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, 2003
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:
5,709,859 shares of common stock, $0.003 par value, at March 31, 2003
(includes 180,726 shares that are disputed and may be repurchased).
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
PART I
Item 1. Identity of Directors, Senior Management and Advisors................2
Item 2. Offer Statistics and Expected Timetable..............................2
Item 3. Key Information......................................................3
Item 4. Information on the Company..........................................14
Item 5. Operating and Financial Review and Prospects........................24
Item 6. Directors, Senior Management and Employees..........................38
Item 7. Major Shareholders and Related Party Transactions...................45
Item 8. Financial Information...............................................47
Item 9. The Offer and Listing...............................................47
Item 10. Additional Information..............................................48
Item 11. Quantitative and Qualitative Disclosures about Market Risk..........53
Item 12. Description of Securities Other Than Equity Securities..............55
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.....................56
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds................................................56
Item 15. Controls and Procedures.............................................56
Item 16. Reserved............................................................56
PART III
Item 17. Financial Statements................................................56
Item 18. Financial Statements................................................56
Item 19. Exhibits............................................................57
SIGNATURES....................................................................59
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 Annual 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, "RMB" are to Chinese Renminbi and "CDN" are to
Canadian Dollars.
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, 2002 and 2003 and
for each of the three fiscal years ended March 31, 2003 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, 1999, 2000 and 2001, and for each of the two
fiscal years in the period ended March 31, 2000 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, 2003 reflects the acquisition of a 51% interest in Gram
Precision Scales, Inc. ("Gram Precision"), which was effective as of August 1,
2002. Data for the fiscal years ended prior to March 31, 2003 does not include
information relating to Gram Precision. The consolidated financial data as of
March 31, 2002 and March 31, 2003 reflects the acquisition of KORONA
Haushaltswaren GmbH & Co. KG ("Korona"), which was effective as of May 1, 2001.
Data for the fiscal years ending prior to March 31, 2002 does not include
information relating to Korona.
2
SELECTED CONSOLIDATED FINANCIAL DATA
Income Statement Data
-----------------------------------------------------------------------------
Year Ended March 31,
-----------------------------------------------------------------------------
1999 2000 2001 2002(2) 2003(1)(2)
----------- ----------- ----------- ----------- -----------
Net Sales $ 13,046 $ 15,380 $ 29,567 $ 53,303 $ 46,330
Cost of Sales (8,812) (11,118) (22,400) (40,192) (35,528)
Gross Margin 4,234 4,262 7,167 13,111 10,802
Selling Expenses (197) (261) (382) (2,476) (2,467)
Salaries and related costs (1,626) (1,899) (2,334) (3,880) (4,563)
Research and Development
expenses (566) (186) (298) (427) (393)
Administration and
general expenses (1,601) (1,646) (2,411) (3,411) (3,957)
Amortization of brand
name -- -- -- (203) (200)
Income (loss) from
operations 244 270 1,742 2,714 (777)
Interest income 63 130 458 167 85
Interest expense (445) (261) (338) (645) (533)
Foreign Exchange gain/(loss) 38 14 43 (40) (96)
Other Income 53 192 205 181 169
Consultancy Fee -- -- (381) (381) (381)
Income/(loss) before
income taxes and
minority interest (22) 345 1,729 1,996 (1,534)
Income tax benefit/(expense) 36 3 (125) (190) (37)
Net income /(loss)
before minority interest $ 14 $ 348 $ 1,604 $ 1,806 (1,571)
Minority interest -- -- -- -- (72)
Net income/ (loss) $ 14 $ 348 $ 1,604 $ 1,806 ($ 1,643)
Earning per share
- Basic $ 0.0045 $ 0.0989 $ 0.2882 $ 0.3232 ($ 0.2936)
- Diluted $ 0.0037 $ 0.0874 $ 0.2824 $ 0.3194 ($ 0.2936)
Weighted average shares 3,079,219 3,515,690 5,564,536 5,586,920 5,599,238
Diluted weighted average
shares 3,674,303 3,978,079 5,679,911 5,652,852 5,599,238
Dividends declared per
share -- -- $ 0.10 $ 0.10 --
----------
(1) Includes financial results of the acquisition of Gram Precision Scales that
was effective as of August 1, 2002.
(2) Includes financial results of the acquisition of Korona that was effective
as of May 1, 2001
3
Balance Sheet Data
-------------------------------------------------------
Fiscal Year ending March 31,
-------------------------------------------------------
1999 2000 2001 2002 (2) 2003 (1)(2)
------- ------- ------- -------- -----------
Working capital $ 3,316 $12,765 $ 9,323 $ 9,599 $ 9,777
Total assets $18,660 $33,793 $37,497 $44,451 $48,911
Long-term debt and capital lease $ 42 $ 865 $ 404 $ 317 $ 606
Deferred income tax assets $ 112 $ 126 $ 97 $ 112 $ 167
Common Stock $ 9,353 $17,133 $16,484 $16,208 $16,583
Shareholders' Equity $14,626 $27,022 $27,673 $29,200 $28,379
----------
(1) Includes financial results of the acquisition of Gram Precision Scales that
was effective as of August 1, 2002.
(2) 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 Korona in Germany changed from the Mark to the Euro
on January 1, 2002.
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 U.S.$1.00 =
CDN$1.3712, U.S.$1.00 = RMB 8.2768, U.S.$1.00 = Euro 1.1766, and U.S.$1.00 =
HK$7.7987, respectively, on May 30, 2003. The following table sets forth the
high and low noon buying rates between Chinese Renminbi and U.S. Dollars, Hong
Kong Dollars and U.S. Dollars, and Euros and U.S. Dollars for each month during
the five month period ended June 30, 2003.
NOON BUYING RATE
---------------------------------------------------------------------------------
CDN$ Per U.S. $1 RMB Per U.S. $1 HK$ PER U.S. $1 U.S. $1 PER EURO
---------------- --------------- --------------- ----------------
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
Jan. 2003 1.5750 1.5220 8.2800 8.2766 7.8001 7.7988 1.0861 1.0361
Feb. 2003 1.5315 1.4880 8.2800 8.2768 7.8000 7.7990 1.0875 1.0708
March 2003 1.4905 1.4659 8.2776 8.2770 7.7995 7.7987 1.1062 1.0545
April 2003 1.4843 1.4336 8.2774 8.2769 7.7998 7.7991 1.1180 1.0621
May 2003 1.4221 1.3446 8.2771 8.2768 7.7995 7.7985 1.1853 1.1200
June 2003 1.3768 1.3348 8.2776 8.2768 7.7980 7.7993 1.1870 1.1423
The following table sets forth the average noon buying rates between
Chinese Renminbi and U.S. Dollars, between Hong Kong Dollars and U.S. Dollars,
and between Euros and U.S. Dollars for each of the calendar years 1998, 1999,
2000, 2001, 2002 calculated by averaging the noon buying rates on the last day
of each month during the relevant year.
4
AVERAGE NOON BUYING RATE
CDN$ Per U.S. $1 RMB PER U.S. $1 HK$ PER U.S. $1 U.S. $1 PER EURO
---------------- --------------- --------------- ----------------
1998 1.4836 8.2772 7.7996 Not Applicable
1999 1.4858 8.2785 7.7599 Not Applicable
2000 1.4855 8.2784 7.7936 Not Applicable
2001 1.5487 8.2772 7.7936 0.8909
2002 1.5704 8.2772 7.7996 0.9495
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:
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 integrating and operating Korona and Gram Precision
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 the Company's reports and filings with the Commission.
5
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, changes in
employment restrictions, 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 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.
6
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.
Controversies affecting China's trade with the United States could harm our
results of operations or depress our stock price. While China has been granted
permanent most favored nation trade status in the United States through its
entry into the World Trade Organization, controversies between the United States
and China may arise that threaten the status quo involving trade between the
United States and China. These controversies could materially and adversely
affect our business by, among other things, causing our products in the United
States to become more expensive resulting in a reduction in the demand for our
products by customers in the United States. Political or trade friction between
the United States and China, whether or not actually affecting our business,
could also materially and adversely affect the prevailing market price of our
common shares.
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 $22,400,000 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.
Our results could be harmed if we have to comply with new environmental
regulations. Our operations create some environmentally sensitive waste that may
increase in the future depending on the nature of our manufacturing operations.
The general issue of the disposal of hazardous waste has received increasing
attention from the PRC national and local governments and foreign governments
and agencies and has been subject to increasing regulation. Our business and
operating results could be materially and adversely affected if we were to
increase expenditures to comply with environmental regulations affecting our
operations.
7
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. Traditionally, we have relied upon 3-4
customers for a significant portion of our sales during the fiscal year. Four
major customers accounted for approximately 44% of our sales in the fiscal year
ended March 31, 2001, one major customer accounted for approximately 22% of our
sales in the fiscal year ended March 31, 2002, and four customers accounted for
approximately 31% in the fiscal year ended March 31, 2003, with one customer
accounting for 14% of our sales. 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 our largest
customers could have a material negative impact on our sales revenue and our
business.
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.
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
8
in Europe. 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.
Our customers are dependent on shipping companies for delivery of our
products and interruptions to shipping could materially and adversely affect our
business and operating results. Typically, we sell our products F.O.B. Hong Kong
and our customers are responsible for the transportation of products from Hong
Kong to their final destinations. Our customers rely on a variety of carriers
for product transportation through various world ports. A work stoppage, strike
or shutdown of one or more major ports or airports could result in shipping
delays materially and adversely affecting our customers, which in turn could
have a material adverse effect on our business and operating results. Similarly,
an increase in freight surcharges due to rising fuel costs or general price
increases could materially and adversely affect our business and operating
results.
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.
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
9
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 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. and principal competitors in the
telecommunications market are other Original Equipment or OEM manufacturers;
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 acquisitions of
Korona and Gram Precision, we compete with distributors of scales in Europe and
Canada. 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 35.77% of the outstanding shares of
common stock, including shares underlying his outstanding options, or 28.58%
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 and Stock Price 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.
Our results have been affected by changes in currency exchange rates.
Changes in currency rates involving the Canadian Dollar, Hong Kong dollar,
Chinese Renminbi or the Euro could increase our expenses.
10
Our financial results have been affected by currency fluctuations,
resulting in total foreign exchange losses of $96,592 during the year ended
March 31, 2003. Generally, our revenues are collected in United States Dollars,
Euros and Canadian Dollars. Our costs and expenses are paid in United States
Dollars, Canadian Dollars, Hong Kong Dollars, Euros and Chinese Renminbi. We
face a variety of risks associated with changes among the relative value of
these currencies. An appreciation of the Canadian Dollar, Chinese Renminbi, Hong
Kong Dollar or the Euro against the U.S. Dollar would increase our expenses when
translated into U.S. Dollars and could materially and adversely affect our
margins. In addition, a significant devaluation in the Canadian Dollar, Chinese
Renminbi, Hong Kong Dollar or Euro could harm our business if it destabilizes
the economy of Canada, China, Hong Kong, or the European Union.
Strategic acquisitions. Recently we have acquired Gram Precision and Korona
to expand our operations. While we are optimistic about these acquisitions,
there can be no assurances that we will be successful in our plans regarding the
operation of these acquisitions. Further, we can give you no assurance that our
acquisitions will perform in accordance with our expectations. Despite our due
diligence efforts, we must necessarily base any assessment of potential
acquisitions on inexact and incomplete information and assumptions with respect
to operations, profitability and other matters that may prove to be incorrect.
Any difficulties with these acquisitions could disrupt our ongoing business,
distract our management and employees and increase our expenses. Moreover, our
profitability may suffer because of acquisition related costs or amortization of
acquired goodwill and other intangible assets.
Protection and Infringement of Intellectual Property. 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. Unauthorized parties may
attempt to copy aspects of our products or trademarks or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult. Our means of protecting our proprietary rights may not be
adequate. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our failure to adequately protect our proprietary rights may allow third parties
to duplicate our products or develop functionally equivalent or superior
technology. In addition, our competitors may independently develop similar
technology or design around our proprietary intellectual property.
