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, 1999
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)
Flat A-D, 8th Floor
Universal Industrial Centre
23-25 Shan Mei Street
Fo Tan, Shatin
New Territories, 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: 3,119,159 shares of Common Stock, $0.003 par value, at March 31, 1999.
Indicate by check mark whether the registrant: (i) 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 (ii) 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]
<PAGE>
TABLE OF CONTENTS
Page
Item 1. Description of Business. 1
Item 2. Description of Property. 17
Item 3. Legal Proceedings. 19
Item 4. Control of Registrant. 19
Item 5. Nature of Trading Market. 19
Item 6. Exchange Controls and Other Limitations Affecting
Security Holders. 21
Item 7. Taxation. 21
Item 8. Selected Financial Data. 22
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 24
Item 10. Directors and Officers of Registrant. 30
Item 11. Compensation of Directors and Officers. 33
Item 12. Options to Purchase Securities from Registrant or Subsidiaries. 35
Item 13. Interest of Management in Certain Transactions. 36
Item 14. Description of Securities to be Registered. 36
Item 15. Defaults Upon Senior Securities. 37
Item 16. Changes in Securities and Changes in Security for Registered
Securities. 37
Item 17. Financial Statements. 37
Item 18. Financial Statements. 37
Item 19. Financial Statements and Exhibits. 37
<PAGE>
PART I
As used 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
term "Company" refers to Bonso Electronics International Inc. and, where the
context so requires or suggests, its direct and indirect subsidiaries.
Item 1. Description of Business.
Overview
Bonso Electronics International Inc. was incorporated on August 8, 1988 as
a limited liability International Business Company under the laws of the British
Virgin Islands to serve as a holding company for the Company's operating
subsidiary, which was formed in 1980. As an International Business Company, the
Company is 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. The Company was incorporated in the British Virgin
Islands principally to facilitate trading in its securities. The government of
Hong Kong imposes a stamp duty on the transfer of securities of Hong Kong
corporations. No such duty is imposed by the British Virgin Islands, and the
Company is also exempt from income tax in the British Virgin Islands. The
Company's corporate administrative matters are conducted through its registered
agent, HWR Services Limited, P.O. Box 71, Road Town, Tortola, British Virgin
Islands. The Company's principal executive offices are located at Flat A-D, 8th
Floor, Universal Industrial Centre, 23-25 Shan Mei Street, Fo Tan, Shatin, New
Territories, Hong Kong. Its telephone number is 852-2605-5822, its facsimile
number is 852-2691-1724 and its E-mail address is http//[email protected].
The Company designs, develops, manufactures and sells a comprehensive line
of electronic scales and weighing instruments and electronic consumer and health
care products. The Company's electronic scales include bathroom, kitchen,
office, jewelry, laboratory, pocket, hanging, postal, industrial and parcel
scales that are used in consumer, commercial and industrial applications. The
Company's electronic consumer and health care products include pedometers,
chronographs, electronic thermometers and blood pressure meters.
The Company also plans to enter the field of digital telecommunications,
with its first telecommunications product to be a 900MHz ISM Band cordless
telephone. Development of this product was delayed due to a lack of funds;
however, management is negotiating a lease financing arrangement with respect to
the necessary production equipment and intends to hire a manager with experience
in producing telecommunications products. Management currently expects to
commence production of the 900MHz ISM Band cordless telephone by the end of
calendar 1999 and management anticipates that the Company will develop different
kinds of telecommunication products in the future. There can be no assurance,
however, that development of any of these products, including the 900MHz ISM
Band cordless telephone, will be successfully completed, that the Company will
obtain customers for any of these products or that sales of any of these
products will be profitable.
The Company's wholly-owned Hong Kong subsidiary - Bonso Electronics
Limited ("Bonso Electronics") - is responsible for the design, development,
manufacture and sale of the Company's products. Bonso Electronics has one active
Hong Kong subsidiary - Bonso Investment Limited ("BIL"), which has been used to
acquire and hold the Company's real estate investments in Hong Kong and China.
The Company has manufactured all of its products in China since 1989 in
order to take advantage of lower overhead costs and competitive labor rates
available there. In January 1997, the Company completed a new, larger
manufacturing facility in the DaYang Synthetical Development District in
Shenzhen, China, which approximately tripled the Company's production capacity.
1
<PAGE>
The leasehold, facilities, machinery, furniture and equipment at that facility
are owned and operated by Bonso Electronics (Shenzhen) Co. Ltd. ("Shenzhen
Bonso"), a 100% Company-owned Chinese limited liability company which was formed
in June 1994. The location of the Company's factory in Shenzhen, only about 50
miles from Hong Kong, permits the Company to manage easily manufacturing
operations from Hong Kong, and facilitates transportation of the Company's
products out of China through the port of Hong Kong.
Business Strategy
The Company experienced dramatic growth from 1994 to 1998, with net sales
increasing from $12,548,770 in 1994 to $23,715,576 in the fiscal year ended
March 31, 1998, and profitability increasing from net income of $1,023,821 in
the fiscal year ended March 31, 1994 to net income of $2,274,645 in the fiscal
year ended March 31, 1998. However, net sales decreased to $13,046,265 for the
fiscal year ended March 31, 1999 and net income decreased to $13,754. Management
attributes these decreases primarily to decreased orders from two major
customers, as well as various smaller customers of the Company. Management
believes that the Company's continued growth depends on its ability to
strengthen its customer base by enhancing and diversifying its products,
increasing the number of customers and expanding into additional markets, while
maintaining or increasing sales of its products to existing customers. The
Company's continued growth and profitability is also dependent upon its ability
to control production costs and increase production capacity. The Company's
strategy to achieve these goals is as follows:
Product Enhancement and Diversification. The Company continually seeks to
improve and enhance its existing products in order to provide a longer product
life-cycle and to meet increasing customer demands for additional features. The
Company's research and development staff are currently working on such projects
as redesigning the existing pedometer, bicycle computer and blood pressure
monitor, redesigning the Company's bicycle accelerator in response to a change
in the requirements of the Japanes government, expanding the health care line
and attempting to make the Company's products more competitive in price and
features. During the last fiscal year, the Company has completed development of
a waterproof digital thermometer, a chronograph, an ear protector and two newly
designed body scales. In addition, the Company has, in varying stages of
development, a bicycle accelerator and postal, kitchen and Gem scales, which are
being developed to the specifications of OEM customers. See "Products," below
Maintaining and Expanding Business Relations with Existing Customers. The
Company promotes its relationships with its significant customers through
regular communication with them, visits to its customers in their home countries
and by providing direct access to the Company's manufacturing and quality
control personnel. This access, together with the Company's concern for quality,
has resulted in a relatively low level of defective products. Moreover,
management believes that the Company's emphasis on timely delivery, good service
and low cost has contributed and will continue to contribute to good relations
with its customers and increased orders. Further, management of the Company
solicits suggestions from its customers for product enhancement and will develop
and incorporate the enhancements suggested by its customers into its products
when feasible.
Market Expansion. In 1998, the Company expanded its marketing efforts in
the United States and Europe. Management intends to continue increasing its
marketing efforts with the use of its Web page and mailing product brochures. In
addition, the Company intends to increase the frequency of its direct and
telemarketing contacts with both existing and potential customers and is
negotiating with an individual to represent the Company in Hamburg, Germany in
order to expand the Company's marketing efforts in the European Union.
2
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Controlling Production Costs. In 1989, recognizing that labor cost is a
major factor permitting effective competition in the consumer electronic
products industry, the Company relocated all of its manufacturing operations to
China to take advantage of the large available pool of relatively inexpensive
manufacturing labor. The Company has made an effort to locate and operate its
manufacturing facilities consistent with the exigencies of manufacturing in
China. For example, the location of the Company's plant in China is in close
proximity, approximately 50 miles, to Hong Kong thereby facilitating
transportation of the Company's products to markets outside of China.
The Company is currently attempting to control production costs by such
means as redesigning its existing scales in order to decrease material and labor
costs, controlling the number of employees, increasing the efficiency of workers
by providing regular training and tools and redesigning the flow of the
production line.
Increasing Production Capacity. Since January 1997, the Company's products
have been manufactured at the Company's new manufacturing facility in the DaYang
Synthetical Development District in Shenzhen, China. This new facility has
triple the capacity of the Company's old manufacturing plant. The floor area of
this new facility is not fully utilized.
Products
The following table sets forth the percentage of net sales of each of the
Company's product lines for the fiscal years ended March 31, 1998 and 1999.
Year ended March 31,
-------------------
1998 1999
---- ----
Product Line
Scales 77% 79%
Health care products 13 15
Electronic consumer products 3 2
Other products and services 7 4
--- ---
Total 100% 100%
Scales
The Company's weighing equipment ranges from the simplest spring scales to
high precision electronic scales that translate weight readings into
corresponding price and postage calculations.
All of the Company's electronic scales use strain gauge sensors, which
management believes are one of the most reliable and accurate weight sensing
systems currently available. A strain gauge sensor is a thin metal foil resistor
which is bonded to a metal block, and which undergoes a change in electrical
resistance as weight is loaded onto the metal block. The measurement of change
in electrical resistance yields a measure of the applied weight.
The Company offers a variety of scales for diverse consumer, commercial and
industrial applications. Scales currently offered by the Company include
bathroom, kitchen, office, jewelry, laboratory, pocket, hanging, postal,
industrial and parcel scales. The following table sets forth the net sales of
each type of scale as a percentage of total scale sales for the fiscal years
ended March 31, 1998 and 1999:
Year ended March 31,
-------------------
1998 1999
---- ----
Type of Scale
Postal and office 45% 29%
Kitchen 6 8
Jewelry and laboratory 18 20
Bathroom 14 15
Pocket and hanging 11 19
Industrial and parcel 6 9
--- ---
Total scale sales 100% 100%
3
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The Company's electronic scales offer many advanced features such as a
talking feature, automatic power off, automatic range, audio signal, digital
auto-calibration, automatic zero tracking and multiple measuring units. The
scales are built with either metal or plastic housings and come in various
models and case designs. The Company's scales are described in more detail
below.
Postal Scales. The Company's postal scales are used primarily by businesses
for weighing letters and parcels of up to 2,000 grams (4.4 lbs.) and are
accurate to 1 gram. Postal scales are calibrated to give postal or franking cost
for the various classes of delivery service available to various destinations.
The scales are marketed primarily in Europe and the United States and are
customized for the postal system of the country of destination.
Office Scales. The Company sells several models of office scales with
capacities ranging from 2,000 grams (4.4 lbs.) to 5,000 grams (11 lbs.), and the
scales are accurate to 1 gram. The scales are used in offices to weigh small
packages and letters. The Company's office scales are sold principally in the
United States, Europe, Australia, Hong Kong and China.
Kitchen Scales. The Company's kitchen scales are used in households and
restaurants to weigh ingredients for cooking and portions for dieting, with
capacities ranging from 1,000 grams (2.2 lbs.) to 5,000 grams (11 lbs.), and the
scales are accurate to 1 gram. The Company's kitchen scales are marketed
principally in the United States and Europe.
Jewelry and Laboratory Scales. Jewelry and laboratory scales are used to
weigh precious metals and stones. In the laboratory, the scales are used to
weigh various chemicals and chemical compounds. The Company's jewelry and
laboratory scales are principally sold in the United States and Europe. The
capacities of these scales range from 120 grams (0.25 lb.) to 1,200 grams (2.6
lbs.), and these scales are accurate to 0.01 gram or 0.1 gram, respectively.
Bathroom Scales. The Company's bathroom scales are used by consumers to
monitor weight, with capacities up to 150 kilograms (330 lbs.). The Company's
bathroom scales are marketed primarily in the United States, Europe and Japan.
Pocket and Hanging Scales. Pocket and hanging scales are small electronic
scales that can be carried by a business person in his or her attache or brief
case. The capacities of the Company's pocket scales range from 80 grams (2.8
oz.) to 320 grams (11.2 oz.), and the scales are accurate to 0.1 gram. The
hanging scales range from 15 kilograms (33 lbs.) to 25 kilograms (55 lbs.), and
the scales are accurate to 10 grams. The pocket scales are principally used in
the jewelry business for weighing low value metals and stones and the hanging
scales are primarily used in fishing. The Company's pocket and hanging scales
are marketed primarily in the United States and Europe.
Industrial/Parcel Scales. The Company manufactures different models of
industrial/ parcel scales, which are used in business or industry to weigh
heavier parcels or objects (i.e., objects whose weight exceeds the capacity of
the Company's office scales). Industrial/parcel scales have a capacity ranging
from 25 kilograms (55 lbs.) to 150 kilograms (330 lbs.). The Company's
industrial/parcel scales are marketed primarily in Europe.
Health Care Products
Electronic Thermometers. The Company's electronic thermometers, which
include both fahrenheit and centigrade versions, measure body temperature. The
Company's electronic thermometer is classified as a medical device under United
States law. Medical devices are required to be approved by the United States
Food and Drug Administration (the FDA) prior to being marketed, unless the law
provides a legal exemption from such approval. The Company's electronic
thermometer has received pre-market approval from the FDA. Sales of electronic
thermometers were approximately 10% of the Company's net sales in the fiscal
year ended March 31, 1998, and approximately 12% of net sales in the fiscal year
ended March 31, 1999.
4
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Blood Pressure Meters. The Company introduced electronic blood pressure
meters to its line of products in November 1994. The Company's electronic blood
pressure meters have digital displays for highest blood pressure (systolic),
lowest blood pressure (diastolic) and pulse rate (number of pulses per minute),
as well as mean blood pressure. The meters have automatic power off, automatic
pressure release, manual rubber bulb pump and many other standard features. The
Company has obtained FDA approva for marketing blood pressure meters in the
United States. Sales of blood pressure meters were approximately 3% of the
Company's net sales in each of the fiscal years ended March 31, 1998 and 1999.
Electronic Consumer Products
Chronographs. The Company began shipping chronographs in 1998. A
chronograph is a device for measuring the speed of a projectile by measuring the
time it takes for it to go between two infra-red sensors. Sales of chronographs
were approximately 0.9% of the Company's net sales in the fiscal year ended
March 31, 1999.
Pedometers. The Company began shipping electronic pedometers in 1993. A
pedometer is worn by a walker or jogger to measure the distance traveled by
recording the steps taken. The Company's pedometer can be adjusted for varying
stride lengths, and will keep track of distance traveled, elapsed time and
average speed. Sales of pedometers were approximately 0.7% of the Company's net
sales in the fiscal year ended March 31, 1998, and 0.9% of net sales in the
fiscal year ended March 31, 1999.
Distance Meters. The Company began shipping distance meters in 1998. Sales
of distance meters were less than 0.1% of the Company's net sales in the fiscal
year ended March 31, 1999.
Other Electronic Consumer Products. In the past, the Company also
manufactured joysticks and bicycle computers. Sales of joysticks were
approximately 1.9% of the Company's net sales in the fiscal year ended March 31,
1998 and sales of the Company's bicycle computers were approximately 0.014% of
the Company's net sales in the fiscal year ended March 31, 1998. The Company did
not manufacture any joysticks or bicycle computers during the fiscal year ended
March 31, 1999.
Other Products and Services
The Company also receives revenue from customer funded research and
development for products subsequently produced and sold to them, the sale of
semi completed units and the sale of spare parts for repair work by its
customers and from repair work performed by the Company for its customers. These
revenues constituted approximately 7% of net sales for the fiscal year ended
March 31, 1998 and 4% of net sales for the fiscal year ended March 31, 1999.
Product Development, Design and Research
The major responsibility of the product design and research and development
personnel is to develop and produce designs to the satisfaction of and in
accordance with the specifications provided by the OEMs. Management believes its
engineering and product development capabilities are important to the future
success of the Company's business. Some of the Company's product design,
research and development activities are customer funded and are initiated under
verbal agreements with specific customer for specific products. The Company has
successfully lowered its costs for its research and development team by moving
most research and development activities to its facility in China and
principally employing Chinese engineers and technicians at costs that are
substantially lower than would be required in Hong Kong.
5
<PAGE>
At March 31, 1999, the Company employed two individuals in Hong Kong and 16
individuals in China on its engineering staff, who are at various times engaged
in research and development. The Company also contracted with a firm in Germany
to develop the software for the Company's proposed cordless telephone. The
Company spent $158,706 and $566,030 on research and development during the
fiscal years ended March 31, 1998 and 1999, respectively. Management intends to
increase the number of research and development personnel to approximately 25.
The Company has, in varying stages of development, a bicycle accelerator
and postal, kitchen and Gem scales, which are being developed to the
specifications of OEM customers, and has recently commenced production of an ear
protector and newly designed body scales.
Manufacturing
The Company currently manufactures and assembles all of its products in
China. Generally, raw materials, electronic components and other parts are
transported to the Company's manufacturing plant in China where the finished
products are assembled. The finished goods are then transported back to Hong
Kong for sale by the Company.
The Company manufactures some of its own components, metal parts and
casings and plastic parts at its facility in China. In 1997, the Company
commenced manufacturing its own strain gauges, and it currently produces over
80% of the strain gauges utilized in its scales. Management believes that the
Company will realize a substantial cost saving from producing its own strain
gauges in the future. Management's objective is to eventually produce 100% of
the strain gauges utilized by the Company; however, management may decide not to
produce some low-demand strain gauges if it determines that to produce them
would not be cost effective.
To take advantage of lower overhead costs and competitive labor rates
available in China, the Company constructed a manufacturing facility in
Shenzhen, China in 1989. The location of that factory in Shenzhen, only about 30
miles from Hong Kong, permitted the Company to manage easily manufacturing
operations from Hong Kong, and facilitated transportation of the Company's
products out of China through the port of Hong Kong, the busiest seaport for
containerized shipping in the world. As sales increased since the year ended
March 31, 1990, the Company's use of available factory capacity increased. In
planning for its future growth, the Company entered into a contract to acquire a
land lease for construction of a new manufacturing complex which, when
completed, would approximately triple the Company's production capacity. The
construction of phase one of the new manufacturing complex was completed in
December 1996 and the Company commenced operations in the new complex in January
1997. The second, and final, phase was completed in May 1998. The new
manufacturing complex is located in the DaYang Synthetical Development District
in Shenzhen, China and is approximately 50 miles from Hong Kong. See Item 2 -
"Description of Property--China," below.
