Net income 347,698 1,603,799 1,805,606
Adjustments to reconcile net income to net cash
provided by operating activities :
Depreciation 1,316,994 2,019,621 2,738,937
Amortization 302,179 329,564 548,978
Consultancy fee -- 381,420 381,420
Other (25,677) 124,743 8,040
Changes in assets and liabilities:
Trade receivables (1,259,455) (1,857,893) 499,236
Other receivables, deposits and prepayments 7,380 (384,007) (99,911)
Notes receivable 165,274 (561,774) 400,691
Inventories (1,622,488) 865,373 (932,725)
Accounts payable, accrued charges and deposits 2,258,494 554,731 148,483
Other 110,849 51,315 (26,286)
----------- ----------- -----------
Net cash provided by operating activities 1,601,248 3,126,892 5,472,469
----------- ----------- -----------
Cash flows from investing activities
Restricted cash deposits (1,060,264) (801,946) (1,098,644)
Deposits for property, plant and equipment (398,147) (70,511) (16,038)
Proceeds from disposal of property, plant and
equipment 8,149 441 26,555
Acquisition of property, plant and equipment (3,458,318) (5,846,296) (756,010)
Acquisition of a subsidiary, net of cash acquired -- -- (3,044,184)
----------- ----------- -----------
Net cash used in investing activities (4,908,580) (6,718,312) (4,888,321)
----------- ----------- -----------
Cash flows from financing activities
Issue of shares on exercise of warrants and options 12,272,436 400,000 --
Repurchase of common stock -- (1,185,249) (102,934)
Expenses paid for warrant redemption (224,261) -- --
Principal payments under long-term debt (111,984) (65,016) (38,451)
Capital lease payments (436,165) (526,227) (681,748)
Net (repayment)/advance under banking facilities (503,428) 2,880,518 (2,648,766)
Payment of dividends to stockholders -- (549,613) (556,490)
----------- ----------- -----------
Net cash (used in)/provided by financing activities 10,996,598 954,413 (4,028,389)
----------- ----------- -----------
Effect of foreign exchange rate changes on cash (1,309) -- --
----------- ----------- -----------
Net (decrease)/increase in cash and cash equivalents 7,687,957 (2,637,007) (3,444,241)
Cash and cash equivalents, beginning of year 271,447 7,959,404 5,322,397
----------- ----------- -----------
Cash and cash equivalents, end of year 7,959,404 5,322,397 1,878,156
=========== =========== ===========
See notes to these consolidated financial statements
F-6
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Expressed in United States Dollars)
2000 2001 2002
$ $ $
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest paid 261,288 337,526 645,045
Income tax paid, net of refund (22,276) -- (204,169)
Non-cash investing and financing activities
Property acquired under capital leases 1,540,608 -- 743,821
Acquisition:
Fair valued of net assets acquired -- -- 1,294,512
Cash acquired -- -- 8,737
See notes to these consolidated financial statements
F-7
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
1 Description of business and significant accounting policies
Bonso Electronics International Inc. ("the Company") and its subsidiaries
are engaged in the designing, manufacturing and selling of a comprehensive
line of electronic scales and weighing instruments, electronic consumer
products, health care products and telecommunication products.
Effective May 1, 2001, the Group acquired 100% of the equity of Korona
Haushaltswaren GmbH & Co. KG ("Korona") from Augusta Technologies AG
("Augusta"). Korona is a German company engaged in the distribution of
electronic scales in Europe.(Note 10)
The consolidated financial statements have been prepared in United States
dollars and in accordance with generally accepted accounting principles in
the United States of America. The preparation of consolidated financial
statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Significant estimates made by management
include provisions made against inventories and trade receivables, and the
valuation of long-lived assets. Actual results could differ from those
estimates.
The significant accounting policies are as follows:
(a) Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries (hereinafter collectively referred to as the "Group").
All significant intercompany accounts and transactions are eliminated in
consolidation.
The companies acquired during the financial period have been consolidated
from the date on which control of the net assets and operations was
transferred to the Group. Similarly the result of a group company divested
during the accounting period is included in the Group accounts only to the
date of disposal.
Acquisitions of companies are accounted for using the purchase method of
accounting. Goodwill represents the excess of the purchase cost over the
fair value of assets less liabilities of acquired companies.
During the financial year ending March 31, 2003, the Group will adopt
Statement of Financial Accounting Standard ("SFAS") No. 142 "Goodwill and
Other Intangible Assets", which requires discontinuance of goodwill
amortization. Where an indication of impairment exists, the carrying amount
of goodwill is assessed and written down to its recoverable amount.
(b) Cash and cash equivalents
Cash and cash equivalents are short-term, highly liquid investments with
original maturities of three months or less. Cash equivalents are stated at
cost, which approximates fair value because of the short term maturity of
these instruments.
(c) Inventories
Inventories are stated at the lower of cost or net realizable value with
cost determined on a first-in, first-out basis. Net realizable value is the
price at which inventories can be sold in the normal course of business
after allowing for the costs of completion and disposal. Inventories are
reduced by reserves for obsolence and slow moving parts, which are
determined based on management's assessment of their current status.
F-8
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
1 Description of business and significant accounting policies (Continued)
(d) Revenue recognition
Revenue is recognized on the transfer of title of ownership, which
generally coincides with the time when the products are shipped to
customers.
(e) Impairment
Long-lived assets held and used by the Company and intangible assets are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
The Company evaluates recoverability of assets to be held and used by
comparing the carrying amount of an asset to future net undiscounted cash
flows to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the
assets calculated using a discounted future cash flows analysis. Assets to
be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(f) Brand name
Brand name acquired as part of the purchase of a business is capitalized
based on the estimated fair value as at the date of acquisition and
amortized using the straight line method over the related estimated useful
life of 15 years. Where an indication of impairment exists, the carrying
amount of the brand name is assessed and written down to its recoverable
amount.
(g) Property, plant and equipment
(i) Property, plant and equipment are stated at cost. Leasehold land and
buildings are amortized on a straight-line basis over 15 to 50 years,
representing the shorter of the remaining term of the lease or the
expected useful life to the Group.
(ii) Other fixed assets are carried at cost and depreciated using the
straight-line method over their expected useful lives to the Group.
The principal annual rates used for this purpose are:
Plant and machinery - 14% to 33.3%
Moulds - 20%
Furniture, fixtures and equipment - 20%
Motor vehicles - 20%
(iii) The cost of major improvements and betterments is capitalized,
whereas the cost of maintenance and repairs is expensed in the year
incurred.
(iv) Any gain or loss on disposal is included in the Consolidated
Statements of Income and Comprehensive Income.
F-9
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
1 Description of business and significant accounting policies (Continued)
(h) Trade receivables
Provision is made against trade receivables to the extent that collection
is considered to be doubtful.
(i) Research and development costs
Research and development costs are expensed in the financial period during
which they are incurred.
(j) Advertising
Advertising costs are expensed as incurred and are included within selling
expenses.
Total advertising costs incurred for the years ended March 31, 2000, 2001
and 2002 amounted to $12,633, $9,942 and $15,821 respectively.