Further, we may be notified that we are infringing patents, trademarks,
copyrights or other intellectual property rights owned by other parties. In the
event of an infringement claim, we may be required to spend a significant amount
of money to develop a non-infringing alternative or to obtain licenses. We may
not be successful in developing such an alternative or obtaining a license on
reasonable terms, if at all. Any litigation, even without merit, could result in
substantial costs and diversion of resources and could materially and adversely
affect our business and operating results.
11
Our business and operating results would be materially and adversely
affected if our suppliers of needed components fail to meet our needs. At
various times, we have and continue to experience shortages of some of the
electronic components that we use, and suppliers of some components lack
sufficient capacity to meet the demand for these components. In some cases,
supply shortages and delays in deliveries of particular components have resulted
in curtailed production, or delays in production, of assemblies using that
component, which contributed to an increase in our inventory levels and
reduction in our gross margins. There can be no assurance that such shortages
and delays in deliveries of some components will not occur in the future. If we
are unable to obtain sufficient components on a timely basis, we may experience
manufacturing delays, which could harm our relationships with current or
prospective customers and reduce our sales. We also depend on a small number of
suppliers for certain of the components that we use in our business. If we were
unable to continue to purchase components from these limited source suppliers,
our business and operating results would be materially and adversely affected.
Cancellations or delays in orders could materially and adversely affect our
gross margins and operating income. Sales to our OEM customers are primarily
based on purchase orders we receive from time to time rather than firm,
long-term purchase commitments. Although it is our general practice to purchase
raw materials only upon receiving a purchase order, for certain customers we
will occasionally purchase raw materials based on such customers' rolling
forecasts. Further, during times of potential component shortages we have
purchased, and may continue to purchase, raw materials and component parts in
the expectation of receiving purchase orders for products that use these
components. In the event actual purchase orders are delayed, are not received or
are cancelled, we would experience increased inventory levels or possible
write-downs of raw material inventory that could materially and adversely affect
our business and operating results.
We generally have no written agreements with suppliers to obtain components
and our margins and operating results could suffer from increases in component
prices. We are typically responsible for purchasing components used in
manufacturing products for our customers. We generally do not have written
agreements with our suppliers of components. This typically results in our
bearing the risk of component price increases because we may be unable to
procure the required materials at a price level necessary to generate
anticipated margins from the orders of our customers. Accordingly, increases in
component prices could materially and adversely affect our gross margins and
operating results.
Certain Legal Consequences of Foreign Incorporation and Operations
Judgments Against The Company And 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
12
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 ("SEC") 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.
Our Board's ability to amend our charter without shareholder approval could
have anti-takeover effects that could prevent a change in control. As permitted
by the law of the British Virgin Islands, our Memorandum and Articles of
Association, which are the terms used in the British Virgin Islands for a
corporation's charter and bylaws, may be amended by our board of directors
without shareholder approval provided that a majority of our independent
directors do not vote against the amendment. This includes amendments to
increase or reduce our authorized capital stock. Our board's ability to amend
our charter documents without shareholder approval could have the effect of
delaying, deterring or preventing a change in control of Bonso, including a
tender offer to purchase our common shares at a premium over the then current
market price.
13
We may not pay dividends in the future. Although we have declared an annual
dividend during the fiscal years ended March 31, 2001 and 2002 and on April 2,
2003, we may not be able to declare dividends or may decide not to declare
dividends in the future. We will determine the amounts of any dividends when and
if they are declared, in the future at the time of declaration.
Dispute With Augusta Technologie AG ("Augusta") Regarding Repurchase
Obligation May Result In Obligation For The Company To Repurchase 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.
On October 22, 2002, Augusta filed a request for arbitration in the state
of New York asserting breach of the Agreement and registration rights agreement.
On January 13, 2003, we filed our answer to Augusta's request for arbitration
asserting that Augusta breached the Agreement and the implied duty of good faith
and fair dealing by withholding consent from Korona's auditors for the release
of Korona's financial statements. We are currently in the process of proceeding
through the arbitration. Although we are optimistic that we will be successful
in the arbitration, there can be no assurance that this will occur. Further, if
the arbitration proceeds, 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 in the arbitration, we may be obligated to
repurchase the stock by exchanging it for the promissory note, to be repaid with
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.
14
As part of our ongoing expansion of the sensor-based product business,
effective as of August 1, 2002, we acquired 51% of the equity of Gram Precision
from a third party for approximately $231,000 in cash, a promissory note in the
gross amount of $231,000, and the issuance of 125,000 shares of our common stock
valued at approximately $300,000. The purchase price was determined through
arms-length negotiations between us and the third party, which negotiations took
into consideration Gram Precision's business, financial position, operating
history, products, and other factors relating to Gram Precision's business. Gram
Precision is primarily engaged in the distribution and marketing of pocket
scales in the United States, Canada, and Europe
Effective as of May 1, 2001 we acquired 100% of the equity of Korona. 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.
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.
15
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.
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, Canada and Europe. We have done this through the
acquisitions of Gram Precision and Korona, and through efforts to introduce the
Korona brand name and 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.
16
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 65% of
revenue for the fiscal year ended March 31, 2001, 63% for 2002 and 59% for 2003.
Our sensor-based healthcare products are comprised primarily of
thermometers and blood pressure meters used by consumers. These products
accounted for 2% of revenue for the fiscal year ended March 31, 2001, 0% for
2002 and 0% for 2003.
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 29% of revenue for the fiscal year
ended March 31, 2001, 33% for 2002 and 34% for 2003.
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 4% of net sales for the fiscal year ended March 31,
2001, 4% for 2002 and 7% for 2003.
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, 2001, 2002,
and 2003.
Year ended March 31,
----------------------------------
Product Line 2001 2002 2003
------------ ---- ---- ----
Scales 65% 63% 59%
Healthcare Products 2% 0% 0%
Telecommunications Products 29% 33% 34%
Other products and services 4% 4% 7%
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. The Gram Precision acquisition allows us to engage in the
distribution and marketing of pocket scales in the United States, Canada, and
Europe. With the acquisition of Korona, we began to distribute scale products
directly to the retail and catalogue markets in Europe.
17
Net export sales to customers by geographic area consisted of the following
for each of the three years ended March 31, 2001, 2002 and 2003.
Year ended March 31,
----------------------------------------------------------------
2001 2002 2003
------------------ ------------------ ------------------
North America $13,531,782 46% $24,553,379 46% $22,017,956 48%
Europe $14,160,371 48% $25,641,446 48% $21,059,227 45%
Asia $ 1,538,650 5% $ 2,223,602 4% $ 2,661,535 6%
Others $ 335,877 1% $ 884,674 2% $ 591,336 1%
Total $29,566,680 100% $53,303,101 100% $46,330,054 100%
We maintain a sales and marketing representative in Hong Kong, a marketing
and sales team of ten people in China, a marketing team of two people in Canada
and two people in Europe for Gram Precision and a sales team at Korona in
Germany of six people (including one sales representative and 4 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 major electronics sensor customers for each of the prior
three fiscal years follows:
Percent of Sales - Year ended March 31,
--------------------------------------------------------------------------------
Electronics Sensor Customers 2001(1) 2002(1) 2003(1)
---------------------------- ------- ------- -------
Ohaus Corporation (USA) 10% 4% 0%
Gram Precision (Canada) 10% 6% (1)
Gottl Kern & Sohn GmbH (Germany) 8% 4% 4%
Werner Dorsch GmbH & Co. (Germany) 6% 4% 3%
----------
(1) The inclusion of Gram Precision Scales has a dilutive effect on sales
percentages in the years ended March 31, 2001 and 2002. Effective August 1,
2002, we acquired a 51% interest in Gram Precision, and sales information for
the fiscal year ended March 31, 2003, has not been included.
A list of our major telecommunications customers for each of the prior
three fiscal years follows:
18
Percent of Sales - Year ended March 31,
--------------------------------------------------------------------------------
Telecommunications Customer 2001 2002 2003
--------------------------- ---- ---- ----
Trisquare Communications (HK)
Company Ltd. 0% 22% 14%
TTI Tech Co., Ltd 0% 4% 8%
Global Link Corporation Ltd. 0% 0% 5%
Telson Information &
Communications Co., Ltd. (Korea) 12% Less Than 1% 0%
Telson Telecommunication
Technology Co., Ltd. (Korea) 12% 0% 0%
Sales of our products to OEMs accounted for approximately 97% of our total
net sales in the year ended March 31, 2001, 65% for the year ended 2002 and 34%
for the year ended 2003. Korona contributed $13,112,156 of our total net sales
or 28% of total net sales for the year ended March 31, 2003. Gram Precision
contributed $4,275,499 of our total net sales or 9% of total net sales for the
year ended March 31, 2003.
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 and to Bonso Electronics
Limited 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.
19
Patents, Licenses, Trademarks, Franchises, Concessions and Royalty Agreements
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 in the United States.
We rely on a combination of patent, trademark and trade secret laws,
employee and third party non-disclosure agreements and other intellectual
property protection methods to protect our proprietary rights. There can be no
assurance that third parties will not assert infringement or other claims
against us with respect to any existing or future products. We cannot assure you
that licenses would be available if any of our technology was successfully
challenged by a third party, or if it became desirable to use any third-party
technology to enhance the Company's products. Litigation to protect our
proprietary information or to determine the validity of any third-party claims
could result in a significant expense to us and divert the efforts of our
technical and management personnel, whether or not such litigation is determined
in our favor.
While we have no knowledge that we are infringing upon the proprietary
rights of any third party, there can be no assurance that such claims will not
be asserted in the future with respect to existing or future products. Any such
assertion by a third party could require us to pay royalties, to participate in
costly litigation and defend licensees in any such suit pursuant to
indemnification agreements, or to refrain from selling an alleged infringing
product or service.
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, 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.
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 approximately $298,000 for 2001, $427,000 for 2002 and $393,000 for
2003.
20
Seasonality
Generally, 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 Gram Precision and Korona;
however, sales of telecommunication products are generally higher in the summer
months off-setting Gram Precision's and Korona's decline in sales. However, the
sales patterns may not be indicative of future performance.
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
A significant amount of our products are manufactured at our factory
located in China. While China has been granted permanent most favored nation
trade status in the United States through its entry into the World Trade
Organization, controversies between the United States and China may arise that
threaten the status quo involving trade between the United States and China.
These controversies could materially and adversely affect our business by, among
other things, causing our products in the United States to become more expensive
resulting in a reduction in the demand for our products by customers in the
United States.
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
21
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, Euros and
Canadian Dollars. Our costs and expenses are paid in United States Dollars,
Canadian Dollars, Hong Kong Dollars, 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. A
significant portion of Korona's costs and expenses are paid in United States
Dollars. An appreciation of the Canadian Dollar, Chinese renminbi, Hong Kong
dollar or the Euro against the U.S. dollar would increase our expenses when
translated into U.S. dollars and could materially and adversely affect our
margins. 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.
C. Organizational Structure.
We have one wholly-owned Hong Kong 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 property 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.
We also have another wholly-owned British Virgin Islands subsidiary - Modus
Enterprise International Inc., which owns 100% of Korona and 51% of Gram
Precision. Korona is engaged in marketing, distributing and retailing of
consumer bathroom and kitchen scale products throughout Europe. Gram Precision
is primarily engaged in the distribution and marketing of pocket scales in the
United States, Canada, and Europe.
22
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
We own 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 4,593 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 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.
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.
23
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 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) 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.
Germany
Korona leases approximately 885 square meters of office space located at
Auf den Huttenberg 1-3, 35428 Langgons-Niederkleen, Germany. This facility is
used as Korona's principal executive offices and the monthly rent for this
facility is E 6,427.12.
