-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SKMy2pA1pgZ8KU752xINSMPTv8ltqpe+wvQUNXCxfHe+KJMWIwg0+egEIY6kCe3c nSLOuC5xs5u7znJsFmieOg== 0001000096-07-000341.txt : 20070927 0001000096-07-000341.hdr.sgml : 20070927 20070927160643 ACCESSION NUMBER: 0001000096-07-000341 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070927 DATE AS OF CHANGE: 20070927 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BONSO ELECTRONICS INTERNATIONAL INC CENTRAL INDEX KEY: 0000846546 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 000000000 STATE OF INCORPORATION: K3 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-17601 FILM NUMBER: 071139497 BUSINESS ADDRESS: STREET 1: UNIT 1106-1110, STAR HOUSE, 3 SALISBURY STREET 2: ROAD, TSIMSHATSUI, KOWLOON CITY: HONG KONG STATE: K3 BUSINESS PHONE: 01185226055822 MAIL ADDRESS: STREET 1: UNIT 1106-1110, STAR HOUSE, 3 SALISBURY STREET 2: ROAD, TSIMSHATSUI, KOWLOON CITY: HONG KONG STATE: K3 20-F 1 bonso3312007.txt FORM 20-F (3-31-2007) 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 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-17601 BONSO ELECTRONICS INTERNATIONAL INC. ---------------------------------------------------- (Exact name of Registrant as specified in its charter) British Virgin Islands (Jurisdiction of incorporation or organization) Unit 1106 - 1110 11/F, Star House 3 Salisbury Road Tsimshatsui Kowloon, Hong Kong (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.003 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. 5,577,639 shares of common stock, $0.003 par value, at March 31, 2007 Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] If the report is an annual or transition report, indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or 15D of the Securities Exchange Act of 1934. Yes [ ] No [X] Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Large Accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated filer [X] Indicate by check mark which financial statement item the Registrant has elected to follow: Item 17 [ ] Item 18 [X] If this is an annual report, indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes [ ] No [ X ] 2 TABLE OF CONTENTS ----------------- PART I Page Item 1. Identity of Directors, Senior Management and Advisors............. 5 Item 2. Offer Statistics and Expected Timetable........................... 5 Item 3. Key Information................................................... 5 Item 4. Information on the Company........................................ 18 Item 5. Operating and Financial Review and Prospects...................... 29 Item 6. Directors, Senior Management and Employees........................ 43 Item 7. Major Shareholders and Related Party Transactions................. 53 Item 8. Financial Information............................................. 54 Item 9. The Offer and Listing............................................. 54 Item 10. Additional Information........................................... 56 Item 11. Quantitative and Qualitative Disclosures about Market Risk....... 60 Item 12. Description of Securities Other Than Equity Securities........... 61 PART II Item 13. Defaults, Dividend Arrearages and Delinquencies.................. 61 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds ........................... 61 Item 15. Controls and Procedures.......................................... 61 Item 16. Reserved......................................................... 62 Item 16A. Audit Committee Financial Expert................................ 62 Item 16B. Code of Ethics.................................................. 62 Item 16C. Principal Accountant Fees and Services.......................... 62 Item 16D. Exemptions from the Listing Standards for Audit Committees...... 64 Item 16E. Purchases of Equity Securities by the Issuer and Affiliates Purchasers .......................................... 64 PART III Item 17. Financial Statements............................................. Item 18. Financial Statements............................................. Item 19. Exhibits......................................................... SIGNATURES................................................................ 3 FORWARD-LOOKING STATEMENTS This Annual Report on Form 20-F contains forward-looking statements. A forward-looking statement is a projection about a future event or result, and whether the statement comes true is subject to many risks and uncertainties. These statements often can be identified by the use of terms such as "may," "will," "expect," "believe," "anticipate," "estimate," "approximate" or "continue," or the negative thereof. The actual results or activities of the Company will likely differ from projected results or activities of the Company as described in this Memorandum, and such differences could be material. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results and performance of the Company to be different from any future results, performance and achievements expressed or implied by these statements. In other words, our performance might be quite different from what the forward-looking statements imply. You should review carefully all information included in this Annual Report. You should rely only on the forward-looking statements that reflect management's view as of the date of this Annual Report. We undertake no obligation to publicly revise or update these forward-looking statements to reflect subsequent events or circumstances. You should also carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission (the "SEC"). The Private 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 the "safe harbor," we are hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by us or on our behalf. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Risk Factors" under Item 3. - - Key Information. FINANCIAL STATEMENTS AND CURRENCY PRESENTATION We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and publish our financial statements in United States Dollars. REFERENCES In this Annual Report, "China" refers to all parts of the People's Republic of China other than the Special Administrative Region of Hong Kong. The terms "Bonso," "we," "our," "us," and the "Company" refer to Bonso Electronics International Inc. and, where the context so requires or suggests, our direct and indirect subsidiaries. References to "dollars" or "$" are to United States Dollars, "HK$" are to Hong Kong Dollars, "Euros" or "(euro)" are to the European Monetary Union's Currency, "GPB" are to British Pounds, "RMB" are to Chinese Renminbi and "CDN" are to Canadian Dollars. 4 PART I Item 1. Identity of Directors, Senior Management and Advisors Not Applicable. Item 2. Offer Statistics and Expected Timetable Not Applicable. Item 3. Key Information The selected consolidated financial data as of March 31, 2006 and 2007 and for each of the three fiscal years ended March 31, 2007 are derived from the Audited Consolidated Financial Statements and notes which appear elsewhere in this Annual Report. The Financial Statements are prepared in accordance with generally accepted accounting principles in the United States of America and expressed in United States Dollars. The selected consolidated financial data set forth below as of March 31, 2003, 2004 and 2005, and for each of the two fiscal years in the period ended March 31, 2004 have been derived from our audited consolidated financial statements that are not included in this Annual Report. The selected consolidated financial data is qualified in their entirety by reference to, and should be read in conjunction with, the Consolidated Financial Statements and related notes and Item 5 - "Operating and Financial Review and Prospects" included in this Annual Report. 5
SELECTED CONSOLIDATED FINANCIAL DATA Income Statement Data (in 000's USD except per shares and per share data) Year Ended March 31, ---------------------------------------------------------------------- 2003(1) 2004 2005 2006 2007(1) ------- ---- ---- ---- ------- Net sales $ 46,400 $ 74,964 $ 69,602 $ 64,543 $ 66,491 Cost of sales (35,528) (57,481) (53,138) (51,114) (53,946) Gross margin 10,872 17,483 16,464 13,429 12,545 Selling expenses (2,467) (3,122) (2,595) (2,111) (2,477) Salaries and related costs (4,563) (5,150) (5,216) (5,681) (5,438) Research and development (393) (740) (710) (847) (983) expenses Administration and general (3,957) (5,439) (4,079) (3,421) (3,004) expenses Amortization of brand name (200) (200) (200) (200) (200) Impairment of goodwill -- -- -- (258) -- Loss from water damage -- -- -- -- (701) (Loss) Income from operations (708) 2,832 3,664 911 (258) Interest income 85 57 81 202 313 Interest expense (533) (500) (417) (504) (626) Foreign exchange gain (loss) (96) 15 (98) (184) (184) Other income 99 225 372 190 302 Consultancy fee (381) -- -- -- -- (Loss) Income before income (1,534) 2,629 3,602 615 (453) taxes and minority interest Income tax expense (37) (402) (266) (131) (918) Net (loss) income before (1,571) 2,227 3,336 484 (1,371) minority interest Minority interest (72) 41 14 -- -- Net (loss) ($ 1,643) 2,268 3,350 484 (1,371) income (Loss) earnings per share - Basic ($ 0.2936) $ 0.3979 $ 0.5932 $ 0.087 ($ 0.2458) - Diluted ($ 0.2936) $ 0.3743 $ 0.5533 $ 0.082 ($ 0.2458) Weighted average shares 5,599,238 5,702,015 5,646,676 5,577,639 5,577,639 Diluted weighted average shares 5,599,238 6,060,264 6,054,303 5,937,644 5,577,639 (1) The diluted net loss per share was the same as the basic net loss per share for the fiscal years ended March 31, 2003 and March 31, 2007 as all potential ordinary shares including the stock options and warrants are anti-dilutive and therefore excluded from the computation of diluted net loss per share. 6 Balance Sheet Data (in 000's USD except per shares and per share data) March 31, --------------------------------------------------------------------------- 2003 2004 2005 2006(1) 2007 ---- ---- ---- ------- ---- Cash and cash equivalents $ 3,633 $10,815 $ 9,708 $ 8,582 $ 8,118 Working capital $ 9,777 $12,901 $15,345 $16,945 $16,842 Total assets $48,911 $53,598 $52,463 $49,479 $47,519 Current liabilities $18,424 $20,190 $18,319 $15,657 $16,394 Long-term debts and capital $ 606 $ 1,158 $ 168 $ 0 $ 59 leases Deferred income tax assets $ 167 $ 67 $ 99 $ 83 $ 87 Common stock $ 17 $ 17 $ 17 $ 17 $ 17 Shareholders' equity $28,379 $30,750 $33,932 $33,802 $31,051 Dividends declared per share -- $ 0.05 $ 0.10 $ 0.05 $ 0.05 (1) Certain comparative figures have been reclassified to conform to the current year's presentation. Exchange Rate Information The Hong Kong Dollar and the United States Dollar have been fixed at approximately 7.80 Hong Kong Dollars to 1.00 U.S. Dollars since 1983. The Chinese government expressed its intention in the Basic Law to maintain the stability of the Hong Kong currency after the sovereignty of Hong Kong (the "Basic Law") was transferred to China. The noon buying rates in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York on August 31, 2007 were U.S. $1.00 = CDN $1.0560, U.S. $1.00 = RMB 7.5462, U.S. $1.00 = HK 7.7968, U.S. $1.3641= Euro 1.00, U.S $2.0165 = 1.00 GBP, respectively. The following table sets forth the high and low noon buying rates between Canadian Dollars and U.S. Dollars, Chinese Renminbi and U.S. Dollars, Hong Kong Dollars and U.S. Dollars, Euros and U.S. Dollars and British Pounds and U.S. Dollars for each month during the six month period ended August 31, 2007. NOON BUYING RATE Cathy : Hank to update CDN$ Per U.S. $1 RMB Per U.S. $1 HK$ PER U.S. $1 U.S. $1 PER EURO U.S. $1 per GBP ---------------- --------------- --------------- ---------------- --------------- High Low High Low High Low High Low High Low ---- --- ---- --- ---- --- ---- --- ---- --- March 2007 1.181 1.153 7.7454 7.8177 7.8177 7.8093 1.3374 1.3094 1.9694 1.9235 April 2007 1.1583 1.1068 7.7345 7.709 7.8212 7.8095 1.366 1.3363 2.0061 1.9608 May 2007 1.1136 1.0727 7.7065 7.6463 7.8236 7.8044 1.3616 1.3419 1.9993 1.9695 June 2007 1.0727 1.0579 7.668 7.612 7.8188 7.8062 1.3526 1.3295 2.0063 1.9657 July 2007 1.0689 1.0372 7.6055 7.5580 7.8264 7,8129 1.3831 1.3592 2.0626 2.0114 August 2007 1.0754 1.0497 7.6181 7.5420 7.8285 7.7968 1.3808 1.3402 2.0426 1.9813 The following table sets forth the average noon buying rates between Canadian Dollars and U.S. Dollars, between Chinese Renminbi and U.S. Dollars, between Hong Kong Dollars and U.S. Dollars, between Euros and U.S. Dollars and between British Pounds and U.S. Dollars for each of the calendar years, 2002, 2003, 2004, 2005 and 2006 based on daily noon buying rates for cable transfer in New York City certified for customs purposes by the Federal Reserve Bank of New York. 7 AVERAGE NOON BUYING RATE --------------------------------------------------------------------------------------------------------- CDN$ Per U.S. $1 RMB PER U.S. $1 HK$ PER U.S. $1 U.S. $1 PER EURO US $1 PER GBP ---------------- --------------- --------------- ---------------- ------------- 2002 1.5704 8.2770 7.7997 0.9454 1.5025 2003 1.4013 8.2772 7.7876 1.1315 1.6341 2004 1.3017 8.2768 7.7891 1.2438 1.8330 2005 1.1689 8.0699 7.8000 1.2096 1.7346 2006 1.1383 7.8994 7.7802 1.2829 1.8932
On July 21,2005, the Peoples Bank of China announced it would revalue the RMB by 2.1%, linking the RMB to a "basket of currencies" which includes the US dollar, Euro, Japanese Yen and Korean Won, rather than directly at 8.28 RMB to the dollar as it has for a decade. Under the new rules, the RMB would be allowed to move 0.3% on a daily basis against the dollar. The People's Bank of China, on May 21 2007, widened the RMB trading band from 0.3 percent daily movement against the US dollar to 0.5 percent. RMB has appreciated 8.87 % against the U.S. dollar between July 21, 2005 and August 31, 2007. As of August 31, 2007, the RMB was valued at 7.5462 per US Dollar. Risk Factors You should carefully consider the following risks, together with all other information included in this Annual Report. The realization of any of the risks described below could have a material adverse effect on our business, results of operations and future prospects. Political, Legal, Economic and Other Uncertainties of Operations in China and Hong Kong We Could Face Increased Currency Risks If China Does Not Maintain The Stability Of The Hong Kong Dollar or the Chinese Renminbi. The Hong Kong Dollar and the United States Dollar have been fixed at approximately 7.80 Hong Kong Dollars to 1.00 U.S. Dollar since 1983. The Chinese Renminbi had remained stable against the U.S. Dollar at approximately 8.28 to 1.00 U.S. Dollar for several years and not until July 21, 2005 that the Chinese currency regime was altered linking the RMB to a "basket of currencies." which includes the US dollar, Euro, Japanese Yen and Korean Won. Under the new rules, the RMB would be allowed to move 0.3% on a daily basis against the dollar. The People's Bank of China, on May 21 2007, widened the RMB trading band from 0.3 percent daily movement against the US dollar to 0.5 percent. RMB has appreciated 8.86% against the U.S. dollar between July 21, 2005 and August 31, 2007. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable to our common shareholders in U.S. dollars. As of August 31, 2007, the RMB was valued at 7.5462 per US Dollar. In addition, China's government continues to receive significant international pressure to further liberalize its currency policy and as a result may further change its currency policy. The Chinese government in the past has expressed its intention in the Basic Law to maintain the stability 8 of the Hong Kong currency after the sovereignty of Hong Kong was transferred to China in July 1997. However, there can be no assurance that the Hong Kong Dollar will remain pegged against the U.S. Dollar or the Chinese Renminbi will not be allowed to fluctuate more than 0.5% on a daily basis. If the current exchange rate mechanism is changed, we face increased currency risks, which could have a material adverse effect upon the Company. We Face Significant Risks If The Chinese Government Changes Its Policies, Laws, Regulations, Tax Structure, Or Its Current Interpretations Of Its Laws, Rules And Regulations Relating To Our Operations In China. Our manufacturing facility is located in China. As a result, our operations and assets are subject to significant political, economic, legal and other uncertainties. Changes in policies by the Chinese government resulting in changes in laws or regulations or the interpretation of laws or regulations, confiscatory taxation, changes in employment restrictions, restrictions on imports and sources of supply, import duties, corruption, currency revaluation or the expropriation of private enterprise could materially and adversely affect us. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. If the Chinese government does not continue to pursue its present policies that encourage foreign investment and operations in China, or if these policies are either not successful or are significantly altered, then our business operations in China could be adversely affected. We could even be subject to the risk of nationalization, which could result in the total loss of investment in that country. Following the Chinese government's policy of privatizing many state-owned enterprises, the Chinese government has attempted to augment its revenues through increased tax collection. Continued efforts to increase tax revenues could result in increased taxation expenses being incurred by us. Economic development may be limited as well by the imposition of austerity measures intended to reduce inflation, the inadequate development of infrastructure and the potential unavailability of adequate power and water supplies, transportation and communications. If for any reason we were required to move our manufacturing operations outside of China, our profitability would be substantially impaired, our competitiveness and market position would be materially jeopardized and we might have to discontinue our operations. On March 16 2007, the National People's Congress approved the Corporate Income Tax Law of the People's Republic of China (the "new CIT Law"). The new CIT Law increases the corporate income tax rate for foreign invested enterprises to 25% with effect from January 1, 2008. The new CIT Law provides that further detailed measures and regulations on the determination of taxable profit, tax incentives and grand-fathering provisions will be issued by the State Council in due course. As and when the State Council announces the additional regulations, we will assess their impact, if any. We Face Risks By Operating In China, Because The Chinese Legal System Relating To Foreign Investment And Foreign Operations Like Bonso's Is Evolving And The Application Of Chinese Laws Is Uncertain. The legal system of China relating to foreign investments is continually evolving, and there can be no certainty as to the application of its laws and regulations in particular instances. The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases 9 have little precedented value. In 1979, the Chinese government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. Legislation over the past 20 years has significantly enhanced the protections afforded to various forms of foreign investment in China. Enforcement of existing laws or agreements may be sporadic and implementation and interpretation of laws inconsistent. The Chinese judiciary is relatively inexperienced in enforcing the laws that exist, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. Even where adequate law exists in China, it may not be possible to obtain swift and equitable enforcement of that law. Continued uncertainty relating to the laws in China could have a material adverse effect upon us and our operations in China. We Could Be Adversely Affected If China Changes Its Economic Policies In The Shenzhen Special Economic Zone Where We Operate. In August 1980, the Chinese government passed "Regulations for The Special Economy Zone of Guang Dong Province" and officially designated a portion of Shenzhen as The Shenzhen Special Economy Zone. Foreign enterprises in these areas benefit from greater economic autonomy and special tax incentives than enterprises in other parts of China. Changes in the policies or laws governing Special Economic Zones could have a material adverse effect on us. Moreover, economic reforms and growth in China have been more successful in certain provinces than others, and the continuation or increase of these disparities could affect the political or social stability of China, which could have a material adverse effect on us and our operations near Shenzhen. Controversies Affecting China's Trade With The United States Could Harm Our Results Of Operations Or Depress Our Stock Price. While China has been granted permanent most favored nation trade status in the United States through its entry into the World Trade Organization, controversies between the United States and China may arise that threaten the status quo involving trade between the United States and China. These controversies could materially and adversely affect our business by, among other things, causing our products in the United States to become more expensive resulting in a reduction in the demand for our products by customers in the United States, which would have a material adverse effect upon us and our results of operations. Further, political or trade friction between the United States and China, whether or not actually affecting our business, could also materially and adversely affect the prevailing market price of our common shares. If Our Sole Factory Were Destroyed Or Significantly Damaged As A Result of Fire, Flood Or Some Other Natural Disaster, We Would Be Adversely Affected. All of our products are currently manufactured at our manufacturing facility located in Shenzhen, China. Fire fighting and disaster relief or assistance in China may not be as developed as in Western countries. Apart from our China operation, the warehouse and storage facility in Germany and Canada are also subject to the risks of loss or damage due to fire, flood, or any other natural disaster. Recent flooding of the river in Germany has imposed severe loss on us as a result of the damage of the inventory and equipment and interruption of business. We currently maintain property damage insurance aggregating approximately $24.75 million covering our stock in trade, goods and merchandise, furniture and equipment and buildings. We do not maintain business interruption insurance. Investors are cautioned that material damage to, or the loss of, our factory due to fire, severe weather, flood or other act of God or cause, even if insured, could have a material adverse effect on our financial condition, results of operations, business and prospects. 10 Our Results Could Be Harmed If We Have To Comply With New Environmental Regulations. Our operations create some environmentally sensitive waste that may increase in the future depending on the nature of our manufacturing operations. The general issue of the disposal of hazardous waste has received increasing attention from China's national and local governments and foreign governments and agencies and has been subject to increasing regulation. Our business and operating results could be materially and adversely affected if we were to increase expenditures to comply with any new environmental regulations affecting our operations. Future Changes in the Labor Laws in China may result in the Continued Increase in Labor Costs. During the fiscal year ended March 31, 2007, we experienced an increase in the cost of labor caused by the increase in the minimum hourly rate. Any future changes in the labor laws in the PRC could result in us having to pay increased labor costs. There can be no assurance that the labor laws will not change, which may have a material adverse effect upon our business and our results of operations. Risk Factors Relating to Our Business We Depend Upon Our Largest Customers For A Significant Portion Of Our Sales Revenue, And We Cannot Be Certain That Sales To These Customers Will Continue. If Sales To These Customers Do Not Continue, Then Our Sales Will Decline And Our Business Will Be Negatively Impacted. Traditionally, we have relied upon 3 customers for a significant portion of our sales during the fiscal year. During the fiscal year ended March 31, 2005, these three customers accounted for approximately 45% of our sales. During the fiscal year ended March 31, 2006 and March 31, 2007, the same three customers accounted for approximately 48% of our sales for both years. We do not enter into long-term contracts with our customers, but manufacture based upon purchase orders and therefore cannot be certain that sales to these customers will continue. The loss of any of our largest customers would likely have a material negative impact on our sales revenue and our business. Defects In Our Products Could Impair Our Ability To Sell Our Products Or Could Result In Litigation And Other Significant Costs. Detection of any significant defects in our products may result in, among other things, delay in time-to-market, loss of market acceptance and sales of our products, diversion of development resources, injury to our reputation, or increased warranty costs. Because our products are complex, they may contain defects that cannot be detected prior to shipment. These defects could harm our reputation, which could result in significant costs to us and could impair our ability to sell our products. The costs we may incur in correcting any product defects may be substantial and could decrease our profit margins. Since certain of our products are used in applications that are integral to our customers' businesses, errors, defects, or other performance problems could result in financial or other damages to our customers, which would likely result in adverse effects upon our business with these customers. If we were involved in any product liability litigation, even if it were unsuccessful, would be time consuming and costly to defend. Further, our product liability insurance may not be adequate to cover claims. 