(k) Deferred income taxes
Amounts in the consolidated financial statements related to income taxes
are calculated using the principles of SFAS No. 109, "Accounting for Income
Taxes". SFAS No. 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
temporary differences between the financial reporting basis and tax basis
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Future tax benefits, such as
net operating loss carry forwards, are recognized to the extent that
realization of such benefits is more likely than not to occur.
(l) Foreign currency translations
(i) The functional currency of the Company and one of its Hong Kong
subsidiaries is the United States dollar, the functional currency of
the other Hong Kong subsidiaries is the Hong Kong dollar and the
functional currency of the German subsidiary is the Euro. The
functional currency of the Company's subsidiary in the People's
Republic of China (the "PRC") is the Renminbi, the national currency
of the PRC. The Group's functional currency is the United States
dollars.
(ii) The financial statements of foreign subsidiaries where the United
States dollar is the functional currency and which have certain
transactions denominated in non-United States dollar currencies are
remeasured into the United States dollar. The remeasurement of local
currencies into United States dollars creates transaction adjustments
which are included in net income.
(iii) The financial statements of foreign subsidiaries, where the local
currency is the functional currency, are translated into United
States dollars using exchange rates in effect at period end for
assets and liabilities and average exchange rates during each
reporting period for statement of income. Adjustments resulting from
translation of these financial statements are reflected as a separate
component of shareholders' equity.
F-10
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
1 Description of business and significant accounting policies (Continued)
(m) Stock options and warrants
Stock options are granted to employees, directors and non-employees
directors and warrants are issued to certain shareholders. Upon exercise of
the options and warrants, the holder can acquire ordinary shares of the
Company at an exercise price determined by the board of directors. The
options are exercisable based on the vesting terms stipulated in the option
schemes. The Group follows the intrinsic method of accounting for these
options. For options and warrants granted with exercise price being equal
or higher than the market price of the common stock on the data of grant,
no compensation expense is recognized in the financial statements.
(n) Warrants issued for non - cash consideration
Warrants issued in consideration for services rendered are recorded at fair
value and a charge equivalent to fair value is included in the Consolidated
Statements of Income and Comprehensive Income.
(o) Recent accounting pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, " Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires the use of the purchase method of
accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS
No. 141 also requires that the Group recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet certain
criteria. SFAS No. 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations for which the date of
acquisition is on or after July 1, 2001. It also requires, upon adoption of
SFAS No. 142, that the Group reclassify the carrying amounts of intangible
assets and goodwill based on the criteria in SFAS No. 141.
SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill impairment at least annually.
In addition, SFAS No. 142 requires that the Group identify reporting units
for the purposes of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized intangible assets,
and cease amortization of intangible assets with an indefinite useful life.
An intangible asset with an indefinite useful life should be tested for
impairment in accordance with the guidance in SFAS No. 142. SFAS No. 142 is
required to be applied in fiscal years beginning after December 31, 2001 to
all goodwill and other intangible assets recognized at that date,
regardless of when those assets were initially recognized. Upon adoption of
SFAS No.142, anticipated undiscounted cash flow attributable to the
intangible asset and the goodwill will be reviewed to assess whether there
are any impairment losses. The Group will adopt SFAS No. 142 during the
year ended March 31, 2003 and anticipates that implementation of SFAS No.
142 will not have a material impact on its financial statements. Goodwill
of the Group of $204,217 as at March 31, 2002 will no longer be subjected
to amortization.
F-11
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
(o) Recent accounting pronouncements (continued)
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", but retains its fundamental
provisions for recognizing and measuring impairment of long-lived assets to
be held and used. SFAS No. 144 standardizes the accounting and presentation
requirements for all long-lived assets to be disposed of by sale,
superceding previous guidance for discontinued operations of business
segments. It requires that all long-lived assets to be disposed of by sale
are carried at the lower of carrying amount or fair value less costs to
sell, and that depreciation should cease to be recorded on such assets.
This standard is effective for fiscal years beginning after December 15,
2001. The Group anticipates that implementation of SFAS No. 144 will not
have a material impact on its financial statements.
2 Allowance for doubtful accounts
Changes in the allowance for doubtful accounts consist of:
2000 2001 2002
$ $ $
Balance, April 1 39,359 -- --
Additions charged to expense -- -- 220,838
Write-off (39,359) -- --
------- ------- -------
Balance, March 31 -- -- 220,838
======= ======= =======
3 Inventories
(a) The components of inventories are as follows:
2001 2002
$ $
Raw materials 3,611,961 4,287,203
Work in progress 1,125,138 1,012,311
Finished goods 913,265 4,131,054
--------- ---------
5,650,364 9,430,568
Inventories reserves (339,475) (568,616)
--------- ---------
5,310,889 8,861,952
========= =========
(b) Changes in the inventories reserves consist of the following:
2000 2001 2002
$ $ $
Balance, April 1 195,321 323,126 339,475
Additions charged to expense 127,805 210,362 229,141
Write-off -- (194,013) --
------- ------- -------
Balance, March 31 323,126 339,475 568,616
======= ======= =======
F-12
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
4 Long-term debt
Long-term debt is denominated in Renminbi and consists of the following:
March 31
---------------------
2001 2002
$ $
Bank loans at 5.3% per annum 68,683 30,231
Less: current portion (38,452) (30,231)
------- -------
Long-term debt, less current maturities 30,231 --
======= =======
5 Taxation
(a) The companies comprising the Group are subject to tax on an entity basis on
income arising in or derived from Hong Kong, the PRC and Germany. The
current rates of taxation of the subsidiaries operating in Hong Kong and,
Shenzhen in the PRC are 16% and 15% respectively. The statutory corporate
tax rate in Germany is 26.375%. The subsidiary of the Group in Germany is
registered as a partnership in Germany which is subject to a statutory rate
of 14.17%. The Group is not subject to income taxes in the British Virgin
Islands.
(b) Pursuant to the relevant income tax laws in the PRC, Bonso Electronics
(Shenzhen) Co., Ltd, a wholly owned subsidiary of the Company, is fully
exempt from PRC state income tax for two years starting from the first
profit-making year followed by a 50% reduction over the ensuing three
years. The first profit-making year of Bonso Electronics (Shenzhen) Co.,
Ltd. was deemed to be the financial year ended December 31, 1998.
(c) The components of the income tax benefit/(expense) are as follows:
2000 2001 2002
$ $ $
Deferred income tax benefit/(expense) 13,898 (28,937) 14,206
Current income tax expense (10,497) (95,806) (204,168)
-------- -------- --------
Total income tax benefit/(expense) 3,401 (124,743) (189,962)
======== ======== ========
F-13
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
5 Taxation (Continued)
(d) Deferred tax assets are comprised of the following:
2001 2002
$ $
Deferred tax liabilities
Accelerated depreciation (852) (7,147)
Deferred tax assets
-------- --------
Tax loss carry forwards 98,246 85,503
Provision for inventories 10,190 43,434
Valuation allowance (10,149) (10,149)
-------- --------
98,287 118,788
-------- --------
Net deferred tax assets 97,435 111,641
Less: current portion 10,190 27,219
-------- --------
Non current portion 87,245 84,422
======== ========
As of March 31, 2002, the Group had accumulated tax losses amounting to
$527,305 (the tax effect thereon is $85,503), which may be carried forward
and applied to reduce future taxable income which is earned in or derived
from Hong Kong. Realization of deferred tax assets associated with tax loss
carry forwards is dependent upon generating sufficient taxable income prior
to their expiration. A valuation allowance is established against such tax
losses when management believes it is more likely than not that a portion
may not be utilized by the Group. The valuation allowance carried forward
relates to previous tax losses incurred by a currently dormant subsidiary.