Because the Company primarily sells and ships its products "F.O.B. Hong
Kong," most of its customers are responsible for the transportation of finished
products from Hong Kong to their final destination and bear the risk of loss
from such transportation. Components and finished products are transported to
and from China primarily with the Company's own truck. The majority of the
Company's component parts purchased from Japan, Taiwan and Korea are transported
by ship or by air to Hong Kong. In recent years, the Company has not been
materially affected by any transportation problems.
Management believes that it has sufficient water and power supplies for
daily usage at its new manufacturing complex. The Company has drilled two water
wells to obtain additional water and to minimize cost.
6
<PAGE>
The availability of adequate power to run the Company's factory is one of
the difficulties of having a factory located in China. In order to minimize
potential power problems that could develop in the Shenzhen factory, the
factory, like most Chinese factories, is equipped with power generators capable
of providing adequate electric power to operate the assembly line.
Component Parts and Suppliers
The Company purchases over 1,000 different component parts from more than
100 major suppliers and is not dependent upon any single supplier for any key
component. The Company purchases components for its products from suppliers in
Japan, Taiwan, South Korea, Hong Kong and elsewhere. The Company has not
experienced, and management does not expect to experience, any difficulty in
obtaining needed component parts for its products.
The major component parts purchased by the Company are integrated circuits
(chips), LEDs, LCDs, strain gauges, force sensors, resistors, capacitors,
transistors, diodes, printed circuit boards and batteries. The Company purchases
both stock or off the shelf chips and custom chips. There are many suppliers of
both stock and custom chips in Japan and Taiwan. At the present time, Micro
Chips in Taiwan, Samsung in South Korea and Hitachi, Toshiba and NEC in Japan
provide most of the Company's chips. Chips are one of the most expensive
component parts purchased by the Company.
Strain gauges are the second most expensive components purchased by the
Company. The Company currently produces over 80% of the strain gauges utilized
in its scales, and obtains the remainder principally from a Japanese
manufacturer. However, the Company could also purchase strain gauges from
suppliers located in the United States and China. LEDs and LCDs are generally
custom made to match the chip design and are principally supplied by companies
in Taiwan, Korea and Japan. The circuit boards can be purchased from circuit
board manufacturers in Hong Kong. Resistors, capacitors, transistors, diodes and
batteries are standard stock items and are generally purchased in Hong Kong and
Taiwan.
The Company produces metal and plastic casings and parts for use in its
products. Plastic resin and metal sheet can be purchased from suppliers in Hong
Kong and Japan.
Quality Control
Management maintains strict quality control procedures for every product
manufactured by the Company throughout the manufacturing process. Incoming raw
materials and components are checked by the Company's quality control personnel.
Moreover, during the production stage, the Company's quality control personnel
monitor each operation in the manufacturing process, including the bonding of
the chips, component insertion and assembly of the printed circuit boards and
casings. All work in process is also checked during the manufacturing and
assembly processes. After the assembly stage, every product is checked for
proper functioning and cosmetic appearance. After packing and before shipment,
the quality control personnel randomly check goods according to product
specifications. Historically, the Company's level of defective products has been
low, and not material to its financial statements. The Company's products are
generally covered by a one-year limited warranty which provides for repair or
replacement of defective products. In certain circumstances, an extended
warranty may be offered. To date, claims against the Company under its warranty
program have been negligible.
In April 1995, the Company received an ISO 9001 certificate from Det Norske
Veritas Industry B.V., The Netherlands. The Company passed a reviewed audit by
Det Norske Veritas, processed in March 1999, and is qualified to maintain the
ISO 9001 certificate.
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The ISO 9000 is a program developed initially by the International
Organization for Standardization in Geneva, Switzerland, to provide quality
control registration standards that could be relied upon to provide assurances
with regard to a registrant's quality control and manufacturing operations.
Management believes that ISO 9000 registration provides its customers with
quality control assurances that are recognized internationally, and that such
registration also provides the Company with a competitive advantage over many
other manufacturers in the Far East who have not registered for ISO 9000
certification. In addition, the Company has submitted applications for the CE
mark for some products and, at the present time, over 36 product groups have
been approved, including the electromagnetic compatibility directive (EMC) and
the medical devices directive (MDD). A CE mark serves as confirmation to the
European authorities that the marked product complies with all European Union
directives relevant to the product and that the product may be traded freely in
the European market.
The Company has hired a Managing Director who will be responsible for
changing the Company's quality control to total quality management ("TQM").
Customers and Marketing
The Company sells its products in the United States, Europe, Asia,
Australia and Africa. Customers for the Company's scales are primarily original
equipment manufacturers, which market the products under their own brand names.
Net export sales to customers by geographic area consisted of the following
for each of the three years ended March 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------------------------------------------
1997 1998 1999
----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
North America $ 7,537,401 44% $12,598,672 53% $5,597,402 43%
Europe 5,492,294 33 8,129,063 34 6,248,263 48
Asia 3,454,505 20 2,117,914 9 1,041,377 8
Australia 425,314 3 756,354 3 130,173 1
Africa 79,505 -- 113,573 1 29,050 --
---------- ---- ---------- ---- ----------- ----
Total Net Sales $16,989,019 100% $23,715,576 100% 13,046,265 100%
</TABLE>
The Company maintains a marketing team in Hong Kong. The Company markets
its products primarily through use of its Web page, advertising in trade
publications such as Hong Kong Enterprise and the use of direct mail catalogues
and product literature. In addition, the Company's marketing team contacts
existing and potential customers by telephone, mail, fax and in person.
Major Customers. Sales of the Company's products to OEMs accounted for
approximately 87% of the Company's total net sales during each of the years
ended March 31, 1997, 1998 and 1999. The Company's principal OEM customers
include the following entities which market the Company's products under the
brand name indicated opposite their respective names:
8
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<TABLE>
<CAPTION>
Percent of Company's Sales
Year ended March 31,
--------------------------
Customer Brand Name Products 1997 1998 1999
-------- ---------- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pitney Bowes, Inc. (USA) Pitney Bowes
Postal scales 18% 30% 15%
Werner Dorsch Gmbh & Co. WEDO Postal, office and
(Germany) parcel scales 11% 9% 15%
Globaltec Corporation ACCULAB Jewelry, educational and
(USA) high precision scales 13% 15% 11%
Omron Health Care OMRON Digital thermometers 11% 8% 10%
Gottl Kern & Sohn Gmbh KERN Laboratory, hanging 3% 4% 7%
pocket and parcel scales
</TABLE>
Werner Dorsch Gmbh & Co. and Globaltec Corporation have been customers of
the Company for fourteen and twelve years, respectively. Management believes
that the Company offers its customers superior quality of products and superior
product design and development capabilities, together with the low costs of
production associated with its operations in China.
If the Company were to lose any customers who account for a material
portion of total sales, or if any of these customers were to substantially
decrease their purchases from the Company, the Company's revenues, earnings and
financial position would be materially and adversely affected. With the
exception of Globaltec Corporation, the Company's dependence on the above-listed
customers is expected to continue in the foreseeable future. The Company follows
normal and customary business practices in the acceptance of orders from its
customers. Orders from the above-listed customers are generally supported by
bank guarantees, letters of credit or insurance from the Hong Kong Export Credit
Insurance Corporation. For updated information with respect to a decrease in
orders from two of the Company's major customers see Item 9 - "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
Sales of the Company's products directly by the Company under its own brand
name accounted for approximately 13% of the Company's total net sales during the
years ended March 31, 1997, 1998 and 1999.
Backlog. The Company's backlog consists of orders from major customers and
purchase orders from other customers of products scheduled for shipment within
three to twelve months. It is the Company's practice to charge customers 50% of
the total order price when orders are cancelled and, as a result, the Company
has experienced nominal cancellations. This practice is not represented by a
written agreement, and the Company may not be able to enforce this arrangement
in every case in the future. The Company generally has not experienced any
difficulty in shipping orders by the dates requested by its customers or in
material returns of its products. The amount of backlog that is manufactured and
shipped during any period is dependent on various factors, including the timing
and scheduling of orders from material customers and accordingly, the amount of
backlog at any date is not necessarily indicative of actual shipments and sales.
The Company's backlog was $3,040,771 at March 31, 1999, compared to a backlog of
$4,386,485 at March 31, 1998
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Competition
The electronic products business is highly competitive. The Company's major
competitors in the scale market include Management Investment & Technology Co.,
Ltd. in Hong Kong and Charder Electronic Company, Ltd. in Taiwan. In the blood
pressure meter market, the Company's major competitor is AnD Co. Ltd of Japan.
In the electronic thermometer market, its major competitors are Citizen Company
and Terumo, both of Japan. Competition is primarily based upon unit price,
product quality, reliability, product features and management's reputation for
integrity. Management believes that the Company competes favorably with respect
to each of these factors.
Employees
At March 31, 1999, the Company employed 701 persons on a full-time basis.
All of the Company's 24 employees located in Hong Kong held administrative,
clerical, sales and marketing positions. Of the 677 employees located in China,
596 were engaged in manufacturing and 81 were engaged in administrative and
clerical positions. The Company is not a party to any labor contract or
collective bargaining agreement. The Company has experienced no significant
labor stoppages in recent years, and management believes that relations with its
employees are satisfactory.
The Company currently houses all 677 employees located in the PRC at the
Shenzhen facility, including administrative staff. The facility is able to house
up to 2,180 employees.
Patents, Licenses, Trademarks, Franchises, Concessions and Royalty
Agreements
The Company has no patents, licenses, franchises, concessions or royalty
agreements that are material to its business as a whole. The Company has
obtained a trademark registration in Hong Kong and China for the marks BONSO and
MODUS in connection with certain electronic apparatus and intends to file an
application in the United States for registration of such trademarks.
Government Regulation
In the United States, the Medical Device Amendments of 1976 to the federal
Food, Drug and Cosmetic Act (Amendments) and the regulations issued or proposed
thereunder provide for regulation by the Food and Drug Administration (the FDA)
of the marketing, manufacturing, labeling, packaging and distribution of medical
devices. These regulations include requirements that manufacturers of medical
devices register with the FDA and furnish lists of devices manufactured by them.
Certain pre-market requirements must be met prior to the marketing of medical
devices introduced after May 28, 1976. These range from a minimum requirement to
wait 90 days after notification to the FDA before introduction of medical
devices substantially similar to devices already on the market to a maximum
requirement to comply with the potentially expensive and time consuming process
of pre-market analysis and testing necessary to obtain FDA approval prior to the
commercial marketing of new medical devices. In addition, the FDA also has the
authority to prescribe performance standards for the types of health care
products manufactured by the Company. Should such standards be prescribed, the
Company's products would be required to conform to them. To date, no such
standards have been adopted and the Company cannot predict what changes, if any,
may be necessitated in its products should such performance standards be issued
in the future. In addition to the Amendments, there are also certain
requirements of other federal laws and of state, local and foreign governments
that may apply to the manufacture and marketing of the Company's health care
products.
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The only products of the Company that are subject to material government
regulation are its electronic thermometers and electronic blood pressure meters,
which are subject to qualifying procedures with the FDA. The qualifying
procedures set forth by the FDA for pre-market approval with respect to the
electronic thermometers and blood pressure meters have been satisfied.
In the European Union, Medical Devices Approval is required for the sale of
the Company's electronic thermometers and blood pressure meters. The Company has
obtained Medical Devices Approval for its electronic thermometers. A customer is
currently seeking Medical Devices Approval, on behalf of the Company, for the
Company's blood pressure meters and management expects such approval to be
granted within six months to a year.
Certain Foreign Issuer Considerations
Transfer of Sovereignty over Hong Kong to China. The principal executive
offices of the Company and all manufacturing operations and assets of the
Company are located in Hong Kong and China. Prior to July 1, 1997, Hong Kong was
a British Crown Colony with responsibility for administering its own internal
affairs. After several years of negotiations concerning Hong Kong's future,
Great Britain and China signed (December 1984) and ratified (May 1985) the
Sino-British Joint Declaration on the Future of Hong Kong (the Sino-British
Agreement). Pursuant to the Sino-British Agreement, Hong Kong was restored to
China on July 1, 1997.
Ownership of Real Property. All land in Hong Kong is owned by the
Government of the Hong Kong Special Administrative Region (the Government).
Prior to July 1, 1997, the Government granted Crown Leases to persons, firms and
corporations on the basis of an annual crown rental payment and other terms and
conditions therein contained. Crown Leases were freely assignable during their
term. In implementation of the Sino-British Agreement, the New Territories
Leases (Extension) Ordinance was enacted and came into effect on April 25, 1988.
Pursuant to that Ordinance, all leases in the New Territories of Hong Kong were
extended up to June 30, 2047. Such extension was at no premium but was subject
to an annual fee equivalent to 3% of the ratable value of the property to be
charged with effect from the date on which the original lease would have
expired.
The land ownership system in China is similar to Hong Kong, in which all
land is owned by the government. The Chinese government and its various
government instrumentalities grant leases to persons, firms and corporations on
the basis of an annual rental payment and other terms and conditions. Such
leases are generally freely transferable during their term.
Enforceability of Certain Civil Liabilities. The Company is a British
Virgin Islands holding corporation. The Company has appointed Henry F.
Schlueter, 1050 Seventeenth Street, Suite 1700, Denver, Colorado 80265 as its
agent upon whom process may be served in any action brought against it under the
securities laws of the United States. However, outside the United States, it may
be difficult for investors to enforce judgments against the Company obtained in
the United States in any such actions, including actions predicated upon civil
liability provisions of the United States securities laws. In addition, most of
the Company's officers and directors reside outside the United States and the
assets of these persons and of the Company are located outside of the United
States. As a result, it may not be possible for investors to effect service of
process within the United States upon such persons, or to enforce against the
Company or such persons judgments obtained in United States courts predicated
upon the liability provisions of the United States securities laws. The Company
has been advised by Harney, Westwood and Riegels ("HW&R"), its British Virgin
Islands counsel, and by Norman M.K. Yeung & Co., Solicitors ("Yeung & Co."), its
Hong Kong counsel, that there is substantial doubt as to the enforceability
against the Company or any of its directors and officers located outside the
United States in original actions or in actions for enforcement of judgments of
United States courts of liabilities predicated solely on the civil liability
provisions of the United States securities laws.
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The Company has been advised by Yeung & Co. and HW&R that no treaty exists
between Hong Kong or the British Virgin Islands and the United States providing
for the reciprocal enforcement of foreign judgments. However, the courts of Hong
Kong and the British Virgin Islands are generally prepared to accept a foreign
judgment as evidence of a debt due. An action may then be commenced in Hong Kong
or the British Virgin Islands for recovery of this debt. A Hong Kong or British
Virgin Islands court wil only accept a foreign judgment as evidence of a debt
due if: (i) the judgment is for a liquidated amount in a civil matter; (ii) the
judgment is final and conclusive and has not been stayed or satisfied in full;
(iii) the judgment is not directly or indirectly for the payment of foreign
taxes, penalties, fines or charges of a like nature (in this regard, a Hong Kong
or British Virgin Islands court is unlikely to accept a judgment for an amount
obtained by doubling, trebling or otherwise multiplying a sum assessed as
compensation for the loss or damage sustained by the person in whose favor the
judgment was given); (iv) the judgment was not obtained by actual or
constructive fraud or duress; (v) the foreign court has taken jurisdiction on
grounds that are recognized by the common law rules as to conflict of laws in
Hong Kong or the British Virgin Islands; (vi) the proceedings in which the
judgment was obtained were not contrary to natural justice; (vii) the
proceedings in which the judgment was obtained, the judgment itself and the
enforcement of the judgment are not contrary to the public policy of Hong Kong
or the British Virgin Islands; (viii) the person against whom the judgment is
given is subject to the jurisdiction of the Hong Kong or the British Virgin
Islands court; and (ix) the judgment is not on a claim for contribution in
respect of damages awarded by a judgment that does not satisfy the foregoing.
Enforcement of a foreign judgment in Hong Kong or the British Virgin Islands may
also be limited or affected by applicable bankruptcy, insolvency, liquidation,
arrangement, moratorium or similar laws relating to or affecting creditors'
rights generally and will be subject to a statutory limitation of time within
which proceedings may be brought.
Under United States law, majority and controlling shareholders generally
have certain "fiduciary" responsibilities to the minority shareholders.
Shareholder action must be taken in good faith and actions by controlling
shareholders that are obviously unreasonable may be declared null and void. The
British Virgin Islands law protecting the interests of the minority shareholders
may not be as protective in all circumstances as the law protecting minority
shareholders in United States jurisdictions While British Virgin Islands law
does permit a shareholder of a British Virgin Islands company to sue its
directors derivatively, i.e. in the name of and for the benefit of the company
and to sue the company and its directors for his benefit and the benefit of
others similarly situated, the circumstances in which any such action may be
brought and the procedures and defenses that may be available in respect of any
such action may result in the rights of shareholders of a British Virgin Islands
company being more limited than those rights of shareholders in a United States
company.
Special Risk Factors
Forward-Looking Statements
Important Factors Related to Forward-Looking Statements and Associated
Risks. This Annual Report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. In addition, the Company may from time to time make
written or oral forward-looking statements. Written forward-looking statements
may appear in documents filed with the Securities and Exchange Commission (the
"Commission"), in press releases and i reports to shareholders. The
forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions that political, economic and commercial
conditions in Hong Kong and China will not change materially or adversely, that
competitive conditions affecting the Company will not change materially or
adversely, that demand for the Company's products will be strong, that the
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Company will retain existing key management personnel, that the Company's
forecasts will accurately anticipate market demand and that there will be no
material adverse change in the Company's operations or business. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. Although the Compan
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, therefore, there
can be no assurance that the results contemplated in forward-looking information
will be realized.