11 Our Sales Through Retail Merchants Result In Seasonality And Susceptibility To A Downturn In The Retail Economy And Sales Variances Resulting From Retail Promotional Programs. A significant amount of our net sales, $13,437,337, is the result of Korona's sales of bathroom and kitchen scales to retail merchants in Europe. In addition, many of our other customers sell to retail merchants. Accordingly, these portions of our customer base are susceptible to a downturn in the retail economy. A greater number of our sales of scales and telecommunications products occur between the months of April and September for shipment in the summer in preparation of the Christmas holiday. Throughout the remainder of the year, our products do not appear to be subject to significant seasonal variation. However, past sales patterns may not be indicative of future performance. A significant portion of our sales in Europe is attributable to the promotional programs of our retail industry customers. These promotional programs result in significant orders by customers who do not carry our products on a regular basis. We cannot assure you that promotional purchases by our retail industry customers will be repeated regularly, or at all. Further, our promotional sales could cause our quarterly results to vary significantly. The reduction in promotional purchases would likely have a material adverse effect upon our results of operations. Our Customers Are Dependent On Shipping Companies For Delivery Of Our Products And Interruptions To Shipping Could Materially And Adversely Affect Our Business And Operating Results. Typically, we sell our products either F.O.B. Hong Kong or Yantian (Shenzhen) and our customers are responsible for the transportation of products from Hong Kong or Yantian (Shenzhen) to their final destinations. Our customers rely on a variety of carriers for product transportation through various world ports. A work stoppage, strike or shutdown of one or more major ports or airports could result in shipping delays materially and adversely affecting our customers, which in turn could have a material adverse effect on our business and operating results. Similarly, an increase in freight surcharges due to rising fuel costs or general price increases could materially and adversely affect our business and operating results. Customer Order Estimates May Not Be Indicative Of Actual Future Sales. Some of our customers have provided us with forecasts of their requirements for our products over a period of time. We make many management decisions based on these customer estimates, including purchasing materials, hiring personnel, and other matters that may increase our production capacity and costs. If a customer reduces its orders from prior estimates after we have increased our production capabilities and costs, this reduction may decrease our net sales and we may not be able to reduce our costs to account for this reduction in customer orders. Many customers do not provide us with forecasts of their requirements for our products. If those customers place significant orders, we may not be able to increase our production quickly enough to fulfill the customers' orders. The inability to fulfill customer orders could damage our relationships with customers and reduce our net sales. Pressure By Our Customers To Reduce Prices And Agree To Long-Term Supply Arrangements May Cause Our Net Sales Or Profit Margins To Decline. Our customers are under pressure to reduce prices of their products. Therefore, we expect to experience increasing pressure from our customers to reduce the prices of our products. Continuing pressure to reduce the price of our products could have a material adverse effect upon our business and operating results. Our customers frequently negotiate supply arrangements with us well in advance of placing 12 orders for delivery within a year, thereby requiring us to commit to price reductions before we can determine if we can achieve the assumed cost reductions. We believe we must reduce our manufacturing costs and obtain higher volume orders to offset declining average sales prices. Further, if we are unable to offset declining average sales prices, our gross profit margins will decline which would have a material adverse effect upon our results of operations. We Depend Upon Our Key Personnel And The Loss Of Any Key Personnel, Or Our Failure To Attract And Retain Key Personnel, Could Adversely Affect Our Future Performance, Including Product Development, Strategic Plans, Marketing And Other Objectives. The loss or failure to attract and retain key personnel could significantly impede our performance, including product development, strategic plans, marketing and other objectives. Our success depends to a substantial extent not only on the ability and experience of our senior management, but particularly upon Anthony So our Chairman of the Board. We do not have key man life insurance on Mr. So. To the extent that the services of Mr. So would be unavailable to us, we would be required to obtain another person to perform the duties Mr. So otherwise would perform. We may be unable to employ another qualified person with the appropriate background and expertise to replace Mr. So on terms suitable to us. Certain Subsidiaries of The Company Received on-going Enquiries from the Local Tax Authorities During the Year. If The Subsidiaries Were Finally Held Liable For Such Additional Taxation, Our Consolidated Net Income And The Value Of Your Investment Could Be Substantially Reduced. During the fiscal year ended March 31, 2007, certain of our subsidiaries were and continue to be subject to enquiries from the local tax authorities. We have made an assessment under SFAS 5 "Accounting for Contingencies" and believed that no additional income tax expense was necessary as of March 31, 2007, as the relevant tax authority was still in the information gathering stage on their enquiries and it was practically difficult to have a reasonable estimate of the possible outcome of these enquiries at this stage. We believe we have a reasonable likelihood of success with respect to these enquiries. There can be no assurance that the enquiry will not result in imposing additional income tax expense on the Group, which could have a material adverse effect upon the Group and its results of operations. The Company will adopt FIN 48 "Accounting for uncertainty in income taxes" effective from April 1, 2007, the amount of income tax provisions required under FIN 48 could be significantly different. Contractual Arrangements We Have Entered Into Among Us and Our Subsidiaries May Be Subject To Scrutiny By The Respective Tax Authorities And A Finding That Bonso And Its Subsidiaries Owe Additional Taxes Could Substantially Reduce Our Consolidated Net Income And The Value Of Your Investment. We could face material and adverse tax consequences if the respective tax authorities determine that the contractual arrangements among our subsidiaries and Bonso do not represent an arm's length price and adjust Bonso or any of its subsidiaries' income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction, for tax purposes, of expense deductions recorded by Bonso or any of its subsidiaries, which could in turn increase its tax liabilities. In addition, the tax authorities may impose late payment fees and other penalties to our affiliated entities for under-paid taxes. Our consolidated net income may be materially and adversely 13 affected if our affiliated entities' tax liabilities increase or if they are found to be subject to late payment fees or other penalties. The Company will adopt FIN 48 effective from April 1, 2007, the amount of income tax provisions required under FIN 48 could be significantly different. Increased Prices for Raw Materials May have a negative impact upon us. During the fiscal years ended March 31, 2006 and 2007, the costs of component parts increased due to the increase in the price of oil used in the production of components such as plastic resin, steel and other raw materials. If oil prices continue to increase, it will likely result in an increase in the costs of components to us as well as an increase in our operating expenses, which may have a material adverse effect upon our business and results of operations. We May Face an Increased Shortage of Factory Workers. During the fiscal years ended March 31, 2005, March 31, 2006 and March 31, 2007, we experienced labor shortages for factory workers. Due to increases in demand for workers in China, we cannot assure you that we can adequately staff the factory. The ability to adequately staff our factory could have a material impact on production, which could lead to delays in shipments or missed sales. In the event that we have delayed or lost sales, we may need to deliver goods by air to ensure that our products arrive on time, which would likely result in an increase in air freight costs, vendor fines and could result in missed sales, any of which could have a material adverse effect upon our business and our results from operations. For the fiscal years ended March 31, 2008, we will reduce the labour requirements by sub-contracting out some production processes that our sub-contractor have a competitive advantage in the cost of production. We will benefit from the lower cost of production and higher business flexibility. We Face Increasing Competition in Our Industry and May not be able to successfully compete with our competitors. Our business is in an industry that is becoming increasingly competitive, and many of our competitors, both local and international, have substantially greater technical, financial and marketing resources than we have, and as a result, we may be unable to compete successfully with these competitors. We compete with scale manufacturers in the Far East, the United States, and Europe. We believe that our principal competitors in the scale and telecommunications market are other OEM and original design manufacturer "ODM" manufacturers, and all companies engaged in the branded, ODM and OEM business. Both the scale and the telecommunications markets are highly competitive and we face pressures on pricing and lower margins as evidenced by the decline in margins that we have experienced with our telecommunications products. Lower margins may affect our ability to cover our costs which could have a material negative impact on our operations and our business. We Are Controlled By Our Management, Whose Interest May Differ From Those Of The Other Shareholders. At the present time, Mr. Anthony So, our founder and Chairman, beneficially owns approximately 36.41% of the outstanding shares of common stock, including shares underlying his outstanding options, or 29.16% without including his outstanding options. Due to his stock ownership, Mr. So may be in a position to elect the board of directors and, therefore, to control our business and affairs including certain significant corporate actions such as acquisitions, the sale or purchase of assets and the issuance and sale of our securities. Mr. So may be able to prevent or cause a change in control. We also 14 may be prevented from entering into transactions that could be beneficial to us without Mr. So's consent. The interest of our largest shareholder may differ from the interests of other shareholders. Compliance costs with recently enacted changes in the securities laws and regulations pursuant to the Sarbanes-Oxley Act of 2002 will increase our costs. The Sarbanes-Oxley Act of 2002 that became law in July 2002 has required changes in some of our corporate governance, securities disclosure, accounting and compliance practices. In response to the requirements of that act, the Securities and Exchange Commission and the NASDAQ have promulgated new rules on a variety of subjects. Compliance with these new rules as well as the Sarbanes-Oxley Act of 2002 has increased our legal, financial and accounting costs, and we expect the cost of compliance with these new rules to continue to increase and to be permanent. Further, the new rules may increase the expenses associated with our director and officer liability insurance. Our Operating Results And Stock Price Are Subject To Wide Fluctuations. Our quarterly and annual operating results are affected by a wide variety of factors that could materially and adversely affect net sales, gross profit and profitability. This could result from any one or a combination of factors, many of which are beyond our control. Results of operations in any period should not be considered indicative of results to be expected in any future period, and fluctuations in operating results may also result in fluctuations in the market price of our common stock. Our Results Could be Affected By Changes In Currency Exchange Rates. Changes in currency rates involving the Canadian Dollar, Hong Kong dollar, Chinese Renminbi, British Pounds or the Euro could increase our expenses. During the fiscal years ended March 31, 2005, 2006 and 2007, our financial results were affected by currency fluctuations, resulting in a total foreign exchange loss of $98,051, $183,887 and $183,952, respectively. Generally, our revenues are collected in United States Dollars, Euros and Canadian Dollars. Our costs and expenses are paid in United States Dollars, Canadian Dollars, Hong Kong Dollars, British Pound, Euros and Chinese Renminbi. We face a variety of risks associated with changes among the relative value of these currencies. An appreciation of the Canadian Dollar, Chinese Renminbi, Hong Kong Dollar, British Pound, or the Euro against the U.S. Dollar would increase our expenses when translated into U.S. Dollars and could materially and adversely affect our margins and results of operations. In addition, a significant devaluation in the Canadian Dollar, Chinese Renminbi, Hong Kong Dollar, British Pound or Euro could have a material adverse effect upon our results of operations if it destabilizes the economy of Canada, China, Hong Kong, Great Britain or the European Union. Protection And Infringement Of Intellectual Property. Except for three patents held by Gram Precision, the trademark for KORONA and twelve trademarks currently held by Gram Precision, we have no patents, licenses, franchises, concessions or royalty agreements that are material to our business. We have obtained a trademark registration in Hong Kong and China for the marks BONSO and MODUS in connection with certain electronic apparatus. Unauthorized parties may attempt to copy aspects of our products or trademarks or to obtain and use information that we regard as proprietary. Policing unauthorized use of our 15 products is difficult. Our means of protecting our proprietary rights may not be adequate. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Our failure to adequately protect our proprietary rights may allow third parties to duplicate our products or develop functionally equivalent or superior technology. In addition, our competitors may independently develop similar technology or design around our proprietary intellectual property. Further, we may be notified that we are infringing patents, trademarks, copyrights or other intellectual property rights owned by other parties. In the event of an infringement claim, we may be required to spend a significant amount of money to develop a non-infringing alternative or to obtain licenses. We may not be successful in developing such an alternative or obtaining a license on reasonable terms, if at all. Any litigation, even without merit, could result in substantial costs and diversion of resources and could have a material adverse affect on our business and results of operations. Cancellations Or Delays In Orders Could Materially And Adversely Affect Our Gross Margins And Operating Income. Sales to our OEM customers are primarily based on purchase orders we receive from time to time rather than firm, long-term purchase commitments. Although it is our general practice to purchase raw materials only upon receiving a purchase order, for certain customers we will occasionally purchase raw materials based on such customers' rolling forecasts. Further, during times of potential component shortages we have purchased, and may continue to purchase, raw materials and component parts in the expectation of receiving purchase orders for products that use these components. In the event actual purchase orders are delayed, are not received or are cancelled, we would experience increased inventory levels or possible write-downs of raw material inventory that could materially and adversely affect our business and operating results. We Generally Have No Written Agreements With Suppliers To Obtain Components And Our Margins And Operating Results Could Suffer From Increases In Component Prices. We are typically responsible for purchasing components used in manufacturing products for our customers. We generally do not have written agreements with our suppliers of components. This typically results in our bearing the risk of component price increases because we may be unable to procure the required materials at a price level necessary to generate anticipated margins from the orders of our customers. Further, prices of components have increased recently based upon the increase in oil prices and what management believes to be a high worldwide demand for components used in the manufacturing of our products. Accordingly, additional increases in component prices could materially and adversely affect our gross margins and results from operations. Certain Legal Consequences of Foreign Incorporation and Operations Judgments Against The Company And Management May Be Difficult To Obtain Or Enforce. We are a holding corporation organized as an International Business Company under the laws of the British Virgin Islands and our principal operating subsidiaries are organized under the laws of Hong Kong and the laws of the Peoples' Republic of China. Our principal executive offices are located in Hong Kong and the Peoples' Republic of China, Korona is located in Germany and Gram Precision is located in Canada. Outside the United States, it may be difficult 16 for investors to enforce judgments obtained against us in actions brought in the United States, including actions predicated upon the civil liability provisions of federal securities laws. In addition, most of our officers and directors reside outside the United States and the assets of these persons are located outside of the United States. As a result, it may not be possible for investors to effect service of process within the United States upon these persons, or to enforce against the Company or these persons judgments predicated upon the liability provisions of United States federal securities laws. Our Hong Kong counsel and our British Virgin Islands counsel have advised that there is substantial doubt as to the enforceability against us or any of our directors or officers in original actions or in actions for enforcement of judgments of United States courts in claims for liability based on the civil liability provisions of federal securities laws. Because We Are Incorporated In The British Virgin Islands, You May Not Have The Same Protections As Shareholders Of U.S. Corporations. We are organized under the laws of the British Virgin Islands. Principles of law relating to matters affecting the validity of corporate procedures, the fiduciary duties of our management, directors and controlling shareholders and the rights of our shareholders differ from, and may not be as protective of shareholders as, those that would apply if we were incorporated in a jurisdiction within the United States. Our directors have the power to take certain actions without shareholder approval, including an amendment of our Memorandum or Articles of Association and certain fundamental corporate transactions, including reorganizations, certain mergers or consolidations and the sale or transfer of assets. In addition, there is doubt that the courts of the British Virgin Islands would enforce liabilities predicated upon United States federal securities laws. Future issuances of preference shares could materially and adversely affect the holders of our common shares or delay or prevent a change of control. Our Memorandum and Articles of Association provide the ability to issue an aggregate of 10,000,000 shares of preferred stock in four classes. While currently no preferred shares are issued or outstanding, we may issue preferred shares in the future. Future issuance of preferred shares could materially and adversely affect the rights of the holders of our common shares, dilute the common shareholders or delay or prevent a change of control. Our Shareholders Do Not Have The Same Protections Or Information Generally Available To Shareholders Of U.S. Corporations Because The Reporting Requirements For Foreign Private Issuers Are More Limited Than Those Applicable To Public Corporations Organized In The United States. We are a foreign private issuer within the meaning of rules promulgated under the Exchange Act. We are not subject to certain provisions of the Exchange Act applicable to United States public companies including: the rules under the Exchange Act requiring the filing with the Securities and Exchange Commission (the "SEC") of quarterly reports on Form 10-Q or current reports on Form 8-K, the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect to a security registered under the Exchange Act and the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any "short-swing" trading transaction (i.e., a purchase and sale, or sale and purchase, of the issuer's equity securities within six months or less). Because we are not subject to these rules, our shareholders are not afforded the same protections or information generally available to investors in public companies organized in the United States. 17 Our Board's Ability To Amend Our Charter Without Shareholder Approval Could Have Anti-Takeover Effects That Could Prevent A Change In Control. As permitted by the law of the British Virgin Islands, our Memorandum and Articles of Association, which are the terms used in the British Virgin Islands for a corporation's charter and bylaws, may be amended by our board of directors without shareholder approval. This includes amendments to increase or reduce our authorized capital stock. Our board's ability to amend our charter documents without shareholder approval could have the effect of delaying, deterring or preventing a change in control of Bonso, including a tender offer to purchase our common shares at a premium over the current market price. We May Not Pay Dividends In The Future. Although we have declared dividends on April 2, 2003 and July 13, 2004 and July 12, 2005 and August 22, 2006, we may not be able to declare dividends or the board of directors may decide not to declare dividends in the future. We will determine the amounts of any dividends when and if they are declared, in the future at the time of declaration. Item 4. Information on the Company History and Development of the Company Bonso Electronics International Inc. was formed on August 8, 1988 as a limited liability International Business Company under the laws of the British Virgin Islands under the name "Golden Virtue Limited." On September 14, 1988, we changed our name to Bonso Electronics International, Inc. We operate under the BVI Business Companies Act. Effective as of May 1, 2001 we acquired 100% of the equity of Korona. Korona markets consumer scale products throughout Europe to retail merchandisers and distributors. These products feature contemporary designs using the latest materials and attractive packaging. As part of our ongoing expansion of the sensor-based product business, effective as of August 1, 2002, we acquired 51% of the equity of Gram Precision. Gram Precision is primarily engaged in the distribution and marketing of pocket scales in the United States, Canada, and Europe. In April 2007, we set up a new wholly-owned subsidiary, Bonso USA Inc. The new subsidiary will focus on the sales of industrial scales in the US market. Our corporate administrative matters are conducted through our registered agent, HWR Services Limited, P.O. Box 71, Road Town, Tortola, British Virgin Islands. Our principal executive offices are located at Unit 1106 - 1110, 11/F, Star House, 3 Salisbury Road, Tsimshatsui, Kowloon, Hong Kong. Our telephone number is 852-2605-5822, our facsimile number is 852-2691-1724, our e-mail address is info@bonso.com and our website is www.bonso.com. Our principal capital expenditures for property, plant and equipment over the last three years is set forth below: 18 2005 2006 2007 ---- ---- ---- Property Plant & Equipment $684,398 $1,340,134 $342,110 Our capital expenditures include the purchase of machinery used in the production of certain of our products. All of the foregoing capital expenditures were financed principally from internally generated funds. In November, 2006, Bonso entered into a land purchase agreement with Xincheng Hi-Tech Industrial Estate to acquire a piece of land of approximately 146,673 square meters for future expansion of the Company's operations in XinXing. Pursuant to the land purchase agreement, the total consideration will be approximately $1,472,000 (RMB11,145,500). In July 2007, the Company paid a deposit of approximately $610,000 (RMB4,617,900). This new piece of land is more than triple the size of the land upon which the Company's existing facilities are located in Shenzhen, China. It is expected that the land transfer will be completed in 2008 and the first phase of construction of the new manufacturing facilities will be completed in 2010. The projected capital expenditure for the first phase of investment is approximately $10,000,000. Our plans for capital improvements are subject to change from time to time. Business Overview Bonso Electronics International Inc. designs, develops, produces and sells electronic sensor-based and wireless products for private label Original Equipment Manufacturers (individually "OEM" or collectively "OEMs"), Original Brand Manufacturers (individually "OBM" or collectively "OBMs") and Original Design Manufacturers (individually "ODM" or collectively "ODMs"). Since 1989, we have manufactured all of our products in China in order to take advantage of the lower overhead costs and competitive labor rates. Our factory is located in Shenzhen, China, about 50 miles from Hong Kong. The convenient location permits us to easily manage manufacturing operations from Hong Kong and facilitates transportation of our products out of China through the port of Hong Kong and Yantian (Shenzhen). Products Our sensor-based scale products are comprised of bathroom, kitchen, office, jewelry, laboratory, postal and industrial scales that are used in consumer, commercial and industrial applications. These products accounted for 68% of revenue for the fiscal year ended March 31, 2005, 67% for 2006 and 75% for 2007. We believe that our industrial scales will continue to be a larger portion of our scales revenue as we are able to secure orders from our major customers. 19 Our wireless telecommunications products are primarily comprised of two-way radios and cordless telephones that are used in consumer and commercial applications. These products accounted for 30% of revenue for the fiscal year ended March 31, 2005, 32% for 2006 and 24% for 2007. We believe that our telecommunications products will maintain stable due to stagnation in the industry. We also receive revenue from certain customers for the development and manufacture of tooling and molding for scales and telecommunication products. Generally, these tools and moulds are used by us for the manufacture of products. We also generate some sales of scrap materials. These revenues accounted for approximately 2% of net sales for the fiscal year ended March 31, 2005, 1% for 2006 and 1% for 2007. The following table sets forth the percentage of net sales for each of the product lines mentioned above, for the fiscal years ended March 31, 2005, 2006, and 2007. Year ended March 31, -------------------------------------- Product Line 2005 2006 2007 ---- ---- ---- Scales 68% 67% 75% Telecommunications Products 30% 32% 24% Others 2% 1% 1% Total 100% 100% 100% Business Strategy We believe that our continued growth depends upon our ability to strengthen our customer base by enhancing and diversifying our products, increasing the number of customers and expanding into additional markets, while maintaining or increasing sales of our products to existing customers. Our continued growth and profitability is also dependent upon our ability to control production costs and increase production capacity. Our strategy to achieve these goals is as follows: Product Enhancement And Diversification. We continually seek to improve and enhance our existing products in order to provide a longer product life-cycle and to meet increasing customer demands for additional features. Our research and development staff are currently working on a variety of projects to enhance our existing scale products and for the telecommunications industry and in the postal scale/meter area. See "Products, Research and Development / Competition" below. 20 Maintaining And Expanding Business Relations With Existing Customers. We promote relationships with our significant customers through regular communication, including visiting certain of our customers in their home countries and providing direct access to our manufacturing and quality control personnel. This access, together with our concern for quality, has resulted in a relatively low level of defective products. Moreover, we believe that our emphasis on timely delivery, good service and low cost has contributed and will continue to contribute to good relations with our customers and increased orders. Further, we solicit suggestions from our customers for product enhancement and when feasible, plan to develop and incorporate the enhancements suggested by our customers into our products. Market And Product Expansion. We have significantly expanded our marketing efforts in the United States, Canada and Europe. We have primarily done this through the acquisitions of Gram Precision and Korona, and through efforts to introduce the Korona brand name and products into the United States. Further, we have taken significant steps to expand the products that we sell and to position ourselves as both ODMs and OEMs for other companies that require a manufacturing partner with our capabilities. We intend to increase our marketing and sales efforts with both existing and potential customers. Controlling Production Costs. In 1989, recognizing that labor cost is a major factor permitting effective competition in the consumer electronic products industry, we relocated all of our manufacturing operations to China to take advantage of the large available pool of lower cost manufacturing labor. We located our manufacturing facilities within 50 miles of Hong Kong in order to facilitate transportation of our products to markets outside of China, while benefiting from the advantages associated with manufacturing in China and in the Shenzhen Special Economy Zone. We are actively seeking to control production costs by such means as redesigning our existing products in order to decrease material and labor costs, controlling the number of our employees, increasing the efficiency of workers by providing regular training and tools and redesigning the flow of our production lines. Increasing Production Capacity. We have significantly expanded our production capacity by leasing additional factory and dormitory buildings immediately adjacent to our factory in China. We have the opportunity to increase our capacity through the construction and/or leasing of additional factory and dormitory space near our factory in China. Further, in November, 2006, Bonso entered into a land purchase agreement to acquire approximately 146,673 square meters of land for future expansion in XinXing, China. We intend to carefully monitor our capacity needs and to expand capacity as necessary. Customers and Marketing We sell our products primarily in the United States and Europe. Customers for our products are primarily OEMs, OBMs and ODMs, which market the products under their own brand names. We continue to market our products to OEM's, OBM's and ODM's at trade shows, via e-mail and facsimile. Gram Precision engages in the distribution and marketing of pocket and industrial scales in the United States, Canada, and Europe. Korona engages in the distribution and marketing of electronic and mechanical body and kitchen scales directly to the retail and catalogue markets in Europe. 21 Net export sales to customers by geographic area consisted of the following for each of the three years ended March 31, 2005, 2006 and 2007.