As of March 31, 2002, the Group's accumulated tax losses have no definite
period of expiration.
(e) Changes in the valuation allowance consist of:
2000 2001 2002
$ $ $
Balance, April 1 34,693 15,420 10,149
Reduction credited to income tax expense (337) (5,271) --
Release of valuation allowance upon:
- approval of losses by tax authorities (18,936) -- --
------- ------- -------
Balance, March 31 15,420 10,149 10,149
======= ======= =======
F-14
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
5 Taxation (Continued)
(f) The actual income tax benefit/(expense) attributable to earnings for the
years ended March 31, 2000, 2001 and 2002 differed from the amounts
computed by applying the Hong Kong statutory tax rate in accordance with
the relevant income tax law as a result of the following:
2000 2001 2002
$ $ $
Hong Kong statutory tax rate 16.0% 16.0% 16.0%
Income tax expense at the Hong
Kong statutory tax rate (55,088) (276,567) (319,291)
Offshore profit not subject to income tax 77,672 171,520 197,676
Expenses not deductible for income tax
purposes (24,365) (13,480) (48,049)
Valuation allowance on tax loss 19,273 5,271 --
Over/(under) provision for Hong Kong
tax in prior years (5,200) 3,194 (18,803)
Other (8,891) (14,681) (1,495)
-------- -------- --------
Total income tax benefit/(expense) 3,401 (124,743) (189,962)
======== ======== ========
6 Leases
(a) Capital leases
Motor vehicles and plant and machinery include the following amounts for
capitalized leases:
Motor vehicles Plant and machinery
--------------------- ---------------------
March 31 March 31
--------------------- ---------------------
2001 2002 2001 2002
$ $ $ $
Cost 59,513 110,065 1,975,887 2,626,620
Less: accumulated
amortization 20,830 7,338 532,831 999,432
--------- --------- --------- ---------
38,683 102,727 1,443,056 1,627,188
========= ========= ========= =========
F-15
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
6 Leases (Continued)
(a) (Continued)
During the years ended March 31, 2000, 2001 and 2002, the Group entered
into additional capital lease obligations amounting to $1,540,608, $Nil and
$743,821 respectively.
Future minimum payments for capital leases as of March 31, 2002 with an
initial term of more than one year are as follows:
$
2003 698,618
2004 278,445
2005 76,674
---------
Total minimum lease payments 1,053,737
Less: amount representing interest (119,458)
---------
Present value of net minimum lease payments (including
current portion of $617,270, as of March 31, 2002) 934,279
=========
(b) Operating leases
As of March 31, 2002, future minimum lease commitments in respect of
noncancellable operating leases for factory, office premises and staff
quarters in Hong Kong, the PRC and Germany are as follows:
$
2003 256,176
2004 110,977
2005 75,179
2006 68,853
2007 65,751
Thereafter 318,921
-------
895,857
=======
Rent expense for all operating leases amounted to $84,749, $123,124 and
$286,351 for the years ended March 31, 2000, 2001 and 2002, respectively.
F-16
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
7 Banking facilities
As of March 31, 2002, the Group had general banking facilities for bank
overdrafts, letters of credit, notes payable, short-term loans and
long-term loans. The facilities are interchangeable with total amounts
available of $25,430,340 (2001: $14,555,862). The general banking
facilities utilitized by the Group are denominated in Hong Kong dollars,
Renminbi, Japanese Yen and Euro.
The Group's general banking facilities, expressed in United States Dollars,
are further analyzed as follows:
Terms of banking facilities as of
Amount available Amount utilized March 31, 2002
----------------------- ---------------------- ------------------------------
March 31 March 31
2001 2002 2001 2002 Interest Repayment
$ $ $ $ rate terms
Import and export
facilities
Letters of credit 7,179,487 12,012,821 4,749,698 3,308,973
Including sublimit
of:
Notes payable 7,179,487 12,012,821 3,234,897 2,857,533 Prime rate Repayable in
minus 0.25% full within
to Prime rate four months
or HIBOR
+2.5%
Short-term loans 5,384,615 11,656,519 1,086,949 3,754,477 Prime rate Repayable in
minus 0.25% full within
to Prime rate three months
or HIBOR
+2.5% or at
fixed rate
of 8%
Other facilities
Bank overdrafts 1,923,077 1,730,769 - - Prime rate Repayable
or HIBOR on demand
+0.5% to
Prime rate
plus 0.5%
Long-term loans 68,683 30,231 68,683 30,231 Fixed rate Repayable by
(Note 4) of 5.3% 9 monthly
instalments
---------- ---------- ---------- ----------
14,555,862 25,430,340 5,905,330 7,093,681
========== ========== ========== ==========
F-17
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
7 Banking facilities (Continued)
The amount of banking facilities utilized by the Group are denominated in
the following currency:
Amount utilized
-----------------------
March 31
2001 2002
$ $
Euro -- 2,846,593
Hong Kong dollars 1,719,659 1,712,006
Japanese Yen 69,952 198,755
Renminbi 68,683 30,231
United States dollars 4,047,036 2,306,096
--------- ---------
5,905,330 7,093,681
========= =========
The Prime rate and HIBOR rate were 5.13% and 2.19% per annum, respectively,
as of March 31, 2002. The Prime rate is determined by the Hong Kong Bankers
Association and is subject to revision from time to time.
The banking facilities are collateralized by the following:
(a) a legal charge over leasehold properties of the Group with net book
value of $3,942,336 (2001: $3,967,190); and
(b) bank guarantee of $5,129,908 (2001:$150,000) and restricted cash
deposits of $3,972,542 (2001: $2,873,898). The restricted cash
deposits have original maturities of less than three months.
The weighted average interest rate of short-term borrowings of the Group is
as follows:
Year ended March 31
-------------------
2001 2002
Bank overdrafts 9.3% 6.5%
Notes payable 8.6% 5.9%
Short-term loans 8.6% 5.9%
F-18
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
8 Related party transactions
(a) The Group paid emoluments, commissions and/or consultancy fees to its
directors as follows:
Year ended Mr So Hung Gun, Ms Pang Kit Mr Chung Kim Mr Luk Kam
March 31 Anthony Teng, Cathy Wah Sun
-------- --------------- ----------- ------------ ----------
2000 $553,718 (iii) $103,744 $128,854(ii) $106,923(iv)
2001 $559,672 (iii) $106,359 $137,285(ii) $20,816(iv)
2002 $559,672 (iii) $109,497 $140,016(ii) N/A
Mr Fok Woo Mr George Mr J Stewart Mr Henry
Ping O'Leary Jackson Schlueter
-------------- ----------- ------------ ----------
2000 Nil $136,286(i) Nil N/A
2001 Nil $170,134(i) Nil N/A
2002 Nil $165,000(i) Nil $108,379(v)
(i) This represented commissions and consultancy fee paid to Mr
George O'Leary. Mr O'Leary received commissions on orders placed
by customers which he obtained for the Group for the years ended
March 31, 2000 and 2001. Since April 1, 2001, a monthly
consultancy fee was paid to Mr. O'Leary for provision of support
and marketing services in the United States.