Canada
Gram Precision leases from an affiliated entity approximately 5,028 square
feet of office space located at 31-5155 Spectrum Way, Mississauga, Ontario, L4W
5A1, Canada. This facility is used as Gram Precision's principal executive
offices and the monthly rent for this facility is CDN 4,250 including Goods &
Services Tax.
United Kingdom
Vector Europe Limited, a subsidiary of Gram Precision, leases 3,319 square
feet of office and warehouse space located at Swansea, Wales, United Kingdom.
The monthly rent for this facility is GBP 833.33.
Adequacy of Facilities
We believe the manufacturing complex, including the newly leased space,
will be adequate for our reasonably foreseeable needs.
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.
24
Financial information as of and for the year ended March 31, 2003 reflects
the impact of the acquisition of a majority interest in Gram Precision and the
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 SEC 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, impairment, brand name, trade receivables, and deferred income
taxes.
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. 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. See discussion of all our
significant accounting policies in footnote 1 to the Consolidated Financial
Statements included elsewhere in this Annual Report.
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
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 adopted
Statement of Financial Accounting Standard ("SFAS") No. 142 "Goodwill and Other
Intangible Assets," which requires discontinuance of goodwill amortization and
an annual impairment review. Where an indication of impairment exists, the
carrying amount of goodwill is assessed and written down to its recoverable
amount.
25
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 of Long-Lived Assets
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. Goodwill is also subject
to an annual impairment review.
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 require 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.
Trade Receivables
Provision is made against trade receivables to the extent that collection is
considered to be doubtful. 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.
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. As part of this process we are required to estimate our income taxes
and tax bases of assets and liabilities in each of the jurisdictions in which we
operate. This process involves us estimating our current tax exposure together
with assessing temporary differences resulting from differing treatment of items
for tax and accounting purposes. We must then assess the likelihood of the
recoverability of future tax benefits, such as net operating loss carry
forwards, based on estimated future taxable income and recognize such benefits
to the extent that realization is more likely than not to occur. To the extent
we establish a valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in the statement of operations.
Any change in the recoverability of the deferred tax assets could significantly
affect the results of our operations or cash flows.
26
Overview
We derive our revenues principally from the sale of sensor-based and
wireless products manufactured in China, which represent 59% and 34% of total
sales for fiscal year ended March 31, 2003 respectively. For 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. In the fiscal year ended March 31, 2003, net sales
were $46,330,000 and net loss was $1,644,000.
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.
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 2001 2002 2003
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales (75.8) (75.4) (76.7)
Gross margin 24.2 24.6 23.3
Selling expenses (1.3) (4.6) (5.3)
Salaries and related costs (7.9) (7.3) (9.8)
Research and development expenses (1.0) (0.8) (0.8)
Administration and general expenses (8.2) (6.4) (8.5)
Amortization of brand name -- (0.4) (0.4)
Income (loss) from operations 5.9 5.1 (1.7)
Interest income 1.6 0.3 0.2
Interest expense (1.1) (1.2) (1.1)
Foreign exchange gains/(loss) 0.1 (0.1) (0.2)
Other income 0.7 0.3 0.4
Consultancy fee (1.3) (0.7) (0.8)
------ ------ ------
Income (loss) before income taxes
and minority interest 5.8 3.7 (3.3)
Income tax expense (0.4) (0.4) (0.1)
------ ------ ------
Minority interest 0 0 (0.2)
------ ------ ------
Net income (loss) 5.4 3.4 (3.4)
====== ====== ======
27
Fiscal year ended March 31, 2003 compared to fiscal year ended March 31, 2002
Net Sales. Our sales decreased 13% from approximately $53,303,101 for the
fiscal year ended March 31, 2002, to approximately $46,330,054 for the fiscal
year ended March 31, 2003, primarily as a result of the poor performance of one
of our subsidiaries, Korona, and the decrease in sales of both our scales and
telecommunications products due to the poor worldwide economy. Gram Precision
had $4,275,499 in sales consolidated since August 1, 2002 representing 9% of
total sales of the group, and Korona had $13,112,156 in sales for the year
representing 28% of total sales for the group for the year ended March 31, 2003.
Korona had $16,039,000 in sales consolidated since May 1, 2001 representing 30%
of total sales of the group for the year ended March 31, 2002.
Gross Margin. Gross margin declined slightly from 24.6% for the fiscal year
ended March 31, 2002, as compared with 23.3% in the current fiscal year. This is
mainly caused by the decrease in selling price of both our scales and
telecommunications products.
Selling Expenses. Total selling expenses declined only slightly; however,
these expenses increased as a percentage of total sales from 4.7% to 5.3%. This
increase was attributable primarily to $302,153 in selling expenses from the
acquisition and consolidation of Gram Precision in 2003.
Salaries And Related Costs. Salaries and related costs increased by 17.6%
from approximately $3,880,274 for the fiscal year ended March 31, 2002 to
approximately $4,563,453 for the fiscal year ended March 31, 2003. This increase
was primarily due to the inclusion of a full year of Korona salaries of
$1,421,174 versus $1,287,000, in 2002 and the inclusion of eight months of
salaries from Gram Precision of $495,648.
Research And Development. Research and development expenses decreased
slightly from $426,364 for the fiscal year ended March 31, 2002, to $392,926 for
the fiscal year ended March 31, 2003 due to less cost, such as testing fees,
involved in the research and development of both our scales and
telecommunication projects.
Administration And General Expenses. Administration and general expenses
increased by 16% from approximately $3,411,336 for the fiscal year ended March
31, 2002 to approximately $3,956,858 for the fiscal year ended March 31, 2003.
This increase was primarily due to the inclusion of $394,950 from Gram
Precision's general and administrative expenses.
Amortization Of Brand Name. We amortized approximately $200,000 and
$202,000 relating to the brand name acquired upon the acquisition of Korona
during the fiscal year ended March 31, 2003 and March 31, 2002, respectively.
The brand name is amortized using the straight line method over the related
estimated useful life of 15 years.
28
Income From Operations. As a result of the above changes, income from
operations declined by 128.7% from approximately $2,713,992 for the fiscal year
ended March 31, 2002 to a loss of $777,779 for the fiscal year ended March 31,
2003.
Interest Income. Interest income decreased by 48.9% from approximately
$166,723 in the fiscal year ended March 31, 2002, to approximately $85,178 for
the fiscal year ended March 31, 2003. This decrease was primarily the result of
the reduction of interest rates in Hong Kong.
Interest Expense. Interest expense declined 17.4% from approximately
$645,045 for the fiscal year ended March 31, 2002 to approximately $532,624 for
the fiscal year ended March 31, 2003. This decrease was primarily the result of
lower interest rates.
Foreign Exchange Losses/Gains. Foreign exchange rates produced a loss of
approximately $96,592 for the fiscal year ended March 31, 2003, as compared to a
loss of $39,954 for the fiscal year ended March 31, 2002, an increased loss of
141.7%. The loss was primarily attributable to translating U.S. Dollars to HK
Dollars, RMB, EURO or Canadian Dollars for the purchase of raw materials and
payments of salaries and wages .
Other Income. Other income fell slightly from $181,272 for the fiscal year
ended March 31, 2002 to $169,456 for the fiscal year ended March 31, 2003. This
decrease primarily resulted from the production of less scrap material. The
scrap we sell consists primarily of 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 was from July 2000 to January 2003. A total
consultancy fee of $1,144,260 was capitalized in 2000 and was amortized over
three years of the contract, resulting in a non-cash consultancy fee of $381,420
for the fiscal years ended March 31, 2003 and 2002, relating to warrants that
were issued to the consultant.
Income Tax Expense. Income tax expense decreased from approximately
$189,962 for the fiscal year ended March 31, 2002 to $37,314 for the fiscal year
ended March 31, 2003, representing 0.36% and 0.08% of net sales respectively.
This decrease was primarily attributed to the benefit arising from the net loss
during this fiscal year of $245,405, offset by an increase in the deferred tax
asset valuation allowance of $153,496. The increase in the valuation allowance
is due to the portion of the increased net operating losses that more likely
than not may not be realized through future taxable earnings of one of our
subsidiaries.
Net Loss. As a result of the above changes, we incurred a net loss of
$1,643,734 for the fiscal year ended March 31, 2003, compared to net income of
$1,805,606 for the fiscal year ended March 31, 2002, a decrease of approximately
$3,449,340, or 191%.
29
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.
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.
30
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.
Other Income. Other income increased 59% from approximately $205,000 for
the fiscal year ended March 31, 2001 to approximately $181,000 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 $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.
31
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.
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.
32
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.
Impact of Inflation
We believe that inflation has not had a material affect on our business
between 2002 and 2003. During the financial year ended March 31, 2002, Hong Kong
had gone through a period of deflation and Germany had sustained a low inflation
rate. 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, the PRC, Canada
and Germany where the corporate tax rates are currently 16%, 15%, 38% and
26.375%, respectively. However, as Korona is a partnership, it is only subject
to a local statutory tax rate in Germany 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 financial year ended December 31, 1998. Therefore,
we were 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, are subject to full
taxation from the PRC at a rate of 15%.
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.
33
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 previously arose 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. Gram Precision
principally pays for its products in United States Dollars and Canadian dollars
and sells its products in Canadian, United States Dollars, and United Kingdom
Pound Sterling. Korona primarily pays for its products in United States Dollars
and Euros and sells its products in Euros. As a result, we may experience
greater foreign exchange risk than we have in the past.
B. Liquidity and Capital Resources.
We have financed our growth and cash needs to date primarily from
internally generated funds and bank debt. We do not use off-balance sheet
financing arrangements, such as securitization of receivables or obtaining
access to assets through special purpose entities, as sources of liquidity. Our
primary uses of cash have been to fund expansions and upgrades of our
manufacturing facilities, to make strategic acquisitions and to fund increases
in inventory and accounts receivable resulting from increased sales.
We believe that our cash flows from operations, our current cash balance
and funds available under our working capital and credit facilities will be
sufficient to meet our working capital needs and planned capital expenditures
for the next 12 months. However, a decrease in the demand for our products may
affect our internally generated funds, and we would further look to our banking
facilities to meet our working capital demands.
34
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. If
we are not successful in the 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.
The following tables set forth information with respect to our contractual
obligations and commercial commitments as of March 31, 2003.
Contractual Obligations
Payments due by Period
----------------------------------------------------
More than
Total 1 to 3 years 4 to 5 years 5 years
----- ------------ ------------ -------
Capital Leases 348,825 348,825 0 0
Operating Leases 1,560,379 1,033,302 244,548 282,529
Other Commercial Commitments
Payments due by Period
-----------------------------------------------------
More than
Total 1 to 3 years 4 to 5 years 5 years
----- ------------ ------------ -------
Letters of credit 4,818,971 4,818,971 0 0
Short-term loans 4,727,988 4,727,988 0 0
Long-term loans 778,712 691,667 87,045 0
Acquisitions of Plant
& Machineries 85,123 85,123 0 0
As of March 31, 2003 we had in place general banking facilities with four
financial institutions with amounts available aggregating $27,849,377. 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,
2003, we had utilized $11,115,241 from these general banking facilities.
Interest on this indebtedness fluctuates with the prime rate and HIBOR as set by
35
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 bank
guarantees. 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, 2003 and 2002 were $9,763,369 and $6,612,010,
respectively. During the fiscal year ended March 31, 2003 we paid a total of
$532,624 in interest on indebtedness.
Operating activities provided $1,708,044 of net cash for the fiscal year
ended March 31, 2003 compared to $5,472,469 of net cash for the fiscal year
ended March 31, 2002. This increase in the use of cash can be primarily
attributed to fund losses from operations. The cash used to fund the losses came
primarily from advances under our banking facilities in the amount of
$2,934,949. Our investing activities included the purchase of fixed assets for
the year ended March 31, 2003 of $1,912,056 compared to purchase of fixed assets
in the prior year of $756,010, or an increase of $1,156,046, due to the purchase
of an office in Canada and the expansion of the manufacturing facilities.