Year ended March 31, 2005 2006 2007 -------------------- --------------------- ------------------------- Canada $2,686,951 4% $1,637,447 3% $2,239,419 3% United States $38,638,906 55% $37,352,618 58% $36,432,384 55% of America Germany $15,025,103 22% $13,302,506 21% $17,545,242 26% United Kingdom $2,769,900 4% $2,262,160 3% $1,480,464 2% Other EC $7,948,970 11% $7,997,740 12% $5,739,117 9% Countries Asia and $2,532,362 4% $1,990,492 3% $3,054,754 5% Others Total $69,602,192 100% $64,542,963 100% $66,491,380 100%
We maintain a marketing and sales team of 19 people in China, a marketing team of 3 people in Canada for Gram Precision and a sales team of 12 people at Korona in Germany (including 8 sales representative and sales agents and 4 persons who are directly employed by Korona). Also, our experienced engineering teams work directly with our customers to develop and tailor our products to meet the customer's specific needs. We market our products primarily through a combination of direct contact by our experienced in-house technical sales staff and our sales representatives, and through the use of direct mail catalogues and product literature. Korona sells its products primarily through direct contact by sales teams with customers. External sales agents may be hired to conduct sales and we may pay commissions to the agents in connection with the sales. During the fiscal years ended March 31, 2005, 2006 and 2007 we recorded a total commission payment of $440,743, $379,162 and $543,349, respectively. In addition, our marketing teams contact existing and potential customers by telephone, mail, facsimile, and in person. A list of our major electronics sensor customers for each of the prior three fiscal years follows: 22 Percent of Sales - Year ended March 31, ------------------------------------------------------------------------- Electronics Sensor Customers 2005 2006 2007 ------------------------------------------------------------------------- Sunbeam Products, Inc. 17% 16% 23% BSH HISNI APARATI, D.O.O. 4% 3% 7% Salter Housewares Ltd. 3% 4% 2% Media Markt und Saturn Verwaltungs 6% 5% 4% GmbH Pitney Bowes, Inc. 6% 7% 7% A list of our major telecommunications customers for each of the prior three fiscal years follows: Percent of Sales - Year ended March 31, Telecommunications 2005 2006 2007 Customer -------------------------------------------------------------------------- TTI Tech Co., Ltd. 11% 16% 12% Global Link Corporation Ltd. 17% 16% 13% Sales of our products to OEMs and ODM's accounted for approximately 67% of our total net sales in the year ended March 31, 2005, 70% for both the year ended March 31, 2006 and March 31, 2007. Korona contributed $16,959,313 of our total net sales or 24% of total net sales for the year ended March 31, 2005, $13,672,447 or 21% of total net sales for the year ended March 31, 2006 and $13,437,337 or 20% of total net sales for the year ended March 31, 2007. Gram Precision contributed $5,961,367 of our total net sales or 9% of total net sales for the year ended March 31, 2005, $5,571,132 or 9% of total net sales for the year ended March 31, 2006 and $4,767,667 or 7% of total net sales for the year ended March 31, 2007. Component Parts and Suppliers We purchase over 1,000 different component parts from more than 100 major suppliers and are not dependent upon any single supplier for key components. We purchase components for our products primarily from suppliers in Japan, Taiwan, South Korea, Hong Kong and China. During the fiscal years ended March 31, 2005, March 31, 2006 and March 31, 2007, the costs of component parts increased due to the increase in the price of oil used in the production of components such as plastic resin, steel and other raw materials. Further, we believe that costs of component parts have also increased due to an increase in worldwide demand for electronic components such as those used in the production of our products. We have taken steps to reduce our exposure to any inability to obtain components by forecasting with an increased buffer rate and placing orders for components earlier and allowing for longer delivery lead times. Because of these actions, we do not expect to experience any difficulty in obtaining needed component parts for our products. 23 Quality Control We have received ISO 9001: 2000 certification from Det Norske Veritas Certification B.V., the Netherlands. The ISO 9001: 2000 certification was awarded to our subsidiary, Bonso Electronics Limited and to Bonso Electronics Limited's subsidiary Bonso Electronics (Shenzhen) Company Limited. Further, we have received TL 9000 certification for our telecommunications products. We also received certification according to the Environmental Management Standards of ISO 14001:2004 and the Occupational Health and Safety Management Standard of OHSAS 18001. ISO 9001 is one of the ISO 9000 series of quality system standards developed by the International Organization for Standardization, a worldwide federation of national standards bodies. ISO 9001 provides a model for quality assurance (and continuous improvement) in product development, manufacturing, installation and servicing that focuses on meeting customer requirements. The TL 9000 standard was developed by the Quality Excellence for Suppliers of Telecommunications (QuEST) Leadership Forum. The TL 9000 certification process was developed exclusively to address the quality of products and services provided by suppliers to the telecommunications industry. By integrating the Occupational Health and Safety Management Standard of OHSAS 18001 into our quality and environmental systems, we have created a total Integrated Management System (IMS) - Quality, Environment and Health and Safety by combining ISO9001, ISO 14001 and OHSAS 18001 into one Quality/Environment/Health and Safety registration. The European Union has enacted the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive ("RoHS"). RoHS prohibits the use of certain substances, including lead, in certain products, sold after July 1, 2006. We believe that we can manufacture compliant products, and believe that we can be assured a supply of compliant components from suppliers. Patents, Licenses, Trademarks, Franchises, Concessions and Royalty Agreements We have obtained a trademark registration in Hong Kong and China for the marks BONSO and MODUS in connection with certain electronic apparatus. Also, we have acquired the trademark registration rights to the KORONA mark for 16 European countries and in the United States. Gram Precision has three patents for scales and twelve trademarks. We rely on a combination of patent, trademark and trade secret laws, employee and third party non-disclosure agreements and other intellectual property protection methods to protect our proprietary rights. There can be no assurance that third parties will not assert infringement or other claims against us with respect to any existing or future products. We cannot assure you that licenses would be available if any of our technology was successfully challenged by a third party, or if it became desirable to use any third-party technology to enhance the Company's products. Litigation to protect our proprietary information or to determine the validity of any third-party claims could result in a significant expense to us and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor. 24 While we have no knowledge that we are infringing upon the proprietary rights of any third party, there can be no assurance that such claims will not be asserted in the future with respect to existing or future products. Any such assertion by a third party could require us to pay royalties, to participate in costly litigation and defend licensees in any such suit pursuant to indemnification agreements, or to refrain from selling an alleged infringing product or service. Product Research and Development/Competition The major responsibility of the product design, research and development personnel is to develop and produce designs to the satisfaction of and in accordance with the specifications provided by the OEMs, OBMs and ODMs. We believe our engineering and product development capabilities are important to the future success of our business. As an ODM, we take specifications that are provided to us by the customer and design a product to meet those specifications. Some of our product design, research, and development activities are customer funded and are under agreements with specific customers for specific products. We have successfully lowered the costs for our research and development team by moving most research and development activities to our facility in China. We principally employ Chinese engineers and technicians at costs that are substantially lower than that would be required in Hong Kong. At March 31, 2007, we employed 72 individuals in Hong Kong and China for our engineering staffs, which are at various times engaged in research and development. The major responsibility of the product design and research and development personnel is to develop and produce designs of scales products to the satisfaction of and in accordance with the specifications provided by the ODMs and OEMs. We anticipate hiring additional research and development personnel to meet the increased demand for scales products. The manufacturing and sale of electronic sensor-based and wireless products is highly competitive. Competition is primarily based upon unit price, product quality, reliability, product features and management's reputation for integrity. Accordingly, reliance is placed on research and development of new products, line extensions and technological, quality and other continuous product improvement. There can be no assurance that we will enjoy the same degree of success in these efforts in the future. Research and development expenses, aggregated $710,355 during the fiscal year ended March 31, 2005, $847,401 during the fiscal year ended March 31, 2006 and $983,172 during the fiscal year ended March 31, 2007. Seasonality Generally, the first calendar quarter of each year is typically the slowest sales period because our manufacturing facilities in China are closed for two weeks for the Chinese New Year holidays to permit employees to travel to their homes in China. In addition, sales during the first calendar quarter of both scales and telecommunications products usually dip following the increase in sales during the Christmas season. A greater number of our sales of scales and telecommunications products occur between the months of April and September for shipment in the summer in preparation of the Christmas holiday. Throughout the remainder of the year, our products do not appear to be subject to significant 25 seasonal variation. The summer months are generally the lowest sales point of the calendar year for Gram Precision and Korona. Sales of telecommunication products are generally higher in the summer months off-setting Gram Precision's and Korona's decline in sales. However, past sales patterns may not be indicative of future performance. Employee incentive compensation is conditioned on the employee's return to work following the Chinese New Year and is paid to employees following the reopening of the factory after the holidays. We believe that this method has resulted in lower employee turnover than might otherwise have occurred. Transportation Typically, we sell products either F.O.B. Hong Kong or Yantian (Shenzhen), which means that our customers are responsible for the transportation of finished products from Hong Kong or Yantian (Shenzhen) to their final destination. Transportation of components and finished products to and from the point of shipment is by truck. To date, we have not been materially affected by any transportation problems. However, transportation difficulties affecting air cargo or shipping, such as an extended closure of ports that materially disrupts the flow of our customers' products into the United States, could materially and adversely affect our sales and margins if, as a result, our customers delay or cancel orders or seek concessions to offset expediting charges they incurred pending resolution of the problems causing the port closures. Government Regulation We are subject to comprehensive and changing foreign, federal, state and local environmental requirements, including those governing discharges to the air and water, the handling and disposal of solid and hazardous waste, and the remediation of contamination associated with releases of hazardous substances. We believe that we are in compliance with current environmental requirements. Nevertheless, we use hazardous substances in our operations and as is the case with manufacturers in general, if a release of hazardous substances occurs on or from our properties we may be held liable and may be required to pay the cost of remediation. The amount of any resulting liability could be material. Foreign Operations A significant amount of our products are manufactured at our factory located in China. While China has been granted permanent most favored nation trade status in the United States through its entry into the World Trade Organization, controversies between the United States and China may arise that threaten the status quo involving trade between the United States and China. These controversies could materially and adversely affect our business by, among other things, causing our products in the United States to become more expensive resulting in a reduction in the demand for our products by customers in the United States. Sovereignty over Hong Kong reverted to China on July 1, 1997. The 1984 Sino-British Joint Declaration, the 1990 Basic Law of Hong Kong, the 1992 United States-Hong Kong Policy Act and other agreements provide some indication of the 26 business climate we believe will continue to exist in Hong Kong. Hong Kong remains a Special Administrative Region ("SAR") of China, with certain autonomies from the Chinese government. Hong Kong is a full member of the World Trade Organization. It has separate customs territory from China, with separate tariff rates and export control procedures. It has a separate intellectual property registration system. The Hong Kong Dollar is legal tender in the SAR, freely convertible and not subject to foreign currency exchange controls by China. The SAR government has sole responsibility for tax policies, though the Chinese government must approve the SAR's budgets. Notwithstanding the provisions of these international agreements, we cannot be assured of the continued stability of political, legal, economic or other conditions in Hong Kong. No treaty exists between Hong Kong and the United States providing for the reciprocal enforcement of foreign judgments. Accordingly, Hong Kong courts might not enforce judgments predicated on the federal securities laws of the United States, whether arising from actions brought in the United States or, if permitted, in Hong Kong. Organizational Structure. We have one wholly-owned Hong Kong subsidiary - Bonso Electronics Limited ("BEL"). BEL was organized under the laws of Hong Kong and is responsible for the design, development, manufacture and sale of our products. BEL has one active Hong Kong subsidiary - Bonso Investment Limited ("BIL"). BIL was organized under the laws of Hong Kong and has been used to acquire and hold our property investments in Hong Kong and China. BEL also has one active PRC subsidiary - Bonso Electronics (Shenzhen) Company Limited, which is organized under the laws of the PRC, and is used to manufacture all of our products. We also have another wholly-owned British Virgin Islands subsidiary - Modus Enterprise International Inc., which owns 100% of Korona and 51% of Gram Precision. Korona is engaged in marketing, distributing and retailing of consumer bathroom and kitchen scale products throughout Europe. Gram Precision is primarily engaged in the distribution and marketing of pocket and industrial scales in the United States, Canada and Europe. In April 2007, we set up a new wholly-owned subsidiary, Bonso USA Inc. This subsidiary is responsible for the sale of industrial scales in the United States. Property, Plant and Equipment British Virgin Islands Our offices are located at Cragmuir Chambers, Road Town, Tortola, British Virgin Islands. Only corporate administrative matters are conducted at such offices, through our registered agent, HWR Services Limited. 27 Hong Kong We own approximately 5,000 square feet of office space located at Unit 1106 - - 1110, 11/F, Star House, 3 Salisbury Road, Tsimshatsui, Kowloon, Hong Kong as our principal executive office. We own approximately 4,593 square feet at Unit C & D, 8th floor of the Universal Industrial Centre, 23-25 Shan Mei Street, Fo Tan, Shatin, New Territories, Hong Kong. This facility now is used exclusively as warehouse space. We own a residential property in Hong Kong, which is located at Savanna Garden, House No. 27, Tai Po, New Territories, Hong Kong. House No. 27 consists of approximately 2,475 square feet plus a 177 square foot terrace and a 2,308 square foot garden area. The use of House No. 27 is provided as quarters to Directors. China Our existing factory in China is located at Shenzhen in the DaYang Synthetical Development District, close to the border between Hong Kong and China. This factory consists of five factory buildings, which contain approximately 333,000 square feet, four workers' dormitories, containing approximately 181,000 square feet, a canteen and recreation center of approximately 25,500 square feet, an office building, consisting of approximately 25,500 square feet, and two staff quarters for our supervisory employees, consisting of approximately 35,000 square feet, for a total of approximately 600,000 square feet. All of the facilities noted above are wholly-owned, except three factory buildings and two workers' dormitories with approximately 200,000 square feet. We pay a monthly management fee of $2,175 pursuant to a Contract on the Management of Land with Shenzhen Baoan Fuan Industrial Company for our own premises. We also own one residential property in Shenzhen, which is located at Lakeview Mansion, B-20C, Hujinju Building No. 63, Xinan Road, Boacheng Baoan Shenzhen, China, It consists of approximately 1,591 square feet and is utilized by directors when they require accommodations in China. We also own two office units in Beijing, namely Units 12 and 13 on the 3rd floor, Block A of Sunshine Plaza in Beijing, China. Unit 12 consists of 1,102 square feet and Unit 13 consists of 1,860 square feet. One Unit is rented to unaffiliated third parties for an aggregate monthly rental of RMB9,692, or approximately $1,255. Germany Korona leases approximately 885 square meters of office space located at Auf den Huttenberg 1-3, 35428 Langgons-Niederkleen, Germany. This facility is used as Korona's principal executive offices and the monthly rent for this facility is (euro) 6,427.12. 28 Poland Korona leases approximately 86 square meters of office space located at ul. Podmiejska 18, 01-498 Warszawa. The facility is used as office space and the monthly rent for this facility is (euro) 533. United States Vector Distribution Systems Inc., a subsidiary of Gram Precision, leases approximately 7,000 square feet of office and warehouse space located at. 5075 West Diablo Drive, Suite 206, Las Vegas, NV 89118-6071. This facility is used as warehouse and the monthly rent for this facility is approximately $7,611. Canada Gram Precision leases approximately 10,800 square feet of office and warehouse space located at 2855 Argentia Road, Unit 1, Mississauga, Ontario, L5N8G6, Canada. The monthly rent for this facility is CDN 11,123. Adequacy of Facilities We believe the manufacturing complex will be adequate for our reasonably foreseeable needs. Item 4A. Unresolved Staff Comments. Not Applicable. Item 5. Operating and Financial Review and Prospects The following discussion and analysis should be read in conjunction with Item 3 - "Key Information - Selected Financial Data" and the Consolidated Financial Statements and Notes to Consolidated Financial Statements attached elsewhere in this Annual Report. Overview We derive our revenues principally from the sale of sensor-based and wireless products manufactured in China, which represent 75% and 24% of total sales for the fiscal year ended March 31, 2007, respectively. As mentioned in Item 3 - "Key Information - Risk factors relating to our business," we are dependent upon a limited number of major customers for a significant portion of our revenues. Our revenues and business operation will be subject to fluctuation if there is loss of orders from any of our largest customers. Further, the pricing of our scales and telecommunication products are becoming increasingly competitive, especially to our customers in the United States and Germany, who contributed over 81% of our revenue during the fiscal year ended March 31, 2007. 29 In the fiscal year ended March 31, 2005, net sales were approximately $69,602,000 and net income was approximately $3,350,000. During the fiscal year ended March 31, 2006 net sales decreased to approximately $64,543,000 and net income decreased to approximately $484,000. During the fiscal year ended March 31, 2007 net sales increased to approximately $66,491,000 and net loss was approximately $1,371,000. Labor costs are increasing in China and our labor costs represent approximately 10% of our total production costs. We believe that increased labor costs in China will have a significant effect on our total production costs or results of operations, and that we will not be able to continue to increase our production at our manufacturing facility without substantially increasing our non-production salaries and related costs. There can be no assurance that labor costs will not further increase or that any additional increase in labor costs will not have a material adverse effect upon our results of operations. We have not experienced significant difficulties in obtaining raw materials for our products and management does not anticipate any such difficulties in the foreseeable future. Operating Results The following table sets forth selected income data as a percentage of net sales for the periods indicated. 30 Fiscal Year Ended ------------------------------------ Income Statement Data 2005 2006 2007 - --------------------- ---- ---- ---- Net sales Cost of sales (76.3) (79.2) (81.1) Gross margin 23.7 20.8 18.9 Selling expenses (3.7) (3.3) (3.7) Salaries and related costs (7.5) (8.8) (8.2) Research and development expenses (1.0) (1.3) (1.5) Administration and general expenses (5.9) (5.3) (4.5) Amortization of brand name (0.3) (0.3) (0.3) Impairment of goodwill - (0.4) - Loss from water damage - - (1.1) (Loss) income from operations Interest income 0.1 0.3 0.5 Interest expense (0.6) (0.8) (0.9) Foreign exchange loss (0.1) (0.3) (0.3) Other income 0.5 0.3 0.4 Income before income taxes and 5.2 1.0 (0.7) minority interest Income tax expense (0.4) (0.2) (1.3) Minority interest 0.0 0.0 0.0 Net (loss) income 4.8 0.8 (2.0) Fiscal year ended March 31, 2007 compared to fiscal year ended March 31, 2006 Net Sales. Our sales increased approximately $1,948,000 or 3.02% from approximately $64,543,000 for the year ended March 31, 2006, to approximately $66,491,000 for the year ended March 31, 2007. The increase in sales was primarily the result of increased sales of scales products caused by the increased orders from our major scale customers. Sales of our scales and others business increased 14.7% from approximately $43,792,000 for the year ended March 31, 2006, to approximately $50,243,000 for the year ended March 31, 2007, and sales for telecommunications products decreased 21.7% from approximately $20,751,000 for the year ended March 31, 2006, to approximately $16,248,000 for the year ended March 31, 2007. The decrease in sales for telecommunications products was caused by the decreased orders from our major telecommunications customers. Gross Margin. Gross margin as a percentage of revenue declined to approximately 18.9% during the year ended March 31, 2007 as compared to approximately 20.8% during the year ended March 31, 2006. The Company was confronted with a tough operating environment in this fiscal year. One of the challenges was rising operating overheads. Continuing from an escalating trend in recent years, the prices of crude oil and other key raw materials remained high, thereby driving up production costs for the Company. Furthermore, labour costs were also increasing. The general labour shortage in Shenzhen required us to offer higher wages to our workers in order to retain them. As a result of all these factors, our gross profit margin had decreased by 1.9%. 31 Selling Expenses. Selling expenses increased by approximately $366,000 or 17.3% from approximately $2,111,000 for the year ended March 31, 2006 to approximately $2,477,000 for the year ended March 31, 2007. This increase was primarily the result of increase in air freight cost to meet customers' delivery schedule. Salaries And Related Costs. Salaries and related costs decreased by approximately $243,000 or 4.3% from approximately $5,681,000 for the year ended March 31, 2006 to approximately $5,438,000 for the year ended March 31, 2007. This decrease was due to the decrease in the number of staff. Research And Development. Research and development expenses increased approximately $136,000 or 16.1% from approximately $847,000 for the year ended March 31, 2006 to approximately $983,000 for the year ended March 31, 2007. The increase in research and development was primarily due to increased research and development activities, such as hiring of additional staff and certification. for both the telecommunications products and new scale models. Research and Development as a percentage of revenue increased to 1.48% during the year ended March 31, 2007 as compared to 1.31% during the year ended March 31, 2006. Administration And General Expenses. Administration and general expenses decreased by approximately $415, 000 or 12.1 % from approximately $3,420,000 for the year ended March 31, 2006 to approximately $3,005,000 for the year ended March 31, 2007. This decrease was primarily due overall reduction in operating expenses for the year ended March 31, 2007 owing to cost control measures. Amortization Of Brand Names. During the years ended March 31, 2006 and 2007 we amortized $200,000 relating to the brand names acquired upon the acquisition of Korona. Brand names are amortized using the straight-line method over the related estimated useful life of 15 years. Impairment of Goodwill. Based on the assessment for the year ended March 31, 2006, the Group made a provision for impairment of approximately $258,000 for one of the subsidiaries, Korona Hauschaltswaren Gmbh & Co.KG, due to the continued weak performance of the scales business. There was no impairment loss recognized during the fiscal year ended March 31, 2007. Loss from Water Damage. During the fiscal year ended March 31, 2007, we incurred a loss of $700,950 from water damage which resulted from a heavy rain which caused a river near where our Germany logistic warehouse was located to overflow. We are now in the process of negotiating with our insurance carrier for compensation of the loss. (Loss)/Income From Operations. As a result of the above changes, (loss)/ income from operations decreased by 128.3% from a gain of approximately $911,000 for the year ended March 31, 2006 to a loss of approximately $258,000 for the year ended March 31, 2007. 