(ii) Included in the emoluments is a housing allowance for $38,462
for each of the three years in the period ended March 31, 2002
payable to a company in which Mr Chung Kim Wah has a beneficial
interest.
(iii) Apart from the emoluments paid by the Group as above, one of the
properties of the Group in Hong Kong is also provided to Mr So
Hung Gun, Anthony as part of his compensation.
(iv) Mr Luk Kam Sun resigned as a director of the Company on April 3,
2000.
(v) Mr Henry Schlueter was appointed as a director of the Company on
October 10, 2001. The amount for the year ended March 31, 2002
represented professional fee paid to Schlueter & Associates,
P.C., the Group's SEC counsel in which Mr Henry Schlueter is one
of the principals.
(b) Promissory note receivable from shareholder
On March 27, 1998, Advantage List & Marketing Corporation ("ALMC")
subscribed for 200,000 shares of common stock of the Company at a
price of $6.75 per share which represented the fair market value at
the date of subscription, in exchange for ALMC's promissory note of
$1,470,000. On the same date, ALMC entered into a pledge agreement
simultaneously under which ALMC agreed to pledge the common stock to
the Company as security for the payment of the promissory note. The
promissory note is with full recourse, interest free and was fully
repayable on or before September 27, 2000. On September 17, 1998, a
total of 200,000 shares of common stock were issued and the shares
were held by the Company as security for payment of the promissory
note. The promissory note was recorded at its discounted value of
$1,350,000. Interest of $80,000 accrued thereon in the year ended
March 31, 1999 has been included in additional paid in capital. On
November 10, 1999, the Company has entered into an agreement with ALMC
to rescind the previous share subscription such that in April 2000,
the 200,000 shares of common stock of the Company held by ALMC were
returned to the Company in exchange for cancellation of the promissory
note of $1,470,000. The 200,000 shares of common stock were cancelled
in 2002 and returned to the status of authorized but unissued shares.
F-19
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
9 Provident fund plan
(a) With effect from January 1, 1988, Bonso Electronics Limited ("BEL"), a
wholly-owned foreign subsidiary of the Company, implemented a defined
contribution plan (the "Plan") with a major international assurance
company to provide life insurance and retirement benefits for its
employees. All permanent full time employees who joined BEL before
December 2000, excluding factory workers, are eligible to join the
provident fund plan.
The Mandatory Provident Fund (the "MPF") was introduced by the Hong
Kong Government, and commenced in December 2000. BEL joined the MPF by
implementing a Plan with a major international assurance company. All
permanent Hong Kong full time employees who joined BEL in or after
December 2000, excluding factory workers, are eligible to join the
MPF.
(b) Members of the Plan are required to contribute 5% of their monthly
salary. The contribution by BEL is as follows:
Years of service % of salary as BEL's contribution
---------------- ---------------------------------
Less than 5 years 5.0%
5 to 10 years 7.5%
More than 10 years 10.0%
Members' and employers' contributions to the MPF are both at 5% of the
members' monthly salaries and are subject to a maximum contribution of
HK$1,000 monthly.
(b) At normal retirement age, death or ill health, the member shall be
entitled to receive from the Plan a lump sum equal to the total of the
member's and BEL's contributions plus a return on their investment. On
resignation prior to normal retirement age, a member shall be entitled
to receive from the Plan a lump sum equal to the member's
contributions plus a percentage of the employer's balance determined
in accordance with a predetermined set scale.
On resignation or at normal retirement age, death or ill health, the
member of the MPF shall be entitled to a lump sum equal to the total
of the member's and BEL's contributions plus a return on their
investment.
(c) BEL's total contributions to the Plan and the MPF for the years ended
March 31, 2000, 2001 and 2002 amounted to $64,921, $53,704 and $78,995
respectively.
F-20
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
10 Business acquisition
Effective May 1, 2001, the Group acquired 100% of the equity of Korona
from Augusta. Korona is a German company engaged in the distribution
of electronic scales in Europe.
The acquisition was accounted for using the purchase method of
accounting. Under purchase accounting, the total purchase price has
been allocated to the acquired assets and liabilities of Korona based
on management's best estimate of the fair value of assets acquired and
the liabilities assumed as of May 1, 2001. Due to legal restrictions
on the timing of the transfer of the title of certain assets, the net
assets purchased included a warehouse and an investment in a wholly
owned subsidiary of Korona. As required under the terms of the sale
and purchase agreement, in June and July 2001, respectively, Augusta
repurchased the warehouse and the investment from Korona at their
approximate net book values for cash.
The purchase consideration included cash consideration of $2,730,000
and common stock consideration by issuance of 180,726 shares of
restricted common stock based on an agreed-upon price of $8.00 per
share pursuant to the Stock Purchase Agreement (the "Agreement") with
Augusta. For accounting purposes, the issue of the shares was
originally recorded at the value of $5.00 per share, based on the
average price per share for a total of 5 days before and after the
completion date of the acquisition. Under the terms of the Agreement
the Company had an obligation to register the common stock with the
United States Securities and Exchange Commission (the "SEC"). The
Agreement gave Augusta the right to redeem the common stock if the
registration of the stock had not cleared the SEC by January 31, 2002.
The Company filed a registration statement to register the common
stock held by Augusta which was declared effective by the SEC on March
7, 2002. In March 2002, Augusta exercised the repurchase obligation
requesting to return the 180,726 shares of common stock to the Company
in exchange for a promissory note of $1,445,808, repayable in nine
monthly payments which would have commenced April 1, 2002 and bearing
interest at a rate of 8% per annum which would result in an interest
cost of approximately $50,000 for the whole period of the promissory
note.
After seeking advice from its legal counsel, the Company believes that
it has strong grounds for rejecting the request for the return of the
shares and is currently in negotiations with Augusta regarding this
matter . The common shares originally issued have not yet been
redeemed.
As the redemption option was exercised by Augusta prior to March 31,
2002, the Group has adjusted the carrying amount of the redeemable
common stock to the full redemption amount, The adjustment of $542,178
accrete to the value of the promissory note of $1,445,808, was treated
as an adjustment to the original purchase price and resulted in the
recognition of goodwill. Any final amendment to the redemption amount
resulting from the current negotiations with Augusta will result in a
subsequent adjustment to this goodwill amount.
F-21
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
10 Business acquisition (continued)
The allocation of the purchase price is as follows:
$
Cash consideration 2,730,000
Common stock consideration 1,445,808
Less: Fair value of net assets acquired (1,294,512)
Less: Fair value of brand name (3,000,000)
Less: Cash received for the warehouse and investment (1,176,975)
Plus: Book value of warehouse and investment 1,176,975
Plus: Transaction and closing costs 322,921
----------
Goodwill 204,217
==========
The goodwill above arose on March 31, 2002 and no amortization charge
was incurred during the current fiscal year.