As of March 31, 2003, we had $3,633,528 in cash and cash equivalents as
opposed to $1,878,156 as of March 31, 2002. Working capital at March 31, 2003,
was $9,777,000 compared to $9,599,000 at March 31, 2002. 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 1.71 as of March 31, 2002 to 1.53 as of March 31, 2003. Our quick ratio
(cash and cash equivalents, restricted cash deposits and receivables divided by
current liabilities) decreased from 1.05 as of March 31, 2002 to 0.84 as of
March 31, 2003.
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, 2003, we employed three individuals in Hong Kong and 43
individuals (26 for 2002) 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.
36
During the fiscal year ended March 31, 2003, we spent approximately
$393,000 on research and development as opposed to $427,000 for the fiscal year
ended March 31, 2002, and approximately $298,000 during the fiscal year ended
March 31, 2001.
D. Trend Information.
During the past three 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, 2003, our backlog of manufacturing
orders was $10,760,341 compared to $4,996,530 at May 31, 2002 and $9,009,059 at
June 30, 2001. We believe that sales from telecommunications products and scales
will be equal in the fiscal year ended March 31, 2004.
In 2002, we acquired 51% of the equity of Gram Precision from a third
party. Gram Precision is primarily engaged in the distribution and marketing of
pocket scales in the United States, Canada, and Europe.
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
was our first step in vertically integrating our manufacturing business with the
marketing and distribution of the products we manufacture under our own brand
name.
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 July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". The
standard requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. This standard is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of this
standard does not have a material impact on our consolidated financial
statements.
37
In November 2002, the FASB issued Interpretation No. ("FIN") 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees and indemnifications that it has issued and clarifies that a
guarantor is required to recognize, at the inception of a guarantee or
indemnification, a liability for the fair value of the obligation undertaken in
issuing the guarantee or indemnification. The initial recognition and
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees and indemnifications issued or modified after December 31, 2002 and
the disclosure requirements are effective for financial statements ending after
December 15, 2002. We believe the adoption of FIN 45 has not significantly
impacted our current disclosures and we are currently assessing the impact of
FIN 45's initial recognition and measurement provisions on our financial
position and results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of FAS 123, which
provides alternative transition methods to the expensing of employee stock-based
compensation under FAS 123. We are not required to adopt the fair value method
prescribed by FAS 123 and, accordingly, will continue to account for stock-based
compensation under the intrinsic value method in accordance with APB Opinion No.
25. FAS 148 also requires new disclosure requirements that are incremental to
FAS 123, which have been included in Note 15 to the Consolidated Financial
Statements included in this Annual Report.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with the standard,
financial instruments that embody obligations for the issuer are required to be
classified as liabilities. SFAS No. 150 shall be effective for financial
instruments entered into or modified after May 31, 2003, and otherwise shall be
effective at the beginning of the first interim period beginning after June 15,
2003. We are currently assessing the impact of this statement on our financial
position and disclosures.
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 59 President, Chief Executive Officer,
Secretary, Treasurer, Chief Financial
Officer, Chairman of the Board of Directors
Kim Wah Chung 45 Director of Engineering and Research and
Development and Director
Cathy Kit Teng Pang 41 Director of Finance and Director
Woo-Ping Fok 54 Director
J. Stewart Jackson, IV 67 Director
George O'Leary 65 Director
Henry F. Schlueter 52 Director and Assistant Secretary
38
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 master's 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
39
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.
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, 2003 to all directors and officers as a group for
services in all capacities was approximately $1,269,574 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 $671,836, for the benefit of Cathy Kit Teng Pang was $125,262,
for the benefit of Kim Wah Chung was $149,606, for the benefit of Mr. George
O'Leary was $180,000, and for the benefit of Henry F. Schlueter was an aggregate
of $142,870. The $142,870 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 expenses incurred.
40
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, 2003, other than contributions to our Provident Fund Plan which aggregated
$33,553 for officers and directors during the fiscal year ended March 31, 2003.
Employment Agreements
We have employment agreements with Anthony So, Kim Wah Chung and Cathy Kit
Teng Pang. The employment agreements expire on March 31, 2008; however, they are
automatically renewable on an annual basis for additional one-year increments.
Mr. So's employment agreement provides for a yearly salary of $700,000 per year
plus bonus. Mr. Chung's employment agreement provides for a yearly salary of
$150,000 per year plus bonus and Ms. Pang's employment agreement provides for a
yearly salary of $135,000 per year plus bonus. The employment agreements contain
provisions under which we will be obligated to pay Mr. So, Mr. Chung and Ms.
Pang all compensation for the remainder of their employment agreements and five
times their annual salary and bonus compensation if a change of control as
defined in the agreements occur.
Options of Directors and Senior Management
The following table provides information concerning options owned by the
directors and senior management at May 31, 2003. 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 Subject to Exercise Price
Name Stock Options Per 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
222,500 $1.61 April 1, 2013
Kim Wah Chung 20,000 $8.00 January 6, 2010
20,000 $3.65 April 9, 2011
20,000 $2.50 March 6, 2012
55,000 $1.61 April 1, 2013
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
55,000 $1.61 April 1, 2013
George O'Leary 10,000 $8.125 January 12, 2010
10,000 $7.875 January 9, 2011
10,000 $2.55 October 15, 2011
10,000 $1.61 April 1, 2013
Woo-Ping Fok 10,000 $8.125 January 12, 2010
10,000 $7.875 January 9, 2011
10,000 $2.55 October 15, 2011
10,000 $1.61 April 1, 2013
J. Stewart Jackson IV 10,000 $7.875 January 9, 2011
10,000 $2.55 October 15, 2011
10,000 $1.61 April 1, 2013
Henry F. Schlueter 10,000 $8.00 January 6, 2010
10,000 $1.61 April 1, 2013
41
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.
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 the 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, 2003, 2002 and 2001 amounted to $73,945, $78,995, and $53,704, respectively.
42
C. Board Practices.
Messrs. Woo Ping Fok and Henry F. Schlueter are members of our Audit
Committee. Mr. Henry F. Schlueter has acted as chairman of the Audit Committee;
however, Mr. Fok will become the Chairman effective September 1, 2003. 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, 2003, we employed 2,876 persons, compared with 2,064 persons
at March 31, 2002; 39 employees in Hong Kong (39 for 2002), 2,795 employees in
China (2,001 for 2002), 24 employees in Germany (24 for 2002, 2 in UK) and 16 in
Canada. Employees are not covered by collective bargaining agreements. We
consider our global labor practices and employee relations to be good.
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, 2003:
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) 636,500(2)(3)(4) 2,262,695 35.77%
Kim Wah Chung 93,700 115,000(5)(6)(7) 208,700 3.60%
Cathy Kit Teng Pang 35,438 115,000(5)(6)(7) 150,438 2.60%
Henry F. Schlueter 34,403 20,000(8)(9) 54.403 0.95%
Woo-Ping Fok 61,907 40,000(10)(11) 101,907 1.77%
George O'Leary 17,775 40,000(10)(11) 57,775 1.00%
J. Stewart Jackson IV 463,075 130,000(10)(11) 592,575 10.18%
(12)
All Directors and Officers 2,332,493 1,096,500 3,055,993 50.53%
as a group (7 persons)
----------
(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 222,500 shares of common stock at an exercise
price of $1.61 per share expiring on April 1, 2013.
43
(5) Includes options to purchase 20,000 shares of common stock at an exercise
price of $8.00 per share expiring January 6, 2010.
(6) 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.
(7) Includes options to purchase 55,000 shares of common stock at an exercise
price of $1.61 per share expiring on April 1, 2013.
(8) Includes options to purchase 10,000 shares of common stock at an exercise
price of $8.00 per share expiring January 6, 2010.
(9) Includes options to purchase 10,000 shares of common stock at an exercise
price of $1.61 per share expiring on April 1, 2013.
(10) Includes options to purchase 10,000 shares of common stock at an exercise
price of $8.125 per share expiring January 12, 2010.
(11) Includes options to purchase 10,000 shares of common stock at an exercise
price of $7.875 per share expiring on January 9, 2011, options to purchase
10,000 shares of common stock at an exercise price of $2.55 per share
expiring on October 15, 2011 and options to purchase 10,000 shares of
common stock at an exercise price of $1.61 per share expiring on April 1,
2003.
(12) Includes 100,000 public warrants to acquire shares issued in January 2000.
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.
During the fiscal year ended March 31, 2003, no options were granted under
the 1996 Stock Option Plan.
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'
44
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.
During the fiscal year ended March 31, 2003, no options were granted under
the 1996 Non-Employee Directors' Plan.
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, 2003, 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
Class (1)
Shares of Options/Warrants to Beneficially
Common Stock Purchase Common Stock Owned
------------ --------------------- -----
Anthony So 1,626,195(2) 636,500(3) 35.77%
John Stewart Jackson IV 462,575 130,000(3) 10.18%
W. Douglas Moreland 501,400 0 8.81%
----------
(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.
45
Of the 5,689,159 (including 180,726 shares that are disputed and may be
repurchased) shares of common stock outstanding as of May 31, 2003, 4,231,350
were held in the United States by 251 holders of record. We have 246
shareholders of record and estimate that we have in excess of 850 shareholders
holding their stock in street name (who have not objected to their names being
disclosed to us)
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, 2003, Mr. O'Leary was paid an aggregate of $180,000 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, 2003 we paid Schlueter & Associates,
P.C. an aggregate of $142,870 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.
46
On October 22, 2002, Augusta filed a request for arbitration in the state
of New York asserting breach of the Agreement and the registration rights
agreement. On January 13, 2003, we filed our answer to Augusta's request for
arbitration asserting that Augusta breached the Agreement and the implied duty
of good faith and fair dealing by withholding consent from Korona's auditors for
the release of Korona's financial statements. We are currently in the process of
proceeding through the arbitration. Although we are optimistic that we will be
successful in the arbitration, there can be no assurance that this will occur.
Further, if the arbitration proceeds, 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 in the arbitration, we may be
obligated to repurchase the stock by exchanging it for the promissory note to be
repaid, with accrued interest, over a nine-month period of time.
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, 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
April 1, 2002 to March 31, 2003 $3.45 $1.41
47
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, 2003.
Period High Low
------ ---- ---
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
April 1, 2002 to June 30, 2002 $3.45 $2.52
July 1, 2002 to September 30, 2002 $2.90 $1.80
October 1, 2002 to December 31, 2002 $2.59 $1.41
January 1, 2003 to March 31, 2003 $2.39 $1.61
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
------ ---- ---
January 2003 $1.99 $1.64
February 2003 $2.39 $1.84
March 2003 $2.17 $1.61
April 2003 $2.29 $1.80
May 2003 $2.28 $1.96
June 2003 $5.20 $2.28
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, 2001, 2002 and 2003 included herein in Item
18.
At May 31, 2003, there were 5,689,159 (including 180,726 shares that are
disputed and may be repurchased) shares of our common stock outstanding, all of
which were fully paid. At May 31, 2003, we had outstanding 2,174,403 warrants to
48
purchase common stock which are publicly traded and are exercisable to purchase
1,087,201 shares of common stock at $17.50 per share. The warrants originally
were exercisable any time prior to 2:00 p.m. (Pacific Time) on December 31,
2001. In October 2001, our board of directors extended the expiration date until
December 31, 2002, and in July 2002, extended the expiration date until December
31, 2003. In addition, at May 31, 2003, we had outstanding 1,044,500 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
372,500 $1.61 April 1, 2013
At May 31, 2003 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.
49
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
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).
50
C. Material Contracts.
The following summarizes each material contract, other than contracts
entered into in the ordinary course of business, to which Bonso or any
subsidiary of Bonso is a party, for the two years immediately preceding the
filing of this report:
We entered into a Stock Purchase Agreement with Augusta Technologie AG
relating to the acquisition of Korona Haushaltswaren GmbH & Co. KG dated April
25, 2001.