32 Interest Income. Interest income increased by $111,000 or 55% from approximately $202,000 for the year ended March 31, 2006 to approximately $313,000 for the year ended March 31, 2007. The increase were primarily the result of depositing our cash into higher yield accounts and the increase in interest rates. Interest Expenses. Interest expenses increased approximately $122,000 or 24.2% from approximately $504,000 for the year ended March 31, 2006 to approximately $626,000 for the year ended March 31, 2007. This increase was primarily due to the increase in interest rates on funds borrowed from the banks and the increase in bank borrowings during the year ended March 31, 2007. Foreign Exchange Losses. There was no significant change in the foreign exchange losses during the year ended March 31, 2007 compared to the year ended March 31, 2006. Despite the continual appreciation of RMB, the effect was offset by fluctuation of foreign currency denominated balances. Other Income. Other income increased approximately $112,000 or 59% from approximately $190,000 for the year ended March 31,2006, to approximately $302,000 for the year ended March 31, 2007. The increase was primarily due to gain from disposal of investment properties in the PRC. Income Tax Expense. Income tax expense increased approximately $787,000 or 601% from approximately $131,000 during the year ended March 31, 2006 to $918,000 during the year ended March 31, 2007, representing approximately 0.2% and approximately 1.4% of net sales respectively. The increase was primarily the result of assessing the impact of the new developments of tax rules in the various tax jurisdictions that the group's subsidiaries are operating. We have performed the assessment in pursuant to FASB No. 5 "Accounting for Contingencies" and made a provision of approximately $737,000 in relation to this contingent liability. Net Income. As a result of the above changes, net income decreased from a profit of approximately $484,000 for the period ended March 31, 2006 to a loss of approximately $1,371,000 for the period ended March 31, 2007, a decrease of approximately $1,855,000, or 383.3%. Fiscal year ended March 31, 2006 compared to fiscal year ended March 31, 2005 Net Sales. Our sales decreased approximately $5,059,000 or 7.27% from approximately $69,602,000 for the year ended March 31, 2005, to approximately $64,543,000 for the year ended March 31, 2006. The decrease in sales was primarily the result of decreased of scales products caused by the decreased orders from our major scale customers. Sales of our scales and others business decreased from approximately $48,946,000 for the year ended March 31, 2005, to approximately $43,792,000 for the year ended March 31,2006, and sales for telecommunications products increased 0.45% from approximately $20,656,000 for the year ended March 31, 2005, to approximately $20,751,000 for the year ended March 31, 2006. 33 Gross Margin. Gross margin as a percentage of revenue declined to approximately 20.8% during the year ended March 31, 2006 as compared to approximately 23.7% during the year ended March 31, 2005. This decline was primarily the result of our cost increase in the area of materials and labor and the increased pressure on the sales prices from our customers for both our telecommunication products and scales products. Selling Expenses. Selling expenses decreased by approximately $485,000 or 18.67% from approximately $2,595,000 for the period ended March 31, 2005 to approximately $2,111,000 for the period ended March 31, 2006. This decrease was primarily the result of decreased commissions paid as a result of decreased sales. As a percentage of revenue selling expenses decreased to 3.27% during the year ended March 31, 2006 as compared to 3.73% during the year ended March 31, 2005. Salaries And Related Costs. Salaries and related costs increased by approximately $465,000 or 8.91% from approximately $5,216,000 for the year ended March 31, 2005 to approximately $5,681,000 for the year ended March 31, 2006. This increase is due to both the increase in the number of staff and the increase in salaries to our employees. Research And Development. Research and development expenses increased approximately $137,000 or 19.30% from approximately $710,000 for the year ended March 31, 2005 to approximately $847,000 for the year ended March 31, 2006. The increase in research and development was primarily due to increased research and development activities, such as hiring of additional staff, certification, etc. for both the telecommunications products and new scale models. Research and Development as a percentage of revenue increased to 1.31% during the year ended March 31, 2006 as compared to 1.02% during the year ended March 31, 2005. Administration And General Expenses. Administration and general expenses decreased by approximately $659,000 or 16.13% from approximately $4,079,000 for the year ended March 31, 2005 to approximately $3,420,000 for the year ended March 31, 2006. This decrease was primarily due to reduced legal & professional fee and no consultancy fee during the year ended March 31, 2006. Amortization Of Brand Names. During the years ended March 31, 2005 and 2006 we amortized $200,000 relating to the brand names acquired upon the acquisition of Korona. Brand names are amortized using the straight-line method over the related estimated useful life of 15 years. Impairment of Goodwill. Based on the assessment for the year ended March 31, 2006, the Group made a provision for impairment of approximately $258,000 for one of the subsidiaries, Korona Hauschaltswaren Gmbh & Co.KG, due to the continued weak performance of the scales business. Income From Operations. As a result of the above changes, income from operations decreased by 75.14% from approximately $3,664,000 for the year ended March 31, 2005 to approximately $911,000 for the year ended March 31, 2006. 34 Interest Income. Interest income increased by $121,000 or 60% from approximately $81,000 for the year ended March 31, 2005 to approximately $202,000 for the year ended March 31, 2006. The increase were primarily the result of depositing our cash into higher yield accounts and the increase in interest rates. Interest Expenses. Interest expenses increased approximately $88,000 or 20.86% from approximately $417,000 for the year ended March 31, 2005 to approximately $504,000 for the year ended March 31, 2006. This increase was primarily due to the increase in interest rates on funds borrowed from banks during the year ended March 31, 2006. Foreign Exchange Losses/Gains. Foreign exchange loss increased from a loss of approximately $98,000 for the year ended March 31, 2005 to a loss of approximately $184,000 for the year ended March 31, 2006. The increase was primarily attributable to the increased strength of the Canadian Dollar and especially the value of the Chinese Renminbi against the U.S. Dollar. On top of that, the RMB will no longer be linked to the US currency but rather to a basket of currencies with a 0.3% margin of fluctuation. This change in policy has resulted in an approximately 3.7% appreciation of the RMB against the U.S. dollar between July 21, 2005 and August 21, 2006. Other Income. Other income decreased approximately $182,000 or 48.92% from approximately $372,000 for the year ended March 31,2005, to approximately $190,000 for the year ended March 31, 2006. The decrease was primarily due to a decrease in the disposal of fixed assets and decreased rental income from 2 of the properties in PRC Income Tax Expense. Income tax expense decreased approximately $135,000 or 50.6% from approximately $266,000 during the year ended March 31, 2005 to approximately $131,000 during the year ended March 31, 2006, representing approximately 0.4% and approximately 0.2% of net sales respectively. The decrease was primarily the result of decrease profit in the current year. Net Income. As a result of the above changes, net income decreased from approximately $3,350,000 for the period ended March 31, 2005 to approximately $484,000 for the period ended March 31, 2006, a decrease of approximately $2,866,000, or 85.55%. Impact of Inflation We believe that inflation has not had a material affect on our business during the fiscal year ended March 31, 2007. During the fiscal years ended March 31, 2002 to March 31, 2006, Hong Kong experienced a period of deflation and Germany sustained a low inflation rate. The estimated inflation rates for 2006 of Hong Kong, PRC, Germany, United States and Canada are 2.2%, 3.5%, 1.3%, 1.7%, 2.5% and 2% respectively. We have generally been able to modify and improve our product designs so that we could either increase the prices of our products or lower the production cost in order to keep pace with inflation. Although our costs of components used in the manufacture of our products have been relatively stable, we believe that any possible significant increase in material costs would affect the entire electronics industry. Thus, it would not have a negative material impact on our competitive position in the industry. 35 Taxation The companies comprising the Group are subject to tax on an entity basis on income arising in or derived from Hong Kong, the PRC, Germany, the United States and Canada. The current rates of taxation of the subsidiary operating in Hong Kong is 17.5%. The subsidiary of the Group in Germany is registered as a partnership in Germany which is subject to a statutory tax rate of 14.17%. The Group is not subject to income taxes in the British Virgin Islands. The statutory tax rates in the United States and Canada are 15% and 36%, respectively. Pursuant to the relevant income tax laws in the PRC, Bonso Electronics (Shenzhen) Co., Ltd, a wholly owned subsidiary of the Company, was fully exempt from PRC state income tax for two years starting from the first profit-making year followed by a 50% reduction over the ensuing three years. The first profit-making year of Bonso Electronics (Shenzhen) Co., Ltd. was deemed to be the financial year ended December 31, 1998 and the last year it was entitled to this benefit was December 31, 2002. In 2003, Bonso Electronics (Shenzhen) Co., Ltd was accredited as an "Advanced Corporation" and a further 50% tax reduction was granted for another three years. The last year it was entitled to this benefit was December 31, 2005. Under the Implementation Rules of the Foreign Enterprise Income Tax Law, Bonso Electronics (Shenzhen) Co. Ltd. was entitled to a further tax rate reduction to 10% for the calendar year ended December 31, 2006, as its export sale exceed 70% of its revenue. Most of our subsidiaries' profits accrue in Hong Kong and the PRC where the applicable tax rates are currently 17.5% and 10%, respectively. There is no tax payable in Hong Kong on offshore profit or on dividends paid to Bonso Electronics Limited by its subsidiaries or to us by Bonso Electronics Limited. Therefore, our overall effective tax rate may be lower than that of most United States corporations; however, this advantage could be materially and adversely affected by changes in the tax laws of the British Virgin Islands, Germany, Canada, Hong Kong or China. Efforts by the Chinese government to increase tax revenues could result in decisions or interpretations of the tax laws by the Chinese tax authorities that are unfavorable to us and which increase our future tax liabilities, or deny our expected refunds. Changes in Chinese tax laws or their interpretation or application may subject us to additional Chinese taxation in the future. No reciprocal tax treaty regarding withholding taxes exists between the United States and the British Virgin Islands. Under current British Virgin Islands law, dividends, interest or royalties paid by us to individuals are not subject to tax as long as the recipient is not a resident of the British Virgin Islands. If we were to pay a dividend, we would not be liable to withhold any tax, but shareholders would receive gross dividends, irrespective of their residential or national status. 36 During the fiscal year ended March 31, 2007, certain of our subsidiaries were and continue to be subject to enquiries from the local tax authorities. We have made an assessment under SFAS 5 "Accounting for Contingencies" and believed that no additional income tax expense was necessary as of March 31, 2007, as the relevant tax authority was still in the information gathering stage on their enquiries and it was practically difficult to have a reasonable estimate of the possible outcome of these enquiries at this stage. We believe we have a reasonable likelihood of success with respect to these enquiries. There can be no assurance that the enquiry will not result in imposing additional income tax expense on the Group, which could have a material adverse effect upon the Group and its results of operations. Contractual arrangements we have entered into among us and our subsidiaries in different locations may be subject to scrutiny by respective tax authorities and a finding against Bonso and its subsidiaries may result in additional tax liabilities that could substantially reduce our consolidated net income. We could face material and adverse tax consequences if respective tax authorities determine that the contractual arrangements among our subsidiaries and Bonso do not represent an arm's length price and adjust Bonso or its subsidiaries' income. Our consolidated net income may be materially and adversely affected if or affiliated entities' tax liabilities increase. The Company will adopt FIN 48 "Accounting for uncertainty in income taxes" effective from April 1, 2007, the amount of income tax provisions required under FIN 48 could be different. Dividends, if any, paid to any United States resident or citizen shareholder are treated as dividend income for United States federal income tax purposes. Such dividends are not eligible for the 70% dividends-received deduction allowed to United States corporations on dividends from a domestic corporation under Section 243 of the United States Internal Revenue Code of 1986 (the "Internal Revenue Code"). Various Internal Revenue Code provisions impose special taxes in certain circumstances on non-United States corporations and their shareholders. You are urged to consult your tax advisor with regard to such possibilities and your own tax situation. In addition to United States federal income taxation, shareholders may be subject to state and local taxes upon their receipt of dividends. Foreign Currency Exchange Rates We sell most of our products to international customers. Our principal export markets are North America (mainly the United States), Europe (mainly Germany) and Asia. Other markets are other European countries (such as the United Kingdom), Australia and Africa. Sales to international customers are made directly by us to our customers. We sell all of our products in United States Dollars and pay for our material components principally in United States Dollars and Hong Kong Dollars. A very small portion of the components used are paid for in Japanese Yen. Most factory expenses incurred are paid in Chinese Renminbi. Because the Hong Kong Dollar is pegged to the United States Dollar, in the past our only material foreign exchange risk previously arose from potential fluctuations in the Chinese Renminbi and the devaluation in United States Dollars; management believes that it may be possible that there will be some fluctuation in the coming year. 37 Gram Precision principally pays for its products in United States Dollars and Canadian dollars and sells its products in Canadian, United States Dollars, and United Kingdom Pound Sterling. Korona primarily pays for its products in United States Dollars and Euros and sells its products in Euros. During the fiscal year ended March 31, 2007, we experienced a foreign currency loss of $183,952. We don't currently engage in hedging transactions; however we may undertake hedging activities in the future. A summary of our debts from our banking facilities utilized as at March 31, 2007 which was subjected to foreign currency risk is as below: March 31, 2007 $ Euro 3,576,366 Hong Kong dollars 2,957,631 United States dollars 778,895 Canadian dollars 459,710 --------- 7,772,602 ========= All the balances above are due within one year. Fluctuations in the value of the Hong Kong Dollar have not been significant since October 17, 1983, when the Hong Kong government tied the value of the Hong Kong Dollar to that of the United States Dollar. However, there can be no assurance that the value of the Hong Kong Dollar will continue to be tied to that of the United States Dollar. China adopted a floating currency system on January 1, 1994, unifying the market and official rates of foreign exchange. China approved current account convertibility of the Chinese Renminbi on July 1, 1996, followed by formal acceptance of the International Monetary Fund's Articles of Agreement on December 1, 1996. These regulations eliminated the requirement for prior government approval to buy foreign exchange for ordinary trade transactions, though approval is still required to repatriate equity or debt, including interest thereon. On July 21, 2005, the Peoples Bank of China announced it would revalue the RMB by 2.1%, linking the RMB to a "basket of currencies" which includes the US dollar, Euro, Japanese Yen and Korean Won, rather than directly at 8.28 RMB to the dollar as it has for a decade. Under the new rules, the RMB will be allowed to move 0.3% on a daily basis against the dollar. The People's Bank of China, on May 21 2007, widened the RMB trading band from 0.3 percent daily movement against the US dollar to 0.5 percent. As of August 31, 2007, the RMB was valued at 7.5462 per US Dollar. There can be no assurance that these currencies will remain stable or will fluctuate to our benefit. To manage our exposure to foreign currency and translation risks, we may purchase currency exchange forward contracts, currency options, or other derivative instruments, provided such instruments may be obtained at suitable prices. Management intends to take corrective action in an effort to attempt to minimize any negative impact foreign currency fluctuations may have upon us. However, to date we have not done so. If we are unsuccessful in hedging against currency fluctuations, it may have a material adverse effect on us. 38 Liquidity and Capital Resources We have financed our growth and cash needs to date primarily from internally generated funds and bank debt. We do not use off-balance sheet financing arrangements, such as securitization of receivables or obtaining access to assets through special purpose entities, as sources of liquidity. Our primary uses of cash have been to fund expansions and upgrades of our manufacturing facilities, to make strategic acquisitions and to fund increases in inventory and accounts receivable resulting from increased sales. Operating activities provided $1,416,241 of net cash for the fiscal year ended March 31, 2007 compared to $2,480,213 of net cash for the fiscal year ended March 31, 2006. This decrease in the amount of cash provided by operating activities was primarily attributable to a decrease in net income. As of March 31, 2007, we had $8,118,018 in cash and cash equivalents as compared to $8,582,257 as of March 31, 2006. Working capital at March 31, 2007, was $16,841,659 compared to $16,945,184 at March 31, 2006. There are no other material unused sources of liquid assets. We believe there are no material restrictions (including foreign exchange controls) on the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans, advances or product/material purchases. We believe our working capital is sufficient for our present requirements. As of March 31, 2007, we had $6,739,567 in trade receivable as compared to $6,740,229 as of March 31, 2006. As of March 31, 2007, we had $14,997,788 in inventories as compared to $15,035,216 as of March 31, 2006. As of March 31, 2007, we had a total of $9,090,852 in notes payable and accounts payable as compared to $9,598,886 as of March 31, 2006. The decrease of $508,034 was primarily attributable to timely payment to our vendors. As of March 31, 2007 we had in place general banking facilities with 6 financial institutions with amounts available aggregating $30,017,128. Such facilities include the ability to obtain overdrafts, letters of credit, short-term notes payable, short-term loans and long-term loans. As of March 31, 2007, we had utilized $7,772,602 from these general banking facilities. Interest on this indebtedness fluctuates with the prime rate and HIBOR as set by the Hong Kong Bankers Association; the EONIA as set by the Germany Bankers Association and the Prime rate as set by the Canada Bankers Association. The bank credit facilities are collateralized by certain of our bank guarantees and one of the credit facilities is collateralized by a personal guarantee from the director of one of the Group's subsidiaries. Our bank credit facilities are due for renewal annually. We anticipate that the banking facilities will be renewed on substantially the same terms and our utilization in the next year will remain at a similar level as that in the current year. Excluding the capital lease obligations, the amounts of total short-term bank borrowings outstanding as of March 31, 2007 and 2006 were $3,576,366 and $2,936,467, respectively. During the fiscal years ended March 31, 2007 and 2006, we paid a total of $516,272 and $480,642, respectively, in interest on indebtedness. 39 Our current ratio decreased from 2.08 as of March 31, 2006 to 2.03 as of March 31, 2007. Our quick ratio decreased from 1.12 as of March 31, 2006 to 1.11 as of March 31, 2007. We believe that our cash flows from operations, our current cash balance and funds available under our working capital and credit facilities will be sufficient to meet our working capital needs and planned capital expenditures for at least the next 12 months. However, a decrease in the demand for our products may affect our internally generated funds, and we would further look to our banking facilities to meet our working capital demands. 40
Commitments The following table sets forth information with respect to our commitments as of March 31, 2007. Payments due by Period - -------------------------------------------------------------------------------------------------------- Total Within 1 year Within 1 to 3 Within 3 to More than 5 years 5 years years - -------------------------------------------------------------------------------------------------------- Notes Payable $3,736,526 $3,736,526 $0 $0 $0 - -------------------------------------------------------------------------------------------------------- Short-term loans $3,576,366 $3,576,366 $0 $0 $0 - -------------------------------------------------------------------------------------------------------- Operating Leases $3,847,657 $1,065,588 $1,861,720 $920,349 $0 - -------------------------------------------------------------------------------------------------------- Capital Leases $154,983 $95,725 $59,258 $0 $0 - -------------------------------------------------------------------------------------------------------- Acquisition of $1,472,325 $610,000 $862,325 $0 $0 land - -------------------------------------------------------------------------------------------------------- Interest on loans $297,933 $297,933 $0 $0 $0 - -------------------------------------------------------------------------------------------------------- Interest on $28,130 $17,374 $10,756 $0 $0 capital leases - -------------------------------------------------------------------------------------------------------- Total $ 13,113,920 $9,399,512 $ 2,794,059 $920,349 $0 - --------------------------------------------------------------------------------------------------------
Interest on loans and capital leases is estimated based on the interest rate of HIBOR+ 1.5% to +1.8%. Critical Accounting Policies The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of our financial condition and results, and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical policies include inventories, impairment, brand name, trade receivables, and deferred income taxes. Below, we discuss these policies further, as well as the estimates and judgments involved. We believe that these other policies either do not generally require us to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on our reported results of operations for a given period. See discussion of all our significant accounting policies in footnote 1 to the Consolidated Financial Statements included elsewhere in this Annual Report. 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. The company continuously reviews slow-moving and obsolete inventory and assesses any inventory obsolescence based on inventory levels, material composition and expected usage as of that date. 41 Revenue recognition No revenue is recognized unless there is persuasive evidence of an arrangement, the price to the buyer is fixed or determinable, delivery has occurred and collectibility of the sales price is reasonably assured. Revenue is recognized when title and risk of loss transfers to the customer, which is generally when the product is shipped to the customer from our facility. Shipping costs billed to our customers are included within revenue. Associated costs are classified in cost of goods sold. The Company provides to certain customers an additional two percent of certain products ordered in lieu of a warranty, which are recognized as cost of sales when these products are shipped to customers from our facility. In addition, certain products sold by the company are subject to a limited product quality warranty. The Company accrues for estimated incurred but unidentified quality issues based upon historical activity and known quality issues if a loss is probable and can be reasonably estimated. The standard limited warranty period is one to three years. Quality returns, refunds, rebates and discounts are recorded net of sales at the time of sale to three years and estimated based on past history. All sales are based upon firm orders with fixed terms and conditions, which generally cannot be modified. Historically, we have not experienced material differences between our estimated amounts of quality returns, refunds, rebates and discounts and the actual results. In all contracts, there is no price protection or similar privilege in relation to the sale of goods. Due to similar contractual terms, the Company's revenue recognition policies do not differ among its significant product lines (i.e. sensor based versus wireless products) and among various marketing venues used by the Company (i.e. distributors and direct sales force), and do not vary in different parts of the world. Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets Long-lived assets held and used by the Group and intangible assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Group evaluates recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment loss is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets calculated using a discounted future cash flows analysis. For the year ended March 31, 2007, the Group made a provision for impairment of approximately $5,414 (2006: $69,077, 2005: $148,198), on investment properties due to the decline in market value. Goodwill is subject to an annual impairment review. The evaluation of goodwill for impairment involves two steps: (1) the identification of potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill and (2) the measurement of the amount of goodwill loss by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill and recognizing a loss by the excess of the latter over the former. The Company measures fair value based upon a discounted future cash flow analysis. Based on the assessment for the year ended March 31, 2007, no provision was made by the Group on impairment of goodwill (2006: $258,141, 2005: nil). 