The following unaudited pro forma consolidated summary of operations
presents information of the Group's results as if the acquisition
occurred on April 1, 2000:
2001 2002
$ $
(unaudited)
Net sales 44,544,079 54,251,315
Net income 309,297 2,016,267
Basic earnings per share 0.05 0.36
Diluted earnings per share 0.05 0.35
Shares used in per share calculation:
Basic 5,745,262 5,624,448
Diluted 5,860,637 5,690,380
These unaudited pro forma results have been prepared for comparative
purposes only. They do not purport to be indicative of the results of
operations which actually would have been resulted had the acquisition
occurred on April 1, 2000 or of future results of operations of the
consolidated entities.
11 Commitments and contingencies
(a) As of March 31, 2002, the Group had commitments to acquire plant and
machineries from third parties for an aggregate consideration of
$17,820 (2001: $198,164) of which $16,038 (2001: $70,511) had been
paid as deposits.
(b) Apart from the dispute with Augusta as discussed in Note 10, the Group
has no other contingent liabilities as at March 31, 2002.
F-22
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
12 Earnings per share
Year ended March 31
---------------------------------
2000 2001 2002
$ $ $
Income available to common
shareholders 347,698 1,603,799 1,805,606
Weighted average shares outstanding 3,515,690 5,564,536 5,586,920
Incremental shares from assumed
exercise of:
Warrants 33,838 48,547 --
Stock options 428,551 66,828 65,932
--------- --------- ---------
Dilutive potential common shares 462,389 115,375 65,932
--------- --------- ---------
Diluted weighted average shares 3,978,079 5,679,911 5,652,852
========= ========= =========
Basic earnings per share $0.10 $0.29 $0.32
Diluted earnings per share $0.09 $0.28 $0.32
Basic earnings per share are computed by dividing net income available
to common shareholders by the weighted average number of shares of
common stock issued and outstanding. Diluted earnings per share is
computed in a manner consistent with that of basic earnings per share
while giving effect to all potentially dilutive shares of common stock
that were outstanding during the period, including warrants and stock
options.
Options to purchase 30,000 shares, 228,000 shares and 20,000 shares of
common stock at $7.875, $8.00 and $8.125 per share respectively were
outstanding during the fiscal year ended March 31, 2002 but were not
included in the calculation of diluted earnings per share during the
year ended March 31, 2002 due to their anti-dilutive effect.
Warrants to purchase 1,087,201 shares and 200,000 shares of common
stock at $17.35 and $8.00 per share respectively were outstanding
during the fiscal year ended March 31, 2002 but were not included in
the calculation of diluted earnings per share during the year ended
March 31, 2002 due to their anti-dilutive effect.
13 Shareholders' equity
(a) Repurchase of common stock
In June 2000, the Board of Directors authorized the repurchase of the
common stock of the Company up to a total consideration of $1,000,000.
The Board of Directors believed that the common stock was undervalued,
and that the repurchase of common stock would be beneficial to the
Company's shareholders. At various times from July 2000 to November
2000, the Company repurchased 123,500 shares of the Company's common
stock, at an average cost of $7.78 per share, for a total cost of
$960,249.
In December 2000, the Board of Directors further authorized the
repurchase of 25,000 shares of the common stock of the Company. The
Board of Directors believed that the common stock was undervalued, and
that the repurchase of common stock would be beneficial to the
Company's shareholders. Subsequently in December 2000, the Company
repurchased 25,000 shares of the Company's common stock, at an average
cost of $9.00 per share, for a total cost of $225,000.
F-23
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
13 Shareholders' equity (continued)
(a) Repurchase of common stock (continued)
In March 2001, 73,500 shares of the repurchased common stock have been
cancelled, and returned to the status of authorized but unissued
shares. The remaining 75,000 repurchased shares of the common stock
were cancelled and returned to the status of authorized but unissued
shares in May 2001.
In April 2001, the Board of Directors authorized the repurchase of the
common stock of the Company up to a total consideration of $500,000.
The Board of Directors believed that the common stock was undervalued,
and that the repurchase of common stock would be beneficial to the
Company's shareholders. During April 2001 to October 2001, the Company
repurchased 17,000 shares of the Company's common stock at an average
cost of $6.05 per share, for a total cost of $102,934.
In October 2001 and March 2002, 15,000 shares and 2,000 shares of the
repurchased common stock have been cancelled, and returned to the
status of authorized but unissued shares respectively.
(b) Preferred stock
On October 10, 2001, the Company's Memorandum and Articles of
Association were amended such that the authorized share capital of the
Company was increased by $100,000 by the creation of 10,000,000 shares
of preferred stock, with par value of $0.01 each, divided into
2,500,000 shares each of class A preferred stock, class B preferred
stock, class C preferred stock and class D preferred stock. Shares may
be issued within each class from time to time by the Company's board
of directors in its sole discretion without the approval of the
shareholders with such designations, power, preferences, rights,
qualifications, limitation and restrictions as the Board of Directors
shall fix and as have not been fixed in the Company's Memorandum of
Association. The Company has not issued any shares of preferred stock
up to March 31, 2002.
14 Stock option plan
(a) In October 1996, the Board of Directors approved the 1996 Stock Option
Plan and 1996 Non-Employee Directors' Stock Option Plan. Under the
1996 Stock Option Plan, the Company may grant options of common stock
to certain employees and directors of the Company for a maximum of
400,000 shares. The 1996 Stock Option Plan is administered by a
committee appointed by the Board of Directors which determines the
terms of options granted, including the exercise price, the option
periods and the number of shares to be subject to each option. The
exercise price of options granted under the 1996 Stock Option Plan may
be less than the fair market value of the common shares on the date of
grant. The maximum term of options granted under the 1996 Stock Option
Plan is 10 years. The right to acquire the common shares is not
assignable except for certain conditions stipulated in the 1996 Stock
Option Plan.
In January 1997, the Company granted options to three directors to
purchase an aggregate of 375,000 shares of common stock of the Company
at an exercise price of $2.00 per share, which was equal to the market
value on the date of grant, in accordance with the 1996 Stock Option
Plan. The options shall expire on January 31, 2007 and can be
exercised at any time immediately after granting. All of the options
were exercised during the year ended March 31, 2000 to purchase
337,264 shares of common stock of the Company.
In January 1998, the Company granted options to an employee to
purchase an aggregate of 25,000 shares of common stock of the Company
at an exercise price of $6.20 per share which was greater than the
market value on the date of grant, in accordance with the 1996 Stock
F-24
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
14 Stock option plan (Continued)
(a) (Continued)
Option Plan. The options shall expire on January 1, 2008 and can be
exercised at any time immediately after granting. All of the options
were exercised during the year ended March 31, 2000 to purchase 17,201
shares of common stock of the Company.
In January 2000, the maximum number of share options which can be
granted under the 1996 Stock Option Plan was increased from 400,000
units to 900,000 units.
In January 2000, the Company granted options to certain employees to
purchase an aggregate of 23,700 shares of common stock of the Company
at an exercise price of $8.00 per share, which was equal to the market
value on the date of grant, in accordance with the 1996 Stock Option
Plan. The options shall expire on January 6, 2010 and can be exercised
at any time immediately after granting. None of the options were
exercised during the year ended March 31, 2000, and 13,700 stock
options were exercised to purchase 7,023 shares of common stock of the
Company during the year ended March 31, 2001. None of the options have
been exercised during the year ended March 31, 2002.