In addition, as disclosed elsewhere under other risk factors, the business
and operations of the Company are subject to substantial risks which increase
the uncertainty inherent in such forward-looking statements. In light of the
significant uncertainties inherent in the forward-looking information included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Privat Securities Reform Act of 1995
contains a safe harbor for forward-looking statements on which the Company
relies in making such disclosures. In connection with this safe harbor the
Company is hereby identifying important factors that could cause actual results
to differ materially from those contained in any forward-looking statements made
by or on behalf of the Company. Any such statement is qualified by reference to
the cautionary statements included in this Annual Report.
Political, Legal, Economic and Other Uncertainties of Operations in China and
Hong Kong
Transfer of Sovereignty over Hong Kong to China. The principal executive
and corporate offices of the Company are located in Hong Kong, formerly a
British Crown Colony. Sovereignty over Hong Kong was transferred effective July
1, 1997 to China, and Hong Kong became a Special Administrative Region of China.
The National People's Congress of China enacted the Basic Law in 1990 as the
constitution of Hong Kong under China's sovereignty (Basic Law). While
management does not believe that the transfer of sovereignty over Hong Kong to
China will have a material adverse effect on the Company's business, there can
be no assurance as to the continued stability of political, economic or
commercial conditions in Hong Kong, and any instability could have an adverse
impact on the Company's business.
The Hong Kong dollar and the United States dollar have been fixed at
approximately 7.80 Hong Kong dollars to $1.00 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. There
can be no assurance that this will continue and the Company could face increased
currency risks if the current exchange rate mechanism is changed.
Internal Political and Other Risks of Manufacturing in China. The Company's
manufacturing facility is located in China. As a result, the Company's
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, regulations or the interpretation thereof, confiscatory
taxation, restrictions on imports and sources of supply, import duties,
corruption, currency revaluations or the expropriation of private enterprise
could materially and adversely affect the Company. Over the past several years,
the Chinese government has pursued economic reform policies including the
encouragement of private economic activity and greater economic
decentralization. There can be no assurance that the Chinese government will
continue to pursue such policies, that such policies will be successful if
pursued, that such policies will not be significantly altered from time to time
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or that business operations in China would not become subject to the risk of
nationalization, which could result in the total loss of investment in that
country. 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 the Company were
required to move its manufacturing operations outside of China, the Company's
profitability would be substantially impaired, its competitiveness and market
position would be materially jeopardized and there can be no assurance that the
Company could continue its operations.
Recent Relations with the U.S. China currently enjoys most favored nation
("MFN") trade status, which provides China with the trading privileges generally
available to trading partners of the United States. The United States annually
reconsiders the renewal of China's MFN status. Various interest groups continue
to urge that the United States not renew MFN for China and there can no
assurance that controversies will not arise that threaten the status quo
involving trade between the United States and China or that the United States
will not revoke or refuse to renew China's MFN status. In any of such
eventualities, the business of the Company could be adversely affected, by among
other things, causing the Company's products in the United States to become more
expensive, which could result in a reduction in the demand for the Company's
products by customers in the United States. Trade friction between the United
States and China, whether or not actually affecting the Company's business,
could also adversely affect the prevailing market price of the Company's Common
Stock and warrants.
Uncertain Chinese Legal System and Application of Laws. 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. China does not have a comprehensive system
of laws. 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.
Possible Changes and Uncertainties in Economic Policies. As part of its
economic reform, China has designated certain areas, including Shenzhen where
the Company's 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 the Company. Moreover, economic reforms and growth in China
have been more successful in certain provinces than others, and the continuation
or increase of such disparities could affect the political or social stability
of China.
Dependence on Single Factory. All of the Company's products are currently
manufactured at its manufacturing facility located in Shenzhen, China. The
Company does not own the land underlying its factory complex. It occupies the
site under an agreement with the local Chinese government pursuant to which the
Company is entitled to use the land upon which its factory complex is situated
until May 2044. This agreement and the operations of the Company's Shenzhen
factory are dependent on the Company's relationship with the local government.
The Company's operations and prospects would be materially and adversely
affected by the failure of the local government to honor the agreement. In the
event of a dispute, enforcement of the agreement could be difficult in China.
Moreover, fire fighting and disaster relief or assistance in China may not
be as developed as in Western countries. The Company currently maintains
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property damage insurance aggregating approximately $13,900,000 covering its
stock in trade, goods and merchandise, furniture and equipment and the
buildings. The Company does not maintain business interruption insurance.
Investors are cautioned that material damage to, or the loss of, the Company's
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 the Company's financial
condition, results of operations, business and prospects.
Asian Economic Problems. Recently, several countries in Southeast Asia have
experienced a significant devaluation of their currencies and decline in the
value of their capital markets. In addition, several Asian countries have
experienced a number of bank failures and consolidations. The Company does not
believe that the declines in Southeast Asia will affect the demand for the
Company's products, because virtually all of the Company's products are sold
into developed countries not experiencing these declines. Moreover, because most
of the Company's products are paid for in U.S. dollars, the Company believes
that it is less susceptible to the effects of a devaluation in the Hong Kong
dollar or Chinese renminbi if either or both were to occur despite assurances to
the contrary by the Chinese government. However, the decline in the currencies
of other Southeast Asian countries could render the Company's products less
competitive if competitors located in these countries are able to manufacture
competitive products at a lower effective cost. Investors are cautioned that
there can be no assurance that the decline in Southeast Asia will not have a
material adverse effect on the Company's business, financial condition, results
of operations or market price of its securities.
Risk Factors Relating to the Business of the Company
Dependence on Major Customers. Four major customers accounted for
approximately 62% of the Company's sales in the fiscal year ended March 31, 1998
and 51% of its sales during the fiscal year ended March 31, 1999. The loss of
any of these major customers could have a material negative impact on the
Company's business. See Item 1 - "Description of Business--Customers and
Marketing--Major Customers" and Item 9 - "Management's Discussion and Analysis
of Financial Condition--Overview."
Dependence on Key Personnel. The Company's future performance will depend
to a significant extent upon the efforts and abilities of certain members of
senior management as well as upon the Company's ability to attract and retain
other qualified personnel. In particular, the Company is largely dependent upon
the continued efforts of Mr. Anthony So, the Company's President, Secretary,
Treasurer and Chairman of its Board of Directors, and Mr. Kim Wah Chung,
Director of Engineering and Research and Development. To the extent that the
services of Mr. So or Mr. Chung would be unavailable to the Company, the Company
would be required to obtain other personnel to perform the duties that they
otherwise would perform. There can be no assurance that the Company would be
able to employ another qualified person or persons, with the appropriate
background and expertise, to replace Mr. So or Mr. Chung on terms suitable to
the Company. See Item 10 - "Directors and Officers of Registrant."
Competition. The Company's business is in an industry that is highly
competitive, and many of its competitors, both local and international, have
substantially greater technical, financial and marketing resources than the
Company. See Item 1 - "Description of Business--Competition."
Need for Qualified Employees. The success of the Company is dependent on
its ability to attract and retain qualified technical, marketing and production
personnel. The Company will have to compete with other larger companies for such
personnel, and there can be no assurance that the Company will be able to
attract or retain such qualified personnel.
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Control by Founder. At the present time, Mr. Anthony So, the founder and
President of the Company, beneficially owns approximately 37.5% of the
outstanding shares of Common Stock. Due to his stock ownership, Mr. So may be in
a position to elect the Board of Directors and, therefore, to control the
business and affairs of the Company including certain significant corporate
actions such as acquisitions, the sale or purchase of assets and the issuance
and sale of the Company's securities. See Item 4 - "Control of Registrant."
Potential Fluctuations in Operating Results. The Company's 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
the control of the Company. 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 the Company's Common Stock.
No Assurance of Exercise of Warrants or Sufficient Operating Revenue;
Potential Need for Outside Funding. In 1998, the Company solicited the exercise
of certain outstanding warrants which were issued to the public in 1994.
Management intended to utilize a portion of the proceeds from such exercises to
fund expansion of operations, including the development and production of the
Company's proposed cordless telephone. However, only 25,597 warrants were
exercised. There is no assurance that any more of the Company's outstanding
warrants will be exercised. Accordingly, funding for the expansion of the
Company's operations will be dependent on the Company's ability to generate
significant operating revenue or procure additional financing. There can be no
assurance that sufficient operating revenue can be generated or that any
additional financing can be arranged on favorable terms and in the amounts
required to fund the expanded operations of the Company.
Possible Inability of Warrantholders to Exercise Warrants. Exercise of the
Company's outstanding warrants is subject to the Company either maintaining the
effectiveness of its registration statement, or filing an effective registration
statement with the Securities and Exchange Commission and complying with the
appropriate state securities laws. No assurance can be given that at the time a
warrantholder seeks to exercise the right to purchase the Company's Common Stock
an effective registration statement will in fact be in effect or that the
Company will have complied with all appropriate state securities laws.
Future Sales of Common Stock. As of the date of this Annual Report,
1,168,421 of the Company's outstanding shares of Common Stock are restricted
securities as that term is defined in Rule 144 promulgated under the Securities
Act. The Securities Act and Rule 144 promulgated thereunder place certain
prohibitions on the sale of such restricted securities. Further, the Company has
issued options to purchase 1,130,000 shares of Common Stock. The possibility
exists that, when permitted, the sale to the public of these shares, or shares
acquired upon exercise of the options, could have a depressing effect on the
price of the Common Stock. Further, future sales of such shares and the exercise
of such options could adversely affect the Company's ability to raise capital in
the future.
Volatility of Stock Price. The markets for equity securities have been
volatile and the price of the Company's Common Stock has been and could continue
to be subject to wide fluctuations in response to quarter to quarter variations
in operating results, news announcements, trading volume, sales of Common Stock
by officers, directors and principal shareholders of the Company, general market
trends and other factors.
Potential Adverse Effect of Redemption of Public Warrants. The Public
Warrants are redeemable by the Company at any time at $0.05 per Warrant upon 30
to 45 days notice if the closing price of the Common Stock for 20 consecutive
trading days within the 30-day period preceding the date the notice is given
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equals or exceeds $8.575 per share. If the Company calls the Public Warrants for
redemption, the holders of the Public Warrants must either (i) exercise the
Public Warrants and pay the exercise price therefor at a time when it may be
disadvantageous for the holders to do so; (ii) sell the Public Warrants at the
then current market price when they might otherwise wish to hold the Public
Warrants; or (iii) accept the nominal redemption price, which is likely to be
substantially less than the market value of the Public Warrants. No assurance
can be given that at the time of redemption an effective registration statement
will be in effect or that the Company will have complied with all appropriate
state securities laws so that a Public Warrantholder will be able to exercise
his Public Warrants rather than accepting the $0.05 per Warrant redemption
price.
Certain Legal Consequences of Foreign Incorporation and Operations
Enforceability of Civil Liabilities. The Company is a holding corporation
organized as an International Business Company under the laws of the British
Virgin Islands and its principal operating subsidiary is organized under the
laws of Hong Kong, where the Company's principal executive offices are also
located. Outside the United States, it may be difficult for investors to enforce
judgments against the Company obtained in the United States in actions brought
against the Company, including action predicated upon civil liability provisions
of federal securities laws. In addition, most of the Company's officers and
directors reside outside the United States and the assets of these persons and
of the Company are located outside of the United States. As a result, it may not
be possible for investors to effect service of process within the United States
upon such persons, or to enforce against the Company or such persons judgments
predicated upon the liability provisions of U.S. securities laws. The Company
has been advised by its Hong Kong counsel and its British Virgin Islands counsel
that there is substantial doubt as to the enforceability against the Company or
any of its directors or officers located outside the United States in original
actions or in actions for enforcement of judgments of U.S. courts of liabilities
predicated solely on the civil liability provisions of federal securities laws.
See Item 1 - "Description of Business--Certain Foreign Issuer
Considerations--Enforceability of Certain Civil Liabilities."
Certain Legal Consequences of Incorporation in the British Virgin Islands.
The Company is 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 the Company's management, directors and
controlling shareholders and the rights of the Company's shareholders differ
from, and may not be as protective of shareholders as, those that would apply if
the Company were incorporated in a jurisdiction within the United States.
Directors of the Company have the power to take certain actions without
shareholder approval, including an amendment of the Company's 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 U.S. securities laws.
Exemptions under the Exchange Act as a Foreign Private Issuer. The Company
is a foreign private issuer within the meaning of rules promulgated under the
Exchange Act. As such, and though its Common Stock is registered under Section
12(g) of the Exchange Act, it is exempt from certain provisions of the Exchange
Act applicable to United States public companies including: the rules under the
Exchange Act requiring the filing with the Commission of quarterly reports on
Form 10-Q or current reports on Form 8-K, the sections of the Exchange Act
regulating the solicitation of proxies, consents or authorizations in respect to
a security registered under the Exchange Act and the sections of the Exchange
Act requiring insiders to file public reports of their stock ownership and
trading activities and establishing insider liability for profits realized from
any short-swing trading transaction (i.e., a purchase and sale, or sale and
purchase, of the issuer's equity securities within six months or less). Because
of the exemptions under the Exchange Act applicable to foreign private issuers,
shareholders of the Company are not afforded the same protections or information
generally available to investors in public companies organized in the United
States.
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Item 2. Description of Property.
British Virgin Islands
The offices of the Company are located at Cragmuir Chambers, Road Town,
Tortola, British Virgin Islands. Only corporate administrative matters are
conducted at such offices, through the Company's registered agent, HWR Services
Limited.
Hong Kong
The Company owns approximately 9,185 square feet in the Universal
Industrial Centre, 23-25 Shan Mei Street, Fo Tan, Shatin, New Territories, Hong
Kong. This facility is used primarily as the Company's principal executive
office. The Company purchased the property from an unaffiiated third party in
May 1999 for approximately $743,590.
The Company owns 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 13 - "Interest of Management in
Certain Transactions."
China
The Company's 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 two factory buildings, which contain
approximately 194,990 square feet, two workers' quarters, containing
approximately 115,050 square feet, a canteen and recreation center of
approximately 25,270 square feet, an office building, consisting of
approximately 25,230 square feet, and staff quarters for the Company's
supervisory employees, consisting of approximately 35,110 square feet, for a
total of approximately 395,650 square feet. The facility is utilized pursuant to
a Contract on the Use of Land and Supply of Workers with Shenzhen Baoan Fuan
Industrial Company. The agreement provides that the Company will use
approximately 269,000 square feet of land for a period of 50 years, commencing
May 10, 1994. To obtain the land lease, the Company agreed to pay $1,810,344
plus a monthly management fee in the amount of $2,750. The Company used part of
the proceeds of a $1,500,000 loan it received in July 1994 to pay a portion of
the initial acquisition cost; the balance of the initial acquisition cost was
paid out of the net proceeds of a public offering of the Company's securities
conducted in December 1994. The facility is wholly-owned by the Company. The
agreement provides that at the expiration of the land lease, the Company will be
given priority for negotiation of a new agreement for the use of the land. The
Company's total investment in the facility is approximately $8,000,000. Phase
one of the facility was completed in December 1996, and manufacturing commenced
in the new facility in January 1997. The second, and final, phase of the
facility was completed in May 1998.
The Company also owns two residential properties, one consisting of
approximately 1,000 square feet, located at Lijingge Court, Unit F, 15th Floor,
Hai Li Building, Shenzhen, China, and one consisting of approximately 1,125
square feet located at the 12th floor, Yuk Yui Court, Gui Hua Garden, Shenzhen
Bay, China. Both properties are utilized by management staff and directors when
they require accommodations in China.
On June 18, 1998, the Company purchased Units 12 and 13 on the 3rd floor,
Block A of Sunshine Plaza in Beijing, China for an aggregate purchase price of
$600,999, payable as follows: $383,468 was paid before June 18, 1998; and the
balance of $217,531, plus interest in the amount of $30,241, is payable on or
before May 18, 2000. Unit 12 consists of 102.38 square meters Unit 13 consists
of 172.77 square meters. Both Units are rented to unaffiliated third parties for
an aggregate monthly rental of $3,353.
18
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Adequacy of Facilities
Management believes that the Company's new manufacturing complex will be
adequate for its reasonably foreseeable needs.
Item 3. Legal Proceedings.
On August 28, 1998, a lawsuit was filed in the United States District Court
for the Central District of California against the Company and the Company's
Warrant Agent alleging that the Company had committed securities fraud, common
law fraud and breach of contract arising out of the original sale of certain
warrants which were sold to the public in 1994 and the issuance on July 22, 1998
of a notice to redeem those warrants on September 4, 1998 for $0.05 per warrant.
The lawsuit was dismissed, without prejudice, on September 2, 1998, and the
Company rescinded the redemption of the warrants that was noticed on July 22,
1998.
Management is not aware of any legal proceedings contemplated by any
governmental authority involving the Company, its subsidiaries or their
property. No director, officer or affiliate of the Company, or any associate of
a director, officer or affiliate of the Company: (i) is a party adverse to the
Company or its subsidiaries in any legal proceedings; or (ii) has an adverse
interest to the Company or its subsidiaries in any legal proceedings. Except as
described herein, the Company and its subsidiaries are not parties to any legal
proceedings and there are no other material legal proceedings pending with
respect to the property of the Company and its subsidiaries.
Item 4. Control of Registrant.
The Company is not directly or indirectly owned or controlled by any
foreign government or by another corporation. The following table sets forth, as
of July 14, 1999, the beneficial ownership of the Company's Common Stock by each
person known by the Company to own beneficially more than 10% of the Common
Stock of the Company outstanding as of such date and by the officers and
directors of the Company as a group. Except as otherwise indicated, all shares
are owned directly.
<TABLE>
<CAPTION>
Amount Owned
---------------------------------------------
Shares of Options to Purchase Percent of
Person or Group Common Stock Common Stock Class(1)
--------------- ------------ ------------------- -----------
<S> <C> <C> <C>
Anthony So 1,168,421(2) 567,000 47.1%
Officers and directors 1,168,421 1,036,000 53.1%
as a group (8 persons)
</TABLE>
- ----------------------
(1) Based on beneficial ownership of both shares of Common Stock and
options to purchase Common Stock which are immediately exercisable.
(2) Owned of record by a corporation that is wholly owned by a trust of
which Mr. So is the sole beneficiary.