42 Brand Name Brand name acquired as part of the purchase of a business is capitalized based on the estimated fair value as at the date of acquisition and amortized using the straight-line method over the related estimated useful life of 15 years. Where an indication of impairment exists, the carrying amount of the brand name is assessed and written down to its recoverable amount. Expected useful lives are reviewed at each balance sheet date and, where these differ significantly from previous estimates, amortization periods are changed accordingly. Where an indication of impairment exists, such as the down turn of economic inflow from the brand name, changes in business plan and so on, the carrying amounts of brand name is assessed and written down to their recoverable amounts. The measurement of the fair value of brand name is subject to management's assumptions regarding future estimated cash flows, discount rates, etc. Changes in these assumptions could significantly affect the recording of an impairment charge related to this asset. Trade Receivables Provision is made against trade receivables to the extent that collection is considered to be doubtful. This provision is primarily determined from our monthly aging analysis. It also requires judgment regarding the collectibility of certain receivables as certain receivables may be identified as collectible that are subsequently uncollectible and which could result in a subsequent write-off of the related receivable to the statement of operations. Any change in the collectibility of accounts receivable that were not previously provided for could significantly change the calculation of such provision and the results of our operations. Income Taxes, Deferred Income Taxes Amounts in the consolidated financial statements related to income taxes are calculated using the principles of SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Future tax benefits, such as net operating loss carry forwards, are recognized to the extent that realization of such benefits is more likely than not to occur. As part of this process we are required to estimate our income taxes and tax bases of assets and liabilities in each of the jurisdictions in which we operate. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. We must then assess the likelihood of the recoverability of future tax benefits, such as net operating loss carry forwards, based on estimated future taxable income and recognize such benefits 43 to the extent that realization is more likely than not to occur. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Any change in the recoverability of the deferred tax assets could significantly affect the results of our operations or cash flows. Research and Development, Patents and Licenses, etc. We believe that our engineering and product development capabilities are important to the future success of our business. We have successfully lowered the costs of our research and development team by moving most research and development activities to our facility in China and principally employing Chinese engineers and technicians at costs that are substantially lower than that would be required in Hong Kong. Research and development costs are expensed in the financial period during which they are incurred. Trend Information Although we are optimistic about our future in the manufacture and sale of telecommunications and scale products, we are dependent upon a limited number of customers, and the loss of any of these customers could have a material adverse effect upon us and our results of operations. At March 31, 2007, our backlog of manufacturing orders was $6,024,339 compared to $10,145,015 at March 31, 2006. We believe that in the fiscal year ended March 31, 2008, the trend of sales from telecommunications products and scales will be similar to the year ended March 31, 2007. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Recent Accounting Pronouncements The new accounting pronouncements in the United States that may be relevant to the Group are as follows: Accounting for Income Taxes In July 2006, the FASB released FIN 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109 ("FIN 48"). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). Under FIN 48, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts, but without considering time values. FIN 48 is effective for annual periods beginning after December 15, 2006. The Company is in the process of assessing the impact of the recent accounting pronouncement. 44 Fair Value Measurements In September 2006, the FASB issued FAS 157, Fair Value Measurements. FAS 157 provides guidance on the measurement of fair value in US GAAP and expands fair value measurement disclosures. FAS 157 is applicable whenever other accounting pronouncements require or permit fair value measurements and does not expand the use of fair value in any new circumstances. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is in the process of assessing the impact of the recent accounting pronouncement. The Fair Value Option for Financial Assets and Financial Liabilities In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of assessing the impact of the recent accounting pronouncement. Item 6. Directors, Senior Management and Employees Directors and Senior Management. Our board of directors and executive officers are listed below: Name Age Position with Bonso - ---- --- ------------------- Anthony So 64 Chairman of the Board, Chief Executive Officer and Director, President Kim Wah Chung 49 Director of Engineering and Research and Development and Director Henry Wan Chong Ma 45 Chief Financial Officer, Secretary and Treasurer Woo-Ping Fok 58 Director J. Stewart Jackson, IV 71 Director Henry F. Schlueter 56 Director and Assistant Secretary ANTHONY SO is the founder of Bonso. He has been our Chairman of the Board of Directors since July 1988. He was appointed as the Chief Executive Officer and the President on November 16, 2006. Mr. So received his BSE degree in civil engineering from National Taiwan University in 1967 and a master's degree in business administration ("MBA") from the Hong Kong campus of the University of Hull, Hull, England in 1994. Mr. So has been Chairman of the Hong Kong GO Association since 1986, and also served as Chairman of the Alumni Association of National Taiwan University for the 1993-1994 academic years. Mr. So has served as a trustee of the Chinese University of Hong Kong, New Asia College since 1994. 45 KIM WAH CHUNG has been a director since September 21, 1994. Mr. Chung has been employed by us since 1981 and currently holds the position of Director of Engineering and Research and Development. Mr. Chung is responsible for all research projects and product development. Mr. Chung's entire engineering career has been spent with Bonso, and he has been involved in all of our major product developments. Mr. Chung graduated with honors in 1981 from the Chinese University of Hong Kong with a Bachelor of Science degree in electronics. CATHY KIT TENG PANG was a director of Bonso from January 1998 to November 2006. Ms. Pang was first employed by us as Financial Controller in December 1996 and was promoted to Director of Finance on April 1, 1998. She was resigned from director and appointed as Chief Financial Officer, Secretary and Treasurer on November 16, 2006. And she resigned from all the positions on June 28, 2007. 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 as Assistant Financial Controller. From 1994 until she joined us in 1996, she was employed as Deputy Chief Accountant in a management and property development company in Hong Kong and China. Ms. Pang has a Bachelor of Business Administration degree from York University in Toronto, Canada. She is a member of the American Institute of Certified Public Accountants and of the Hong Kong Institute of Certified Public Accountants. WOO-PING FOK was elected to our Board of Directors on September 21, 1994. Mr. Fok has practiced law in Hong Kong since 1991 and is a Consultant with Messrs. C.K. Mok & 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. Mr. Fok was admitted to the Canadian Bar as a Barrister & Solicitor in December 1987 and was a partner in the law firm of Woo & Fok, a Canadian law firm with its head office in Edmonton, Alberta, Canada. In 1991, Mr. Fok was qualified to practice as a Solicitor of England & Wales, a Solicitor of Hong Kong and a Barrister & Solicitor of Australian Capital Territory. J. STEWART JACKSON IV has been a director since January 10, 2000. From 1962 until its merger with Republic Industries in 1996, Mr. Jackson served in various management capacities, including president, of Denver Burglar Alarm Co., Inc., a business founded by his family. In addition, in the mid-1960's, Mr. Jackson founded Denver Burglar Alarm Products, a separate company which invented, patented, manufactured, distributed and installed the first self-contained ionization smoke detectors and which was later sold to a conglomerate manufacturer. After the merger of Denver Burglar Alarm Co., Inc., Mr. Jackson founded Jackson Burglar Alarm Co., Inc. Mr. Jackson served as Chief Executive Officer of Jackson Burglar Alarm Co. from February 1998 to October 2005. Mr. Jackson has served as the Chief Executive Officer of J S J Corporation. Mr. Jackson served on the advisory board of directors for Underwriter's Laboratories for burglar and fire alarm systems for 25 years and has been an officer in the Central Station Protection Association, which, along with the National Burglar Alarm Association, was formed by his family in the late 1940's. Mr. Jackson graduated from the University of Colorado in 1962 with a degree in Business Management and Engineering. 46 HENRY F. SCHLUETER has been a director since October 2001, and has been our Assistant Secretary since October 6, 1988. Since 1992, Mr. Schlueter has been the Managing Director of Schlueter & Associates, P.C., a law firm, practicing in the areas of securities, mergers and acquisitions, finance and corporate law. Mr. Schlueter has served as our United States corporate and securities counsel since 1988. From 1989 to 1991, prior to establishing Schlueter & Associates, P.C., Mr. Schlueter was a partner in the Denver, Colorado office of Kutak Rock (formerly Kutak, Rock & Campbell), and from 1984 to 1989, he was a partner in the Denver office of Nelson & Harding. Mr. Schlueter is a member of the American Institute of Certified Public Accountants, the Colorado and Denver Bar Associations and the Wyoming State Bar. HENRY WAN CHONG MA was appointed as the Chief Financial Officer, Secretary and Treasurer on June 28, 2007. He was first employed as the Financial Controller of Bonso in April 2007. From 1995 to 2007, Mr. Ma was employed by an international printing company in Hong Kong as Regional Financial Controller of Asia. From 1992 to 1994, Mr. Ma worked for some local CPA firms as an auditor in Alberta, Canada. Mr. Ma obtained a Bachelor degree in Economics from the University of Alberta in Edmonton, Canada. He is a member of the Registered Public Accountant Association of Alberta, Canada. There are no family relationships between any of our directors and executive officers. No arrangement or understanding exists between any such director or officer and any other persons pursuant to which any director or executive officer was elected as a director or executive officer. Our directors are elected annually and serve until their successors take office or until their death, resignation or removal. The executive officers serve at the pleasure of the Board of Directors. Compensation The aggregate amount of compensation paid by us and our subsidiaries during the year ended March 31, 2007 to all directors and officers as a group for services in all capacities was $1,155,835. Total compensation for the benefit of Anthony So was $741,947, for the benefit of Cathy Kit Teng Pang was $68,222, for the benefit of Kim Wah Chung was $151,095, for the benefit of George O'Leary was $180,000 and for the benefit of Henry F. Schlueter was an aggregate of $14,571. The $14,571 listed as having been paid for the benefit of Mr. Schlueter was paid to his law firm, Schlueter & Associates, P.C. for legal services rendered and expenses incurred. Cathy Kit Teng Pang resigned as a director on November 16, 2006 and resigned as the Chief Financial Officer, Secretary and Treasurer on June 28, 2007. George O'Leary retired from the positions of Chief Executive Officer, President and a director on November 16, 2006. We did not set aside or accrue any amounts to provide pension, retirement or similar benefits for directors and officers for the fiscal year ended March 31, 2007, other than contributions to our Provident Fund Plan which aggregated $31,836 for officers and directors during the fiscal year ended March 31, 2007. 47 Employment Agreements We have employment agreements with Anthony So and Kim Wah Chung. The employment agreements expire on March 31, 2008; however, they are automatically renewable on an annual basis for additional one-year increments. Mr. So's employment agreement provides for a yearly salary of approximately $742,000 per year plus bonus. Mr. Chung's employment agreement provides for a yearly salary of approximately $151,000 per year plus bonus. The employment agreements contain provisions under which we will be obligated to pay Mr. So and Mr. Chung all compensation for the remainder of their employment agreements and five times their annual salary and bonus compensation if a change of control as defined in the agreements occur. Options of Directors and Senior Management The following table provides information concerning options owned by the directors and senior management at March 31, 2007. Number of Common Shares Subject to Exercise Price Name Stock Options Per Share Expiration Date - ------------------------------------------------------------------------------- Anthony So 158,000 $8.00 January 6, 2010 128,000 $3.65 April 9, 2011 128,000 $2.50 March 6, 2012 222,500 $1.61 March 31, 2013 Kim Wah Chung 20,000 $8.00 January 6, 2010 20,000 $3.65 April 9, 2011 20,000 $2.50 March 6, 2012 55,000 $1.61 March 31, 2013 Cathy Kit Teng Pang 20,000 $8.00 January 6, 2010 (1) 20,000 $3.65 April 9, 2011 20,000 $2.50 March 6, 2012 55,000 $1.61 March 31, 2013 Woo-Ping Fok 10,000 $8.125 January 12, 2010 10,000 $7.875 January 9, 2011 10,000 $6.12 March 25, 2014 10,000 $6.20 September 12, 2014 10,000 $4.50 December 4, 2015 J. Stewart Jackson IV 10,000 $7.875 January 9, 2011 10,000 $2.55 October 15, 2011 10,000 $1.61 March 31, 2013 10,000 $6.12 March 25, 2014 10,000 $6.20 September 12, 2014 10,000 $4.50 December 4, 2015 Henry F. Schlueter 10,000 $8.00 January 6, 2010 10,000 $6.12 March 25, 2014 10,000 $6.20 September 12, 2014 10,000 $4.50 December 4, 2015 48 (1) Cathy Kit Teng Pang resigned as a director on November 16, 2006 and resigned as the Chief Financial Officer, Secretary and Treasurer on June 28, 2007. Directors Except for that mentioned above, our directors do not receive any additional monetary compensation for serving in their capacities. All directors are reimbursed for all reasonable expenses incurred in connection with services as a director. Provident Fund Plan With effect from January 1, 1988, Bonso Electronics Limited ("BEL"), our wholly-owned foreign subsidiary, started a Provident Fund Plan (the "Plan") with a major international assurance company to provide life insurance and retirement benefits for its employees. All permanent full time employees who joined BEL before December 2000, excluding factory workers, are eligible to join the Plan. Members of the Plan are required to contribute 5% of their monthly salary. The contribution by BEL is as follows: Years of Service % of salary as BEL's contribution ---------------- --------------------------------- Less than 5 years 5.0% 5 to 10 years 7.5% More than 10 years 10.0% The Mandatory Provident Fund (the "MPF") was introduced by the Hong Kong Government commencing in December 2000. BEL joined the MPF with a major international assurance company. All permanent full time employees who joined BEL in or after December 2000, excluding factory workers, are eligible to join the MPF. Members' and employers' contributions to the MPF are both at 5% of the members' monthly salaries and are subject to a maximum contribution of HK $1,000 monthly. At normal retirement age, death or ill health, the member shall be entitled to receive from the Plan a lump sum equal to the total of the member's and BEL's contributions plus the return on their investment. On resignation prior to normal retirement age, a member shall be entitled to receive from the Plan a lump sum equal to the member's contributions plus a percentage of the employer's balance determined in accordance with a predetermined set scale. BEL's total contributions to the Plan and the MPF for the years ended March 31, 2005, 2006 and 2007 amounted to $83,277, $95,339 and $86,530, respectively. 49 Board Practices All directors hold office until our next annual meeting of shareholders or until their respective successors are duly elected and qualified or their positions are earlier vacated by resignation or otherwise. All executive officers are appointed by the Board and serve at the pleasure of the Board. There are no director service contracts providing for benefits upon termination of employment or directorship. NASDAQ Exemptions and Home Country Practices NASDAQ Marketplace Rule 4350 provides that foreign private issuers may elect to follow certain home country corporate governance practices so long as they provide NASDAQ with a letter from outside counsel in its home country certifying that the issuer 's corporate governance practices are not prohibited by home country law. On July 19, 2005, we submitted a letter to the NASDAQ certifying that certain of Bonso's corporate governance practices are not prohibited by the relevant laws of the British Virgin Islands. We will follow British Virgin Island law in respect to the following requirements: o A majority of Bonso's board of directors will not be independent; o Bonso will not have a nominating committee; o Bonso will not have a compensation committee; o Bonso's independent directors will not meet in executive session; and o Bonso's audit committee will have only one member. Audit Committee Mr. Woo Ping Fok is the sole member of the Audit Committee. Mr. Fok is "independent" as defined in the NASDAQ listing standards. The Audit Committee was established to (i) review and approve the scope of audit procedures employed by our independent auditors; (ii) review and approve the audit reports rendered by our independent auditors; (iii) approve the audit fee charged by the independent auditors; (iv) report to the Board of Directors with respect to such matters; (v) recommend the selection of independent auditors; and (vi) discharge such other responsibilities as may be delegated to it from time to time by the Board of Directors and to discharge such other responsibilities as may be delegated to it from time to time by the Board of Directors. Effective as of August 17, 2000, the Board of Directors adopted a formal charter for its Audit Committee, which was amended effective June 30, 2005. Employees At March 31, 2007, we employed a total of 3,366 persons, compared with 3,460 persons at March 31, 2006 and 3,050 persons at March 31, 2005; 45 employees in Hong Kong (45 in 2006 and 42 in 2005), 3,289 employees in China (3,380 in 2006 and 2,973 in 2005), 18 employees in Germany, (20 in 2006 and 22 in 2005), 2 employees in Poland (2 in 2006 and 2005), 4 employees in the United States (4 in 2006 and 2 in 2005) and 8 in Canada (9 in 2006 and 2005). Employees are not covered by collective bargaining agreements. We consider our global labor practices and employee relations to be good. 50 Share Ownership The following table shows the number of shares of common stock beneficially owned by our directors and executive officers as of August 21, 2007:
Total Number of Shares of Shares of Common Stock Common Stock Percent of Owned of Beneficially Beneficial Name Record Options Held Owned Ownership ---- ------ ------------ ----- --------- Anthony So 1,626,195(1) 636,500(2) 2,262,695 36.41% Kim Wah Chung 93,700 115,000(3) 208,700 3.67% Cathy Kit Teng Pang (10) 35,438 115,000(3) 150,438 2.64% Henry F. Schlueter 34,000 40,000(4)(9) 74,000 1.32% Woo-Ping Fok 64,407 50,000(6)(8)(9) 114,407 2.03% J. Stewart Jackson IV 462,575(7) 60,000(5)(8)(9) 522,575 9.27% All Directors and Officers as a 2,316,315 1,016,500 3,332,815 55.34% group (6 persons)
(1) Includes 1,143,421 shares of common stock owned of record by a corporation that is wholly owned by a trust of which Mr. So is the sole beneficiary. (2) Includes options to purchase 158,000 shares of common stock at an exercise price of $8.00 per share expiring January 6, 2010, options to purchase 128,000 shares of common stock at an exercise price of $3.65 per share expiring on April 9, 2011, options to purchase 128,000 shares of common stock at an exercise price of $2.50 per share expiring on March 6, 2012, and options to purchase 222,500 shares of common stock at an exercise price of $1.61 per share expiring on March 31, 2013. (3) Includes options to purchase 20,000 shares of common stock at an exercise price of $8.00 per share expiring January 6, 2010, options to purchase 20,000 shares of common stock at an exercise price of $3.65 per share expiring on April 9, 2011, options to purchase 20,000 shares of common stock at an exercise price of $2.50 per share expiring on March 6, 2012, and options to purchase 55,000 shares of common stock at an exercise price of $1.61 per share expiring on March 31, 2013. (4) Includes options to purchase 10,000 shares of common stock at an exercise price of $8.00 per share expiring January 6, 2010. (5) Includes options to purchase 10,000 shares of common stock at an exercise price of $2.55 expiring on October 15, 2011 and 10,000 shares of common stock at an exercise price of $1.61 per share expiring on March 31, 2013. (6) Includes options to purchase 10,000 shares of common stock at an exercise price of $8.125 per share expiring January 12, 2010. (7) Includes 461,975 shares held by Mr. Jackson and 600 shares held by Mr. Jackson's wife. (8) Includes options to purchase 10,000 shares of common stock at an exercise price of $7.875 per share expiring on January 9, 2011. (9) Includes options to purchase 10,000 shares of common stock at an exercise price of $6.12 expiring on March 25, 2014, Includes options to purchase 10,000 shares of common stock at an exercise price of $6.20 per share expiring on September 12, 2014 and options to purchase 10,000 shares of common stock at an exercise price of $4.50 per share expiring on December 4, 2015. (10) Cathy Kit Teng Pang resigned as a director on November 16, 2006 and resigned as the Chief Financial Officer, Secretary and Treasurer on June 28, 2007. 51 Stock Option and Bonus Plans The 1996 Stock Option Plan In October 1996, our stockholders adopted the 1996 Stock Option Plan (the "Employees' Plan") which provides for the grant of options to purchase an aggregate of not more than 400,000 shares of our common stock. In January 2000, our shareholders approved the proposal of the Board of Directors to increase from 400,000 to 900,000 in the aggregate the number of options to purchase common stock under the Employees' Plan. The purpose of the Employees' Plan is to make options available to management and employees in order to encourage them to secure or increase on reasonable terms their stock ownership and to encourage them to remain with the Company. The Employees' Plan is administered by a committee appointed by the Board of Directors which determines the persons to be granted options under the Employees' Plan, the number of shares subject to each option, the exercise price of each option and the option period, subject to the requirement that no option may be exercisable more than ten years after the date of grant. The exercise price of an option may be less than fair market value of the underlying shares of common stock. No options granted under the Employee Plan are transferable by the optionee other than by will or the laws of descent and distribution and each option will be exercisable during the lifetime of the optionee, only by such optionee. The exercise price of an option granted pursuant to the Employees' Plan may be paid in cash, by the surrender of options, in common stock, in other property, including the optionee's promissory note, or by a combination of the above, at our discretion. The 1996 Non-Employee Directors' Stock Option Plan In October 1996, our stockholders adopted the 1996 Non-Employee Directors' Stock Option Plan (the "Non-Employee Directors' Plan") which provides for the grant of options to purchase an aggregate of not more than 100,000 shares of common stock. In January 2000, our shareholders approved the proposal of the Board of Directors to increase from 100,000 to 600,000 in the aggregate the number of options to purchase common stock under the Non-Employee Directors' Plan. On November 16, 2006, the Board of Directors of the Company voted to rescind the Company's 1996 Non-Employee Directors' Stock Option Plan (the "Non-Employee Directors' Plan"). All options previously granted under the Non-Employee Directors' Plan continue in full force and effect pursuant to their terms of grant. During the fiscal year ended March 31, 2007, no options were granted under the 1996 Non-Employee Directors' Plan. 52 The 2004 Stock Option Plan On March 23, 2004, our stockholders adopted the 2004 Stock Option Plan (the "2004 Plan") which provides for the grant of up to six hundred thousand (600,000) shares of the Company's common stock in the form of stock options, subject to certain adjustments as described in the 2004 Plan. The purpose of the 2004 Plan is to secure key employees to remain in the employ of the Company and to encourage such employees to secure or increase on reasonable terms their common stock ownership in the Corporation. The Company believes that the 2004 Plan promotes continuity of management and increased incentive and personal interest in the welfare of the Company. The 2004 Plan is administered by a committee appointed by the Board of Directors which consists of at least two but not more than three members of the Board, one of who shall be a non-employee of the Company. The committee members currently are Anthony So and Woo Ping Fok. The committee determines the specific terms of the options granted, including the employees to be granted options under the plan, the number of shares subject to each option grant, 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 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 the optionee. The exercise price of an option granted pursuant to the 2004 Plan may be paid in cash, by the surrender of options, in common stock, in other property, including a promissory note from the optionee, or by a combination of the above, at the discretion of the Committee. As of March 31, 2007, no shares option had been granted under the Stock Bonus Plan. 2004 Stock Bonus Plan On September 7, 2004, our stockholders adopted the 2004 Stock Bonus Plan (the "Stock Bonus Plan") which authorizes the issuance of up to five hundred thousand (500,000) shares of the Corporation's Common Stock in the form of stock a stock bonus. The purpose of this Stock Bonus Plan is to: (i) induce key employees to remain in the employ of the Corporation, or of any subsidiary of the Corporation; (ii) encourage such employees to secure or increase their stock ownership in the Corporation; and (iii) reward employees, non-employee directors, advisors and consultants for services rendered or to be rendered to or for the benefit of the Corporation, or any of its subsidiaries. The Corporation believes that Stock Bonus Plan will promote continuity of management and increased incentive and personal interest in the welfare of the Corporation. The Stock Bonus Plan shall be administered by a committee appointed by the Board of Directors which consists of at least two but not more than three members of the Board, one of who shall be a non-employee of the Corporation. The Committee members currently are Anthony So and Woo Ping Fok. The Committee has the authority, in its sole discretion: (i) to determine the parties to receive 53 bonus stock, the times when they shall receive such awards, the number of shares to be issued, and the time, terms and conditions of the issuance of any such shares; (ii) to construe and interpret the terms of the Stock Bonus Plan; (iii) to establish, amend and rescind rules and regulations for the administration of the Stock Bonus Plan; and (iv) to make all other determinations necessary or advisable for administering the Stock Bonus Plan. As of March 31, 2007, no shares had been granted under the Stock Bonus Plan. Item 7. Major Shareholders and Related Party Transactions Major shareholders We are not directly or indirectly owned or controlled by any foreign government or by another corporation. The following table sets forth, as of August 21, 2007, beneficial ownership of our common stock by each person known by us to own beneficially 5% or more of our common stock outstanding as of such date. Except as otherwise indicated, all shares are owned directly and hold equal voting rights.