The stock options outstanding in respect of the 1996 Stock Option Plan
as of March 31, 2002 is summarized as follows:
Average per share
-------------------
Number Exercise Market
of shares price price
Balance, March 31, 1999 400,000 $2.26 $2.26
Exercised during the year (400,000) $2.26 $2.26
Granted 23,700 $8.00 $8.00
------- ------- -------
Balance, March 31, 2000 23,700 $8.00 $8.00
Exercised during the year (13,700) $8.00 $8.00
------- ------- -------
Balance March 31, 2001 and 2002 10,000 $8.00 $8.00
======= ======= =======
Under the 1996 Non-Employee Directors' Stock Option Plan, the
non-employee directors are automatically granted stock options on the
third business day following the day of each annual general meeting of
the Company to purchase an aggregate of 100,000 shares of common
stock. The exercise price of all options granted under the 1996
Non-Employee Directors' Stock Option Plan shall be one hundred percent
of the fair market value per share of the common shares on the date of
grant. The maximum term of options granted under the 1996 Non-Employee
Directors' Stock Option Plan is 10 years. No stock option may be
exercised during the first six months of its term except for certain
conditions provided in the 1996 Non-Employee Directors' Stock Option
Plan. The right to acquire the common shares is not assignable except
for under certain conditions stipulated in the 1996 Non-Employee
Directors' Stock Option Plan.
In October 1996, the Company issued options to three non-employee
directors in accordance with the 1996 Non-Employee Directors' Stock
Option Plan to purchase an aggregate of 30,000 shares of common stock
of the Company at an exercise price of $2.25 per share, which was
equal to the market value on the date of grant. The options shall
expire October 16, 2006 and can be exercised at any time after
granting. During the years ended on March 31, 2000 and 2001, 10,000
and 20,000 stock options were exercised to purchase 10,000 and 18,868
shares of common stock of the Company respectively.
F-25
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
14 Stock option plan (Continued)
(a) (Continued)
In September 1997, the Company issued options to four non-employee
directors in accordance with the 1996 Non-Employee Directors' Stock
Option Plan to purchase an aggregate of 40,000 shares of common stock
of the Company at an exercise price of $5.06 per share, which was
equal to the market value on the date of grant. The options shall
expire on September 8, 2007 and can be exercised at any time after
granting. During the year ended March 31, 2000, 30,000 stock options
were exercised to purchase 22,362 shares of common stock of the
Company. The remaining 10,000 stock options was cancelled following
the resignation of Mr Ray Mehra as a director of the Company on
January 2, 1998.
No annual general meeting was held by the Company for the year 1998
and therefore no stock option was granted in accordance with the 1996
Non-Employee Directors' Stock Option Plan during the year ended March
31, 1999.
In January 2000, the maximum number of share options which can be
granted under the 1996 Non-Employee Directors' Stock Option Plan was
increased from 100,000 units to 600,000 units.
In January 2000, the Company issued options to two non-employee
directors in accordance with the 1996 Non-Employee Directors' Stock
Option Plan to purchase an aggregate of 20,000 shares of the common
stock of the Company at an exercise price of $8.125 per share, which
was equal to the market value on the date of grant. The options shall
expire on January 12, 2010 and can be exercised at any time
immediately after granting. None of the options has been exercised
during the years ended March 31, 2001 and 2002.
In January 2001, the Company issued options to three non-employee
directors in accordance with the 1996 Non-Employee Directors' Stock
Option Plan to purchase an aggregate of 30,000 shares of the common
stock of the Company at an exercise price of $7.875 per share, which
was equal to the market value on the date of grant. The options shall
expire on January 9, 2011 and can be exercised at any time after
granting. None of the options has been exercised during the years
ended up to March 31, 2001 and 2002.
The stock options activity in respect of the 1996 Non-Employee
Directors' Stock Option Plan as of March 31, 2002 is summarized as
follows:
Average per share
-------------------
Number Exercise Market
of shares price price
Balance, March 31, 1999 60,000 $4.12 $4.12
Exercised during the year (50,000) $3.936 $3.936
Granted 20,000 $8.125 $8.125
------- ------- -------
Balance, March 31, 2000 30,000 $7.103 $7.103
Granted 30,000 $7.875 $7.875
------- ------- -------
Balance, March 31, 2001 and 2002 60,000 $7.489 $7.489
======= ======= =======
F-26
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
14 Stock option plan (Continued)
(b) In January 1997, the Company granted options to three non-employee
directors to purchase an aggregate of 100,000 shares of common stock
of the Company. The exercise price is $2.00 per share, which equaled
the market value of the Company's common stock on the date of grant.
The options shall expire on January 31, 2007 and can be exercised at
any time immediately after granting. During the years ended March 31,
1999 and March 31, 2000, 55,000 and 45,000 options were exercised to
purchase 55,000 and 41,981 shares of common stock of the Company
respectively.
The stock options summary as of March 31, 2002 is summarized as
follows:
Average per share
---------------------
Number Exercise Market
of shares price price
Balance, March 31, 1999 45,000 $2.00 $2.00
Exercised during the year (45,000) $2.00 $2.00
------- ------- -------
Balance, March 31, 2000,
2001 and 2002 -- -- --
======= ======= =======
(c) At various times in January 1998, the Company issued options to the
directors and an employee of the Company to purchase an aggregate of
195,000 shares of common stock of the Company at an exercise price of
$6.20 per share. The options shall expire in January 2008 and can be
exercised at any time after granting. The exercise prices of these
options were equal to or greater than the fair market value at the
time of grant. No options were exercised during the years ended March
31, 1998 and 1999, and all of the 195,000 options were exercised to
purchase 134,174 shares of common stock of the Company during the year
ended March 31, 2000.
The stock options summary as of March 31, 2002 is summarized as
follows:
Average per share
---------------------
Number Exercise Market
of shares price price
Balance, March 31, 1999 195,000 $6.20 $6.20
Exercised during the year (195,000) $6.20 $6.20
------- ------- -------
Balance, March 31, 2000,
2001 and 2002 -- -- --
======= ======= =======
F-27
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
14 Stock option plan (Continued)
(d) In October 1998, the Company issued options to the directors,
non-employee directors and certain employees of the Company to
purchase an aggregate of 430,000 shares of common stock of the Company
at an exercise price of $3.60 to $3.70. The options shall expire in
October 2008 and can be exercised at any time after granting. The
exercise prices of these options were greater than the market value on
the time of grant. No options were exercised during the year ended
March 31, 1999, and all of the 430,000 stock options were exercised to
purchase 347,825 shares of common stock of the Company during the year
ended March 31, 2000.
The stock options summary as of March 31, 2002 is summarized as
follows:
Average per share
---------------------
Number Exercise Market
of shares price price
Balance, March 31, 1999 430,000 $3.60 $3.60
Exercised during the year (430,000} $3.60 $3.60
------- ------- -------
Balance, March 31, 2000,
2001 and 2002 -- -- --
======= ======= =======
(e) In January 2000, the Company issued options to the directors and an
employee to purchase an aggregate of 218,000 shares of common stock of
the Company at an exercise price of US$8.00. The options shall expire
on January 6, 2010 and can be exercised at any time after granting.