There are no arrangements known to the Company the operation of which may
at a subsequent date result in a change in control of the Company.
19
<PAGE>
Item 5. Nature of Trading Market.
The Company's Common Stock and warrants are traded only in the United
States over-the-counter market. The Common Stock is quoted on the National
Association of Securities Dealers, Inc. Automated Quotation System ("Nasdaq")
National Market under the trading symbol BNSO; the warrants are quoted under the
trading symbol BNSOW on Nasdaq.
The table set forth below presents the range, on a quarterly basis, of high
and low closing sales prices per share of Common Stock and per warrant as
reported by Nasdaq for the last two fiscal years and for the first quarter of
the fiscal year ending March 31, 2000. The quotations represent prices between
dealers and do not include retail markup, markdown or commissions and may not
necessarily represent actual transactions.
Common Stock
<TABLE>
<CAPTION>
Quarter Ended High Low
<S> <C> <C>
Fiscal 1998
June 30, 1997 $ 2.25 $1.6875
-----------------------------------------------------
September 30, 1997 $ 6.50(2) $2.0625(2)
-----------------------------------------------
December 31, 1997 $ 8.375(2) $5.375(2)
------------------------------------------------
March 31, 1998 $10.125(2) $5.875(2)
----------------------------------------------------
Fiscal 1999
June 30, 1998 $11.375(2) $9.0625(2)
-----------------------------------------------------
September 30, 1998 $11.125(2) $5.125(2)
-----------------------------------------------
December 31, 1998 $ 6.125(2) $3.125(2)
------------------------------------------------
March 31, 1999 $ 7.50(2) $5.375(2)
----------------------------------------------------
Fiscal 2000
June 30, 1999 $7.938(2) $5.75(2)
-----------------------------------------------------
20
<PAGE>
<CAPTION>
Public Warrants(1)
Quarter Ended High Low
<S> <C> <C>
Fiscal 1998
June 30, 1997 $0.40625 $0.3125
-----------------------------------------------------
September 30, 1997 $1.50(2) $0.40625(2)
-----------------------------------------------
December 31, 1997 $2.375(2) $0.78125(2)
-------------------------------------------------
March 31, 1998 $2.5625(2) $1.125(2)
---------------------------------------------------
Fiscal 1999
June 30, 1998 $3.375(2) $2.125(2)
-----------------------------------------------------
September 30, 1998 $3.453(2) $0.063(2)
-----------------------------------------------
December 31, 1998 $0.656(2) $0.156(2)
-------------------------------------------------
March 31, 1999 $0.875(2) $0.313(2)
---------------------------------------------------
Fiscal 2000
June 30, 1999 $0.75(2) $0.188(2)
-----------------------------------------------------
</TABLE>
- ----------------------
(1) The Public Warrants were issued in December 1994 pursuant to a public
offering of Units each consisting of one share of Common Stock and two
Public Warrants.
(2) Reflects high and low closing prices as reported by Nasdaq.
The 3,119,159 shares of Common Stock outstanding as of July 14, 1999 were
held by approximately 296 holders of record worldwide, including 292 holders of
record in the United States. Management believes that holders of record hold for
approximately 676 beneficial holders.
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 6. Exchange Controls and Other Limitations Affecting Security Holders.
There are no exchange control restrictions on payments of dividends on the
Company's Common Stock or on the conduct of the Company's operations either in
Hong Kong, where the Company's principal executive offices are located, or the
British Virgin Islands, where the Company is incorporated. Other jurisdictions
in which the Company conducts operations may have various exchange controls.
Taxation and repatriation of profits regarding the Company's 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 the Company's financial
results. There are no material British Virgin Islands laws that impose foreign
exchange controls on the Company or that affect the payment of dividends,
interest or other payments to holders of the Company's securities who are not
residents of the British Virgin Islands. British Virgin Islands law and the
Company's Memorandum and Articles of Association impose no limitations on the
right of nonresident or foreign owners to hold or vote the Company's securities.
21
<PAGE>
Item 7. Taxation.
Taxation
Under current British Virgin Islands law, the Company is not subject to tax
on its income. Most of the Company's subsidiaries' profits accrue in Hong Kong,
where the corporate tax rate is currently 16%. There is no tax payable in Hong
Kong on offshore profit or on dividends paid to Bonso Electronics Limited by its
subsidiaries or by Bonso Electronics Limited to the Company. Therefore, the
overall effective tax rate of the Company may be lower than that of most United
States corporations; however, such could be materially and adversely affected by
changes in the tax laws of the British Virgin Islands, Hong Kong or China.
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 the Company to individuals are not
subject to tax as long as the recipient is not a resident of the British Virgin
Islands. If the Company were to pay a dividend, the Company would not be liable
to withhold any tax, but shareholders would receive gross dividends, if any,
irrespective of their residential or national status.
Dividends, if any, paid to any United States resident or citizen
shareholder would be treated as dividend income for United States federal income
tax purposes. Such dividends would not be 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. Shareholders of the Company are
urged to consult their tax advisors with regard to such possibilities and their
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.
Dividend Policy
The Company has never paid any dividends on its Common Stock and does not
anticipate paying any dividends in the future. The Board of Directors has not
adopted a policy with respect to the payment of dividends. The declaration of
cash dividends may be considered by the Board of Directors from time to time
based on the Company's results of operations. The Company's dividend policy will
be dependent on its net income, financial position and capital requirements
along with economic and market conditions, industry standards and other factors.
In addition, dividend distribution and repatriation of profits or funds from the
Company's operations in China are regulated by Chinese laws and regulations. No
profits are generated from China because the Company's Chinese operations
involve only the manufacture and assembly of its products which are then shipped
to Hong Kong for sale and distribution. No assurance can be given, however, that
such laws will not be interpreted differently in the future, in which case the
Company's ability to pay dividends could be adversely affected. In light of the
above, no assurance can be given as to the amount or timing of future dividend
payments, if any. See Item 6 - "Exchange Controls and Other Limitations
Affecting Security Holders."
22
<PAGE>
Item 8. Selected Financial Data.
The selected consolidated financial data set forth below as of March 31,
1998 and 1999 and for each of the three fiscal years in the period ended March
31, 1999 are derived from the audited Consolidated Financial Statements and
notes thereto, which 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 1995, 1996 and 1997 and for each
of the two fiscal years in the period ended March 31, 1996 have been derived
from the Company's audited consolidated financial statements which do not appear
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 9 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
Year ended March 31,
----------------------------------------------------------
Income Statement Data 1995 1996 1997 1998 1999
(In thousands of United States dollars, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $13,266 $14,248 $16,989 $23,716 $13,046
Cost of sales (8,936) (9,412) (12,096) (17,071) 8,812
------- ------- ------- -------- -------
Gross margin 4,330 4,836 4,893 6,645 4,234
Selling expenses (265) (325) (433) (420) (197)
Salaries and related costs (1,561) (1,960) (1,973) (1,897) (1,626)
Research and development expenses (108) (173) (122) (159) (566)
Administration and general expenses 98 (1,234) (1,609) (1,815) (1,601)
Provision for permanent diminution in value
of investment in a joint venture company -- (153) -- -- --
Net gain on liquidation of a joint venture
company -- -- 160 -- --
-------- -------- --- -------- --------
Income from operations 2,494 991 916 2,354 244
Interest income 75 127 64 73 63
Interest expenses (560) (607) (532) (503) (445)
Less: Interest capitalized -- 58 61 46 25
--------- ------ ------ ----- --
(560) (549) (471) (457) (420)
-
Foreign exchange (losses)/gains (146) (124) (136) 35 38
Other income -- 76 102 243 53
--------- ----- ----- ----- ------
Income/(loss) before income taxes 1,863 521 475 2,248 (22)
Income tax (expense)/benefit (67) 96 72 27 36
---------- ----- ---- ----- ------
Income before minority interests 1,796 617 547 2,275 14
Minority interests 47 (10) -- -- --
--------- ------ ------ ------- -------
Net income $1,843 $ 607 $ 547 $2,275 $ 14
--------- ------ ------ ------ -------
Earnings per share - Basic $ 0.95 $ 0.21 $ 0.19 $ 0.80 $ 0.45
- Diluted $ 0.95 $ 0.21 $ 0.19 $ 0.73 $ 0.37
23
<PAGE>
<CAPTION>
As of March 31,
-------------------------------------------------------------
Balance Sheet Data 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $ 4,719 $ 3,801 $ 1,663 $ 3,184 $ 3,316
Total assets 18,278 20,700 20,516 20,647 18,660
Long-term debt and capital lease obligations,
net of current maturities 68 744 787 243 42
Deferred income taxes(liabilities)/assets (103) (49) 16 74 112
Shareholders' equity 10,764 11,433 12,142 14,479 14,626
</TABLE>
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This section contains forward-looking statements that involve risks and
uncertainties. The Company's 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 1 - "Description of Business--Special Risk
Factors." The following discussion and analysis should be read in conjunction
with Item 8 - "Selected Financial Data" and the Consolidated Financial
Statements and notes thereto appearing elsewhere in this Annual Report.
Overview
The Company derives its revenues principally from the sale of electronic
scales and electronic consumer and health care products manufactured by it in
China. For the fiscal year ended March 31, 1998, the Company had net sales of
$23,715,576 and net income of $2,274,645. However, in the fiscal year ended
March 31, 1999, net sales decreased to $13,046,265 and net income decreased to
$13,754.
The Company was operating at full capacity in its prior manufacturing
facility and, in January 1997, it moved its manufacturing operations to a new
facility which has approximately tripled the Company's manufacturing capacity.
Management believes that the Company will be able to increase sales to take
advantage of its increased manufacturing capacity and improve margins and
financial performance. Increased revenue and net income in future periods will
depend on the Company's ability to (i) strengthen its customer base by enhancing
and diversifying its products; (ii) increase the number of its customers; (iii)
expand into additional markets; (iv) maintain or increase sales of its products
to existing customers; (v) increase production; and (vi) control all of its
costs. Although labor costs are increasing in China, the Company's labor costs
continue to represent a relatively small percentage of its total production
costs. Management believes that increased labor costs in China will not have
significant effect on its total production costs or results of operations, and
that the Company will be able to continue to increase its production at its new
facility without substantially increasing its non-production salaries and
related costs. In addition, the Company has not experienced significant
difficulties in obtaining raw materials for its products, and management does
not anticipate any such difficulties in the foreseeable future.
As of the date of filing this Annual Report on Form 20-F, the Company's
year to date revenues have declined when compared to the comparable period in
the prior year. Management believes that the decline in the Company's revenues
from 1998 to 1999 is attributable to a general decline in the worldwide economy
and reduced orders from two of the Company's major customers, as well as from
various smaller customers. One of these major customers has reduced its orders
24
<PAGE>
significantly and management does not believe that it is likely that this
customer's orders will increase in the future. Management believes that the
other major customer's order reduction is temporary and expects that orders from
that customer will increase in the third and fourth fiscal quarters. In 1998,
management initiated a cost savings program in order to reduce the effect upon
the Company's net income of the reduced sales volume. The cost saving steps
included a temporary reduction in managements' salaries which were restored to
previous levels as of April 1, 1999. Management is optimistic that the Company
will be able to not only replace sales lost during the last fiscal year but to
increase sales volume during the next fiscal year as a result of increased
marketing activities, diversification of the Company's customer base and new
product development. Readers are cautioned that there can be no assurance that
management will be successful in achieving these objectives.
Results of Operations
The following table sets forth selected income data as a percentage of net
sales for the periods indicated.
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------
Income Statement Data 1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales (71.2) (72.0) (67.5)
-------- -------- --------
Gross margin 28.8 28.0 32.5
Selling expenses (2.5) (1.8) (1.5)
Salaries and related costs (11.6) (8.0) (12.5)
Research and development expenses (0.7) (0.7) (4.3)
Administration and general expenses (9.5) (7.6) (12.3)
Net gain on liquidation of a joint venture company 0.9 -- --
----- ----- -----
Income from operations 5.4 9.9 1.9
Interest income 0.4 0.3 0.4
Interest expense (3.1) (2.1) (3.4)
----- ----- -----
Less: Interest capitalized 0.3 0.2 0.2
----- ----- -----
(2.8) (1.9) (3.2)
Foreign exchange (losses)/gains (0.8) 0.2 0.3
Other income 0.6 1.0 0.4
--- --- ---
Income before income taxes 2.8 9.5 (0.2)
Income tax benefit 0.4 0.1 0.3
Net income 3.2% 9.6% 0.1%
==== ==== ====
</TABLE>
Fiscal year ended March 31, 1999 compared to fiscal year ended March 31, 1998
Net Sales. The Company's sales decreased 45.0% from $23,715,576 for the
fiscal year ended March 31, 1998, to $13,046,265 for the fiscal year ended March
31, 1999, primarily as a result of decreased orders from two major customers and
from various smaller customers of the Company.
25
<PAGE>
Gross Margin. Gross margin increased from 28.0% to 32.5% primarily due to
the fact that the Company was able to utilize existing inventory by modifying it
to fill orders and the fact that the Company manufactured over 80% of the strain
gauges which it used in its products. Implementation of a "just-in-time"
inventory system, which resulted in a reduction in inventory, also contributed
to this increase.
Selling Expenses. Selling expenses decreased by 53.1% from $419,755 for the
fiscal year ended March 31, 1998 to $196,974 for the fiscal year ended March 31,
1999. This decrease was attributable primarily to the decrease in sales.
Salaries and Related Costs. Salaries and related costs decreased by 14.3%
from $1,897,412 for the fiscal year ended March 31, 1998 to $1,625,731 for the
fiscal year ended March 31, 1999. This decrease was primarily due to the
Company's efforts to control the number of employees in light of the reduction
in orders from two major customers as well as a temporary reduction in
management's salaries.
Research and Development. Research and development expenses increased
256.7% from $158,706 during the fiscal year ended March 31, 1998 to $566,030 for
the fiscal year ended March 31, 1999, primarily as a result of the Company's
increased emphasis on developing new products to diversify its customer base and
particularly the expenditure of $392,454 on development of the Company's
proposed cordless telephone.
Administration and General Expenses. Administration and general expenses
decreased by 11.8% from $1,814,535 for the fiscal year ended March 31, 1998, to
$1,601,186 for the fiscal year ended March 31, 1999. This decrease was
attributable primarily to various cost saving programs such as negotiating with
the owner of the Universal Industrial Centre property for a reduction of rental
expenses. The Company subsequently purchased its office space in an attempt to
control this expense in the long run.
Income from Operations. Income from operations decreased by 89.6% from
$2,354,079 for the fiscal year ended March 31, 1998 to $244,171 for the fiscal
year ended March 31, 1999, primarily as a result of reduced sales and a
resulting increase in research and development efforts.
Other Income. Other income decreased by 78.3% from $242,669 for the fiscal
year ended March 31, 1998 to $52,662 for the fiscal year ended March 31, 1999,
primarily as a result of reduced orders for scrap and increased efficiency which
resulted in a reduction of scrap for resale.
Foreign Exchange Losses/Gains. Foreign exchange rates produced a gain of
$35,187 for the fiscal year ended March 31, 1998 and a gain of $37,882 for the
fiscal year ended March 31, 1999. This difference was primarily attributable to
the difference between the pegged exchange rate and the actual transaction rate.
Interest Expenses. Interest expenses decreased by 8.1% from $457,838 in the
fiscal year ended March 31, 1998 to $420,536 in the fiscal year ended March 31,
1999, as a result of reduced bank borrowings.
Income Taxes. The Company received an income tax credit of $27,117 for the
fiscal year ended March 31, 1998 and $36,087 for the fiscal year ended March 31,
1999. The increase in tax credit is basically due to approved tax losses of
certain of the Company's subsidiaries during the year.
Net Income. Net income decreased by 99.4% from $2,274,645 for the fiscal
year ended March 31, 1998 to $13,754 for the fiscal year ended March 31, 1999,
primarily as a result of decreased turnover and the other factors described
above.
26
<PAGE>
Fiscal year ended March 31, 1998 compared to fiscal year ended March 31, 1997
Net Sales. The Company's sales increased 39.6% from $16,989,019 for the
fiscal year ended March 31, 1997, to $23,715,576 for the fiscal year ended March
31, 1998, primarily as a result of increased orders received from two major
customers. Increased shipments to the Company's two largest customers accounted
for 32.6% of the net increase in sales. The addition of new products also
contributed to the increase in net sales. A new model built-in scale and glass
body scale accounted for approximately 2.4% of the net increase, and the balance
of 4.6% is the result of increased orders from various existing customers.
Gross Margin. Gross margin decreased from 28.8% to 28.0% primarily due to
increased production costs and decreased selling prices for certain products.
Selling Expenses. Selling expenses decreased by 3.0% from $432,518 for the
fiscal year ended March 31, 1997 to $419,755 for the fiscal year ended March 31,
1998. This decrease was attributable primarily to better control over freight
costs by shipping out larger lots of goods.
Salaries and Related Costs. Salaries and related costs decreased by 3.9%
from $1,973,021 for the fiscal year ended March 31, 1997 to $1,897,412 for the
fiscal year ended March 31, 1998. This decrease was primarily due to the
Company's efforts to control the number of employees.
Research and Development. Research and development expenses increased 29.8%
from $122,263 during the fiscal year ended March 31, 1997 to $158,706 for the
fiscal year ended March 31, 1998, primarily as a result of the increase in new
product development, such as a series of low profile body scales, a generic LCD
scale and a new pocket scale.
Administration and General Expenses. Administration and general expenses
increased by 12.8% from $1,609,217 for the fiscal year ended March 31, 1997, to
$1,814,535 for the fiscal year ended March 31, 1998. This increase was
attributable primarily to a write-off of deposits on property in the amount of
$78,436 and an increase in depreciation expense of $134,401 as a result of
placing additional depreciable assets into service.
Income from Operations. Income from operations increased by 157.1% from
$915,569 for the fiscal year ended March 31, 1997 to $2,354,079 for the fiscal
year ended March 31, 1998, primarily as a result of the factors described above.