Name Amount Owned ---- ------------ Percent of Shares of Options to Class (1) Common Stock Purchase Common Stock Beneficially Owned ------------ --------------------- ------------------ Anthony So 1,626,195(2) 636,500(3) 36.41% John Stewart Jackson IV 462,575 60,000(3) 9.27% W. Douglas Moreland 501,400 0 8.99% Royce & Associates LLC 297,000 0 5.32%
(1) Based on beneficial ownership of both shares of common stock and of options to purchase common stock that is immediately exercisable. (2) Includes 1,143,421 shares of common stock owned of record by a corporation that is wholly owned by a trust of which Mr. So is the sole beneficiary. (3) See "Share Ownership" for additional information. There are no arrangements known to us, which may at a subsequent date, result in a change in control of the Company. Related Party Transactions During the fiscal year ended March 31, 2007 we paid Schlueter & Associates, P.C. an aggregate of $14,571 for legal fees and expenses. Mr. Henry F. Schlueter, a director, is the Managing Director of Schlueter & Associates, P.C. As of March 31, 2007, Bonso Electronics Limited ("BEL"), a wholly-owned foreign subsidiary of the Company, had paid a deposit of $795,000 with regard to a potential investment in a hotel in the PRC. Subsequent to this fiscal year end, Mr. Anthony So, Chairman of Bonso decided to take up BEL's potential investment and paid BEL the full amount in July 2007. This hotel is now held by Mr. Anthony So and three third parties. 54 Interests of Experts and Counsel Not Applicable. Legal Proceedings Not Applicable. Item 8. Financial Information Financial Statements Our Consolidated Financial Statements are set forth under Item 18. Financial Statements. Item 9. The Offer and Listing Listing Details Our common stock is traded only in the United States over-the-counter market. It is quoted on the Nasdaq Global Market ("NASDAQ") under the trading symbol "BNSO." The following table sets forth, for the periods indicated, the range of high and low closing sales prices per share reported by NASDAQ. The quotations represent prices between dealers and do not include retail markup markdown or commissions and may not necessarily represent actual transactions. The following table sets forth the high and low sale prices for each of the last five years: Period High Low ------ ---- --- April 1, 2002 to March 31, 2003 $3.45 $1.41 April 1, 2003 to March 31, 2004 $9.71 $1.70 April 1, 2004 to March 31, 2005 $9.09 $3.90 April 1, 2005 to March 31, 2006 $7.00 $3.40 April 1, 2006 to March 31, 2007 $5.47 $3.01 55 The following table sets forth the high and low sale prices during each of the quarters in the two-year period ended June 30, 2007. Period High Low ------ ---- --- April 1, 2005 to June 30, 2005 $5.48 $3.40 July 1, 2005 to September 30, 2005 $7.00 $4.80 October 1, 2005 to December 31, 2005 $5.35 $3.75 January 1, 2006 to March 31, 2006 $5.93 $4.04 April 1, 2006 to June 30, 2006 $5.28 $4.02 July 1, 2006 to September 30, 2006 $4.25 $3.11 October 1, 2006 to December 31, 2006 $5.23 $3.01 January 1, 2007 to March 31, 2007 $5.47 $3.77 April 1, 2007 to June 30, 2007 $4.26 $3.42 The following table sets forth the high and low sale prices during each of the most recent six months. Period High Low ------ ---- --- March 2007 $4.90 $3.77 April 2007 $4.26 $3.75 May 2007 $4.15 $3.70 June 2007 $3.89 $3.42 July 2007 $4.00 $3.21 August 2007 $3.44 $2.40 On September 12, 2007, the closing price of our common stock was $2.13. Of the 5,577,639 shares of common stock outstanding as of August 21, 2007, 3,713,550 were held in the United States by 208 holders of record. We have 214 shareholders of record and estimate that we have 1,239 shareholders holding their stock in street name (who have not objected to their names being disclosed to us). Transfer and Warrant Agent The transfer agent and registrar for the common stock and the warrant agent for the warrants is Computershare, 1745 Gardena Avenue #200, Glendale, California 91204. Item 10. Additional Information 56 Share Capital Our authorized capital is $170,000 consisting of 23,333,334 shares of common stock, $0.003 par value per share, and 10,000,000 authorized shares of preferred stock, $0.01 par value, divided into 2,500,000 shares each of class A preferred stock, class B preferred stock, class C preferred stock and class D preferred stock. Information with respect to the number of shares of common stock outstanding at the beginning and at the end of the last three fiscal years is presented in the Consolidated Statements of Changes in Shareholders' Equity for the fiscal years ended March 31, 2005, 2006 and 2007 included herein in Item 18. At August 31, 2007, there were 5,577,639 shares of our common stock outstanding, all of which were fully paid. In addition, we had outstanding 1,104,500 options to purchase common stock as follows: Number of Exercise Price Expiration Options per Share Date --------- ----------- ------ 228,000 $8.00 January 6, 2010 20,000 $8.125 January 12, 2010 30,000 $7.875 January 9, 2011 196,000 $3.65 April 9, 2011 10,000 $2.55 October 15, 2011 168,000 $2.50 March 6, 2012 342,500 $1.61 March 31, 2013 40,000 $6.12 March 25, 2014 40,000 $6.20 September 12, 2014 30,000 $4.50 December 4, 2015 At August 31, 2007 there were no shares of our preferred stock outstanding. Memorandum and Articles of Association We are registered in the British Virgin Islands and have been assigned company number 9032 in the register of companies. Our registered agent is HWR Services Limited and is at Craigmuir Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands. The object or purpose of the Company is to engage in any act or activity that is not prohibited under British Virgin Islands law as set forth in Paragraph 4 of our Memorandum of Association. As an International Business Company, we are prohibited from doing business with persons resident in the British Virgin Islands, owning real estate in the British Virgin Islands or acting as a bank or insurance company. We do not believe that these restrictions materially affect our operations. Paragraph 57(c) of our Amended Articles of Association (the "Articles") provides that a director may be counted as one of a quorum in respect of any contract or arrangement in which the director is materially interested; however, if the agreement or transaction cannot be approved by a resolution of directors without counting the vote or consent of any interested director, the agreement or transaction may only be validated by approval or ratification by a resolution of the members. Paragraph 53 of the Articles allows the directors to vote compensation to themselves in respect of services rendered to the Company. 57 Paragraph 66 of the Articles provides that the directors may by resolution exercise all the powers of the Company to borrow money and to mortgage or charge its undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of ours or of any third party. Such borrowing powers can be altered by an amendment to the Articles. There is no provision in the Articles for the mandatory retirement of directors. Directors are not required to own shares of the Company in order to serve as directors. Our authorized share capital is $170,000 divided into 23,333,334 shares of common stock, $0.003 par value, and 10,000,000 authorized shares of preferred stock, $0.01 par value. Holders of our common stock are entitled to one vote for each whole share on all matters to be voted upon by shareholders, including the election of directors. Holders of our common stock do not have cumulative voting rights in the election of directors. All of our common shares are equal to each other with respect to liquidation and dividend rights. Holders of our common shares are entitled to receive dividends if and when declared by our board of directors out of funds legally available under British Virgin Islands law. In the event of our liquidation, all assets available for distribution to the holders of our common shares are distributable among them according to their respective holdings. Holders of our common stock have no preemptive rights to purchase any additional un-issued common shares. No shares of our preferred stock have been issued, however the board of directors has the ability to determine the rights, preferences and restrictions to the preferred stock at their discretion. Paragraph 7 of the Memorandum of Association provides that without prejudice to any special rights previously conferred on the holders of any existing shares, any share may be issued with such preferred, deferred or other special rights or such restrictions, whether in regard to dividend, voting, return of capital or otherwise as the directors may from time to time determine. Paragraph 10 of the Memorandum of Association provides that if at any time the authorized share capital is divided into different classes or series of shares, the rights attached to any class or series may be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of any other class or series of shares which may be affected by such variation. Paragraph 105 of the Articles of Association provides that our Memorandum and Articles of Association may be amended by a resolution of members or a resolution of directors. Thus, our board of directors without shareholder approval may amend our Memorandum and Articles of Association. This includes amendments to increase or reduce our authorized capital stock. Our ability to amend our Memorandum and Articles of Association without shareholder approval could have the effect of delaying, deterring or preventing a change in control of the Company, including a tender offer to purchase our common shares at a premium over the then current market price. Provisions in respect of the holding of general meetings and extraordinary general meetings are set out in Paragraphs 68 through 77 of the Articles and under the International Business Companies Act. The directors may convene meetings of the members at such times and in such manner and places as the directors consider necessary or desirable, and they shall convene such a meeting upon the written request of members holding more than 30% of the votes of our outstanding voting shares. 58 British Virgin Islands law and our Memorandum and Articles of Association impose no limitations on the right of nonresident or foreign owners to hold or vote our securities. There are no provisions in the Memorandum and Articles of Association governing the ownership threshold above which shareholder ownership must be disclosed. A copy of our Memorandum and Articles of Association, as amended, has been filed as an exhibit to the Registration Statement on Form F-2 (SEC File No. 333-32524). Material Contracts The following summarizes each material contract, other than contracts entered into in the ordinary course of business, to which Bonso or any subsidiary of Bonso is a party, for the two years immediately preceding the filing of this report: We signed a Banking Facility Letter, dated June 6, 2007 between Bonso and Standard Chartered Bank for a HK $78,000,000 letter of credit, trust receipt facility, export D/P bills, export trade loan, factoring and overdraft facility. We signed a Banking Facility Letter dated March 23, 2007 between Bonso and KBC Bank Hong Kong Branch for a HK $10,500,000 letter of credit, trust receipt facility, export D/P bills, export trade loan, factoring and overdraft facility and a EURO 3,300,000 bank guarantee to KBC Bank Deutschland AG, Germany to secure a trade facility to one of the subsidiaries, Korona Haushaltswaren GmbH & Co. We signed a Banking Facility Letter, dated March 2, 2007 between Bonso and Hang Seng Bank Limited for a HK $66,720,000 letter of credit, trust receipt facility, export D/P bills, export trade loan, factoring and overdraft facility. We signed a Banking Facility Letter, dated June 12, 2006 between Bonso and the Hong Kong and Shanghai Banking Corporation Limited for a HK $37,500,000 letter of credit, trust receipt facility, export D/P bills, export trade loan, factoring and overdraft facility. Exchange Controls There are no exchange control restrictions on payments of dividends on our common stock or on the conduct of our operations either in Hong Kong, where our principal executive offices are located, or the British Virgin Islands, where we are incorporated. Other jurisdictions in which we conduct operations may have various exchange controls. Taxation and repatriation of profits regarding our China operations are regulated by Chinese laws and regulations. To date, these controls have not had and are not expected to have a material impact on our financial results. There are no material British Virgin Islands laws that impose 59 foreign exchange controls on us or that affect the payment of dividends, interest or other payments to holders of our securities who are not residents of the British Virgin Islands. British Virgin Islands law and our Memorandum and Articles of Association impose no limitations on the right of nonresident or foreign owners to hold or vote our securities. Taxation No reciprocal tax treaty regarding withholding exists between the United States and the British Virgin Islands. Under current British Virgin Islands law, dividends, interest or royalties paid by us to individuals are not subject to tax as long as the recipient is not a resident of the British Virgin Islands. If we were to pay a dividend, we would not be liable to withhold any tax, but shareholders would receive gross dividends, if any, irrespective of their residential or national status. Dividends, if any, paid to any United States resident or citizen shareholder are treated as dividend income for United States federal income tax purposes. Such dividends are not eligible for the 70% dividends-received deduction allowed to United States corporations on dividends from a domestic corporation under Section 243 of the United States Internal Revenue Code of 1986 (the "Internal Revenue Code"). Various Internal Revenue Code provisions impose special taxes in certain circumstances on non-United States corporations and their shareholders. You are urged to consult your tax advisor with regard to such possibilities and your own tax situation. A foreign corporation will be treated as a passive foreign investment company ("PFIC") for United States federal income tax purposes if, after applying relevant look-through rules with respect to the income and assets of subsidiaries, 75% or more of its gross income consists of certain types of passive income or 50% or more of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income. For this purpose, passive income generally includes dividends, interest, royalties, rents (other that rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. We presently believe that we are not a PFIC and do not anticipate becoming a PFIC. This is, however, a factual determination made on an annual basis and is subject to change. If we were to be classified as a PFIC in any taxable year, (i) U.S. Holders would generally be required to treat any gain on sales of our shares held by them as ordinary income and to pay an interest charge on the value of the deferral of their United States federal income tax attributable to such gain and (ii) distributions paid by us to our U.S. Holders could also be subject to an interest charge. In addition, we would not provide information to our U.S. Holders that would enable them to make a "qualified electing fund" election under which, generally, in lieu of the foregoing treatment, our earnings would be currently included in their United States federal income. In addition to United States federal income taxation, shareholders may be subject to state and local taxes upon their receipt of dividends. Documents on Display You may read and copy documents referred to in this Annual Report on Form 20-F that have been filed with the Securities and Exchange Commission (the "Commission") at the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. You can also obtain copies of our Commission filings by going to the Commission's website at http://www.sec.gov. 60 The SEC allows us to "incorporate by reference" the information we file with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this Annual Report on Form 20-F. Item 11. Quantitative and Qualitative Disclosures About Market Risk We are exposed to a certain level of interest rate risk and foreign currency exchange risk. Interest Rate Risk Our interest rate risk primarily arises from our long-term debt and our general banking facilities. As at March 31, 2007, there was no long-term debt. We had utilized $7,772,602 of our total banking facilities of $ 30,017,128 . Based on the maturity profile and composition of our long-term debt and general banking facilities, including the fact that our banking facilities are at variable interest rates, we estimate that changes in interest rates will not have a material impact on our operating results or cash flows. We intend to manage our interest rate risk through appropriate borrowing strategies. We have not entered into interest rate swap or risk management agreements; however, it is possible that we may do so in the future. A summary of our debts as at March 31, 2007 which were subjected to variable interest rates is as below: March 31, Interest 2007 rate ---- Notes payable $3,736,526 HIBOR + 1.5% Short-term loans $3,576,366 EONIA +1.15% to 1.95% HIBOR: Hong Kong Inter-bank Offered Rate EONIA : Euro Over Night Index Average. All the balances above are due within one year. For further information concerning our banking facilities the interest rates payable, and repayment terms please see Note 7 to our Consolidated Financial Statements. 61 Foreign Currency Exchange Rates For a discussion of our Foreign Currency Exchange Risk, See Item 5. Operating and Financial Review and Prospects "Foreign Currency Exchange Rates." Item 12. Description of Securities Other Than Equity Securities Not applicable. PART II Item 13. Defaults, Dividend Arrearages and Delinquencies. None. Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds. None. Item 15. Controls and Procedures Based on an evaluation carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer believe that our disclosure controls and procedures, as defined in Securities Exchange Act Rules 13a-15(d) and 15d-15(e), were, as of the end of the period covered by this report, to the best of their knowledge, effective. There has been no change in our internal control over financial reporting during the year ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our officers also concluded that disclosure controls and procedures are also effective to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to management to allow timely decisions regarding required disclosure. During the period covered by this annual report and during the last fiscal quarter, no change has occurred in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. We are aware of the importance of maintaining controls and procedures and are continuing to work towards improving our controls and procedures. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, ("Section 404"). On December 15, 2006, the SEC advised that it was extending further the dates that were published on September 29, 2005, to postpone the compliance date for filing internal control reports by companies not designated as accelerated filers. Under this revised compliance schedule, the Company will be required to include an internal control report of management with the annual report on Form 20-F beginning with the fiscal year ending March 31, 2008. Further, the Company will not be required to file the auditor's attestation report on internal control over financial reporting until it files its annual report for the fiscal year ending March 31, 2009. 62 In connection with this required Section 404 evaluation, we are planning to perform the system and process evaluation and testing required (and any necessary remediation) in an effort to comply with such requirements by the effective date for compliance. Our efforts to implement standardized internal control procedures and develop the internal tests necessary to verify the proper application of the internal control procedures and their effectiveness will be a key area of focus for our board of directors, our audit committee and our senior management. This evaluation is expected to underlie the internal control report of management and auditor attestation requirements of Section 404. Item 16. Reserved Item 16A. Audit Committee Financial Expert Bonso does not have an independent member of the audit committee that is deemed to be a financial expert. Item 16B. Code of Ethics We have adopted a code of ethics that applies to our Chief Executive Officer and Chief Financial Officer. We intend to disclose any changes in or waivers from our code of ethics by filing a Form 6-K. Stockholders may request a free copy in print form from our Chief Financial Officer at: Bonso Electronics International, Inc. Unit 1106 - 1110 11/F, Star House 3 Salisbury Road Tsimshatsui Kowloon, Hong Kong Item 16C. Principal Accountant Fees and Services. Audit Committee's pre-approval policies and procedure The Audit Committee must pre-approve the audit and non-audit services performed by the independent auditor in order to assure that the provision of such services does not impair the auditor's independence. Before the Company or any of its subsidiaries engages the independent auditor to render a service, the engagement must be either: (1) specifically approved by the Audit Committee; or (2) entered into pursuant to this Pre-Approval Policy. 63 The term of any pre-approval is 12 months from the date of pre-approval, unless the Audit Committee specifically provides for a different period. The Audit Committee may periodically revise the list of pre-approved services. The Audit Committee may delegate pre-approval authority to one or more of its members. The member or members to whom such authority is delegated shall report any pre-approval decisions to the Audit Committee at its next scheduled meeting. The Audit Committee may not delegate to management the Audit Committee's responsibilities to pre-approve services performed by the independent auditor. The Audit Committee must specifically pre-approve the terms of the annual audit services engagement. The Audit Committee shall approve, if necessary, any changes in terms resulting from changes in audit scope, Company structure or other matters. In addition to the annual audit services engagement approved by the Audit Committee, the Audit Committee may grant pre-approval for other audit services, which are those services that only the independent auditor reasonably can provide. The Audit Committee may grant pre-approval to those permissible non-audit services classified as other services that it believes would not impair the independence of the auditor, including those that are routine and recurring services. The Audit Committee may consider the amount or range of estimated fees as a factor in determining whether a proposed service would impair the auditor's independence. Where the Audit Committee has approved an estimated fee for a service, the pre-approval applies to all services described in the approval. However, in the event the invoice in respect of any such service is materially in excess of the estimated amount or range, the Audit Committee must approve such excess amount prior to payment of the invoice. The Audit Committee expects that any requests to pay invoices in excess of the estimated amounts will include an explanation as to the reason for the overage. The Company's independent auditor will be informed of this policy. The Company's management shall inform the Audit Committee of each service performed by the independent auditor pursuant to this Pre-Approval Policy. Requests or applications to provide services that require separate approval by the Audit Committee shall be submitted to the Audit Committee by both the independent auditor and the Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC's and the Public Company Accounting Oversight Board's rules on auditor independence. The audit fee indicated below was pre-approved by the Audit Committee before the auditor commenced their work. Audit Fees The aggregate fees billed by PricewaterhouseCoopers for professional services rendered for the audit of the Corporation's annual consolidated financial statements for the fiscal year ended March 31, 2007 were $261,282 and for the fiscal year ended March 31, 2006 were $236,538. 64 Audit Related Fees There were no fees billed by PricewaterhouseCoopers for professional services rendered for assurance and related services provided by PricewaterhouseCoopers that were reasonably related to the performance of the audit and are not reported above under "Audit Fees" for the fiscal year ended March 31, 2007 and for the fiscal year ended March 31, 2006. Tax Fees The aggregate fees billed by PricewaterhouseCoopers for professional services rendered for tax compliance for the fiscal year ended March 31, 2007 were $115,000 and for the fiscal year ended March 31, 2006 were $6,000. Item 16D. Exemptions from the Listing Standards for Audit Committees Pursuant to NASDAQ Marketplace Rule 4350(a), a foreign private issuer may follow its home country practice in lieu of Rule 4350, which sets forth the qualitative Listing Requirements for NASDAQ listed companies. Rule 4350 requires, among other things, that a listed company have at least three members on its audit committee. The Company currently has an audit committee consisting of one director who is deemed to be "independent" as defined in NASDAQ Marketplace Rule 4200. The Company has obtained a written statement from independent counsel in the British Virgin Islands certifying that the Company's corporate governance practices relating to the single member audit committee is not prohibited by British Virgin Island law. See "NASDAQ Exemptions and Home Country Practices." Item 16E. Purchasers of Equity Securities by the Issuer and Affiliated Purchasers. In August of 2001, the Company's Board of Directors authorized a program for the Company to repurchase up to $500,000 of its common stock. This repurchase program does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time. No stocks had been repurchased since then up to March 31, 2006. On November 16, 2006, the Company's Board of Directors authorized another $1,000,000 for the Company to repurchase of its common stock under the same repurchase program. This authorization to repurchase shares increases the amount authorized for repurchase from $500,000 to $1,500,000. During the fiscal year ended March 31, 2007, 260,717 shares valued at $1,328,560 were purchased under this program. The Company may from time to time repurchase shares of its Common Stock under this program. The following table sets forth information concerning the Company's purchase of equity securities: 65