The exercise prices of these options were equal to the fair market
value at the time of grant. No options have been exercised during the
years ended March 31, 2001 and 2002.
The stock options summary as of March 31, 2002 is summarized as
follows:
Average per share
---------------------
Number Exercise Market
of shares price price
Balance, March 31, 1999 -- -- --
Granted 218,000 $8.00 $8.00
------- ------- -------
Balance, March 31, 2000,
2001 and 2002 218,000 $8.00 $8.00
======= ======= =======
(f) In April 2001, the Company issued options to certain directors and
certain employees of the Company to purchase an aggregate of 196,000
shares of common stock of the Company at an exercise price of US$3.65.
The options shall expire on April 9, 2011 and can be exercised at any
time after granting. The exercise prices of these options were equal
to the fair market value at the time of grant. No options have been
exercised during the year ended March 31, 2002.
F-28
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
14 Stock option plan (Continued)
(f) (Continued)
In October 2001, the Company issued options to certain non-employee
directors to purchase an aggregate of 30,000 shares of common stock of
the Company at an exercise price of US$2.55. The options shall expire
on October 15, 2011 and can be exercised at any time after granting.
The exercise prices of these options were equal to the fair market
value at the time of grant. No options have been exercised during the
year ended March 31, 2002.
In March 2002, the Company issued options to certain directors to
purchase an aggregate of 168,000 shares of common stock of the Company
at an exercise price of US$2.50. The options shall expire on March 6,
2012 and can be exercised at any time after granting. The exercise
prices of these options were equal to the fair market value at the
time of grant. No options have been exercised during the year ended
March 31, 2002.
The stock options summary as of March 31, 2002 for those granted
during the year is summarized as follows:
Average per share
---------------------
Number Exercise Market
of shares price price
Balance, March 31, 1999,
2000 and 2001 -- -- --
Granted 196,000 $3.65 $3.65
Granted 30,000 $2.55 $2.55
Granted 168,000 $2.50 $2.50
------- ------- -------
Balance, March 31, 2002 394,000 $3.08 $3.08
======= ======= =======
(g) The following table summarizes the information about all stock options
of the Company outstanding at March 31, 2002:
Weighted
Number average Exercisable
Weighted average outstanding at remaining life shares at
exercise price March 31, 2002 (years) March 31, 2002
-------------- -------------- ------- --------------
$2.50 168,000 9.9 168,000
$2.55 30,000 9.5 30,000
$3.65 196,000 9.0 196,000
$7.875 30,000 9.8 30,000
$8.00 228,000 8.8 228,000
$8.125 20,000 8.8 20,000
------- -------
$5.11 672,000 8.8 672,000
======= =======
F-29
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
14 Stock option plan (Continued)
(h) The Company applies Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its employee stock options. Under
APB Opinion No. 25, as the exercise price of all the options issued by
the Company equals or is higher than the market price of the
underlying stock on the date of grant, no compensation expense has
been recognized for the years ended March 31, 2000, 2001 and 2002.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 "Accounting for Stock-Based Compensation",
and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS No. 123.
The weighted average fair value of options granted during the years
ended March 31, 2000, 2001 and 2002 were $1,880,621, $153,988 and
$939,314, respectively. The fair value for these options was estimated
at the date of grant using a Black-Scholes Option Valuation model with
the following weighted-average assumptions for the year ended March
31, 2000, 2001 and 2002 are as follows:
2000 2001 2002
$ $ $
Weighted risk-free interest rate 6.30% 4.70% 4.55%
Dividend yield - - -
Weighted volatility factor of the expected market
price of the Company's common share 93.00% 76.30% 102.35%
Weighted average expected life of the option 10 years 5 years 5 years
For purposes of pro forma disclosure, the estimated fair value of the
options is charged to net income of respective years. The Group pro
forma information follows:
2000 2001 2002
$ $ $
Net income
As reported 347,698 1,603,799 1,805,606
Pro forma (1,532,923) 1,449,811 866,292
Basis earnings/(losses) per share
As reported $0.10 $0.29 $0.32
Pro forma $(0.44) $0.26 $0.16
Diluted earnings/(losses) per share
As reported $0.09 $0.28 $0.32
Pro forma $(0.39) $0.26 $0.15
F-30
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
15 Warrants
(a) As a result of the Company's second public offering in December 1994,
the Company issued 2,200,000 five-year warrants to its public
shareholders. Each warrant entitled the holder thereof to purchase one
share of common stock of the Company at $7.35 per share, which was
equal to the market price on the date. The warrants should expire on
January 31, 2001. The warrants were redeemable by the Company at $0.05
per warrant upon 30 to 45 days notice at any time after December 14,
1995, or such earlier date as the representatives of the underwriters
may determine, if the closing price per share of common stock of the
Company for 20 consecutive trading days within the 30-day period prior
to the date of notice of redemption is given equals or exceeds $8.575
per share. A total of 25,597 warrants and 1,673,776 warrants were
exercised to purchase 25,597 shares and 1,673,776 shares of common
stock of the Company at $7.35 per share during the years ended March
31, 1999 and March 31, 2000 respectively. The remaining 500,627
warrants expired on January 31, 2001.
(b) In conjunction with the second public offering, the Company issued
warrants to the representatives of the underwriters (the
"Representatives' Warrants") to purchase from the Company up to an
aggregate of 110,000 units at an exercise price of $9.1875 per unit
which was equal to the market price on that date; each unit consists
of one share of common stock and two five-year warrants of the
Company. The Representatives' Warrants expired on January 31, 2000.
Upon any transfer to a person other than an officer, shareholder or
director of the representatives of the underwriters, the transferred
or exercised five-year warrants must be exercised immediately or they
will lapse. No warrants were transferred and exercised and the
warrants expired on January 31, 2000.
(c) On January 5, 2000, the Company declared a one-for-one warrant
dividend on all warrants which either were outstanding as of the close
of trading on January 19, 2000 or which were exercised during the
period commencing on November 22, 1999 and ending at the close of
trading on January 19, 2000. A total of 2,174,403 new warrants were
issued accordingly on June 1, 2000. No warrants have been exercised
during the year ended March 31, 2001. Each two new warrants were
exercisable to purchase 1 share of common stock of the Company at an
exercise price of $17.50, which was equal to the market price on that
date. The warrants originally expired on December 31, 2001 but the
board of directors, in October 2001, extended the expiration date
until December 31, 2002. No warrants have been exercised during the
years ended March 31, 2001 or 2002.
(d) On January 14, 2000, the Company has entered into an agreement with
Profit Concepts Limited ("Profit Concepts"), which provides consulting
services to the Company. The agreement provides for the issuance by
the Company to Profit Concepts of non-callable warrants to purchase
250,000 shares of the Company's common stock at $8.00 per share, which
was equal to the market price on that date. Profit Concepts is engaged
in the provision of advisory services for equity fund raising exercise
of the Company and the warrants are exercisable for a period of three
years from January 14, 2000. No warrants were exercised up to March
31, 2000 and 50,000 warrants were exercised to purchase 50,000 shares
of common stock of the Company at $8.00 per share during the year
ended March 31, 2001. No warrants have been exercised during the year
ended March 31, 2002.