We entered into a Stock Purchase Agreement dated July 22, 2002, with Modus
Enterprise International Inc. (a wholly-owned subsidiary of Bonso), and a third
party relating to the acquisition of 51% of Gram Precision.
We entered into an employment agreement with Anthony So our President,
Chief Executive Officer, Secretary, Treasurer, Chief Financial Officer effective
April 1, 2003. This agreement is attached hereto as Exhibit 4.3.
We entered into an employment agreement with Cathy Kit Teng Pang our
Director of Finance effective April 1, 2003. This agreement is attached hereto
as Exhibit 4.4.
We entered into an employment agreement with Kim Wah Chung our Director of
Research and Development effective April 1, 2003. This agreement is attached
hereto as Exhibit 4.5.
We signed a credit facility letter on March 31, 2003 with Bank of America
(Asia) Ltd. for a HK $13,000,000 overdraft and import and export line of credit.
A copy of this letter is attached hereto as Exhibit 4.6.
We signed a credit facility letter on April 8, 2003 and amended the letter
of April 22, 2003 (exhibit 4.7) with Standard Chartered Bank for a HK
$53,000,000 trade finance facilities agreement. A copy of this letter is
attached hereto as Exhibit 4.8. This letter amended previous agreements with
Standard Chartered Bank on May 17, 2002, May 11, 2001 and March 5, 2001. Copies
of these agreements are included as Exhibits to this filing as Exhibits 4.9,
4.10 and 4.11 respectively.
We signed a Banking Facility Letter, dated April 25, 2003 between Bonso and
DBS Kwong on Bank Limited for a HK $11,500,000 overdraft, letter of credit,
trust receipt, export invoice financing and negotiation under documentary
credit. A copy of this letter is attached hereto as Exhibit 4.12. This letter
amended a previous agreement dated May 16, 2002 attached hereto as Exhibit 4.13.
We signed a Banking Facility Letter, dated May 8, 2003 between Korona,
Bonso and Commerzbank Aktiengesellschaft Bank for a EURO 1,900,000 line of
credit. A copy of this letter is attached hereto as Exhibit 4.14.
We signed a Banking Facility Letter, dated May 21, 2003 between Bonso and
Hang Seng Bank Limited for a HK $49,000,000 letter of credit, trust receipt
facility, export D/P bills, export trade loan and overdraft facility. A copy of
this letter is attached hereto as Exhibit 4.15.
51
We signed a Banking Facility Letter, dated April 8, 2003 between Bonso and
the Hong Kong and Shanghai Banking Corporation Limited for a HK $20,000,000
overdraft facility, import/export facility, trust receipt facility and a D/A
bill facility. A copy of this letter is attached hereto as Exhibit 4.16.
We signed a Banking Facility Letter, dated April 8, 2003 between Bonso and
the Hong Kong and Natexis Banques Populaires Hong Kong Branch for a U.S.
$2,000,000 Export Credit Insurance Corporation discount invoices, negotiation of
export letter of credit discrepencies, and export bills. A copy of this letter
is attached hereto as Exhibit 4.17.
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, Canada and
Germany where the corporate tax rates are currently 16%, 38% and 26.375%,
respectively. However, as Korona is a partnership, it is only subject to 14.17%
of the local statutory rate in Germany. 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
have been subject to income tax at the rate of 7.5% in the PRC from January 1,
2000 to December 31, 2002. Effective January 1, 2003, we became subject to tax
at the full rate of 15%.
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.
52
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
53
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
Renminbi, the Euro, the Canadian Dollar and the Japanese Yen. These factors are
also applicable as a result of our acquisition of Gram Precision in the fiscal
year ended March 31, 2003 and Korona in the fiscal year ended March 31, 2002.
Recent fluctuations in the value of the United States dollar versus other
currencies (primarily the Canadian dollar and the Euro), and fluctuations in the
relative values of those currencies, have had a negative impact upon our
financial performance. A significant portion of Gram Precision's net sales were
in paid in Canadian Dollars and Euros, while Gram Precision's costs were paid in
United States Dollars and Canadian Dollars. The majority of Korona's net sales
were in German Marks prior to January 1, 2002 and are currently in Euros, while
a significant portion of Korona's costs and expenses are paid for in United
States Dollars and Euros. Further fluctuation of the value of the Canadian
Dollar or 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, 2003 which were subjected to foreign
currency risk is as below:
March 31,
Currencies: 2003
----------- ----
Euro 4,369,800
Hong Kong Dollars 1,924,582
Japanese Yen 179,828
United States Dollars 4,315,888
Canadian Dollars 325,143
----------
11,115,241
----------
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.
54
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. Management intends to take corrective action in an effort to attempt to
minimize any negative impact foreign currency fluctuations may have upon us.
However, to date we have not done so. If we are unsuccessful in hedging against
currency fluctuations, it may have a material adverse effect on us.
Interest Rate Risk
Our interest rate risk primarily arises from our long-term debt and our
general banking facilities. At March 31, 2003 our total long-term debt was
$778,712, and we had utilized approximately $11,115,241 of our total banking
facilities of $27,849,377. 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, 2003 which were subjected to
variable interest rates is as below:
March 31, Interest
2003 rate
---- ----
Notes payable $4,818,971 Prime rate minus
0.5% to prime rate
or HIBOR + 2.5%
Short-term loans $4,727,988 Prime rate minus
0. 5% or
HIBOR + 2.25% to
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.
55
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. Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in US Exchange Act Rules 13a-14(c)) as of the end of the period
covered by this Annual Report, have concluded that, as of such date, the
Company's disclosure controls and procedures were effective to ensure that
material information relating to the Company was made known to them by others
within the Company particularly during the period in which this Form 20-F was
being prepared.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date our Chief Executive Officer and our Chief Financial Officer completed their
evaluation, nor were there any significant deficiencies or material weaknesses
in the Company's internal controls requiring corrective actions.
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 Auditors F-2
Consolidated Balance Sheets as of March 31, 2002 and 2003 F-3
Consolidated Statements of Income (Loss) and Comprehensive F-4
Income (Loss) for the years ended March 31, 2001, 2002
and 2003
Consolidated Statements of Changes in Shareholders' Equity F-5
for the years ended March 31, 2001, 2002 and 2003
Consolidated Statements of Cash Flows for the years ended F-6
March 31, 2001, 2002 and 2003
Notes to Consolidated Financial Statements F-8 through F-35
56
Item 19. Exhibits.
4.1 Stock Purchase Agreement between Bonso Electronics International
Inc. and Augusta Technologie AG relating to the acquisition of
Korona Haushaltswaren GmbH & Co. KG dated April 25, 2001 (1)
4.2 Stock Purchase Agreement dated July 22, 2002, between Bonso
Electronics International Inc., Modus Enterprise International
Inc. (a wholly-owned subsidiary of Bonso), and Mohan Thadani (2)
4.3 Anthony So Employment Agreement effective April 1, 2003
4.4 Cathy Kit Teng Pang Employment Agreement effective April 1, 2003
4.5 Kim Wah Chung Employment Agreement effective April 1, 2003
4.6 Banking Facility Letter, as amended, dated March 31, 2003 between
Bonso and Bank of America (Asia) Ltd.
4.7 Banking Facility Letter, as amended, dated April 22, 2003 between
Bonso and Standard Charter Bank
4.8 Banking Facility Letter, as amended, dated April 8, 2003 between
Bonso and Standard Charter Bank
4.9 Banking Facility Letter, dated March 5, 2001 between Bonso and
Standard Charter Bank
4.10 Banking Facility Letter, as amended, dated May 11, 2001 between
Bonso and Standard Charter Bank
4.11 Banking Facility Letter, as amended, dated May 17, 2002 between
Bonso and Standard Charter Bank
4.12 Banking Facility Letter, dated May 16, 2002 between Bonso and DBS
Kwong on Bank Limited
4.13 Banking Facility Letter, as amended, dated April 25, 2003 between
Bonso and DBS Kwong on Bank Limited
4.14 Banking Facility Letter, dated May 8, 2003 between Bonso, Korona
and Commerzbank Aktiengesellschaft Bank
4.15 Banking Facility Letter, dated May 21, 2003 between Bonso and Hang
Seng Bank Limited
4.16 Banking Facility Letter, dated April 8, 2003 between Bonso and the
Hong Kong and Shanghai Banking Corporation Limited
57
4.17 Banking Facility Letter, dated February 13, 2003 between Bonso and
Natexis Banques Populaires Hong Kong Branch
12.1 Certification Pursuant to 18 U.S.C. 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
12.2 Certification of Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
12.3 Certification of Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
----------
(1) This document has been previously filed as Exhibit 4.1 to the Registrant's
Annual Report for the fiscal year ending March 31, 2001 on Form 20-F and is
hereby incorporated by reference.
(2) This document has been previously filed as Exhibit 4.1 to the Registrant's
Annual Report for the fiscal year ending March 31, 2002 on Form 20-F and is
hereby incorporated by reference.
58
SIGNATURE
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 24, 2003 /s/ Anthony So
------------- -------------------------------------
Anthony So, President
59
Consolidated Financial Statements
Bonso Electronics International Inc.