Other Income. Other income increased by 138.3% from $101,843 for the fiscal
year ended March 31, 1997 to $242,669 for the fiscal year ended March 31, 1998,
primarily as a result of increased assembly subcontracting work for a third
party.
Foreign Exchange Losses/Gains. Foreign exchange rates produced a loss of
$135,780 for the fiscal year ended March 31, 1997 and a gain of $35,187 for the
fiscal year ended March 31, 1998. This difference was primarily attributable to
the difference between the pegged exchange rate and actual transaction rate.
Interest Expenses. Interest expenses decreased by 2.7% from $470,655 in the
fiscal year ended March 31, 1997 to $457,838 in the fiscal year ended March 31,
1998, as a result of reduced bank borrowings.
Income Taxes. The Company received an income tax credit of $71,368 for the
fiscal year ended March 31, 1997 and $27,117 for the fiscal year ended March 31,
1998. The decrease in tax credit is basically due to the increase in tax expense
of $35,926
Net Income. Net income increased by 316.2% from $546,589 for the fiscal
year ended March 31, 1997 to $2,274,645 for the fiscal year ended March 31, 1998
primarily as a result of increased turnover, better control of administrative
overhead and other factors described above.
27
<PAGE>
Seasonality
The first calendar quarter of each year is typically the slowest sales
period as the Company's manufacturing facilities in China are closed for two
weeks for Chinese New Year holidays to permit employees to travel to their homes
in China. Throughout the remainder of the year, the Company's products do not
appear to be subject to significant seasonal variation.
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. Management believes that this
method has resulted in lower employee turnover than might otherwise have
occurred.
Liquidity and Capital Resources
The Company has traditionally relied on borrowings to meet its working
capital requirements. These borrowings have been supplemented by internally
generated funds and trade credits from suppliers. As of March 31, 1999, the
Company had in place general banking facilities with three financial
institutions aggregating $6,217,949. Such facilities include the ability to
obtain overdrafts, letters of credit, notes payable and fixed loans. As of March
31, 1999, the Company had utilized $2,059,357 under its general banking
facilities. Interest on this indebtedness fluctuates with the prime rate and
HIBOR as set by the Hong Kong Bankers Association. The bank credit facilities
are collateralized by certain bank deposits of the Company, by the Company's
real property located at Savanna Garden in Hong Kong and by a bank guarantee in
the amount of $150,000. The Company's bank credit facilities are due for renewal
annually. Management of the Company anticipates that the banking facilities will
be renewed on substantially the same terms. 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, 1999 and 1998 were $1,944,756 and
$3,199,737, respectively. During the fiscal year ended March 31, 1999, the
Company paid a total of $445,644 in interest on indebtedness (including
capitalized interest).
Management is negotiating an equipment lease financing arrangement for the
equipment which will be needed to produce the Company's proposed cordless
telephone. Management anticipates that the Company will finance 85% of the cost
of the equipment, which will require an initial payment of approximately HK$1
million. The terms of the lease financing arrangement are expected to include a
3-year term with annual interest equal to HIBOR plus 3.375% and monthly payments
of principal and interest.
Operating activities provided $2,644,612 of net cash for the fiscal year
ended March 31, 1999 compared to $3,262,259 of net cash for the fiscal year
ended March 31, 1998. The decrease from the fiscal year ended March 31, 1998 to
the fiscal year ended March 31, 1999, was primarily due to the decrease in sales
and in net income. Investing activities used $926,312 of net cash for the fiscal
year ended March 31, 1999 and used $1,604,013 of net cash for the fiscal year
ended March 31, 1998. The decrease in net cash used in investing activities from
the fiscal year ended March 31, 1998 to the fiscal year ended March 31, 1999 was
primarily due to a decrease in the acquisition of property, plant and equipment.
Financing activities used $1,892,619 of net cash for the fiscal year ended March
31, 1999 and used $1,294,420 for the fiscal year ended March 31, 1998. This
increase was primarily due to the repayment of banking facilities.
As of March 31, 1999, the Company had $271,447 in cash and cash equivalents
as opposed to $448,454 as of March 31, 1998. There are no other material unused
sources of liquid assets. The Company believes that there are no material
restrictions (including foreign exchange controls) on the ability of the
Company's subsidiaries to transfer funds to the Company in the form of cash
dividends, loans, advances or product/material purchases.
28
<PAGE>
The Company's current ratio (current assets divided by current liabilities)
increased from 1.54 as of March 31, 1998 to 1.83 as of March 31, 1999. Its quick
ratio (cash and cash equivalents, restricted cash deposits and receivables
divided by current liabilities) increased from 0.53 as of March 31, 1998 to 0.65
as of March 31, 1999.
As of March 31, 1999, the Company had contingent liabilities to banks for
outstanding letters of credit of $114,601 as opposed to $502,270 as of March 31,
1998.
Impact of Inflation
Management believes that inflation has not had a material effect on its
business between 1998 and 1999. The Company has generally been able to modify
and improve its product designs so that it could either increase the prices of
its products or lower the production cost in order to keep pace with inflation.
All of the Company's manufacturing is being done in China, and China is
experiencing deflation. If such trend continues, the Company could incur
decreased labor costs with regard to its Chines operations, resulting in lower
production costs. Although the costs to the Company of components used in the
manufacture of its products have been relatively stable, management believes
that any possible significant increase in material costs would affect the entire
electronics industry and thus would not have a negative material impact on the
Company's competitive position.
Year 2000
The Company, like many owners of computer software, will be required to
modify portions of its software so that it will function properly in the year
2000. The Company's information technology systems are maintained under a
maintenance arrangement with the primary vendor of its information technology
software. The vendor has advised that it does not anticipate any problems in
making the necessary modifications to the Company's software. The Company's
inventory and purchasing software, as well as its accounting system, have been
updated for Year 2000 compliance, including upgrading of hardware. The total
costs in relation to these upgrades are immaterial to the Company. Management
anticipates that all necessary changes to its software will be completed before
December 31, 1999, and that the Company will not experience any significant
impact with respect to Year 2000 compliance with the Company's non-information
technology systems and equipment.
Taxation
Under current British Virgin Islands law, the Company is not subject to tax
on its income. Most of the Company's profits accrue in Hong Kong, where the
corporate tax rate is currently 16%. There is no tax payable in Hong Kong on
offshore profit or on dividends paid to Bonso Electronics Limited by its
subsidiaries or by Bonso Electronics Limited to the Company. Therefore, the
overall effective tax rate of the Company may be lower than that of most United
States corporations; however, such could be materially and adversely affected by
changes in the tax laws applicable to the Company.
Exchange Rates
The Company sells most of its products to international customers. The
Company's 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 from the Company to its customers. The Company sells
all of its products in United States dollars and pays for its material
components principally in United States and Hong Kong dollars. A very small
portion of the components used by the Company are paid for in Japanese yen. Most
factory expenses incurred by the Company are paid in Chinese renminbi. Because
29
<PAGE>
the Hong Kong dollar is pegged to the United States dollar, the only material
foreign exchange risk to the Company arises from potential fluctuations in the
Chinese renminbi; however, the Chinese renminbi was very stable in the past
fiscal year and it is unlikely that there will be material fluctuations in the
coming year. The Company does not currently engage in hedging transactions, and
does not intend to do so in the future.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued certain pronouncements
which are effective as indicated below with respect to the fiscal years
presented in the consolidated financial statements.
SFAS No. 130, "Reporting Comprehensive Income," is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
This statement establishes guidelines for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements; it does not
address issues of recognition of measurement. The primary element of
comprehensive income applicable to the Company is the foreign currency
cumulative translation adjustment. The adoption of SFAS No. 130 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. This statement establishes guidelines for the
way that public business enterprises report information about operating segments
in financial statements. This statement also establishes guidelines for related
disclosures about products and services, geographic areas and major customers.
The Company has evaluated the disclosure requirements of SFAS No. 131 and
believes the adoption will not have a material impact on its future disclosure
requirements.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Post-retirement Benefits," is effective for fiscal years beginning after
December 15, 1997. Restatement of disclosures for earlier periods provided for
comparative purposes is required. This statement revises employers' disclosures
about pension and other post-retirement benefit plans. It does not change the
measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other post-retirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
statement suggests combined formats for presentation of pension and other
post-retirement benefit disclosures. The Company has evaluated the disclosure
requirements of SFAS No. 132 and believes the adoption will not have a material
impact on its future disclosure requirements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for fiscal years beginning after June 15, 1999.
Restatement of disclosures for earlier periods provided for comparative purposes
is required. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company has evaluated the disclosure requirements of SFAS No. 133 and believes
that implementation of the new standard will have no impact on its results of
operations and financial position.
30
<PAGE>
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
is effective for fiscal years beginning after December 15, 1998. This statement
amends SFAS 65, "Accounting for Certain Mortgage Banking Activities" and
requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold these investments. This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a nonmortgage
banking enterprise. The Company has evaluated the disclosure requirements of
SFAS No. 134 and believes that implementation of the new standard will have no
impac on its results of operations and financial position.
Item 10. Directors and Officers of Registrant.
The directors, executive officers and a key employee of the Company are as
follows:
Name Position with the Company
- ---- -------------------------
Anthony So 55 President, Chief Executive Officer, Secretary,
Treasurer, Chief Financial Officer, Chairman
of the Board and Director
Kim Wah Chung 41 Director of Engineering and Research and
Development and Director
Kam Sun Luk 54 General Manager and Director
Cathy, Kit Teng Pang 36 Director of Finance and Director
Henry F. Schlueter 48 Assistant Secretary
Woo-Ping Fok 50 Director
George O'Leary 61 Director
Key Employee
Michael Byrne 51 Managing Director
ANTHONY SO is the founder of the Company. He has been President, Chairman
of the Board of Directors and Treasurer of the Company since its inception and
has been Secretary of the Company since July 1991. Mr. So received his BSE
degree in civil engineering from National Taiwan University in 1967 and a
masters degree in business administration ("MBA") from the Hong Kong campus of
the University of Hull, Hull, England in 1994. Mr. So has been Chairman of the
Hong Kong GO Association since 1986, and also served as Chairman of the Alumni
Association of National Taiwan University for the 1993-1994 academic year. Mr.
So has served as a trustee of the Chinese University of Hong Kong, New Asia
College since 1994.
KIM WAH CHUNG has been a director of the Company since September 21, 1994.
Mr. Chung has been employed by the Company 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 of the Company.
Mr. Chung's entire engineering career has been spent with the Company, and he
has been involved with every major product development made by the Company. Mr.
Chung was graduated with honors i 1981 from the Chinese University of Hong Kong
with a Bachelor of Science degree in electronics.
KAM SUN LUK was elected to the Board of Directors of the Company on
September 21, 1994 and has been employed by the Company as Director of New
Projects and Quality Control since October 1993. Mr. Luk obtained his bachelors
degree in electrical engineering from National Taiwan University in 1968. Mr.
Luk is also a member of the Institute of Electrical Engineers United Kingdom and
a Chartered Engineer in Electrical Engineering. Mr. Luk was employed by
Semiconductor Devices Ltd. of Hong Kong in a variety of positions between 1970
and 1992 when he joined the Company, including serving as Semiconductor Devices'
General Manager and Senior Vice President.
31
<PAGE>
CATHY, KIT TENG PANG has been a director of the Company since January 1,
1998. Ms. Pang was first employed by the Company 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 the
Company in 1996, she was employed as Deput 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.
HENRY F. SCHLUETER has served as Assistant Secretary of the Company 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. 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. Mr. Schlueter received his law degree
from the University of Wyoming College of Law in 1978.
WOO-PING FOK was elected to the Board of Directors of the Company on
September 21, 1994. Mr. Fok and his firm, Norman M.K. Yeung & Co., have served
as Hong Kong counsel to the Company 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 Kon and a Barrister & Solicitor of
Australian Capital Territory. Mr. Fok practices law in Hong Kong and is a
partner with Norman M.K. Yeung & Co. 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.
GEORGE O'LEARY has been a director of the Company 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. Fo 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.
MICHAEL BYRNE has served as Managing Director for the Company since
October, 1998. Mr. Byrne has been employed by various manufacturing firms,
including International Harvester, Prince Engineering, Combustion Engneering
Canada and Aerospace Technologies of Australia, since 1964. From 1993 to 1995,
Mr. Byrne was employed as a senior manufacturing executive by Henderson's
Automotive Group, a supplier of metal and foam seating components to all four
automotive assemblers. In that position he managed three factories in Melbourne,
Adelaide and Geelong and led Henderson's very successful productivity and
quality improvement programs. In July 1995, Mr. Byrne established Henderson's
first venture into automotive trim products, specifically leather seat covers
for Mitsubishi's export Diamante program. The new Henderson's trim plant became
a model for demonstrating the effectiveness of focused customer service, total
quality management and innovative human resource strategies. Mr. Byrne received
his Masters of Business Administration degree from the University of Adelaide in
December 1998 and also holds a Graduate Management Qualification from the
Australian Graduate School of Management.
32
<PAGE>
At the present time no family relationship exists among any of the named
directors and executive officers; however, Mr. Cham Some So, who served as a
director until his resignation on April 30, 1998, is the father of Anthony So.
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 of the Company. The directors of the
Company 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 of the Company.
Item 11. Compensation of Directors and Officers .
Executive Officers and Directors
The following table sets forth certain information as to the compensation
paid to certain of the Company's executive officers and directors and for all
directors and executive officers as a group for the year ended March 31, 1999:
<TABLE>
<CAPTION>
Cash Non-Cash
Name of Individual Capacities in Which Served Compensation Compensation
- ------------------ -------------------------- ------------ ------------
<S> <C> <C> <C>
Anthony So President, Chief Executive Officer,
Secretary, Treasurer, Chief Financial
Officer, Chairman of the Board and
Director $ 346,153(1) $ 95,385(1)
Kim Wah Chung Director of Engineering and Research
and Development and Director $ 59,615(2) $ 53,974(2)
Kam Sun Luk Director of New Projects and Quality
Control and Director $ 86,539(3) $ 4,615(3)
Cathy Pang Director of Finance and Director $ 85,817(4) $ 4,577(4)
Henry F. Schlueter Assistant Secretary $ -- $ --
Woo Ping Fok Director $ -- $ --
George O'Leary Director $ 115,342(5) $ --
Cham Some So Director $ 13,000(6) $ --
All directors and
officers as a group (8 persons)(7) $ 706,466(7) $ 158,551
</TABLE>
- ----------------------
(1) Cash compensation consists of emoluments of $346,153. Non-cash
compensation consists of a $15,385 contribution to the Company's
Provident Fund Plan and the value of housing provided to Mr. So valued
at $80,000 during fiscal 1999. See "Provident Fund Plan," below, and
Item 13 - "Interest of Management in Certain Transactions."
(2) Cash compensation consists of emoluments of $59,615. Non-cash
compensation consists of a $10,461 contribution to the Company's
Provident Fund Plan, life insurance of $5,051 and a housing allowance
of $38,462. See "Provident Fund Plan," below, and Item 13 - "Interest
of Management in Certain Transactions."
(3) Cash compensation consists of emoluments of $86,539. Non-cash
compensation consists of a $4,615 contribution to the Company's
Provident Fund Plan. See "Provident Fund Plan," below.
(4) Cash compensation consists of emoluments of $85,817. Non-cash
compensation consists of a $4,577 contribution to the Company's
Provident Fund Plan. See "Provident Fund Plan," below.
(5) Consists of payments made pursuant to a sales commission arrangement
with the Company. See Item 13 - "Interest of Management in Certain
Transactions."
33
<PAGE>
(6) Consists of $13,000 paid as a director's fee. Mr. Cham Some So
resigned from the Board of Directors as of April 30, 1998.
(7) Includes Mr. Cham Some So who resigned as a director as of April 30,
1998.
The Company 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, 1999, other than contributions to the Company's Provident Fund
Plan which aggregated $35,038 for officers and directors in 1999.
Directors
Except for Cham Some So, who was paid a director's fee of $13,000 during
the fiscal year ended March 31, 1999, directors do not receive any additional
monetary compensation for serving as directors of the Company. 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, and Item 12 -
"Options to Purchase Securities from Registrant or Subsidiaries.") All directors
are reimbursed for all reasonable expenses incurred in connection with services
as a director.
Provident Fund Plan
On January 1, 1988, the Company started a provident fund plan with a major
international assurance company to provide life insurance and retirement
benefits to its employees. All permanent full-time employees, excluding
employees of the China subsidiary, are eligible to join the plan.
Each participant is required to contribute 5% of his salary, which amount
is deducted monthly from the participant's salary. The contribution by the
Company is either 5%, 7.5% or 10% of the participant's salary, depending on
whether the length of the participant's service is less than five years, between
five and ten years or more than ten years, respectively.
At normal retirement age or "ill health" (defined essentially as
disability), the participant is entitled to receive from the plan a lump sum
equal to the total of the participant's and the Company's balances. On
resignation prior to normal retirement age, a participant is entitled to receive
from the plan a lump sum equal to his balance plus a percentage of the
employer's balance determined in accordance with a predetermined scale. Upon the
death of a participant, the benefit (calculated as at normal retirement age) is
paid to the employer to be held in trust for the participant's beneficiaries and
paid to them as the employer determines.
The Company's aggregate contributions to the Provident Fund Plan for the
years ended March 31, 1997, 1998 and 1999 amounted to $54,924, $45,227 and
$54,046, respectively.
Stock Option Plans
The 1996 Stock Option Plan
In August 1996, the Board of Directors of the Company 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 the
Company's Common Stock. The purpose of the Employees' Plan is to make options
available to management and employees of the Company in order to encourage them
to secure or increase on reasonable terms their stock ownership in the Company
and to encourage them to remain in the employ o the Company.
34
<PAGE>
The Employees' Plan will be 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 10 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 will be 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.
The 1996 Non-Employee Directors' Stock Option Plan
In August 1996, the Board of Directors of the Company adopted a 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 the Company's Common Stock. 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 of the Company, to provide an additional
inducement for such directors to remain with the Company and to provide a means
through which the Company may attract able persons to serve as directors of the
Company. The Non-Employee Directors' Plan will be 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 will automatically be 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 will be 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. The term of each option granted pursuant to the Non-Employee Directors'
Plan will be 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 of the Company. No option granted pursuant
to the Non-Employee Directors' Plan will be transferable otherwise than by will
or the laws of descent and distribution.