The fair value of the warrants on the date of issue was US$1,144,260
and is being recognized as consultancy fee in the Consolidated
Statements of Income and Comprehensive Income on a straight-line basis
over the period of services by Profit Concepts which commenced on July
1, 2000 and concludes on January 13, 2003. The consultancy fee charged
to the Consolidated Statements of Income and Comprehensive Income
amounted to $0, $381,420 and $381,420 for the years ended March 31,
2000, 2001 and 2002 respectively.
F-31
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
16 Business segment information
(a) The Group is organized based on the products it offers. Under this
organizational structure, the Group's operation can be classified into
four business segments, Scales, Telecommunications products, Health
care products and Other.
Scales operations principally involve production and marketing of
sensor based scales products. These included bathroom, kitchen,
office, jewellery, laboratory, postal and industrial scales that are
used in consumer, commercial and industrial applications.
Telecommunications products operation principally involved production
and modification of two-way radios and cordless telephones that are
used in consumer and commercial applications.
Health care products operation principally involved production of
thermometers and blood pressure meters used by consumers.
The company established the "Other" segment which principally includes
the activities of (i) tooling and mould charges for scales and
telecommunication products, (ii) supporting service to customer
including perform repairing work for customers and sales of spare
parts.
The accounting policies of the Group's reportable segments are the
same as those described in description of business and significant
accounting policies.
F-32
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
16 Business segment information (continued)
Summarized financial information by business segment for 2000, 2001
and 2002 is as follows:
Identifiable Depreciation
Net Operating assets as of and Capital
sales profit/(loss) March 31 amortization expenditure
----- ------------- -------- ------------ -----------
$ $ $ $ $
2002
Scales 33,451,978 6,990,999 21,403,551 1,266,122 919,550
Telecommunication products 17,359,570 821,153 6,677,075 1,109,584 610,533
Health care products 81,660 1,110 2,499 233 202
Other 2,409,893 1,762,854 3,967,575 370,670 320,493
---------- ---------- ---------- ---------- ----------
Total operating segments 53,303,101 9,576,116 32,050,700 2,746,609 1,850,778
Corporate -- (6,862,124) 12,400,377 541,306 934,993
---------- ---------- ---------- ---------- ----------
Group 53,303,101 2,713,992 44,451,077 3,287,915 2,785,771
========== ========== ========== ========== ==========
2001
Scales 19,119,293 4,396,476 14,797,805 1,152,366 1,242,650
Telecommunication products 8,679,253 760,968 5,728,041 784,610 2,639,195
Health care products 460,817 11,123 37,439 2,916 3,144
Other 1,307,317 815,139 2,743,622 213,657 230,396
---------- ---------- ---------- ---------- ----------
Total operating segments 29,566,680 5,983,706 23,306,907 2,153,549 4,115,385
Corporate -- (4,241,853) 14,189,763 195,636 2,242,955
---------- ---------- ---------- ---------- ----------
Group 29,566,680 1,741,853 37,496,670 2,349,185 6,358,340
========== ========== ========== ========== ==========
2000
Scales 12,608,415 2,889,663 12,552,235 980,122 1,228,865
Telecommunication products 700,777 108,981 4,553,394 226,190 2,603,456
Health care products 1,246,305 40,071 174,062 13,591 17,041
Other 824,789 589,994 2,562,840 200,116 250,903
---------- ---------- ---------- ---------- ----------
Total operating segments 15,380,286 3,628,709 19,842,531 1,420,019 4,100,265
Corporate -- (3,359,157) 13,950,185 199,154 898,661
---------- ---------- ---------- ---------- ----------
Group 15,380,286 269,552 33,792,716 1,619,173 4,998,926
========== ========== ========== ========== ==========
Operating profit by segment equals total operating revenues less
expenses which are related to the segment's operating revenues.
Operating loss of the corporate segment consists principally of
salaries and related costs of administrative staff, and administration
and general expenses of the Group. Identifiable assets by segment are
those assets that are used in the operation of that segment. Corporate
assets consist principally of cash and cash equivalents, deferred
income tax assets and other identifiable assets not related
specifically to individual segments.
F-33
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
16 Business segment information (Continued)
(b) The Group primarily operates in Hong Kong, the PRC and Germany. The
manufacture of components and their assembly into finished products is
carried out in the PRC. The Hong Kong office is mainly responsible for
the purchase of raw materials, arrangement of shipments and research
and development. A German subsidiary in the Group is responsible for
the distribution of electronics scales in Europe. As the operations
are integrated, it is not practicable to distinguish the net income
derived among the activities in Hong Kong, the PRC and Germany.
Identifiable assets by geographical areas are as follows:
2001 2002
$ $
Hong Kong 17,561,478 14,784,311
The PRC 19,935,192 18,959,106
Germany -- 10,707,660
---------- ----------
Total assets 37,496,670 44,451,077
========== ==========
(c) The following is a summary of net export sales by geographical areas
constituting 10% or more of total sales of the Group for the years
ended March 31, 2000, 2001 and 2002:
Year ended March 31
------------------------------------------------------------------------------
2000 % 2001 % 2002 %
$ $ $
United States of
America 6,274,612 41 10,945,310 37 23,578,878 44
Europe 6,330,064 41 14,160,371 48 25,641,446 48
Others 2,775,610 18 4,460,999 15 4,082,777 8
---------- --- ---------- --- ---------- ---
15,380,286 100 29,566,680 100 53,303,101 100
========== === ========== === ========== ===
(d) The details of sales made to customers constituting 10% or more of
total sales of the Group is as follows:
Year ended March 31
---------------------------------------------------------------
Business 2000 % 2001 % 2002 %
segment $ $ $
Werner Dorsch Gmbh & Co. Scales 1,780,572 12 1,819,116 6 2,163,530 4
Gottl Kern & Sohn Gmbh Scales 1,735,355 11 2,337,665 8 2,019,407 4
Ohaus Corporation Scales 1,725,343 11 2,875,027 10 2,078,647 4
Telson Telecommunication Tele-
and Technology Company communication
Limited products 375,252 3 3,505,516 12 - -
Telson Information and Tele-
Communication Company communication
Limited products 403,386 3 3,657,135 12 210,978 0
Gram Precision Scales, Scales 1,142,182 7 2,919,960 10 3,245,184 6
Inc.
Trisquare Communications Tele-
(HK) Company communication
Limited products - - - - 11,497,223 22
---------- -- ---------- -- ---------- ---
7,162,090 47 17,114,419 58 21,214,969 40
========== == ========== == ========== ===
F-34
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
17 Fair value of financial instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
defines the fair value of a financial instrument at which the
instrument could be exchanged in a current transaction between willing
parties.
The carrying value of all of the Group's financial instruments
classified as current assets or current liabilities are deemed to
approximate fair value because of the short maturity of these
instruments. These would include cash and cash equivalents, accounts
receivable, accounts payable and accrued and other liabilities, which
are reflected on the consolidated balance sheets.
In the opinion of management, the carrying amount of the Group's
long-term debt approximates fair value as the interest rate applicable
is believed to approximate the market rates that would be offered to
Group for debt of the same remaining maturities.
F-35