(Incorporated in the British Virgin Islands)
and Subsidiaries
March 31, 2003
Index to Consolidated Financial Statements
Contents Pages
Report of Independent Auditors...............................................F-2
Consolidated Balance Sheets as of March 31, 2002 and 2003....................F-3
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
for the years ended March 31, 2001, 2002 and 2003............................F-4
Consolidated Statements of Changes in Shareholders' Equity for the years
ended March 31, 2001, 2002 and 2003..........................................F-5
Consolidated Statements of Cash Flows for the years ended
March 31, 2001, 2002 and 2003..........................................F-6 - F-7
Notes to Consolidated Financial Statements............................F-8 - F-35
F-1
Report of Independent Auditors
------------------------------
Board of Directors and Shareholders of
Bonso Electronics International Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income (loss) and comprehensive income (loss), of
cash flows and of changes in shareholders' equity present fairly, in all
material respects, the financial position of Bonso Electronics International
Inc. and its subsidiaries at March 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2003, in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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 financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
--------------------------
PricewaterhouseCoopers
Hong Kong,
July 18, 2003
F-2
Bonso Electronics International Inc. and Subsidiaries
Consolidated Balance Sheets
(Expressed in United States Dollars)
March 31
--------------------------
2002 2003
----------- -----------
$ $
Assets
Current assets
Cash and cash equivalents 1,878,156 3,633,528
Restricted cash deposits 3,972,542 4,104,168
Trade receivables, net 6,838,576 6,191,627
Inventories 8,861,952 12,656,518
Notes receivable 686,258 358,188
Tax recoverable -- 52,087
Deferred income tax assets - current 27,219 38,348
Other receivables, deposits and prepayments 822,646 1,166,234
----------- -----------
Total current assets 23,087,349 28,200,698
----------- -----------
Deposits 16,038 551,399
Deferred income tax assets - non current 84,422 128,887
Goodwill 204,217 1,100,962
Brand name, net 2,797,392 2,597,392
Property, plant and equipment
Leasehold land and buildings 12,567,309 12,505,141
Plant and machinery 11,995,871 12,801,183
Furniture, fixtures and equipment 4,239,602 5,251,171
Motor vehicles 343,068 343,068
----------- -----------
29,145,850 30,900,563
Less: accumulated depreciation and amortization (10,884,191) (14,569,165)
----------- -----------
Net property, plant and equipment 18,261,659 16,331,398
----------- -----------
Total assets 44,451,077 48,910,736
----------- -----------
Liabilities and shareholders' equity
Current liabilities
Bank overdraft -- 216,410
Notes payable 2,857,533 4,818,971
Accounts payable 4,122,443 6,350,527
Accrued charges and deposits 2,022,472 1,827,286
Income taxes payable 83,614 --
Short-term loans 3,754,477 4,727,988
Current portion of long-term debt and capital lease obligations 647,501 482,940
----------- -----------
Total current liabilities 13,488,040 18,424,122
----------- -----------
Long-term debt and capital lease obligations, net of current
maturities 317,009 606,488
Commitments and contingencies (Notes 6(b) and 12)
Minority interests -- 55,275
Redeemable common stock
Redeemable common stock par value $0.003 per share
- issued and outstanding shares: 2002 - 180,726; 2003 - 180,726 1,445,808 1,445,808
Shareholders' equity
Preferred stock par value $0.01 per share
- authorized shares - 10,000,000
- issued and outstanding shares: 2002-0; 2003-0 -- --
Common stock par value $0.003 per share
- authorized shares - 23,333,334
- issued and outstanding shares: 2002 - 5,404,133;
2003 - 5,529,133 16,208 16,583
Additional paid-in capital 21,152,502 21,458,376
Deferred consultancy fee (381,420) --
Retained earnings 8,176,958 6,533,224
Accumulated other comprehensive income 235,972 409,692
Common stock held in treasury, at cost -19.900 shares -- (38,832)
----------- -----------
29,200,220 28,379,043
----------- -----------
Total liabilities and shareholders' equity 44,451,077 48,910,736
----------- -----------
See notes to these consolidated financial statements
F-3
Bonso Electronics International Inc. and Subsidiaries
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Expressed in United States Dollars)
Year ended March 31,
-----------------------------------------
2001 2002 2003
----------- ----------- -----------
$ $ $
Net sales 29,566,680 53,303,101 46,330,054
Cost of sales 22,400,017 40,192,242 35,527,943
----------- ----------- -----------
Gross margin 7,166,663 13,110,859 10,802,111
Selling expenses 382,422 2,476,285 2,466,653
Salaries and related costs 2,333,776 3,880,274 4,563,453
Research and development expenses 297,740 426,364 392,926
Administration and general expenses 2,410,872 3,411,336 3,956,858
Amortization of brand name -- 202,608 200,000
----------- ----------- -----------
Income (loss) from operations 1,741,853 2,713,992 (777,779)
Interest income 458,328 166,723 85,178
Interest expenses (337,526) (645,045) (532,624)
Foreign exchange gains (losses) 42,722 (39,954) (96,592)
Other income 204,585 181,272 169,456
Consultancy fee (381,420) (381,420) (381,420)
----------- ----------- -----------
Income (loss) before income taxes and minority interest 1,728,542 1,995,568 (1,533,781)
Income tax expense (124,743) (189,962) (37,314)
----------- ----------- -----------
Net income (loss) before minority interest 1,603,799 1,805,606 (1,571,095)
Minority interest -- -- (72,639)
----------- ----------- -----------
Net income (loss) 1,603,799 1,805,606 (1,643,734)
Other comprehensive income, net of tax:
Foreign currency translation adjustments net of tax -- -- 173,720
----------- ----------- -----------
Comprehensive income (loss) 1,603,799 1,805,606 (1,470,014)
----------- ----------- -----------
Earnings (loss) per share
Basic $ 0.29 $ 0.32 $ (0.29)
----------- ----------- -----------
Diluted $ 0.28 $ 0.32 $ (0.29)
----------- ----------- -----------
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
receivable
Shares Additional from Common
issued and Amount paid-in shareholder Stock held
outstanding outstanding capital (note 8(b)) at treasury
----------- ----------- ----------- ----------- -----------
$ $ $ $
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 16(c)) -- -- 1,144,260 -- --
Amortization of deferred consultancy fee (note 16(c)) -- -- -- --
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 16(c)) -- -- -- -- --
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 -- --
Net (loss) -- -- -- -- --
Amortization of deferred consultancy fee (note 16(c)) -- -- -- -- --
Common stock issued upon acquisition of a subsidiary 125,000 375 305,874 -- --
Purchase of common stock -- -- -- -- (38,832)
Foreign exchange translation adjustment -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, March 31, 2003 5,529,133 16,583 21,458,376 -- (38,832)
----------- ----------- ----------- ----------- -----------
Table continues on following page.
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, 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 16(c)) (1,144,260) -- -- --
Amortization of deferred consultancy fee (note 16(c)) 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 16(c)) 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
Net (loss) -- (1,643,734) -- (1,643,734)
Amortization of deferred consultancy fee (note 16(c)) 381,420 -- -- 381,420
Common stock issued upon acquisition of a subsidiary -- -- -- 306,249
Purchase of common stock -- -- -- (38,832)
Foreign exchange translation adjustment -- -- 173,720 173,720
----------- ----------- ----------- -----------
Balance, March 31, 2003 -- 6,533,224 409,692 28,379,043
----------- ----------- ----------- -----------
See notes to these consolidated financial statements
F-5 (Continued)
Bonso Electronics International Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Expressed in United States Dollars)
Year Ended March 31,
--------------------------------------
2001 2002 2003
---------- ---------- ----------
$ $ $
Cash flows from operating activities
Net income (loss) 1,603,799 1,805,606 (1,643,734)
Adjustments to reconcile net income to net cash
provided by operating activities :
Depreciation 2,019,621 2,738,937 3,297,608
Amortization 329,564 548,978 550,300
Consultancy fee 381,420 381,420 381,420
Minority interest -- -- 72,639
Other 124,743 8,040 152,929
Changes in assets and liabilities:
Trade receivables (1,857,893) 499,236 1,077,932
Other receivables, deposits and prepayments (384,007) (99,911) (111,441)
Notes receivable (561,774) 400,691 328,070
Inventories 865,373 (932,725) (2,314,599)
Accounts payable 407,603 352,023 2,056,513
Accrued charges and deposits 147,128 (203,540) (2,094,096)
Other 51,315 (26,286) (45,497)
---------- ---------- ----------
Net cash provided by operating activities 3,126,892 5,472,469 1,708,044
---------- ---------- ----------
Cash flows from investing activities
Restricted cash deposits (801,946) (1,098,644) (131,626)
Deposits for property, plant and equipment (70,511) (16,038) (551,399)
Proceeds from disposal of property, plant and
Equipment 441 26,555 250,103
Acquisition of property, plant and equipment (5,846,296) (756,010) (1,912,056)
Acquisition of a subsidiary, net of cash acquired -- (3,044,184) (519,805)
---------- ---------- ----------
Net cash used in investing activities (6,718,312) (4,888,321) (2,864,783)
---------- ---------- ----------
Cash flows from financing activities
Issue of shares on exercise of warrants and options 400,000 -- --
Repurchase of common stock (1,185,249) (102,934) (38,832)
Proceeds from long-term borrowings -- -- 488,389
Principal payments under long-term debt (65,016) (38,451) (65,245)
Capital lease payments (526,227) (681,748) (623,592)
Net (repayment) advance under banking facilities 2,880,518 (2,648,766) 3,151,359
Capital contribution by minority shareholder -- -- 32
Payment of dividends to stockholders (549,613) (556,490) --
---------- ---------- ----------
Net cash (used in) provided by financing activities 954,413 (4,028,389) 2,912,111
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (2,637,007) (3,444,241) 1,755,372
Cash and cash equivalents, beginning of year 7,959,404 5,322,397 1,878,156
---------- ---------- ----------
Cash and cash equivalents, end of year 5,322,397 1,878,156 3,633,528
---------- ---------- ----------
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)
2001 2002 2003
--------- --------- ---------
$ $ $
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest paid 337,526 645,045 532,624
Income tax paid, net of refund -- 204,169 249,873
Non-cash investing and financing activities
Property acquired under capital leases -- 743,821 --
Acquisition:
Fair value of net assets acquired -- 1,294,512 (18,107)
Cash acquired -- 8,737 (150,728)
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
(collectively, the "Group") 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 Gmblt & Co. KG ("Korona") from Augusta Technologies AG
("Augusta"). Korona is a German company engaged in the distribution of
electronic scales in Europe.
Effective August 1, 2002, the Group acquired 51% of the equity of Gram
Precision Scales Inc. ("Gram"). Gram is a Canadian company engaged in the
distribution of electronic scales in North America and Europe.
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.
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 acquired less liabilities assumed of acquired
companies.
During the financial year ending March 31, 2003, the Group adopted
Statement of Financial Accounting Standard ("SFAS") No. 142 "Goodwill and
Other Intangible Assets", which requires discontinuance of goodwill
amortization and an annual impairment review. 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.
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)
(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 obsolescence and slow moving parts.
(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 of long lived assets
Long-lived assets held and used by the Group 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 Group 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 loss 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.
Goodwill is subject to an annual impairment review.
(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%
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 (Loss) and Comprehensive Income (Loss).
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.
(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, one of its Hong Kong
subsidiaries and two subsidiaries in the United States 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
Group's subsidiary in the People's Republic of China (the "PRC") is
the Renminbi, the national currency of the PRC. The functional
currency of the Group's subsidiary in Canada is the Canadian Dollar.
The functional currency of the Group's subsidiary in the United
Kingdom is the sterling. The Group's functional currency is the United
States dollar.
(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 (loss).
(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 in accumulated other comprehensive income.
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-employee
directors and warrants are issued to certain shareholders. Upon exercise of
the options and warrants, the holder can acquire ordinary shares of the
Group 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 an exercise price being
equal or higher than the market price of the common stock on the date 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 (Loss) and Comprehensive Income (Loss).
(o) Recent accounting pronouncements
In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146 "Accounting for Costs Associated with Exit or Disposal Activities".
The standard requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. This standard is effective for exit
or disposal activities that are initiated after December 31, 2002. The
adoption of this standard does not have a material impact on the Group's
financial statements.
In November 2002, the FASB issued Interpretation No. ("FIN") 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates
on the disclosures to be made by a guarantor about its obligations under
certain guarantees and indemnifications that it has issued and clarifies
that a guarantor is required to recognize, at the inception of a guarantee
or indemnification, a liability for the fair value of the obligation
undertaken in issuing the guarantee or indemnification. The initial
recognition and measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees and indemnifications issued or modified
after December 31, 2002 and the disclosure requirements are effective for
financial statements ending after December 15, 2002. The Group believes the
adoption of FIN 45 has not significantly impacted its current disclosures
and is currently assessing the impact of FIN 45's initial recognition and
measurement provisions on its financial position and results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure--an Amendment of FAS 123." SFAS No.
148 amends SFAS No. 123 to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It also amends the
disclosure provisions of SFAS No. 123 to require prominent disclosure about
the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. Finally, SFAS
No. 148 amends APB Opinion No. 28 "Interim Financial Reporting" to require
disclosure about those effects in interim financial information. SFAS No.
148 is effective for financial statements for fiscal years ending after and
for interim period beginning December 15, 2002. The adoption of this
standard does not have a material impact on the Group's financial
statements.
In May 2003, the FASB issued SFAS No.150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This
statement establishes standards for how an issuer classifies and measures
in its statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with SFAS
No.150, financial instruments that embody obligations for the issuer are
required to be classified as liabilities. SFAS No. 150 shall be effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003. The Group is currently assessing the impact
of this statement on its financial position and disclosures.