Item 12. Options to Purchase Securities from Registrant or Subsidiaries.
Public Warrants
As a result of a public offering of Units conducted in December 1994, the
Company issued 2,200,000 warrants to the public. An aggregate of 25,597 of these
warrants were exercised in October 1998. Each of the remaining 2,174,403
warrants entitles the holder thereof to purchase one share of Common Stock at
$7.35 per share. By their terms, the warrants expire on December 14, 1999,
unless extended.
35
<PAGE>
Representatives' Warrants
In conjunction with a public offering of Units conducted in December 1994,
the Company issued Representatives' Warrants entitling the holders thereof to
purchase up to 110,000 Units, each Unit to consist of one share of Common Stock
and two warrants, at an exercise price of $9.1875 per Unit. The Representatives'
Warrants are exercisable until December 14, 1999. Upon any transfer after
December 15, 1996 to a person other than an officer, shareholder or director of
the Representatives, the transferred Representatives' Warrants must be exercised
immediately or they will lapse. In addition, the Company granted certain rights
to the holders of the Representatives' Warrants under the Securities Act.
Options
The following table sets forth all options to purchase Common Stock granted
by the Company which are outstanding as of the date of this Annual Report.
Number of Exercise Price Expiration
Options per Share Date
20,000 $2.25 October 16, 2006
420,000 $2.00 January 31, 2007
40,000 $5.06 September 8, 2007
220,000 $6.20 January 2008
415,000 $3.60 October 2008
15,000 $3.70 October 2008
Item 13. Interest of Management in Certain Transactions.
Over the years, the Company has provided to and received cash advances from
its officers and directors. In October 1994, the Board of Directors adopted a
policy resolution prohibiting the Company from making any loan or advance of
money or property, or guaranteeing the obligation of any directors of the
Company, and limiting the Company's ability to make such loans, advances or
guarantees to officers of the Company or its subsidiaries unless a majority of
independent, disinterested outside directors determine that such loan, advance
or guarantee may reasonably be expected to benefit the Company. Further, all
future material affiliated transactions, loans and loan guarantees, if any, will
be made on terms that are no less favorable to the Company than those that are
generally available from unaffiliated third parties. The Company has neither
provided nor received any cash advances to it officers or directors since this
policy resolution was adopted.
It is common practice in Hong Kong, the location of the Company's principal
executive offices, to provide a housing allowance or living accommodations for
senior executives as part of their compensation. The Company provides Mr.
Anthony So with living accommodations consisting of a Company-owned townhouse,
for which the Company paid a total purchase price of approximately $1,337,000.
The Company valued this benefit at $80,000 during the fiscal year ended March
31, 1999. The Company also provides Mr. Kim Wah Chung, its Director of
Engineering and Research and Development and a director of the Company, with a
housing allowance which amounted to $38,462 during the fiscal year ended March
31, 1999.
Mr. George O'Leary, a director of the Company, is paid a commission on
orders placed by customers which he obtains for the Company. The amount of the
commission is negotiated on a deal-by-deal basis, without a written agreement.
During the fiscal years ended March 31, 1998 and 1999, Mr. O'Leary was paid an
aggregate of $354,835 and $115,342, respectively, in commissions.
36
<PAGE>
PART II
Item 14. Description of Securities to be Registered.
Not applicable.
37
<PAGE>
PART III
Item 15. Defaults Upon Senior Securities.
Not applicable.
Item 16. Changes in Securities and Changes in Security for Registered
Securities.
On July 22, 1998 the Company issued a notice to redeem the Company's
warrants on September 4, 1998 for $0.05 per warrant. On September 2, 1998, the
notice to redeem was rescinded.
PART IV
Item 17. Financial Statements.
Not applicable.
Item 18. Financial Statements.
Reference is made to Item 19(a) for a list of all financial statements
filed as part of this Annual Report on Form 20-F.
Item 19. Financial Statements and Exhibits.
(a) The following Financial Statements are filed as part of this Annual
Report:
Page
Index to Consolidated Financial Statements F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets as of March 31, 1998 and 1999 F-3
Consolidated Statements of Comprehensive Income for the years F-4
ended March 31, 1997, 1998 and 1999
Consolidated Statements of Changes in Shareholders' Equity for the F-5
years ended March 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended F-6
March 31, 1997, 1998 and 1999
Notes to Consolidated Financial Statements F-7 through 27
(b) No Exhibits are filed as part of this Annual Report.
37
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BONSO ELECTRONICS INTERNATIONAL INC.
Date August 2, 1999 /s/ Anthony So
------------------------------------
Anthony So, President
39
<PAGE>
Consolidated Financial Statements
Bonso Electronics International Inc.
(Incorporated in the British Virgin Islands)
and Subsidiaries
March 31, 1999
PricewaterhouseCoopers
Independent Accountants
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Index to Consolidated Financial Statements
Contents Pages
Report of Independent Accountants............................................. 2
Consolidated Balance Sheets as of March 31, 1998 and 1999..................... 3
Consolidated Statements of Comprehensive Income
for the years ended 31, 1997, 1998 and 1999................................... 4
Consolidated Statements of Changes in Shareholders'
Equity for the years ended 31, 1997, 1998 and 1999........................... 5
Consolidated Statements of Cash Flows for the years ended
March 31, 1997, 1998 and 1999................................................. 6
Notes to Consolidated Financial Statements...............................7 to 27
F-1
<PAGE>
Report of Independent Accountants
Board of Directors and Shareholders
Bonso Electronics International Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Bonso
Electronics International Inc. and Subsidiaries (the "Group") as of March 31,
1998 and 1999 and the related consolidated statements of comprehensive income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended March 31, 1999. These consolidated financial statements are the
responsibility of the Group's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Group as of
March 31, 1998 and 1999 and the results of their operations and cash flows for
each of the three years in the period ended March 31, 1999, in conformity with
generally accepted accounting principles in the United States of America.
PricewaterhouseCoopers
Hong Kong, May 28, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
Bonso Electronics International Inc. and Subsidiaries
Consolidated Balance Sheets
(Expressed in United States Dollars)
March 31
-----------------------------
1998 1999
---- ----
$ $
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents ...................................... 448,454 271,447
Restricted cash deposits (Note 7) .............................. 952,267 1,011,688
Trade receivables, net (Note 2) ................................ 964,958 362,236
Inventories, net (Note 3) ...................................... 5,966,700 4,697,928
Notes receivable ............................................... 340,518 690,449
Deferred income tax assets - current (Note 5(d)) ............... 35,088 31,251
Other receivables, deposits and prepayments .................... 400,924 243,231
----------- -----------
Total current assets ........................................... 9,108,909 7,308,230
----------- -----------
Deposits ........................................................ 447,735 --
Deferred income tax assets - non current (Note 5(d)) ............ 38,430 81,223
Property, plant and equipment
Leasehold land and buildings ................................... 7,259,414 8,997,073
Construction-in-progress ....................................... 785,364 --
Plant and machinery ............................................ 3,385,846 3,495,632
Molds .......................................................... 2,108,967 2,112,608
Furniture, fixtures and equipment .............................. 2,122,805 2,661,718
Motor vehicles ................................................. 306,946 306,979
----------- -----------
15,969,342 17,574,010
Less: accumulated depreciation and amortization ................ (4,917,853) (6,303,179)
----------- -----------
Net property, plant and equipment .............................. 11,051,489 11,270,831
----------- -----------
Total assets ................................................... 20,646,563 18,660,284
----------- -----------
(cont'd)
See notes to these consolidated financial statements
<PAGE>
<CAPTION>
Bonso Electronics International Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
(Expressed in United States Dollars)
March 31
---------------------------
1998 1999
---- ----
$ $
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities
Bank overdrafts (Note 7) ....................................... 600,721 643,278
Notes payable (Note 7) ......................................... 2,260,384 581,349
Accounts payable ............................................... 1,560,954 1,135,910
Accrued charges and deposits ................................... 482,222 516,458
Income taxes payable ........................................... 30,000 11,667
Short-term loans (Note 7) ...................................... 338,632 720,129
Current portion of long-term debt and
capital lease obligations
(Notes 4 and 6(a)) ........................................... 652,041 383,409
----------- -----------
Total current liabilities ...................................... 5,924,954 3,992,200
----------- -----------
Long-term debt and capital lease obligations, net of current
maturities (Notes 4 and 6(a)) .................................. 242,889 42,397
Commitments and contingencies (Note 10)
Shareholders' equity (Notes 8(b), 14 and 15)
Common stock par value $0.003 per share
- authorized shares - 23,333,334
- issued and outstanding shares - 3,119,159 ................... 8,485 9,353
Additional paid-in capital ..................................... 8,724,503 10,285,105
Promissory note receivable from shareholder (Note 8(b)) ........ (1,350,000) (1,430,000)
Common stock subscribed (Note 8(b)) ............................ 1,350,000 --
Retained earnings .............................................. 5,512,204 5,525,958
Accumulated other comprehensive income ......................... 233,528 235,271
----------- -----------
14,478,720 14,625,687
----------- -----------
Total liabilities and shareholders' equity ...................... 20,646,563 18,660,284
----------- -----------
</TABLE>
See notes to these consolidated financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
Bonso Electronics International Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Expressed in United States Dollars)
Year ended March 31
-----------------------------------------
1997 1998 1999
$ $ $
<S> <C> <C> <C>
Net sales (Note 16) ....................... 16,989,019 23,715,576 13,046,265
Cost of sales ............................. 12,096,085 17,071,089 8,812,173
----------- ----------- -----------
Gross margin .............................. 4,892,934 6,644,487 4,234,092
Selling expenses .......................... 432,518 419,755 196,974
Salaries and related costs ................ 1,973,021 1,897,412 1,625,731
Research and development expenses (Note 11) 122,263 158,706 566,030
Administration and general expenses ....... 1,609,217 1,814,535 1,601,186
Net gain on liquidation of a joint venture
company (Note 13) ........................ (159,654) -- --
----------- ----------- -----------
Income from operations .................... 915,569 2,354,079 244,171
Interest income ........................... 64,248 73,431 63,488
Interest expenses ......................... (532,068) (503,896) (445,644)
Less: Interest capitalized ................ 61,413 46,058 25,108
----------- ----------- -----------
(470,655) (457,838) (420,536)
Foreign exchange (losses)/gains ........... (135,780) 35,187 37,882
Other income .............................. 101,843 242,669 52,662
----------- ----------- -----------
Income/(loss) before income taxes ......... 475,225 2,247,528 (22,333)
Income tax benefit (Note 5(c)) ............ 71,364 27,117 36,087
----------- ----------- -----------
Net income ................................ 546,589 2,274,645 13,754
Other comprehensive income, net of tax:
Foreign currency translation adjustments .. 162,970 43,129 1,743
----------- ----------- -----------
Comprehensive income ...................... 709,559 2,317,774 15,497
----------- ----------- -----------
Earning per share (Note 12)
Basic .................................... 19.34 cents 80.39 cents 0.45 cents
----------- ----------- -----------
Diluted .................................. 19.21 cents 72.57 cents 0.37 cents
----------- ----------- -----------
</TABLE>
See notes to these consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
Bonso Electronics International Inc. and Subsidiaries
Consolidated Statements of Charges in Shareholders' Equity
(Expressed in United States Dollars)
Promissory
Common stock note
----------------------- receivable
Shares Amount Additional from
outstanding outstanding paid-in capital shareholder
----------- ----------- --------------- -----------
$ $ $
<S> <C> <C> <C> <C>
Balance, March 31, 1996 ............ 2,825,949 8,477 8,705,917 --
Net income .........................
Other comprehensive income,
net of tax
Foreign currency adjustments:
Cumulative translation adjustments
Reversal upon liquidation
of a joint venture company .......
Comprehensive income ...............
----------- ----------- ----------- ----------
Balance, March 31, 1997 ............ 2,825,949 8,477 8,705,917 --
Net income .........................
Other comprehensive income,
net of tax
Foreign currency adjustments:
Cumulative translation adjustments
Reversal upon liquidation of a
subsidiary ......................
----------- ----------- ----------- ----------
Comprehensive income ...............
Common stock issued upon exercise
of warrant (Note 15) .............. 2,613 8 18,586
Common stock subscribed
(Note 8(b)) ....................... -- -- -- (1,350,000)
----------- ----------- ----------- ----------
Balance, March 31, 1998 ............ 2,828,562 8,485 8,724,503 (1,350,000)
Net income ......................... 13,754 -- 13,754
Other comprehensive income,
net of tax
Foreign currency adjustments:
Cumulative translation adjustment.. -- 1,743 1,743
----------- ----------- ----------- ----------
Comprehensive income ...............
Issue of common stock (Note 8(b))... 200,000 600 1,349,400 --
Common stock issued upon
exercise of share option (Note (14). 5,000 193 131,202 --
Common stock issued upon exercise
of warrant, net of expenses (Note
15) 25,597 75 -- --
Interest income from promissory
note receivable (Note 8(b)) ....... -- -- 80,000 (80,000)
----------- ----------- ----------- ----------
Balance, March 31, 1999 ............ 3,119,159 9,353 10,285,105 (1,430,000)
----------- ----------- ----------- ----------
(cont'd)
<PAGE>
<CAPTION>
Bonso Electronics International Inc. and Subsidiaries
Consolidated Statements of Charges in Shareholders' Equity (continued)
(Expressed in United States Dollars)
Accumulated
other
comprehensive
income-
Common foreign Total
stock Retained currency shareholders'
subscribed earnings adjustments equity
---------- -------- ----------- ------------
$ $ $ $
<S> <C> <C> <C> <C>
Balance, March 31, 1996 ............ -- 2,690,970 27,429 11,432,793
Net income ......................... 546,589 -- 546,589
Other comprehensive income,
net of tax
Foreign currency adjustments:
Cumulative translation adjustments -- 57,746 57,746
Reversal upon liquidation
of a joint venture company ....... -- 105,224 105,224
Comprehensive income ............... 546,589 162,970 709,559
---------- ----------- ----------- -----------
Balance, March 31, 1997 ............ -- 3,237,559 190,399 12,142,352
Net income ......................... 2,274,645 -- 2,274,645
Other comprehensive income,
net of tax
Foreign currency adjustments:
Cumulative translation adjustments -- 45,779 45,779
Reversal upon liquidation of a
subsidiary ...................... -- (2,650) (2,650)
---------- ----------- ----------- -----------
Comprehensive income ............... -- 2,274,645 43,129 2,317,774
Common stock issued upon exercise
of warrant (Note 15) .............. -- -- -- 18,594
Common stock subscribed
(Note 8(b)) ....................... 1,350,000 -- -- --
---------- ----------- ----------- -----------
Balance, March 31, 1998 ............ 1,350,000 5,512,204 233,528 14,478,720
Net income ......................... 13,754 -- 13,754
Other comprehensive income,
net of tax
Foreign currency adjustments:
Cumulative translation adjustment.. -- 1,743 1,743
---------- ----------- ----------- -----------
Comprehensive income ............... 13,754 1,743 15,497
Issue of common stock (Note 8(b))... (1,350,000) -- -- --
Common stock issued upon
exercise of share option (Note (14). -- -- -- 131,395
Common stock issued upon exercise
of warrant, net of expenses (Note
15 -- -- -- 75
Interest income from promissory
note receivable (Note 8(b)) - ..... -- -- -- --
---------- ----------- ----------- -----------
Balance, March 31, 1999 ............ -- 5,525,958 235,271 14,625,687
---------- ----------- ----------- -----------
</TABLE>
See notes to these consolidated financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
Bonso Electronics International Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Expressed in United States Dollars)
Year ended March 31
--------------------------------------------
1997 1998 1999
---- ---- ----
$ $ $
<S> <C> <C> <C>
Cash flows from operating activities
Net income ............................................................ 546,589 2,274,645 13,754
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation .......................................................... 681,730 942,894 1,109,286
Amortization .......................................................... 279,201 482,214 275,323
Other ................................................................. (71,716) 113,794 (51,187)
Changes in assets and liabilities, net of disposed
subsidiary:
Trade receivables ..................................................... 394,234 45,929 596,696
Other receivables, deposits and prepayments ........................... 773,636 (57,577) 157,693
Notes receivable ...................................................... (535,685) 427,015 (349,931)
Inventories ........................................................... 275,537 53,994 1,341,075
Accounts payable, accrued charges and deposits ........................ 1,237,089 (1,084,467) (390,808)
Other ................................................................. (56,309) 63,818 (57,289)
---------- ---------- ----------
Net cash provided by operating activities ............................. 3,524,306 3,262,259 2,644,612
---------- ---------- ----------
Cash flows from investing activities
Restricted cash deposits .............................................. 664,820 (65,947) (59,421)
Deposit for properties ................................................ -- (64,215) --
Proceeds from disposal of property, plant and
equipment ............................................................ 212,494 83,418 --
Acquisition of property, plant and equipment .......................... (2,844,115) (1,557,269) (866,891)
---------- ---------- ----------
Net cash used in investing activities ................................. (1,966,801) (1,604,013) (926,312)
---------- ---------- ----------
Cash flows from financing activities
Issue of shares on exercise of warrants and options ................... -- -- 317,966
Expenses paid for warrant redemption .................................. -- -- (201,586)
Principal payments under long-term debt ............................... (307,692) (410,256) (381,826)
Capital lease payments ................................................ (169,569) (355,750) (372,192)
Net repayment under banking facilities ................................ (1,180,565) (528,414) (1,254,981)
---------- ---------- ----------
Net cash used in financing activities ................................. (1,657,826) (1,294,420) (1,892,619)
---------- ---------- ----------
Effect of foreign exchange rate changes on cash ....................... 23,457 (4,519) (2,688)
---------- ---------- ----------
Net (decrease)/increase in cash ....................................... (76,864) 359,307 (177,007)
Cash and cash equivalents, beginning of year .......................... 166,011 89,147 448,454
---------- ---------- ----------
89,147 448,454 271,447
---------- ---------- ----------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest paid, net of amounts capitalized ............................ 470,655 457,838 420,536
Income tax paid, net of refund ....................................... 50,383 (33,818) (21,202)
</TABLE>
See notes to these consolidated financial statements
F-6
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
1 Description of business and significant accounting policies
Bonso Electronics International Inc. ("the Company") and its subsidiaries
are engaged in the designing, manufacturing and selling of a comprehensive
line of electronic scales and weighing instruments, electronic consumer
products and health care products.