F-11
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
2 Allowance for doubtful accounts
Changes in the allowance for doubtful accounts comprises:
2001 2002 2003
-------- -------- --------
$ $ $
Balance, April 1 -- -- 220,838
Exchange adjustment -- -- 28,549
Acquisition of subsidiary -- -- 20,027
Additions charged to expense -- 220,838 290,556
Write-off -- -- (138,631)
-------- -------- --------
Balance, March 31 -- 220,838 421,339
-------- -------- --------
3 Inventories
(a) The components of inventories are as follows:
2002 2003
----------- -----------
$ $
Raw materials 4,287,203 5,720,006
Work in progress 1,012,311 3,339,078
Finished goods 4,131,054 4,181,709
----------- -----------
9,430,568 13,240,793
Inventories reserves (568,616) (584,275)
----------- -----------
8,861,952 12,656,518
----------- -----------
(b) Changes in the inventories reserves comprises:
2001 2002 2003
-------- -------- --------
$ $ $
Balance, April 1 323,126 339,475 568,616
Additions charged to expense 210,362 229,141 18,451
Write-off (194,013) -- (2,792)
-------- -------- --------
Balance, March 31 339,475 568,616 584,275
-------- -------- --------
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 comprises:
March 31
--------------------
2002 2003
-------- --------
$ $
Bank loan for acquisition of fixed assets, denominated
in United States dollars, due on February 12, 2006 -- 466,667
Long term bank loan at bank's floating base rate + 4%,
denominated in Canadian dollars, due on March 2006 -- 108,733
Bank loans at 5.3% per annum denominated in Renminbi 30,231 --
Promissory note for the acquisition of Gram due on
March 31, 2008 (see Note 10) -- 203,312
Less: current portion (30,231) (235,000)
-------- --------
Long-term debt, less current maturities -- 543,712
-------- --------
Long term debt principal repayments are due as follows:
$
2004 235,000
2005 235,000
2006 221,667
2007 46,381
2008 40,664
--------
Total $778,712
========
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, Germany, the United
States, the United Kingdom and Canada. The current rates of taxation of the
subsidiaries operating in Hong Kong and, Shenzhen in the PRC are 16% and
15% respectively. 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. The
statutory tax rates in the United States, the United Kingdom and Canada are
15%, 19.64%, and 38% respectively.
(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:
2001 2002 2003
-------- -------- --------
$ $ $
Deferred income tax benefit (expense) (28,937) 14,206 76,858
Current income tax expense (95,806) (204,168) (114,172)
-------- -------- --------
Total income tax expense (124,743) (189,962) (37,314)
-------- -------- --------
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:
2002 2003
-------- --------
$ $
Deferred tax liabilities
Accelerated depreciation (7,147) (33,626)
Deferred tax assets
Tax loss carry forwards 85,503 326,158
Inventories reserves 43,434 38,348
Less: Valuation allowance (10,149) (163,645)
-------- --------
118,788 200,861
-------- --------
Net deferred tax assets 111,641 167,235
Less: current portion (27,219) (38,348)
-------- --------
Non current portion 84,422 128,887
-------- --------
As of March 31, 2003, the Group had accumulated tax losses amounting to
$2,224,289 (the tax effect thereon is $326,157), which may be carried
forward and applied to reduce future taxable income which is earned in or
derived from Hong Kong and Germany. 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 or its
subsidiaries.
As of March 31, 2003, the Group's accumulated tax losses have no definite
period of expiration.
(e) Changes in the valuation allowance consist of:
2001 2002 2003
------- ------- -------
$ $ $
Balance, April 1 15,420 10,149 10,149
Reduction credited to income tax expense (5,271) -- --
Addition debited to income tax expense -- -- 153,496
------- ------- -------
Balance, March 31 10,149 10,149 163,645
------- ------- -------
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 expense attributable to earnings for the years ended
March 31, 2001, 2002 and 2003 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:
2001 2002 2003
-------- -------- --------
$ $ $
Hong Kong statutory tax rate 16.0% 16.0% 16.0%
Income tax (expense) credit at the Hong
Kong statutory tax rate (276,567) (319,291) 245,405
Offshore profit not subject to income tax 171,520 197,676 27,544
Expenses not deductible for income tax
purposes (13,480) (48,049) (66,920)
Changes in valuation allowance 5,271 -- (153,496)
Over (under) provision for Hong Kong
tax in prior years 3,194 (18,803) (91,129)
Income tax rate differentials (14,681) (1,495) (27,047)
Tax losses utilized -- -- 28,329
-------- -------- --------
Total income tax expense (124,743) (189,962) (37,314)
-------- -------- --------
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
------------------------ ------------------------
2002 2003 2002 2003
---------- ---------- ---------- ----------
$ $ $ $
Cost 110,065 110,065 2,626,620 939,049
Less: accumulated amortization (7,338) (29,351) (999,432) (392,966)
---------- ---------- ---------- ----------
102,727 80,714 1,627,188 546,083
---------- ---------- ---------- ----------
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, 2001, 2002 and 2003, the Group entered
into additional capital lease obligations amounting to $Nil, $743,821 and
$Nil respectively.
Future minimum payments under capital leases as of March 31, 2003 with an
initial term of more than one year are as follows:
$
2003 278,444
2004 70,381
--------
Total minimum lease payments 348,825
Less: amount representing interest (38,109)
--------
Present value of net minimum lease payments (including
current portion of $247,940 as of March 31, 2003) 310,716
--------
(b) Operating leases
As of March 31, 2003, future minimum lease commitments in respect of
noncancellable operating leases for factory, office premises and staff
quarters in Hong Kong, the PRC, Germany, the United States, the United
Kingdom and Canada are as follows:
$
2004 379,131
2005 506,772
2006 147,399
2007 125,043
2008 119,505
Thereafter 282,529
---------
1,560,379
---------
Rent expense for all operating leases amounted to $123,124, $286,351 and
$311,417 for the years ended March 31, 2001, 2002 and 2003, 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, 2003, 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 $27,849,377 (2002: $25,430,340). The general banking
facilities utilized by the Group are denominated in United States dollars,
Hong Kong dollars, Renminbi, Japanese Yen and Canadian dollars.
The Group's general banking facilities, expressed in United States Dollars,
are further detailed as follows:
Amount available Amount utilized Terms of banking facilities as of
March 31 March 31 March 31, 2003
------------------------ ---------------------- ---------------------------------
2002 2003 2002 2003 Interest Repayment
$ $ $ $ rate terms
------------------------ ---------------------- ---------------------------------
Import and export
Facilities
Letters of credit 12,012,821 12,756,410 3,308,973 5,595,443
Including sublimit
of:
Notes payable 12,012,821 12,756,410 2,857,533 4,818,971 Prime rate minus Repayable in
0.5% to Prime full within
rate or four months
HIBOR +2.5%
Short-term loans 11,656,519 12,869,375 3,754,477 4,727,988 Prime rate Repayable in
minus 0.5% full within
or HIBOR twelve months
+2.25% to
HIBOR +2.5%
Other facilities
Bank overdrafts 1,730,769 1,648,192 - 216,410 Prime rate or Repayable
HIBOR +0.5% on demand
to Prime rate
plus 0.5% or
0.75%
Long-term loans 30,231 575,400 30,231 575,400 Prime rate +4% Repayable
(Note 4) or HIBOR in full
within
+2.25% thirty-six
months
---------- ---------- --------- ----------
25,430,340 27,849,377 7,093,681 11,115,241
---------- ---------- --------- ----------
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
--------------------------
2002 2003
---------- ----------
$ $
Euro 2,846,593 4,369,800
Hong Kong dollars 1,712,006 1,924,582
Japanese Yen 198,755 179,828
Renminbi 30,231 --
United States dollars 2,306,096 4,315,888
Canadian dollars -- 325,143
---------- ----------
7,093,681 11,115,241
---------- ----------
The Prime rate and HIBOR rate were 5% and 1.375% per annum, respectively,
as of March 31, 2003. 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 $3,521,810 (2002: $3,942,336); and
(b) bank guarantee of $6,178,615 (2002:$5,129,908) and restricted cash
deposits of $4,104,168 (2002: $3,972,542). The restricted cash
deposits have original maturities of less than three months.
(c) a legal charge over certain assets of one of the Group's subsidiaries.
(d) personal guarantee of $102,000 (2002:Nil) by a director of one of the
Group's subsidiaries.
The weighted average interest rate of short-term borrowings of the Group is
as follows:
Year ended March 31
-------------------
2002 2003
Bank overdrafts 6.5% 5.45%
Notes payable 5.9% 5.05%
Short-term loans 5.9% 5.05%
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
-------- --------------- ----------- ------------ -----------
2001 $559,672 (iii) $106,359 $137,285(ii) $20,816(iv)
2002 $559,672 (iii) $109,497 $140,016(ii) N/A
2003 $671,836 (iii) $125,262 $149,606(ii) N/A
Mr Fok Woo Mr George Mr J Stewart Mr Henry
Ping O'Leary Jackson Schlueter
-------------- ----------- ------------ -----------
2001 Nil $170,134(i) Nil N/A
2002 Nil $165,000(i) Nil $108,379(v)
2003 Nil $180,000(i) Nil $142,870(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, 2001,
2002 and 2003. 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, 2003 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 years ended March 31, 2002 and
2003 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 was 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 was 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 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 the 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 the return on their investment.
(c) BEL's total contributions to the Plan and the MPF for the years ended March
31, 2001, 2002 and 2003 amounted to $53,704, $78,995 and $73,945
respectively.
F-20
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
10 Business acquisition
Acquisition of Korona
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 repurchase
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.
On October 22, 2002, Augusta filed a request for arbitration in the state
of New York and on January 13, 2003, the Group filed its answer to
Augusta's request for arbitration asserting that Augusta breached the
agreement and the implied duty of good faith and fair dealing by
withholding consent from Korona's auditors for the release of Korona's
financial statements. It is currently in the process of proceeding through
the arbitration process. If the arbitration proceeds, there will be legal
fees, travel expenses and other costs related to the arbitration that will
be incurred by the Group in defending the case. If the Group does not
succeed in the arbitration, we may be obligated to repurchase the stock by
exchanging it for the promissory note, to be repaid with accrued interest,
over a nine-month period of time.
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 to 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.
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 376,845
----------
Goodwill 258,141
----------
The Group incurred additional transaction costs in year ended March 31,
2003 related to the acquisition of Korona, which have resulted in an
increase to goodwill of $53,924. No amortization charge related to goodwill
was incurred during the current financial year.
F-21
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
10 Business acquisition (continued)
Acquisition of Gram
As part of the Group's ongoing expansion of its sensor-based product
business, effective August 1, 2002, the Group acquired 51% of the equity of
Gram. Gram is a Canadian company engaged in the distribution of digital
scales in North America and 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 Gram based on management's best
estimate of the fair value of assets acquired and the liabilities assumed
as of August 1, 2002.
The allocation of the purchase price is as follows:
$
Cash consideration 230,644
Promissory note 203,312
Common stock consideration 306,250
Plus: Fair value of net liabilities acquired 35,503
Less: Minority shareholders' interest (17,396)
Plus: Transaction and closing costs 84,508
--------
Goodwill 842,821
--------
Total consideration consisted of cash, common stock and a promissory note
issued by the buyer of Gram. The value of the common stock issued (125,000
shares at $2.45 each) was determined based on the market price of the
Group's stock on the date of the acquisition, which was also the date the
terms of acquisition were agreed to and announced. The total promissory
note of $231,000 is unsecured, non-interest bearing and repayable in five
yearly installments through March 31, 2008 (see Note 4). The value at
acquisition of $203,312 was calculated based on an imputed interest rate of
4%. The goodwill above arose on August 1, 2002 and is not amortized but
subject to annual impairment review.
The following unaudited pro forma consolidated summary of operations
presents information of the Group's results as if the acquisition occurred
on April 1, 2001:
2002 2003
$ $
(unaudited)
Net sales 54,554,827 47,866,091
Net income (loss) 1,713,211 (1,649,072)
Basic earnings (losses) per share 0.31 (0.29)
Diluted earnings (losses) per share 0.30 (0.29)
Shares used in per share calculation:
Basic 5,586,920 5,599,238
Diluted 5,652,852 5,599,238
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 would have resulted had the acquisition occurred on April
1, 2001 or of future results of operations of the consolidated entities.