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. 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 foreign subsidiaries (hereinafter collectively referred to as the
"Group"). All significant intercompany accounts and transactions are
eliminated.
(b) Cash and cash equivalents
Cash and cash equivalents are short-term, highly liquid investments with
original maturities of three months or less. Cash equivalents are stated at
cost, which approximates fair value because of the short term maturity of
these instruments.
(c) Inventories
Inventories are stated at the lower of cost or net realizable value with
cost determined on a first-in, first-out basis. Net realizable value is the
price at which inventories can be sold in the normal course of business
after allowing for the costs of completion and disposal.
(d) Revenue recognition
Revenue is recognized when the products are shipped to customers.
(e) 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) Construction-in-progress represents factories and office buildings
under construction and is stated at cost. Cost includes the costs of
construction and interest charges arising from borrowings used to
finance these assets during the period of construction.
Construction-in-progress is not depreciated during the period of
construction.
F-7
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
1 Description of business and significant accounting policies (cont'd)
(e) Property, plant and equipment (cont'd)
(iii)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%
Molds - 20%
Furniture, fixtures and equipment - 20%
Motor vehicles - 20%
(iv) The cost of major improvements and betterments is capitalized, whereas
the cost of maintenance and repairs is expensed in the year incurred.
(v) Any gain or loss on disposal is included in the Consolidated
Statements of Comprehensive Income.
(f) Research and development costs
Research and development costs are charged to expense as incurred.
(g) Advertising
Advertising costs are expensed as incurred and are included within selling
expenses.
Total advertising costs incurred for the years ended March 31, 1997, 1998
and 1999 amounted to $22,315 and $9,078 and $43,424 respectively.
(h) Deferred income taxes
Amounts in the consolidated financial statements related to income taxes
are calculated using the principles of Statement of Financial Accounting
Standards ("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.
(i) Capitalization of interest costs
Interest attributable to borrowings used to finance the construction of
factories and office buildings is capitalized as an additional cost of the
related assets. Interest is capitalized by applying the weighted average
interest rate on borrowings outstanding during the year or, where
applicable, the interest rate related to specific borrowings, to the
average amount of the accumulated expenditures for the assets during the
period. Capitalization of interest ceases when the property is ready for
its intended use.
F-8
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
1 Description of business and significant accounting policies (cont'd)
(j) Foreign currency translations
(i) The functional currency of the Company and one of its Hong Kong
subsidiaries is the United States dollar and the functional currency
of the other Hong Kong subsidiaries is the Hong Kong dollar. The
functional currency of the Company's subsidiary in the Peoples'
Republic of China (the "PRC") is the Renminbi, the national currency
of the PRC. The functional currency of the Company's subsidiary in
Canada, which was liquidated in 1998, is the Canadian dollar.
(ii) The financial statements of foreign subsidiaries where the U.S. dollar
is the functional currency and which have certain transactions
denominated in non-U.S. dollar currencies are remeasured as if the
functional currency were the U.S. dollar. The remeasurement of local
currencies into U.S. dollars creates translation adjustments which are
included in net income.
(iii)The financial statements of foreign subsidiaries, where the local
currency is the functional currency, are translated into U.S. 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
financial statements are reflected as a separate component of
shareholders' equity.
(k) Adoption of new accounting standards
The Group adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income". This statement establishes guidelines for the reporting and
display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements. It
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements; it does not address issues of recognition or measurement. The
primary element of comprehensive income applicable to the Group is the
foreign currency cumulative translation adjustment. The Group adopted this
standard from December 15, 1998. The comparative figures have been
restated.
The Group adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This statement
establishes guidelines for the way that public business enterprises report
information about operating segments in financial statements. This
statement also establishes guidelines for related disclosures about
products and services, geographic areas, and major customers. The Group
adopted this standard from December 15, 1998.
F-9
<PAGE>
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 consist of:
1997 1998 1999
---- ---- ----
$ $ $
Balance, April 1 ....................... 52,919 99,856 33,333
Additions charged to expense ........... 46,937 -- 6,026
Write-off .............................. -- (26,126) --
Provision written back ................. -- (40,397) --
------- ------- -------
Balance, March 31 ...................... 99,856 33,333 39,359
------- ------- -------
3 Inventories
(a) The components of inventories are as follows:
March 31
--------------------------
1998 1999
---- ----
$ $
Raw materials ...................... 4,288,182 3,601,695
Work in progress ................... 849,343 841,008
Finished goods ..................... 1,096,799 450,546
---------- ----------
6,234,324 4,893,249
---------- ----------
Provisions ......................... (267,624) (195,321)
---------- ----------
5,966,700 4,697,928
---------- ----------
(b) Changes in the inventories provisions consist of the following:
1997 1998 1999
---- ---- ----
$ $ $
Balance, April 1 ................... 49,014 146,530 267,624
Additions charged to expense ....... 131,516 121,094 --
Write-back ......................... (34,000) -- (72,303)
-------- -------- --------
Balance, March 31 .................. 146,530 267,624 195,321
-------- -------- --------
F-10
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
4 Long-term debt
Long-term debt denominated in Hong Kong dollars consists of the following:
March 31
----------------
1998 1999
---- ----
$ $
Loan payable to a bank at HIBOR plus 2.25% per annum
(8.5% as of March 31, 1998) ............................. 307,692 --
Loan payable to a property developer at 14% per annum ... -- 131,786
Less: current portion ................................... (307,692) (111,494)
-------- --------
Long-term debt, less current maturities .................. -- 20,292
-------- --------
5 Taxation
(a) The companies are subject to tax on an entity basis on income arising in or
derived from Hong Kong and the PRC. The current rates of taxation of the
subsidiaries operating in Hong Kong and Shenzhen in the PRC are 16% and
15%, respectively. The Group is not subject to income taxes in the British
Virgin Islands.
(b) Pursuant to the relevant income tax laws in the PRC, Bonso Electronics
(Shenzhen) Co., Ltd, a wholly owned subsidiary of the Company, is fully
exempt from PRC state income tax for two years starting from the first
profit-making year followed by a 50% reduction over the ensuing three
years. Bonso Electronics (Shenzhen) Co., Ltd. was loss-making for the years
ended March 31, 1997, 1998 and 1999.
(c) The components of the income tax benefit are as follows:
Year ended March 31
---------------------------
1997 1998 1999
---- ---- ----
$ $ $
Deferred income tax benefit ................. 65,438 57,117 38,956
Current income tax benefit/(expense) ....... 5,926 (30,000) (2,869)
------- ------- -------
Total income tax benefit .................... 71,364 27,117 36,087
------- ------- -------
F-11
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
5 Taxation (cont'd)
(d) Deferred tax assets are comprised of the following:
March 31
----------------
1998 1999
---- ----
$ $
Deferred tax liabilities
Accelerated depreciation .............. (34,387) (11,807)
Deferred tax assets
Tax loss carry forwards ............... 133,993 127,723
Valuation allowance ................... (61,176) (34,693)
-------- --------
72,817 93,030
-------- --------
Other ................................. 35,088 31,251
-------- --------
107,905 124,281
-------- --------
73,518 112,474
-------- --------
Less: current portion .................. 35,088 31,251
-------- --------
Deferred tax assets, non current portion 38,430 81,223
-------- --------
As of March 31, 1999, the Group had accumulated tax losses amounting to
$798,265 (the tax effect thereon is $127,723) which may be carried forward
and applied to reduce future taxable income which is earned in or derived
from Hong Kong. Realization of deferred tax assets associated with tax loss
carry forwards is dependent upon generating sufficient taxable income prior
to their expiration. A valuation allowance is established against such tax
losses when management believes it is more likely than not that a portion
may be disputed by the tax authorities.
As of March 31, 1999, the Group's accumulated tax losses have no definite
period of expiration.
(e) Changes in the valuation allowance consist of:
1997 1998 1999
---- ---- ----
$ $ $
Balance, April 1 ........................ 89,112 147,716 61,176
Additions/(reductions) charged/(credited)
to income tax expense .................. 58,604 55,082 (4,630)
Release of valuation allowance upon:
- liquidation of subsidiary ............ -- (62,089) --
- approval of losses by tax authorities -- (77,621) (21,853)
Effect of change in tax rate ............ -- (1,912) --
-------- -------- --------
Balance, March 31 ....................... 147,716 61,176 34,693
-------- -------- --------
F-12
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
5 Taxation (cont'd)
(f) The actual income tax benefit attributable to earnings for the years ended
March 31, 1997, 1998 and 1999 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:
<TABLE>
<CAPTION>
Year ended March 31
-------------------------------
1997 1998 1999
---- ---- ----
$ $ $
<S> <C> <C> <C>
Hong Kong statutory tax rate ............... 16.5% 16.5% 16.0%
Income tax (expense)/credit at the Hong Kong
statutory tax rate ........................ (78,412) (370,842) 3,573
Offshore profit not subject to income tax .. 181,409 381,167 40,477
Valuation allowance on tax loss ............ (58,604) 22,539 26,483
Over/(under)provision for Hong Kong tax in
prior years ............................... 5,926 10,246 (22,064)
Other ...................................... 21,045 (15,993) (12,382)
-------- -------- --------
Total income tax benefit ................... 71,364 27,117 36,087
-------- -------- --------
</TABLE>
F-13
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
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
---------------- ----------------
1998 1999 1998 1999
---- ---- ---- ----
$ $ $ $
Cost ......................... 45,835 45,835 1,397,129 1,495,847
Less: accumulated amortization 7,639 16,806 344,684 643,041
--------- --------- --------- ---------
38,196 29,029 1,052,445 852,806
--------- --------- --------- ---------
During the years ended March 31, 1997, 1998 and 1999, the Group entered
into additional capital lease obligations amounting to $880,261, $143,471
and $78,974 respectively.
Future minimum payments for capital leases as of March 31, 1999 with an
initial term of more than one year are as follows:
$
2000 ........................................................ 326,686
2001 ........................................................ 13,812
-------
Total minimum lease payments ................................ 340,498
Less: amount representing interest .......................... 46,478
-------
Present value of net minimum lease payments (including
current portion of $271,915, as of March 31, 1999) ......... 294,020
-------
(b) Operating leases
As of March 31, 1999, future minimum lease commitments in respect of
noncancellable operating leases for office premises and staff quarters in
Hong Kong and the PRC are $46,795, payable in the year ending March 31,
2000.
Rent expense for all operating leases amounted to $279,311, $196,622 and
$166,824 for the years ended March 31, 1997, 1998 and 1999, respectively.
F-14
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
7 Banking facilities
As of March 31, 1999, the Group had general banking facilities for bank
overdrafts, notes payable, short-term loans and long-term debt. The
facilities are interchangeable with total amounts available of $6,217,949
(1998: $6,948,717), including facilities in respect of letters of credit of
$1,410,257 (1998: $1,282,051). All general banking facilities granted to
the Group are denominated in Hong Kong dollars.
The Group's general banking facilities, expressed in United States Dollars,
are further analyzed as follows:
<TABLE>
<CAPTION>
Amount available Amount utilized Terms of banking facilities as of
March 31 March 31 March 31, 1998
---------------- ----------------- ---------------------------
1998 1999 1998 1999 Interest Repayment
---- ---- ---- ---- rate terms
$ $ $ $ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Trade financing facilities:
Notes payable ....... 3,635,726 2,771,089 2,260,384 581,349 Prime rate Repayable in
to Prime rate full within
plus 0.5% or four months
HIBOR plus
2%
Short-term loans .... 723,248 1,075,064 338,632 720,129 Prime rate Repayable in
to Prime rate full within
plus 0.5% or three months
HIBOR plus
2%
Letters of credit .... 1,282,051 1,410,257 502,270 114,601 Nil Nil
Other facilities:
Bank overdrafts ...... 897,436 961,539 600,721 643,278 Prime rate Repayable
plus 0.25% on demand
to Prime rate
plus 1.5%
Long-term debt, ...... 410,256 -- 307,692 -- HIBOR Nil
including current ... plus 2.25%
maturities (Note 4)
--------- --------- ---------- ------------
6,948,717 6,217,949 4,009,699 2,059,357
--------- --------- ---------- ------------
</TABLE>
The Prime rate and HIBOR rate were 8.75% and 5.63%, respectively, as of
March 31, 1999. The Prime rate is determined by the Hong Kong Bankers
Association and is subject to revision from time to time.
F-15
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
7 Banking facilities (cont'd)
The banking facilities are collateralized by the following:
(a) a legal charge over a leasehold property of the Group with net book value
of $1,241,712 (1998: $1,269,917); and
(b) a bank guarantee of $150,000 (1998: $150,000) and restricted cash deposits
of $1,011,688 (1998: $952,267). The restricted cash deposits have original
maturities of less than three months.
The weighted average interest rate of short-term borrowings of the Group is
as follows:
Year ended March 31
-------------------
1998 1999
---- ----
Bank overdrafts ............................... 9.5% 10.2%
Notes payable ................................. 9.4% 9.5%
Short-term loans .............................. 9.4% 9.5%
8 Related party transactions
(a) The Group paid emoluments, commissions and/or consultancy fees to their
directors as follows:
<TABLE>
<CAPTION>
Year ended Mr So Hung Gun,
March 31 Anthony Mr So Cham Some Mr Ray Mehra Mr Chung Kim Wah
-------- -------------- --------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
1997 $443,590 $ 66,410 $ 21,986 $115,226(ii)
1998 $500,560 $ 66,410 $ 11,000 $140,175(ii)
1999 $441,538 $ 13,000 -- $113,589(ii)
Mr George Ms Pang Kit
Mr Luk Kam Sun Mr Fok Woo Ping O'Leary Teng, Cathy
-------------- --------------- --------- -----------
1997 $100,564 $ 12,000 $ 52,605(i) Nil
1998 $106,923 Nil $354,835(i) $ 24,029
1999 $ 91,154 Nil $115,342(i) $ 90,394
</TABLE>
(i) This represented commissions paid to Mr George O'Leary.
(ii) Included in the emoluments is a housing allowance for $38,462
payable to a company in which Mr Chung Kim Wah has a beneficial
interest for each of the three years in the period ended March
31, 1999.
F-16
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
8 Related party transactions (cont'd)
(b) Promissory note receivable from shareholder
On March 27, 1998, Advantage List & Marketing Corporation ("ALMC")
subscribed 200,000 shares of common stock of the Company at a price of
$6.75 per share which represented the fair market value at the date of
subscription, in exchange for ALMC's promissory note of $1,470,000. On the
same date, ALMC entered into a pledge agreement simultaneously under which
ALMC agreed to pledge the common stock to the Company as security for the
payment of the promissory note. The promissory note is with full recourse,
interest free and shall be fully repayable on or before September 27, 1999.
On September 17, 1998, a total of 200,000 shares of common stock were
issued and the shares were held by the Company as security for payment of
the promissory note. The promissory note was recorded at its discounted
value of $1,350,000. Interest of $80,000 accrued thereon in the year ended
March 31, 1999 has been included in additional paid in capital.
9 Provident fund plan
(a) With effect from January 1, 1988, Bonso Electronics Limited ("BEL"), a
wholly-owned foreign subsidiary of the Company, 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, excluding factory workers, are eligible to join the
provident fund plan.
(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%
(c) At normal retirement age, death or ill health, the member shall be entitled
to receive from the Plan a lump sum equal to the total of the member's and
BEL's contributions plus a return on their investment. On resignation prior
to normal retirement age, a member shall be entitled to receive from the
Plan a lump sum equal to the member's contributions plus a percentage of
the employer's balance determined in accordance with a predetermined set
scale.
(d) BEL's contributions to the Plan for the years ended March 31, 1997, 1998
and 1999 amounted to $54,924, $45,227 and $54,046 respectively.
10 Commitments and contingencies
As of March 31, 1999, the Group had contingent liabilities to banks for
outstanding letters of credit of $114,601 (1998: $502,270).
11 Research and development expenses
Included in the research and development expenses for the year ended March
31, 1999 was $392,454 incurred in connection with a telephone project.
F-17
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
12 Earnings per share
Year ended March 31
---------------------------
1997 1998 1999
---- ---- ----
$ $ $
Income available to common
shareholders: ............................ 546,589 2,274,645 13,754
Weighted average shares outstanding ....... 2,825,949 2,829,448 3,079,219
Incremental shares from assumed exercise
of:
Warrants ................................ -- 25,562 166,024
Stock options ........................... 20,095 279,362 429,060
Dilutive potential common shares .......... 20,095 304,924 595,084
--------- --------- ---------
Diluted weighted average shares ........... 2,846,044 3,134,372 3,674,303
--------- --------- ---------
Basic earnings per share .................. 19.34 cents 80.39 cents 0.45 cents
Diluted earnings per share ................ 19.21 cents 72.57 cents 0.37 cents
Earnings per share are computed based on the weighted average number of
common shares and, as appropriate, dilutive common stock equivalents
outstanding for the period and the related income amount.
Warrants to purchase 16,667 shares of common stock at $6.00 per share were
outstanding for the fiscal years ended March 31, 1997 but were not included
in the calculation of earnings per share because the warrants' exercise
price was greater than the market price of the Company's common stock. The
warrants were exercised during the year ended March 31, 1998.
Warrants to purchase 110,000 shares of common stock at $9.1875 per share
were outstanding during the fiscal years ended March 31, 1997, 1998 but
were not included in the calculation of diluted earnings per share because
the warrants' exercise price was greater than the market price of the
Company's common stock. The warrants, which expire on December 14, 1999,
were still outstanding as of March 31, 1999.
Warrants to purchase 2,200,000 shares of common stock at $7.35 per share
were outstanding during the fiscal years ended March 31, 1997 and 1998 but
were not included in the calculation of diluted earnings per share during
the year ended March 31, 1997 because the warrants' exercise price was
greater than the market price of the Company's common stock. During the
year ended March 31, 1999, 25,597 warrants were exercised by the public
shareholders to purchase 25,597 shares of common stock of the Company.
Warrants to purchase 2,174,403 shares of common stock at $7.35 per share,
which expire on December 14, 1999, were still outstanding as of March 31,
1999.
F-18
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
13 Minority interests
In April 1993, the Group, together with a Chinese partner, formed and
invested in a joint venture company in the PRC, Shenzhen Bonso Electronics
Limited ("SBEL"), owned as to 60% by the Group and 40% by the Chinese
partner. According to the joint venture agreement, the registered share
capital of SBEL was $3,205,128 (HK$25 million); the Group and the Chinese
partner could appoint three and two directors, respectively, to the board
of SBEL. The Group effectively controlled all major financial and operating
policy decisions of SBEL. Accordingly, this joint venture company was
consolidated.
In accordance with an agreement between the Group and the Chinese partner,
SBEL was liquidated on October 31, 1996. The land and buildings originally
contributed to the joint venture by the Chinese partner reverted to same
and all other assets and liabilities including the plant and machinery were
taken up by the Group. During the year ended March 31, 1996, the directors
estimated that a provision for permanent diminution in value of SBEL
amounting to $152,480 was necessary and accordingly a provision for this
amount was recorded. During the year ended March 31, 1997, upon the
liquidation of SBEL, a gain of $159,654 was recognized by the Group of
which $152,480 represents the reversal of the provision for permanent
diminution in value.
14 Stock option plan
(a) In October 1996, the Board of Directors approved the 1996 Stock Option Plan
and 1996 Non-Employee Directors' Stock Option Plan. Under the 1996 Stock
Option Plan, the Company may grant options of common stock to certain
employees and directors of the Company for a maximum of 400,000 shares. The
1996 Stock Option Plan is administered by a committee appointed by the
Board of Directors which determines the terms of options granted, including
the exercise price, the option periods and the number of shares to be
subject to each option. The exercise price of options granted under the
1996 Stock Option Plan may be less than the fair market value of the common
shares on the date of grant. The maximum term of options granted under the
1996 Stock Option Plan is 10 years. The right to acquire the common shares
is not assignable except for certain conditions stipulated in the 1996
Stock Option Plan. In January 1997, the Board of Directors delegated to Mr
So Hung Gun, Anthony, the authority to issue options to employees and
directors of the Company for an additional 25,000 shares.
In January 1997, the Company granted options to three directors to purchase
an aggregate of 375,000 shares of common stock of the Company at an
exercise price of $2.00 per share, which was equal to the market value on
the date of grant, in accordance with the 1996 Stock Option Plan. The
options shall expire on January 31, 2007 and can be exercised at any time
immediately after granting.
In January 1998, the Company granted options to an employee to purchase an
aggregate of 25,000 shares of common stock of the Company at an exercise
price of $6.20 per share which is greater than the market value on the date
of grant, in accordance with the 1996 Stock Option Plan. The options shall
expire on January 1, 2008 and can be exercised at any time immediately
after granting.
No options have been exercised during the years ended March 31, 1998 and
1999.
F-19
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
14 Stock option plan (cont'd)
(a) (cont'd)
The stock options outstanding in respect of the 1996 Stock Option Plan as
of March 31, 1999 is summarized as follows:
Average per share
--------------------
Number Exercise Market
of shares price price
Balance, March 31, 1997 ........................ 375,000 $2.00 $2.00
Grant at exercise price greater than the
market value of the common shares ............. 25,000 $6.20 $6.13
------- ----- -----
Balance, March 31, 1998 and 1999 ............... 400,000 $2.26 $2.26
------- ----- -----
Under the 1996 Non-Employee Directors' Stock Option Plan, the non-employee
directors are automatically granted stock options on the third business day
following the day of each annual general meeting of the Company to purchase
an aggregate of 100,000 shares of common stock. The exercise price of all
options granted under the 1996 Non-Employee Directors' Stock Option Plan
shall be one hundred percent of the fair market value per share of the
common shares on the date of grant. The maximum term of options granted
under the 1996 Non-Employee Directors' Stock Option Plan is 10 years. No
stock option may be exercised during the first six months of its term
except for certain conditions provided in the 1996 Non-Employee Directors'
Stock Option Plan. The right to acquire the common shares is not assignable
except for 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 and the options shall expire October 16,
2006 and can be exercised at any time immediately after granting.
In September 1997, the Company issued options to four non-employee
directors in accordance with the 1996 Non-Employee Directors' Stock Option
Plan to purchase an aggregate of 40,000 shares of common stock of the
Company at an exercise price of $5.06 per share and the options shall
expire on September 8, 2007 and can be exercised at any time immediately
after granting.
No annual general meeting was held by the Company for the year 1998 and
therefore no stock option was granted in accordance with the 1996
Non-Employee Directors' Stock Option Plan during the year ended March 31,
1999.
No options have been exercised during the year ended March 31, 1998 and
10,000 stock options were exercised to purchase 10,000 common stock of the
Company at an exercise price of $2.25 per share during the year ended 31,
1999.
F-20
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
14 Stock option plan (cont'd)
(a) (cont'd)
The stock options activity in respect of the 1996 Non-Employee Directors'
Stock Option Plan as of March 31, 1999 is summarized as follows:
Average per share
-----------------
Number Exercise Market
of shares price price
Balance, March 31, 1997 ....................... 30,000 $2.25 $2.25
Grant at exercise price equal to the market
value of the common shares ................... 40,000 $5.06 $5.06
------- ----- -----
Balance, March 31, 1998 ....................... 70,000 $3.86 $3.86
Exercised during the year ..................... (10,000) $2.25 $2.25
------- ----- -----
Balance, March 31, 1999 ....................... 60,000 $4.12 $4.12
------- ----- -----
(b) In January 1997, the Company granted options to three non-employee
directors to purchase an aggregate of 100,000 shares of common stock of the
Company. The exercise price is $2.00 per share, which was equal to the
market value of the Company's common stock on the date of grant. The
options shall expire on January 31, 2007 and can be exercised at any time
immediately after granting.
No options have been exercised during the years ended March 31, 1997 and
1998, and 55,000 options were exercised to purchase 55,000 common stock of
the Company at an exercise price of $2.00 per share during the year ended
March 31, 1999.
The stock options summary as of March 31, 1999 is summarised as follows:
Average per share
------------------
Number Exercise Market
of shares price price
Balance, March 31, 1997 ...................... -- -- --
Grant at exercise price equal to the market
value of the common shares .................. 100,000 $2.00 $2.00
-------- ----- -----
Balance, March 31, 1998 ...................... 100,000 $2.00 $2.00
Exercised during the year .................... (55,000) $2.00 $2.00
-------- ----- -----
Balance, March 31, 1999 ...................... 45,000 $2.00 $2.00
-------- ----- -----
F-21
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
14 Stock option plan (cont'd)
At various times in January 1998, the Company issued options to the
directors and an employee of the Company to purchase an aggregate of
195,000 shares of common stock of the Company at an exercise price of $6.20
per share. The options shall expire in January 2008 and can be exercised at
any time immediately after granting. The exercise prices of these options
were equal to or greater than the fair market value at the time of grant.
No options have been exercised during the years ended March 31, 1998 and
1999.
In October 1998, the Company issued options to the directors, non-employee
directors and certain employees of the Company to purchase an aggregate of
430,000 shares of common stock of the Company at an exercise price of $3.60
to $3.70. The options shall expire in October 2008 and can be exercised at
any time immediately after granting. The exercise prices of these options
were greater than the fair market value at the time of grant. No options
have been exercised during the year ended March 31, 1999.
(e) The following table summarizes the information about stock options
outstanding at March 31, 1999:
Number Exercisable
outstanding at Average life shares at
Exercise price March 31, 1999 (years) March 31, 1999
-------------- -------------- ------------ --------------
$2.00 420,000 7.8 420,000
$2.25 20,000 7.5 20,000
$3.60 415,000 9.5 415,000
$3.70 15,000 9.5 15,000
$5.06 40,000 8.4 40,000
$6.20 220,000 8.8 220,000
--------- --- ---------
$2.00 to $6.20 1,130,000 8.7 1,130,000
--------- --- ---------
(f) Included in the options outstanding as of March 31, 1999 were 10,000 and
63,000 units held by Mr Ray Mehra and Mr So Cham Some, respectively, both
of whom have resigned as directors of the Company on January 2, 1998 and
April 30, 1998, respectively.
F-22
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
14 Stock option plan (cont'd)
(g) 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,
because 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 is recognized.
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, 1998 and
1999 were $820,200 and $2,503,363, respectively. The fair value for these
options was estimated at the date of grant using a Black-Scholes Option
Valuation model with the following weighted-average assumptions for the
year ended March 31, 1999: risk-free interest rates of 5.48% to 5.49%; no
dividend yield; volatility factor of the expected market price of the
Company's common share of 81.20%; and a weighted-average expected life of
the option of ten years.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Group
pro forma information follows:
1998 1999
---- ----
$ $
Net income
As reported ........................... 2,274,645 13,754
Pro forma ............................. 1,454,445 (2,489,609)
Basis earnings/(losses) per share
As reported ........................... 80.39 cents 0.45 cents
Pro forma ............................. 51.40 cents (80.85) cents
Diluted earnings/(losses) per share
As reported ........................... 72.57 cents 0.37 cents
Pro forma ............................. 46.40 cents (67.76) cents
Because compensation expense associated with an award is recognized over
the vesting period, the initial impact on pro forma net income may not be
representative of compensation expense in future years, when the effect of
the amortization of multiple awards would be reflected in the income
statement.
F-23
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
15 Warrants
In 1994, the Company issued 16,667 warrants under a loan agreement to the
lender to purchase common shares of the Company at $6.00 per share. No
warrants were exercised during the year ended March 31, 1997. In December
1997, 2,613 shares of common stock were issued at $7.11 per share, which
represented the fair market value at the date of issue, upon the exercise
of all the warrants on a cashless basis.
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 entitles the holder thereof to purchase one share of common
stock of the Company at $7.35 per share. The warrants expire on December
14, 1999. The warrants are 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. No
warrants were exercised or redeemed during the years ended March 31, 1997
and 1998. A total of 25,597 warrants were exercised to purchase 25,597
shares of common stock of the Company at $7.35 per share during the year
ended March 31, 1999.
In conjunction with the second public offering, the Company issued warrants
to the representatives of the underwriters (the "Representatives'
Warrants") to purchase from the Company up to an aggregate of 110,000 units
at an exercise price of $9.1875 per unit; each unit consists of one share
of common stock and two five-year warrants of the Company. The
Representatives' Warrants are exercisable for a period of three years
commencing December 15, 1996. Upon any transfer to a person other than an
officer, shareholder or director of the representatives of the
underwriters, the transferred five-year warrants must be exercised
immediately or they will lapse. No warrants have been transferred during
the years ended March 31, 1997, 1998 and 1999.
F-24
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
16 Business segment information
(a) The Group's operations have been classified into three business segments:
scales, health care products and other. Summarized financial information by
business segment for 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Identifiable Depreciation
Net Operating assets as of and Capital
sales profit March 31 amortization expenditure
----- --------- ------------ ------------ -----------
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
1999
Scales .................................. 10,306,549 3,042,936 12,098,180 1,015,272 132,395
Health care products .................... 1,956,940 55,066 212,450 17,829 2,325
Other ................................... 782,776 532,353 2,053,884 172,361 22,476
---------- ---------- ---------- ---------- ----------
Total operating segments ................ 13,046,265 3,630,355 14,364,514 1,205,462 157,196
Corporate ............................... -- (3,386,184) 4,295,770 179,147 1,442,324
---------- ---------- ---------- ---------- ----------
Group ................................... 13,046,265 244,171 18,660,284 1,384,609 1,599,520
---------- ---------- ---------- ---------- ----------
1998
Scales .................................. 18,260,994 5,234,759 14,604,822 1,110,023 1,280,219
Health care products .................... 3,083,025 73,197 204,218 15,521 17,901
Other ................................... 2,371,557 534,778 1,492,015 113,399 130,786
---------- ---------- ---------- ---------- ----------
Total operating segments ................ 23,715,576 5,842,734 16,301,055 1,238,943 1,428,906
Corporate ............................... -- (3,488,655) 4,345,508 186,165 271,834
---------- ---------- ---------- ---------- ----------
Group ................................... 23,715,576 2,354,079 20,646,563 1,425,108 1,700,740
---------- ---------- ---------- ---------- ----------
1997
Scales .................................. 11,892,313 3,188,072 13,369,205 656,807 4,534,113
Health care products .................... 2,718,243 66,246 277,802 13,648 94,216
Other ................................... 2,378,463 720,500 3,021,421 148,438 1,024,703
---------- ---------- ---------- ---------- ----------
Total operating segments ................ 16,989,019 3,974,818 16,668,428 818,893 5,653,032
Corporate ............................... -- (3,059,249) 3,847,183 142,038 8,100
---------- ---------- ---------- ---------- ----------
Group ................................... 16,989,019 915,569 20,515,611 960,931 5,661,132
---------- ---------- ---------- ---------- ----------
</TABLE>
Operating profit by segment equals total operating revenues less expenses
which are related to the segment's operating revenues. 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, income
tax recoverable, deferred income tax assets and other identifiable assets
not related specifically to individual segments.
F-25
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
16 Business segment information (cont'd)
(b) The Group primarily operates in Hong Kong and the PRC. 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. As the
operations are integrated, it is not practicable to distinguish the sales
and net income derived from the activities in Hong Kong from those in the
PRC.
Identifiable assets by geographical areas are as follows:
1998 1999
---- ----
$ $
Hong Kong .................... 7,469,828 5,314,252
The PRC ...................... 13,176,735 13,346,032
---------- ----------
Total assets ................. 20,646,563 18,660,284
---------- ----------
(c) The following is a summary of net export sales to customers by geographical
area for the years ended March 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
Year ended March 31
---------------------------------------------------------
1997 % 1998 % 1999 %
---- - ---- - ---- -
$ $ $
<S> <C> <C> <C> <C> <C> <C>
United States of
America .......... 6,873,780 40 12,570,427 53 5,609,457 43
Germany ............ 3,994,167 24 6,290,634 27 4,212,958 32
Others ............ 6,121,072 36 4,854,515 20 3,223,850 25
---------- --- ---------- --- ---------- ---
16,989,019 100 23,715,576 100 13,046,265 100
---------- --- ---------- --- ---------- ---
</TABLE>
(d) The details of sales made to customers constituting 10% or more of total
sales of the Group is as follows:
<TABLE>
<CAPTION>
Year ended March 31
-----------------------------------------------------
Business 1997 % 1998 % 1999 %
segment $ $ $
--------- ---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C>
Pitney Bowes, Inc. (USA) ............... Scales 3,007,070 18 7,075,338 30 2,011,393 15
Globaltec Corporation (USA) ............ Scales 2,252,184 13 3,721,060 15 1,454,550 11
Werner Dorsch Gmbh & Co. ...............
(Germany) ............................. Scales 1,906,961 11 2,105,307 9 1,998,505 15
Omron Healthcare ....................... Health care
Group ................................. products 1,888,335 11 1,841,427 8 1,358,356 10
--------- --------- ---- ---------- ---- ---------- ----
9,054,550 53 14,743,132 62 6,822,804 51
--------- --------- ---- ---------- ---- ---------- ----
</TABLE>
F-26
<PAGE>
Bonso Electronics International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Expressed in United States Dollars)
17 Financial instruments
In accordance with SFAS No. 107 "Disclosures about Fair Value of Financial
Instruments", the carrying amounts and fair values of the Group's financial
instruments are as follows:
<TABLE>
<CAPTION>
Carrying amount Fair value
March 31 March 31
-------------------- -----------------
1998 1999 1998 1999
---- ---- ---- ----
$ $ $ $
<S> <C> <C> <C> <C>
Cash and cash equivalents ............ 448,454 271,447 448,454 271,447
Restricted cash deposits ............. 952,267 1,011,688 952,267 1,011,688
Deposits ............................. 447,735 -- 447,735 --
Bank overdrafts ...................... 600,721 643,278 600,721 643,278
Notes payable ........................ 2,260,384 581,349 2,260,384 581,349
Short-term loans ..................... 338,632 720,129 338,632 720,129
Long-term debt ....................... 307,692 131,786 299,215 136,013
Promissory note receivable ........... 1,350,000 1,350,000 1,350,000 1,350,000
--------- --------- --------- ---------
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
(a) Cash and cash equivalents, restricted cash deposits, bank overdrafts, notes
payable and short-term loans - the carrying amount approximates fair value
because of the short maturity of these instruments.
(b) Long term debt - interest rates that are currently available to the Group
for issuance of debt with similar terms and remaining maturities are used
to estimate the fair value of debt issues that are not quoted on an
exchange. Fair value estimates are made at a specific point in time and
based on relevant market information. These estimates are subjective in
nature, involve uncertainties and matters of significant judgement and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(c) Deposits - the carrying amount of refundable deposits approximates fair
value based on the terms of the related contracts.
(d) Promissory note receivable - the fair value of promissory note receivable
approximates the carrying value based on a comparison of interest rate to
current market rate for instruments of similar nature.
All other financial instruments included among current assets and
liabilities are stated at cost which approximates their fair value.
18 Post balance sheet date events
In May 1999, the Group acquired an office premise in Hong Kong at a
consideration of $743,590.
F-27
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,283,135
<SECURITIES> 0
<RECEIVABLES> 1,052,685
<ALLOWANCES> 0
<INVENTORY> 4,697,928
<CURRENT-ASSETS> 7,308,230
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0
0
<COMMON> 10,294,458
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<CGS> 8,812,173
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<INCOME-PRETAX> (22,333)
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<CHANGES> 1,743
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</TABLE>