F-22
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
11 Goodwill and Brand name
Goodwill and brand name are analysed as follows:
Goodwill Brand name
----------------------- ------------------------
March 31 March 31
----------------------- ------------------------
2002 2003 2002 2003
$ $ $ $
Cost 204,217 1,100,962 3,000,000 3,000,000
Less: accumulated amortization -- -- (202,608) (402,608)
---------- ---------- ---------- ----------
204,217 1,100,962 2,797,392 2,597,392
---------- ---------- ---------- ----------
The Group adopted SFAS No. 142 during the year ended March 31, 2003.
Goodwill of the Group of $204,217 and $1,100,962 as at March 31, 2002 and
2003 respectively was not subject to amortization. Amortization expense
related to brand name was nil, $202,608 and $200,000 for the years ended
March 31, 2001, 2002 and 2003, respectively.
12 Commitments and contingencies
(a) As of March 31, 2003, the Group had commitments to acquire plant and
machineries from third parties for an aggregate consideration of $125,882
(2002: $17,820), of which $40,759 (2002: $16,038) had been paid as
deposits.
(b) The dispute with Augusta as discussed in Note 10.
(c) Vector Distribution System Inc., a subsidiary of Gram, was subject to two
cases of lawsuits for alleged patent infringement. The Group considers the
possibility of an unfavourable outcome to be remote and as such have not
made any provision for these cases as at March 31, 2003.
F-23
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
13 Earnings per share
Year ended March 31
-------------------------------------
2001 2002 2003
$ $ $
Income (loss) available to common
shareholders 1,603,799 1,805,606 (1,643,734)
Weighted average shares outstanding 5,564,536 5,586,920 5,599,238
Incremental shares from assumed
exercise of:
Warrants 48,547 -- --
Stock options 66,828 65,932 --
---------- ---------- ----------
Dilutive potential common shares 115,375 65,932
---------- ---------- ----------
Diluted weighted average shares 5,679,911 5,652,852 5,599,238
---------- ---------- ----------
Basic earnings (loss) per share $ 0.29 $ 0.32 $ (0.29)
Diluted earnings (loss) per share $ 0.28 $ 0.32 $ (0.29)
Basic earnings per share is computed by dividing net income/(loss)
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 168,000 shares, 30,000 shares, 196,000 shares, 10,000
shares, 30,000 shares, 218,000 shares and 20,000 shares of common stock at
$2.50, $2.55, $3.65, $5.06, $7.875, $8.00 and $8.125 per share respectively
and warrants to purchase 2,174,403 shares of common stock at $17.50 per
share were outstanding during the fiscal year ended March 31, 2003 but were
not included in the calculation of diluted earnings per share during the
year ended March 31, 2003 due to their anti-dilutive effect.
F-24
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
14 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.
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.
During December 2002 to March 2003, the Company repurchased 19,900 shares
of the Company's common stock at an average cost of $1.95 per share, for a
total cost of $38,832.
(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, 2003.
F-25
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
15 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 900,000 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 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 years
ended March 31, 2002 and 2003.
F-26
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
15 Stock option plan (Continued)
(a) (Continued)
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 600,000 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.
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 have been exercised during the years ended March 31, 2001, 2002 and
2003.
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 have been
exercised during the years ended March 31, 2001, 2002 and 2003.
F-27
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
15 Stock option plan (Continued)
(b) In January 2000, the Company issued options to the directors and an
employee of the Company to purchase an aggregate of 218,000 shares of
common stock of the Company at an exercise price of $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, 2002 and 2003.
(c) 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 years ended March 31, 2002 and 2003.
F-28
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
15 Stock option plan (Continued)
(d) (Continued)
In October 2001, the Company issued options to certain non-employee
directors of the Company 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 years ended March 31, 2002 and 2003.
In March 2002, the Company issued options to certain directors of the
Company 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 years ended March 31, 2002
and 2003.
No options or warrants have been granted or exercised during the year ended
March 31, 2003.
The stock options summary as of March 31, 2003 is summarized as follows:
Average per share
----------------------
Number Exercise Market
of shares price price
--------- ----- -----
Balance, March 31, 2000 261,700 $8.01 $8.01
Exercised (13,700) $8.00 $8.00
Granted 30,000 $7.875 $7.875
------- ------ ------
Balance March 31, 2001 278,000 $7.996 $7.996
Granted 394,000 $3.076 $3.076
------- ------ ------
Balance, March 31, 2002 and 2003 672,000 $5.11 $5.11
------- ------ ------
(e) The following table summarizes the information about all stock options of
the Company outstanding at March 31, 2003:
Weighted
Number average Exercisable
Weighted average outstanding at remaining life shares at
exercise price March 31, 2003 (years) March 31, 2003
-------------- -------------- ------- --------------
$2.50 168,000 8.9 168,000
$2.55 30,000 8.5 30,000
$3.65 196,000 8.0 196,000
$7.875 30,000 7.8 30,000
$8.00 228,000 6.8 228,000
$8.125 20,000 6.8 20,000
-------- --------
$5.11 672,000 7.8 672,000
-------- --------
F-29
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
15 Stock option plan (Continued)
(f) 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,
2001, 2002 and 2003.
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, 2001, 2002
and 2003 were $153,988, $939,314 and $0 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 years ended March 31, 2001, 2002 and 2003:
2001 2002 2003
$ $ $
Weighted risk-free interest rate 4.70% 4.55% N/A
Dividend yield - - -
Weighted volatility factor of the expected market
price of the Company's common share 76.30% 102.35% N/A
Weighted average expected life of the option 5 years 5 years N/A
For purposes of pro forma disclosure, the estimated fair value of the
options is charged to net income (loss) of the respective years. The
Group's pro forma information is as follows:
2001 2002 2003
---------- ---------- ----------
$ $ $
Net income (loss) as reported 1,603,799 1,805,606 (1,643,734)
Deduct:
Total stock-based employee compensation
expense determined under fair
value based method for all stock
options, net of related tax effects (153,988) (939,314) --
---------- ---------- ----------
Pro forma net income (loss) 1,449,811 866,292 (1,643,734)
Basic earnings (losses) per share
As reported $ 0.29 $0.32 $(0.29)
Pro forma $ 0.26 $0.16 $(0.29)
Diluted earnings (losses) per share
As reported $ 0.28 $0.32 $(0.29)
Pro forma $ 0.26 $0.15 $(0.29)
F-30
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
16 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 expiration date of the warrants was 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) 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.
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,
2002 but the Board of Directors, in July 2002, extended the expiration date
until December 31, 2003. No warrants have been exercised during the years
ended March 31, 2001, 2002 and 2003.
(c) On January 14, 2000, the Company entered into an agreement with Profit
Concepts Limited ("Profit Concepts"), which provided consulting services to
the Company. The agreement provided 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 was engaged in the provision of
advisory services for equity fund raising exercise of the Company and the
warrants were 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 years ended March 31, 2002 and 2003 and the warrants
expired on January 13, 2003.
The fair value of the warrants on the date of issue was US$1,144,260 and
was being recognized as consultancy fee in the Consolidated Statements of
Income (Loss) and Comprehensive Income (Loss) on a straight-line basis over
the period of services by Profit Concepts which commenced on July 1, 2000
and concluded on January 13, 2003. The consultancy fee charged to the
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
amounted to $381,420, $381,420 and $381,420 for the years ended March 31,
2001, 2002 and 2003 respectively.
F-31
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
17 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 involves production and marketing of sensor
based scales products. These include bathroom, kitchen, office, jewelry,
laboratory, postal and industrial scales that are used in consumer,
commercial and industrial applications.
Telecommunications products operations principally involve production and
modification of two-way radios and cordless telephones that are used in
consumer and commercial applications.
Health care products operations principally involve production of
thermometers and blood pressure meters used by consumers.
The Group established the "Other" segment which principally includes the
activities of (i) tooling and mould charges for scales and
telecommunication products, and (ii) supporting service to customers
including performing repairs work for customers and sales of spare parts.
The accounting policies of the Group's reportable segments are the same as
those described in the 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)
17 Business segment information (Continued)
Summarized financial information by business segment for 2001, 2002 and
2003 is as follows:
Identifiable Depreciation
Net Operating assets as of and Capital
sales profit/(loss) March 31 amortization expenditure
----- ------------- -------- ------------ -----------
$ $ $ $ $
2003
Scales 27,443,774 3,855,701 24,672,560 2,019,590 837,113
Telecommunication products 15,729,490 94,623 7,158,520 1,177,268 66,310
Health care products -- -- -- -- --
Other 3,156,790 290,626 1,403,184 183,356 84,354
---------- ---------- ---------- ---------- ----------
Total operating segments 46,330,054 4,240,950 33,234,264 3,380,214 987,777
Corporate -- (5,018,729) 15,676,472 467,694 940,317
---------- ---------- ---------- ---------- ----------
Group 46,330,054 (777,779) 48,910,736 3,847,908 1,928,094
---------- ---------- ---------- ---------- ----------
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
---------- ---------- ---------- ---------- ----------
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. Goodwill of $204,217 and
$1,100,962 which is arising from the purchase of Korona and Gram, is
included in identifiable assets of the Scales segment as of March 31, 2002
and 2003, respectively.
F-33
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
17 Business segment information (Continued)
(b) The Group primarily operates in Hong Kong, the PRC, Germany, Canada, the
United States and the United Kingdom. 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. Subsidiaries in
Germany, Canada, the United States and the United Kingdom in the Group are
responsible for the distribution of electronics scales in Europe and in
North America. As the operations are integrated, it is not practicable to
distinguish the net income derived among the activities in Hong Kong, the
PRC, Germany, Canada, the United States and the United Kingdom.
Identifiable assets by geographical areas are as follows:
2002 2003
$ $
Hong Kong 14,784,311 17,823,526
The PRC 18,959,106 20,707,989
Germany 10,707,660 6,335,920
Canada -- 1,880,559
United States of America -- 1,444,464
United Kingdom -- 718,278
---------- ----------
Total assets 44,451,077 48,910,736
---------- ----------
(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, 2001, 2002 and 2003:
Year ended March 31
---------------------------------------------------------------------------
2001 2002 2003
----------------------- ----------------------- -----------------------
$ % $ % $ %
United States of
America 10,945,310 37 23,578,878 44 22,017,956 48
Europe 14,160,371 48 25,641,446 48 21,059,227 45
Others 4,460,999 15 4,082,777 8 3,252,871 7
---------- ---------- ---------- ---------- ---------- ----------
29,566,680 100 53,303,101 100 46,330,054 100
---------- ---------- ---------- ---------- ---------- ----------
(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 2001 2002 2003
segment ------------------- ------------------ -------------------
$ % $ % $ %
Ohaus Corporation Scales 2,875,027 10 2,078,647 4 - -
Telson
Telecommunication Tele-
and Technology Company communication
Limited products 3,505,516 12 - - - -
Telson Information and Tele-
Communication Company communication
Limited products 3,657,135 12 210,978 0 - -
Gram Precision Scales, Scales 2,919,960 10 3,245,184 6 - -
Inc.
Trisquare Communications Tele-
(HK) Company communication
Limited products - - 11,497,223 22 6,693,470 14
Salter Weightronix Scales 2,496,612 8 2,724,635 5 4,686,207 10
---------- -- ---------- -- ---------- --
19,611,031 66 23,939,604 45 14,425,154 31
---------- -- ---------- -- ---------- --
F-34
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
18 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 the Group for debt of
the same remaining maturities.
19 Subsequent event
Pursuant to a special meeting held by the Board of Directors on April 1,
2003, the Group granted options to three employees to purchase an aggregate
of 332,500 shares of common stock of the Group at an exercise price of
$1.61 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
March 31, 2013 and can be exercised at any time immediately after granting.
The Group also 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 Group at an exercise
price of $1.61 per share, which was equal to the market value on the date
of grant. The options shall expire March 31, 2013 and can be exercised at
any time after granting.
Pursuant to a special meeting held by the Board of Directors on April 2,
2003, a cash dividend of $0.05 per share was declared to common stock
shareholders. This cash dividend, totalling $284,458, was paid on May 31,
2003.
F-35