Period (Month) Total number of Average Price Paid Total Number of Approximate dollar Shares purchased Per Share Shares Purchased as value of Shares Part of Publically that May Yet Be Announced Plans or Purchased under the Programs Plans or Programs - ------------------------ ---------------------- --------------------- ---------------------- --------------------- December 2006 4,949 $4.38 4,949 $1,478,323 January 2007 166,562 $5.23 171,511 $607,253 February 2007 64,891 $4.91 236,402 $288,872 March 2007 24,315 $4.82 260,717 $171,440 PART III Item 17. Financial Statements. Not applicable. Item 18. Financial Statements. The following Financial Statements are filed as part of this Annual Report: Page ---- Report of Independent Registered Public Accounting Firm F-1 Index to Consolidated Financial Statements F-2 Consolidated Balance Sheets as of March 31, 2006 and 2007 F-4 Consolidated Statements of Income (Loss) and Comprehensive F-5 Income (Loss) for the years ended March 31, 2005, 2006 and 2007 Consolidated Statements of Changes in Shareholders' Equity for the F-6 years ended March 31, 2005, 2006 and 2007 Consolidated Statements of Cash Flows for the years ended F-7 March 31, 2005, 2006 and 2007 Notes to Consolidated Financial Statements F-8 through F-35
66 Item 19. Exhibits. 4.1 Banking Facility Letter dated March 23, 2007 between Bonso and KBC Bank Hong Kong Branch. 4.2 Banking Facility Letter, dated June 6, 2007 between Bonso and Standard Chartered Bank 4.3 Banking Facility Letter, dated June 12, 2006 between Bonso and the Hong Kong and Shanghai Banking Corporation Limited 4.4 Banking Facility Letter, dated March 2, 2007 between Bonso and Hang Seng Bank Limited 11.1 Code of Ethics For Chief Executive Officer and Chief Financial Officer (1) 12.1 Certification of Officer Pursuant to Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 12.2 Certification of Officer Pursuant to Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 12.3 Certification Pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - ----------------- (1) Filed as an Exhibit on Form 20-F filed with the Commission on August 13, 2004. 67 SIGNATURE The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf. BONSO ELECTRONICS INTERNATIONAL INC. Dated September 27, 2007 /s/ Anthony So ----------------------------------- Anthony So, Chairman of the Board, Chief Executive Officer, and Director 68 Consolidated Financial Statements Bonso Electronics International Inc. (Incorporated in the British Virgin Islands) March 31, 2007 Bonso Electronics International Inc. Index to Consolidated Financial Statements Contents Pages Report of Independent Registered Public Accounting Firm.................F-1 Consolidated Balance Sheets as of March 31, 2006 and 2007...............F-2 Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the years ended March 31, 2005, 2006 and 2007...........................................F-3 Consolidated Statements of Changes in Shareholders' Equity for the years ended March 31, 2005, 2006 and 2007...........................................F-4 Consolidated Statements of Cash Flows for the years ended March 31, 2005, 2006 and 2007...........................................F-5 Notes to Consolidated Financial Statements...........................F-6 to F-35 Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders of Bonso Electronics International Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income (loss) and comprehensive income (loss), of cash flows and of shareholders' equity present fairly, in all material respects, the financial position of Bonso Electronics International Inc. and its subsidiaries at March 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2007 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers Hong Kong, September 27, 2007 F-1
Bonso Electronics International Inc. Consolidated Balance Sheets (Expressed in United States Dollars) March 31 ----------------------------- Note 2006 2007 $ $ Assets Current assets Cash and cash equivalents 8,582,257 8,118,018 Trade receivables, net 2 6,740,229 6,739,567 Inventories 3 15,035,216 14,997,788 Tax recoverable 78,735 2,117 Other receivables, deposits and prepayments 2,165,479 2,678,328 Investment - 700,000 ------- ------- Total current assets 32,601,916 33,235,818 ---------- ---------- Deposits 90,711 - Long term investment 500,000 - Deferred income tax assets 5 82,529 87,369 Goodwill 10 842,821 842,821 Brand name and other intangible asset, net 10 2,526,982 2,313,434 Property, plant and equipment Leasehold land and buildings 13,787,334 13,672,257 Plant and machinery 16,286,028 17,294,870 Furniture, fixtures and equipment 4,341,105 4,805,189 Motor vehicles 456,237 459,721 ---------- ---------- 34,870,704 36,232,037 Less: accumulated depreciation and impairment (22,036,775) (25,192,864) ------- ------- Property, plant and equipment, net 12,833,929 11,039,173 ---------- ---------- Total assets 49,478,888 47,518,615 ========== ========== Liabilities and shareholders' equity Current liabilities Bank overdraft 7 471,254 459,710 Notes payable 7 3,310,673 3,736,526 Accounts payable 6,288,213 5,354,326 Accrued charges and deposits 2,434,994 2,357,132 Income tax liabilities 5 - 814,374 Short-term loans 7 2,936,467 3,576,366 Current portion of long-term debts 4 48,329 - Current portion of capital lease obligations 6 166,802 95,725 ---------- ---------- Total current liabilities 15,656,732 16,394,159 ---------- ---------- Capital lease obligations, net of current portion 6 - 59,258 Deferred income tax liabilities 5 19,863 13,901 Commitments and contingencies (Notes 6 and 12) Shareholders' equity Common stock par value $0.003 per share - authorized shares - 23,333,334 - issued and outstanding shares : 2006 & 2007 - 5,577,639 16,729 16,729 Additional paid-in capital 21,764,788 21,764,788 Retained earnings 11,234,006 9,584,181 Accumulated other comprehensive income 786,770 1,014,159 Common stock held at treasury (260,717 shares) 14 - (1,328,560) ---------- ---------- 33,802,293 31,051,297 ========== ========== Total liabilities and shareholders' equity 49,478,888 47,518,615 ========== ========== See notes to these consolidated financial statements F-2 Bonso Electronics International Inc. Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (Expressed in United States Dollars) Year ended March 31, Note 2005 2006 2007 ----------------------------------------------------- $ $ $ Net sales 16 69,602,192 64,542,963 66,491,380 Cost of sales 53,138,410 51,114,155 53,946,323 ---------- ---------- ---------- Gross margin 16,463,782 13,428,808 12,545,057 Selling expenses 2,595,222 2,110,563 2,477,249 Salaries and related costs 5,215,798 5,681,175 5,437,654 Research and development expenses 710,355 847,401 983,172 Administration and general expenses 4,079,201 3,420,485 3,004,358 Amortization of brand name 10 200,000 200,000 200,000 Impairment of goodwill 10 - 258,141 - Loss from water damage 11 - - 700,950 ---------- ---------- ---------- Income (Loss) from operations 16 3,663,206 911,043 (258,326) Interest income 80,955 202,155 312,768 Interest expenses (416,774) (504,280) (626,188) Foreign exchange loss (98,051) (183,887) (183,952) Other income 372,133 190,571 302,266 ---------- ---------- ---------- Income (Loss) before income taxes and minority interest 3,601,469 615,602 (453,432) Income tax expense 5 (266,059) (131,474) (917,511) ---------- ---------- ---------- Net income (loss) before minority interest 3,335,410 484,128 (1,370,943) Minority interest 14,202 - - ---------- ---------- ---------- Net income (loss) 3,349,612 484,128 (1,370,943) Other comprehensive income, net of tax: Foreign currency translation adjustments, net of tax 290,354 (56,053) 227,389 ---------- ---------- ---------- Comprehensive income (loss) 3,639,966 428,075 (1,143,554) ---------- ---------- ---------- Earnings (Loss) per share Basic 13 0.59 0.09 (0.25) ---------- ---------- ---------- Diluted 13 0.55 0.08 (0.25) ---------- ---------- ---------- See notes to these consolidated financial statements F-3 Bonso Electronics International Inc. Consolidated Statements of Shareholders' Equity (Expressed in United States Dollars) Common stock -------------------------- Accumulated other comprehensive Shares Additional Common income-foreign Total issued and Amount paid-in Stock held Retained currency shareholders' outstanding outstanding capital at treasury earnings adjustments equity ----------- ----------- ------- ----------- -------- ----------- ------ $ $ $ $ $ $ Balance, March 31, 2004 5,527,639 16,579 21,665,801 -- 8,515,793 552,469 30,750,642 Net income -- -- -- -- 3,349,612 -- 3,349,612 Common stock issued upon exercise of warrants 50,000 150 98,987 -- -- -- 99,137 Dividends paid -- -- -- -- (557,763) -- (557,763) Foreign exchange translation adjustment -- -- -- -- -- 290,354 290,354 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, March 31, 2005 5,577,639 16,729 21,764,788 -- 11,307,642 842,823 33,931,982 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income -- -- -- -- 484,128 -- 484,128 Dividends paid -- -- -- -- (557,764) -- (557,764) Foreign exchange ranslation adjustment -- -- -- -- -- (56,053) (56,053) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, March 31, 2006 5,577,639 16,729 21,764,788 -- 11,234,006 786,770 33,802,293 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income -- -- -- -- (1,370,943) -- (1,370,943) Shares repurchase -- -- -- (1,328,560) -- -- (1,328,560) Dividends paid -- -- -- -- (278,882) -- (278,882) Foreign exchange translation adjustment -- -- -- -- -- 227,389 227,389 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, March 31, 2007 5,577,639 16,729 21,764,788 (1,328,560) 9,584,181 1,014,159 31,051,297 ----------- ----------- ----------- ----------- ----------- ----------- ----------- See notes to these consolidated financial statements F-4 Bonso Electronics International Inc. Consolidated Statements of Cash Flows (Expressed in United States Dollars) Year Ended March 31, 2005 2006 2007 --------------------------------------------------- $ $ $ Cash flows from operating activities Net income / (loss) 3,349,612 484,128 (1,370,943) Adjustments to reconcile net income to net cash provided by operating activities : Depreciation 2,436,428 2,379,919 2,347,569 Amortization 336,658 290,267 290,946 Impairment of investment properties 148,198 69,077 5,414 (Gain)/loss on disposal of property, plant and equipment 35,392 (110,936) (54,409) Minority interest (14,202) -- -- Impairment of goodwill -- 258,141 -- Others 42,573 (19,903) 11,639 Changes in assets and liabilities: Trade receivables (196,199) 3,845,739 662 Other receivables, deposits and prepayments (561,664) (537,710) (422,138) Inventories (280,013) (3,686,505) 442,411 Deposits -- (90,711) -- Tax (payable)/ recoverable (428,154) 303,225 76,618 Accounts payable (1,367,085) (706,043) (1,063,091) Accrued charges and deposits (973,575) 456,772 (77,862) Notes payable 500,532 (434,053) 425,853 Income tax payable (279,485) -- 814,374 Deferred tax (27,434) (21,194) (10,802) ----------- ----------- ----------- Net cash generated from operating activities 2,721,582 2,480,213 1,416,241 ----------- ----------- ----------- Cash flows from investing activities Restricted cash deposits (511) 4,848 -- Proceeds from disposal of property, plant and equipment 22,256 579,896 173,583 Acquisition of property, plant and equipment (684,398) (1,340,134) (342,110) Acquisition of investment (500,000) -- (200,000) ----------- ----------- ----------- Net cash used in investing activities (1,162,653) (755,390) (368,527) ----------- ----------- ----------- Cash flows from financing activities Issue of shares on exercise of warrants and options 99,137 -- -- Repurchase of redeemable common stocks (1,445,808) -- -- Repurchase of common stocks -- -- (1,328,560) Repayment of long-term borrowings (146,667) (208,421) (48,329) Capital lease payments (433,869) (426,556) (250,513) Net advance from (repayment of) banking facilities (186,631) (1,657,181) 340,945 Payment of dividends to stockholders (557,763) (557,764) (278,882) ----------- ----------- ----------- Net cash used in financing activities (2,671,601) (2,849,922) (1,565,339) ----------- ----------- ----------- Net decrease in cash and cash equivalents (1,112,672) (1,125,099) (517,625) Effect of exchange rate changes on cash and cash equivalents held in foreign currencies 4,981 (232) 53,386 Cash and cash equivalents, beginning of year 10,815,279 9,707,588 8,582,257 ----------- ----------- ----------- Cash and cash equivalents, end of year 9,707,588 8,582,257 8,118,018 =========== =========== =========== Supplemental disclosure of cash flow information Cash paid during the year for: Interest paid 416,774 494,310 614,269 Income tax paid, net of refund 329,483 153,008 37,321 Non-cash investing and financing activities Other intangible assets reclassified from deposit 544,267 -- -- Property, plant and machinery acquired under capital leases -- 188,718 98,462 Interest income 80,955 202,155 312,768 See notes to these consolidated financial statements F-5
Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 1 Description of business and significant accounting policies Bonso Electronics International Inc. ("the Company") and its subsidiaries (collectively, the "Group") are engaged in the designing, manufacturing and selling of a comprehensive line of electronic scales and weighing instruments, electronic consumer products and telecommunication 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 receivable, and the valuation of long-lived assets. Actual results could differ from those estimates. The significant accounting policies are as follows: (a) Principles of consolidation The consolidated financial statements include the accounts of the Group. All significant inter-company accounts and transactions are eliminated in consolidation. Acquisitions of companies have been consolidated from the date on which control of the net assets and operations was transferred to the Group. Acquisitions of companies are accounted for using the purchase method of accounting. Goodwill represents the excess of the purchase cost over the fair value of assets acquired less liabilities assumed of acquired companies. (b) Cash and cash equivalents Cash and cash equivalents are short-term, highly liquid investments with original maturities of three months or less. Cash equivalents are stated at cost, which approximates fair value because of the short-term maturity of these instruments. F-6 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 1 Description of business and significant accounting policies (Continued) (c) Inventories Inventories are stated at the lower of cost or net realizable value with cost determined on a first-in, first-out basis. Net realizable value is the price at which inventories can be sold in the normal course of business after allowing for the costs of completion and disposal. The company continuously reviews slow-moving and obsolete inventory and assesses any inventory obsolescence based on inventory levels, material composition and expected usage as of that date. (d) Trade receivables Provision is made against trade receivables to the extent that collection is considered to be doubtful. (e) Investment Investment is related to a 7% zero coupon capital guaranteed fund with maturity on October 11, 2007 and an investment in a private company principally engaged in the biochemistry industry in the United States of America. The purpose of holding the investment is to generate higher income yield. The investment in the 7% zero coupon capital guaranteed fund is recorded at amortised cost and the investment in a private company is recorded at cost less accumulated impairment. (f) Deferred income taxes Amounts in the consolidated financial statements related to income taxes are calculated using the principles of SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Future tax benefits, such as net operating loss carry forwards, are recognized as deferred tax assets. Recognized deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. (g) Brand name Brand name acquired as part of the purchase of a business is capitalized based on the estimated fair value as at the date of acquisition and amortized using the straight-line method over the related estimated useful life of 15 years. Brand name is assessed for impairment according to the policy described in note 1(j). (h) Other intangible Assets Other intangible assets represent taxi licenses which are stated at cost and are amortized on a straight-line basis over the related granted useful life of 50 years, representing the shorter of their remaining term of the license period or the expected useful life to the Group. Taxi licenses entitled the Group to operate 5 taxis for 50 years in Shenzhen, the People's Republic of China ("PRC"). The purpose of holding these licenses is to generate higher income yield. Taxi licenses are assessed for impairment according to the policy described in note 1(j). F-7 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 1 Description of business and significant accounting policies (Continued) (i) Property, plant and equipment (i) Property, plant and equipment are stated at cost less accumulated depreciation. Leasehold land and buildings are depreciated on a straight-line basis over 15 to 50 years, representing the shorter of the remaining term of the lease or the expected useful life to the Group. (ii) Other fixed assets are carried at cost and depreciated using the straight-line method over their expected useful lives to the Group. The principal annual rates used for this purpose are: Plant and machinery - 14% to 33.3% Furniture, fixtures and equipment - 20% Motor vehicles - 20% (iii) The cost of major improvements and betterments is capitalized, whereas the cost of maintenance and repairs is expensed in the year incurred. (iv) Any gain or loss on disposal is included in the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). (j) Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets Long-lived assets held and used by the Group and intangible assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Group evaluates recoverability of assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment loss is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets calculated using a discounted future cash flows analysis. For the year ended March 31, 2007, the Group made a provision for impairment of approximately $5,414 (2006: $69,077, 2005: $148,198), on investment properties due to the decline in market value. Goodwill is subject to an annual impairment review. The evaluation of goodwill for impairment involves two steps: (1) the identification of potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill and (2) the measurement of the amount of goodwill loss by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill and recognizing a loss by the excess of the latter over the former. The company measures fair value based upon a discounted future cash flows analysis. Based on the assessment for the year ended March 31, 2007, no provision was made by the Group on impairment of goodwill (2006: $258,141, 2005: nil). F-8 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 1 Description of business and significant accounting policies (Continued) (k) Revenue recognition No revenue is recognized unless there is persuasive evidence of an arrangement, the price to the buyer is fixed or determinable, delivery has occurred and collectibility of the sales price is reasonably assured. Revenue is recognized when title and risk of loss transfers to the customer, which is generally when the product is shipped to the customer from our facility. Shipping costs billed to our customers are included within revenue. Associated costs are classified in cost of goods sold. The company provides to certain customers an additional two percent of certain products ordered in lieu of a warranty, which are recognized as cost of sales when these products are shipped to customers from our facility. In addition, certain products sold by the company are subject to a limited product quality warranty. The company accrues for estimated incurred but unidentified quality issues based upon historical activity and known quality issues if a loss is probable and can be reasonably estimated. The standard limited warranty period is one to three years. Quality returns, refunds, rebates and discounts are recorded net of sales at the time of sale to three years and estimated based on past history. All sales are based upon firm orders with fixed terms and conditions, which generally cannot be modified. Historically, we have not experienced material differences between our estimated amounts of quality returns, refunds, rebates and discounts and the actual results. In all contracts, there is no price protection or similar privilege in relation to the sale of goods. (l) Research and development costs Research and development costs include salaries, utilities, and contractor fees that is directly attributable to the conduct of research and development progress primarily related to the development of new design of products. Research and development costs are expensed in the financial period during which they are incurred. (m) Advertising Advertising costs are expensed as incurred and are included within selling expenses. (2007: $142,642, 2006: $255,006, 2005: $246,193) (n) Foreign currency translations (i) The Group's functional currency is United States dollar. The financial statements of foreign subsidiaries where United States dollar is the functional currency and which have certain transactions denominated in non-United States dollar currencies are translated into United States dollar at the exchange rates existing on that date. The translation of local currencies into United States dollars creates transaction adjustments which are included in net income (loss). Exchange differences are recorded in the Statements of Income (Loss) and Comprehensive Income (Loss). (ii) The financial statements of foreign subsidiaries, where the non-United States dollar currencies are the functional currencies, are translated into United States dollars using exchange rates in effect at period end for assets and liabilities and average exchange rates during each reporting period for statement of income. Adjustments resulting from translation of these financial statements are reflected as a separate component of shareholders' equity in accumulated other comprehensive income. F-9 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 1 Description of business and significant accounting policies (Continued) (o) Stock options and warrants Stock options have been granted to employees, directors and non-employee directors. Upon exercise of the options, the holder can acquire share of common stock of the Group at an exercise price determined by the board of directors. The options are exercisable based on the vesting terms stipulated in the option agreements or plan. The Group follows the intrinsic method of accounting for these options. Prior to 1 April 2006, the Company applies Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock options. Under APB Opinion No. 25, as the exercise price of all the options issued by the Company was equal to or higher than the market price of the underlying stock on the date of grant, no compensation expense has been recognized for the years ended March 31, 2005 and 2006. Effective April 1, 2006, the Company adopted the SFAS No. 123(R) in accounting for its employee stock option. Under the provisions of SFAS No. 123(R), the Company is required to measure the cost of employee services received in exchange for stock-based compensation measured at the fair value of the award as of the grant date. According to the modified prospective application method, the Company applies SFAS No. 123(R) for: (1) new awards granted after April 1, 2006, and (2) any portion of awards that were granted after April 1, 1995 and have not vested by April 1, 2006. As the Company did not have any unvested stock-based compensation as of April 1, 2006, the adoption of SFAS No. 123(R) did not have impact on the Company's financial statements. F-10 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 1 Description of business and significant accounting policies (Continued) (p) Recent accounting pronouncements Accounting for Income Taxes In July 2006, the FASB released FIN 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109 ("FIN 48"). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). Under FIN 48, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts, but without considering time values. FIN 48 is effective for annual periods beginning after December 15, 2006. The Company is in the process of assessing the impact of the recent accounting pronouncement. Fair Value Measurements In September 2006, the FASB issued FAS 157, Fair Value Measurements. FAS 157 provides guidance on the measurement of fair value in US GAAP and expands fair value measurement disclosures. FAS 157 is applicable whenever other accounting pronouncements require or permit fair value measurements and does not expand the use of fair value in any new circumstances. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is in the process of assessing the impact of the recent accounting pronouncement. The Fair Value Option for Financial Assets and Financial Liabilities In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of assessing the impact of the recent accounting pronouncement. (q) Comparatives Certain of the comparative figures, mainly the classifications of the various cash receipts and cash payments within the consolidated statements of cash flows, have been reclassified to conform to the current year's presentation. F-11 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 2 Allowance for doubtful accounts Changes in the allowance for doubtful accounts comprises:
2005 2006 2007 $ $ $ Balance, April 1 383,770 399,006 227,001 Exchange adjustment 18,744 (21,415) 9,268 Additions charged to expense 197,310 223,388 134,931 Write-off (200,818) (373,978) (263,049) ----------- ----------- ----------- Balance, March 31 399,006 227,001 108,151 ----------- ----------- ----------- 3 Inventories (a) The components of inventories are as follows: 2006 2007 $ $ Raw materials 6,005,337 5,951,366 Work in progress 3,423,775 4,232,035 Finished goods 5,606,104 4,814,387 ----------- ----------- 15,035,216 14,997,788 ----------- ----------- During the years ended March 31, 2005, 2006 and 2007, provision for obsolete inventories recognised in the consolidated statement of income (loss) was $74,954, $170,592 and $261,242, respectively. F-12 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 4 Long-term debt Long-term debt comprises: March 31 -------------------------- 2006 2007 $ $ Long term bank loan at bank's floating base rate + 4%, denominated in Canadian dollars 7,197 - Mortgage loan at bank's prime interest rate + 1.15%, denominated in Canadian dollars 41,132 - ----- ----- Long term debt 48,329 - Less: current portion (48,329) - ------ ----- Long-term debt, less current maturities - - ------ ----- 5 Taxation (a) The companies comprising the Group are subject to tax on an entity basis on income arising in or derived from Hong Kong, the PRC, Germany, the United States and Canada. The current rates of taxation of the subsidiaries operating in Hong Kong is 17.5%. The subsidiary of the Group in Germany is registered as a partnership in Germany which is subject to a statutory tax rate of 14.17%. The Group is not subject to income taxes in the British Virgin Islands. The statutory tax rates in the United States and Canada are 15% and 36%, respectively. (b) Pursuant to the relevant income tax laws in the PRC, Bonso Electronics (Shenzhen) Co., Ltd, a wholly owned subsidiary of the Company, was fully exempt from PRC state income tax for two years starting from the first profit-making year followed by a 50% reduction over the ensuing three years. The first profit-making year of Bonso Electronics (Shenzhen) Co., Ltd. was deemed to be the financial year ended December 31, 1998 and the last year it was entitled to this benefit was December 31, 2002. In 2003, Bonso Electronics (Shenzhen) Co., Ltd was accredited as an "Advanced Corporation". A further 50% tax reduction was granted for another three years and the last year it was entitled to this benefit is December 31, 2005. Under the Implementation Rules of the Foreign Enterprise Income Tax Law, Bonso Electronics (Shenzhen) Co. Ltd. is entitled to a further tax rate reduction to 10% for the year ended 31 December 2006, as its export sale exceed 70% of its revenue. (c) Income is subject to taxation in the various countries in which the Company and its subsidiaries operate. The (loss) income before income taxes by geographical location was as follows: 2005 2006 2007 $ $ $ Hong Kong 2,088,341 1,055,120 854,807 PRC (441,753) 1,194,690 1,303,303 Others 1,954,881 (1,634,208) (2,611,542) --------- --------- --------- Total 3,601,469 615,602 (453,432) ========= ========= ========= Others mainly include the profit (loss) from BVI, Germany and Canada. F-13 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 5 Taxation (Continued) (d) 2005 2006 2007 $ $ $ Deferred income tax 27,434 21,194 10,802 Current income tax (293,493) (152,668) (928,313) ------- ------- ------- Total income tax expense (266,059) (131,474) (917,511) ======= ======= ======= The components of the income tax expense by geographical location are as follows: 2005 2006 2007 $ $ $ Hong Kong (214,045) (89,035) (797,225) PRC (26,241) (36,842) (126,617) Others (25,773) (5,597) 6,331 ------- ------- ------- Total: (266,059) (131,474) (917,511) ======= ======= ======= (e) 2006 2007 $ $ Deferred income tax assets 82,529 87,369 Deferred income tax liabilities 19,863 13,901 Deferred tax assets comprised the following: 2006 2007 $ $ Tax loss carry forwards 700,966 1,167,987 Others 82,529 87,369 Less: Valuation allowance (700,966) (1,167,987) ------- --------- 82,529 87,369 Less: current portion - - ------- --------- Non-current portion 82,529 87,369 ======= ========= As of March 31, 2007 and 2006, the Group had accumulated tax losses amounting to $5,845,998 and $4,340,661 (the tax effect thereon is $1,167,987 and $700,966) respectively, which may be carried forward and applied to reduce future taxable income which is earned in or derived from Hong Kong, Germany and Canada. Realization of deferred tax assets associated with tax loss carry forwards is dependent upon generating sufficient taxable income prior to their expiration. A valuation allowance is established against such tax losses when management believes it is more likely than not that a portion may not be utilized. As of March 31, 2007, the Group's accumulated tax losses have no definite period of expiration. F-14 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 5 Taxation (Continued) f) Changes in the valuation allowance consist of: 2006 2007 $ $ Balance, April 1 479,341 700,966 Charged to income tax expense 221,625 467,021 ------- -------- Balance, March 31 700,966 1,167,987 ======= ======== (g) The actual income tax expense attributable to earnings for the years ended March 31, 2005, 2006 and 2007 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: 2005 2006 2007 $ $ $ Income tax credit/(expense) calculated at domestic tax rates applicable to loss/ profit in the respective countries (26,041) (52,128) 205,583 Profit not subject to income tax 313,964 183,211 154,349 Expenses not deductible for income tax purposes (210,737) (52,648) (73,283) (Under)/over provision for income tax in prior years (69,389) 6,623 - Tax losses utilized 5,166 5,093 - Increase in valuation allowance (279,022) (221,625) (467,021) Additional provision made as a result of development of tax rules (h) - - (737,139) ------- ------- ------- Total income tax expense (266,059) (131,474) (917,511) ======= ======= ======= (h) The provision was made as a result of assessing the impact of the new developments of tax rules in the various tax jurisdictions that the Group's subsidiaries are operating. Management have performed an assessment in pursuant to FASB No. 5 "Accounting for Contingencies" and made a provision of $737,000 in relation to this contingent liability. F-15 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 6 Leases (a) Capital leases Plant and machinery include the following amounts for capitalized leases: Plant and machinery ------------------- March 31 -------- 2006 2007 $ $ Cost 1,731,894 1,830,356 Less: accumulated depreciation (388,894) (594,052) ---------- ---------- 1,343,000 1,236,304 ========== ========== During the years ended March 31, 2005, 2006 and 2007, the Group entered into additional capital lease obligations amounting to $Nil, $188,718 and $98,462 respectively. Future minimum payments under capital leases as of March 31, 2007 with an initial term of more than one year are as follows: $ Total minimum lease payments 183,113 Less: amount representing interest (28,130) ------- Present value of net minimum lease payments (including current portion of $95,725 as of March 31, 2007) 154,983 ------- Future minimum payments under capital leases 2008 95,725 2009 53,788 2010 5,470 Thereafter - ------- 154,983 ======= F-16 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 6 Leases (Continued) (b) Operating leases As of March 31, 2007, future minimum lease payments in respect of non-cancellable operating leases for factory, office premises and staff quarters in Hong Kong, the PRC, Germany, the United States, the United Kingdom and Canada are as follows: $ 2008 1,065,588 2009 932,850 2010 928,870 2011 648,760 Thereafter 271,589 --------- 3,847,657 ========= Rental expense for all operating leases amounted to $521,819, $688,469 and $1,239,366 for the years ended March 31, 2005, 2006 and 2007, respectively. F-17 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 7 Banking facilities As of March 31, 2007, the Group had general banking facilities for bank overdrafts, letters of credit, notes payable, short-term loans and long-term loans. The facilities are interchangeable with total amounts available of $30,017,128 (2006: $36,018,301). The general banking facilities utilized by the Group are denominated in United States dollars, Hong Kong dollars, European dollars and Canadian dollars. The Group's general banking facilities, expressed in United States dollars, are further detailed as follows: Terms of banking facilities as of Amount available Amount utilized March 31, 2007 -------------------------- ----------------------- -------------- March 31 March 31 -------------------------- ---------------------- 2006 2007 2006 2007 Interest Repayment $ $ $ $ rate terms Import and export Facilities Letters of credit 26,602,564 18,589,744 3,310,673 3,736,526 Including sub-limit of: Notes payable 20,846,154 17,564,103 3,310,673 3,736,526 HIBOR +1.5% Repayable in full within four months Short-term loans 7,246,526 4,745,640 2,936,467 3,576,366 *Eonia+1.15% to Repayable in +1.95% full within twelve months Other facilities Factoring -- 4,964,102 -- -- HIBOR +1.5% Bank overdrafts 1,912,461 1,717,642 471,254 459,710 Prime rate Repayable +0.5% to on demand +1% Or HIBOR+2.25% Long-term debts 256,750 -- 48,329 -- Prime rate + 1% to Repayable in (Note 4) +1.15% full within thirty-six months ---------- ---------- --------- --------- 36,018,301 30,017,128 6,766,723 7,772,602 ========== ========== ========= ========= * EONIA stands for Euro Overnight Index Average. F-18 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 7 Banking facilities (Continued) The amounts of banking facilities utilized by the Group are denominated in the following currencies: Amount utilized March 31 ------------------------------ 2006 2007 $ $ Euro 2,936,467 3,576,366 Hong Kong dollars 2,261,593 2,957,631 United States dollars 1,041,883 778,895 Canadian dollars 526,780 459,710 --------- --------- 6,766,723 7,772,602 ========= ========= The Prime Rate, HIBOR rate and EONIA were 7.75%, 4.218% and 3.9% per annum, respectively, as of March 31, 2007. The Prime Rate is determined by the Hong Kong Bankers Association and is subject to revision from time to time. The banking facilities are collateralized by the following: (a) guarantee of $4,276,218 (2006: $6,618,333) by a third party bank; and (b) a personal guarantee of $102,000 (2006: $102,000) by a director of one of the Group's subsidiaries. The weighted average interest rate of short-term borrowings of the Group is as follows: Year ended March 31 ------------------------- 2006 2007 Bank overdrafts 6.01% 6.48% Notes payable 4.83% 5.62% Short-term loans 4.35% 4.88% F-19 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 8 Related party transactions (a) The Group paid emoluments, commissions and/or consultancy fees to its directors as follows: Year ended Mr. So Hung Gun, Ms. Pang Kit Mr. Chung Kim March 31 Anthony Teng, Cathy Wah -------- ---------------- ------------ ------------- 2005 $700,000 (iii) $111,912 $134,350 (ii) 2006 $583,215 (iii) $113,913 $137,990 (ii) 2007 $741,947 $68,222 (v) $151,095 Mr. Fok Woo Mr. George Mr. J Stewart Mr.Henry Ping O'Leary Jackson Schlueter ----------- ---------- ------------- --------- 2005 Nil $158,766 (i) Nil $119,201 (iv) 2006 Nil $240,000 (i) Nil $23,519 (iv) 2007 Nil $180,000(i), (v) Nil $14,571 (iv) (i) This represented consultancy fee paid to Mr. George O'Leary. Since April 1, 2001, a monthly consultancy fee was paid to Mr. O'Leary for provision of support and marketing services in the United States. No such consultancy fees were paid after March 31, 2005. Also included in the emoluments is a monthly consultancy fee to Mr. O'Leary for provision of support and marketing services in the United States and director fee since January 17, 2005. (ii) Included in the emoluments is a housing allowance for $38,462 for each of the two years ended March 31, 2005 and 2006 payable to a company in which Mr. Chung Kim Wah has a beneficial interest. (iii) Apart from the emoluments paid by the Group as shown above, one of the properties of the Group in Hong Kong is also provided to Mr. So Hung Gun, Anthony as part of his compensation. (iv) Mr. Henry Schlueter was appointed as a director of the Company on October 10, 2001. The amount for the years ended March 31, 2005, 2006 and 2007 represented professional fees paid to Schlueter & Associates, P.C., and the Group's SEC counsel in which Mr Henry Schlueter is one of the principals. (v) Ms. Pang Kit Teng, Cathy and Mr. George O'Leary resigned from their positions as directors of the Company on November 16, 2006. (b) As of March 31, 2007, Bonso Electronics Limited ("BEL"), a wholly-owned foreign subsidiary of the Company, had paid a deposit of approximately US$799,000 with regard to a potential investment in a hotel in the PRC. Subsequent to this fiscal year end, Mr. Anthony So, Chairman of Bonso decided to take up BEL's potential investment and paid BEL the full amount of approximately US$799,000 in July 2007. The carrying amount of the deposit approximates its fair value due to its short maturities. This hotel is now held by Mr. Anthony So and three third parties. (c) For the year ended March 31, 2005, the Group sold scales to Tantric Europe Ltd. ("Tantric") amounting to $99,410. There was no such transaction in the years ended March 31, 2006 and 2007. Tantric is 100% owned by Mohan Thadani, the Chief Executive Officer and minority shareholder of one of the subsidiaries of the Company. F-20 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 9 Provident fund plan (a) With effect from January 1, 1988, BEL, a wholly-owned foreign subsidiary of the Company, implemented a defined contribution plan (the "Plan") with a major international assurance company to provide life insurance and retirement benefits for its employees. All permanent full time employees who joined BEL before December 2000, excluding factory workers, are eligible to join the provident fund plan. The Mandatory Provident Fund (the "MPF") was introduced by the Hong Kong Government, and commenced in December 2000. BEL joined the MPF by implementing a plan with a major international assurance company. All permanent Hong Kong full time employees who joined BEL in or after December 2000, excluding factory workers, are eligible to join the MPF. (b) Members of the Plan are required to contribute 5% of their monthly salary. The contribution by BEL is as follows: Years of service % of salary as BEL's contribution ---------------- --------------------------------- Less than 5 years 5.0% 5 to 10 years 7.5% More than 10 years 10.0% Members' and employers' contributions to the MPF are both at 5% of the members' monthly salaries and are subject to a maximum contribution of HK$1,000 monthly. (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 the return on their investment. On resignation prior to normal retirement age, a member shall be entitled to receive from the Plan a lump sum equal to the member's contributions plus a percentage of the employer's balance determined in accordance with a predetermined set scale. On resignation or at normal retirement age, death or ill health, the member of the MPF shall be entitled to a lump sum equal to the total of the member's and BEL's contributions plus the return on their investment. The contributions are recognised as employee benefit expense when they are due and are reduced by contributions forfeited by those employees who leave the scheme prior to vesting fully in the contributions. (d) BEL's total contributions to the Plan and the MPF for the years ended March 31, 2005, 2006 and 2007 amounted to $83,277, $95,339 and $86,530, respectively. F-21 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 10 Goodwill, Brand name and other intangible assets Goodwill, brand name and other intangible assets are analysed as follows: Goodwill Brand name Other intangible asset -------- ---------- ---------------------- March 31 March 31 March 31 -------- -------- -------- 2006 2007 2006 2007 2006 2007 $ $ $ $ $ $ Cost 1,100,962 842,821 3,000,000 3,000,000 544,267 544,267 Less: accumulated amortization -- -- (1,002,608) (1,202,608) (14,677) (28,225) Less: impairment loss for the year (258,141) -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- 842,821 842,821 1,997,392 1,797,392 529,590 516,042 ========== ========== ========== ========== ========== ========== Goodwill of the Group of $842,821 as at March 31, 2007 (2006: $842,821) was not subject to amortization. Amortization expense in relation to brand name was $200,000 for each of the years ended March 31, 2005, 2006 and 2007. Amortization expense in relation to other intangible assets was $1,129, $13,548, $13,548 for each of the years ended March 31, 2005, 2006 and 2007. As of March 31, 2007, future minimum amortization expenses in respect of brand name and other intangible assets are as follows: Other intangible Brand name assets $ $ 2008 200,000 13,548 2009 200,000 13,548 2010 200,000 13,548 2011 200,000 13,548 2012 200,000 13,548 Thereafter 797,392 448,302 --------- -------- Total 1,797,392 $516,042 ========= ======== F-22 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 11 Loss from water damage In September 2006, a heavy rain caused overflow of a river which is near a logistic warehouse of the Group in Germany. A loss of approximately $700,950, mainly represent write-off of equipment and inventories, was recognised as a result of the heavy rain. As of the date of this report, the Company is in the process of negotiating with the insurance carrier for compensation of the loss incurred. Since the negotiation is still in a preliminary stage, management considers it is not in a position to assess the likelihood of the outcome given the evidence prevailing at the moment. 12 Commitments and contingencies (a) Commitment Capital expenditure contracted at the balance sheet but not yet provided for is as follows: 2006 2007 $ $ Plant and machineries 65,692 - Land use right (i) - 1,472,325 (i) In November, 2006, Bonso entered into a land use right purchase agreement with Xincheng Hi- Tech Industrial Estate to acquire the right to use a piece of land of approximately 146,673 square meters for future expansion of production capacity in XinXing of GuangDong, PRC. The total consideration is $1,472,325. In July 2007, a deposit of approximately $610,000 was paid. (b) Contingencies Certain subsidiaries of the Company received on-going enquiries from the local tax authorities during the year. The Company made an assessment under SFAS 5 "Accounting for Contingencies" and believed that no additional income tax expense was necessary as of March 31, 2007, as the relevant tax authority was still in the information gathering stage on their enquiries and it was practically difficult to have a reasonable estimate of the possible outcome of these enquiries at this stage. The Company believes it has a reasonable likelihood of success with respect to these enquiries. Nevertheless, if the subsidiaries were finally held liable for such additional taxation, the range of possible outcome of this potential liability can be up to $2,000,000. Contractual arrangements entered into among us and our subsidiaries in different locations may be subject to scrutiny by respective tax authorities and a finding against Bonso and its subsidiaries may result in additional tax liabilities that could substantially reduce our consolidated net income. We could face material and advance tax consequences if respective tax authorities determine that the contractual arrangements among our subsidiaries and Bonso do not represent an arm's length price and adjust Bonso or its subsidiaries' income. Our consolidated net income may be materially and adversely affected if or affiliated entities' tax liabilities increase. F-23 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 13 Earnings per share Year ended March 31 ------------------------------------------------- 2005 2006 2007 $ $ $ Net income available to common shareholders 3,349,612 484,128 (1,370,943) Weighted average shares outstanding 5,646,676 5,577,639 5,577,639 Incremental shares from assumed exercise of: Stock options 407,627 360,005 305,009 --------- --------- --------- Dilutive potential common shares 407,627 360,005 305,009 --------- --------- --------- Dilutive weighted average shares 6,054,303 5,937,644 5,882,648 ========= ========= ========= Basic earnings per share 0.59 0.09 (0.25) Diluted earnings per share 0.55 0.08 (0.25) Basic earnings per share is computed by dividing net (loss)/ income available to common shareholders by the weighted average number of shares of common stock issued and outstanding. Diluted earnings per share is computed in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive shares of common stock that were outstanding during the period, including stock options. Diluted net loss per share is computed by dividing net loss for each year by the weighted average number of shares of common stock and ordinary share equivalents issued and outstanding. The weighted average number of shares used to compute diluted net loss per share include the incremental shares of ordinary shares relating to outstanding options, to the extent such incremental shares are dilutive The diluted net loss per share was the same as the basic net loss per share for the year ended March 31, 2007 as all 305,009 potential ordinary shares from the exercise of stock options, are anti-dilutive and are therefore excluded from the computation of diluted net loss per share. F-24 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 14 Shareholders' equity (a) Repurchase of common stock In August of 2001, the Company's Board of Directors authorized a program for the Company to repurchase up to $500,000 of its common stock. This repurchase program does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time. No stocks had been repurchased since then up to November 16, 2006. The Board of Directors believed that the common stock was undervalued, and that the repurchase of common stock would be beneficial to the Company's shareholders. On November 16, 2006, the Company's Board of Directors authorized another $1,000,000 for the Company to repurchase its common stock under the same repurchase program. This authorization to repurchase shares increases the amount authorized for repurchase from $500,000 to $1,500,000. During the fiscal year ended March 31, 2007, 260,717 ($1,328,560) shares were purchased under this program. The Company may from time to time repurchase shares of its common stock under this program. (b) Preferred stock The Company had authorized share capital of $100,000 or 10,000,000 shares of preferred stock, with par value of $0.01 each, divided into 2,500,000 shares each of class A preferred stock, class B preferred stock, class C preferred stock and class D preferred stock. Shares may be issued within each class from time to time by the Company's Board of Directors in its sole discretion without the approval of the shareholders with such designations, power, preferences, rights, qualifications, limitation and restrictions as the Board of Directors shall fix and as have not been fixed in the Company's Memorandum of Association. The Company had not issued any shares of preferred stock as of March 31, 2007. (c) Dividends Dividends of $0.1, $0.05 and $0.05 per share were declared by the Company for the years ended March 31, 2005, 2006 and 2007 respectively. F-25 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 15 Stock option and bonus plans (a) On September 7, 2004, our stockholders adopted the 2004 Stock Bonus Plan (the "Stock Bonus Plan") which authorizes the issuance of up to five hundred thousand (500,000) shares of the Company's common stock in the form of stock bonus. The purpose of this Stock Bonus Plan is to (i) induce key employees to remain in the employment of the Company, or of any subsidiary of the Company; (ii) encourage such employees to secure or increase their stock ownership in the Company; and (iii) reward employees, non-employee directors, advisors and consultants for services rendered or to be rendered to or for the benefit of the Company, or any of its subsidiaries. The Company believes that Stock Bonus Plan will promote continuity of management and increased incentive and personal interest in the welfare of the Company. The Stock Bonus Plan shall be administered by a committee appointed by the Board of Directors which consists of at least two but not more than three members of the Board, one of who shall be a non-employee of the Company. The existing Committee members are Anthony So and Woo Ping Fok. The Committee has the authority, in its sole discretion:(i) to determine the parties to receive bonus stock, the times when they shall receive such awards, the number of shares to be issued, and the time, terms and conditions of the issuance of any such shares; (ii) to construe and interpret the terms of the Stock Bonus Plan; (iii) to establish, amend and rescind rules and regulations for the administration of the Stock Bonus Plan; and (iv) to make all other determinations necessary or advisable for administering the Stock Bonus Plan. On March 23, 2004, our stockholders adopted the 2004 Stock Option Plan (the "2004 Plan") which provides for the grant of up to six hundred thousand (600,000) shares of the Company's common stock in the form of stock options, subject to certain adjustments as described in the Plan. The purpose of the 2004 Plan is to secure key employees to remain in the employment of the Company and to encourage such employees to secure or increase on reasonable terms their common stock ownership in the Company. The Company believes that the 2004 Plan promotes continuity of management and increased incentive and personal interest in the welfare of the Company. The 2004 Plan is administered by a committee appointed by the Board of Directors which consists of at least two but not more than three members of the Board, one of who shall be a non-employee of the Company. The committee members currently are Anthony So and Woo Ping Fok. The committee determines the specific terms of the options granted, including the employees to be granted options under the plan, the number of shares subject to each option grant, 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 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 the optionee. The exercise price of an option granted pursuant to the 2004 Plan may be paid in cash, by the surrender of options, in common stock, in other property, including a promissory note from the optionee, or by a combination of the above, at the discretion of the Committee. F-26 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 15 Stock option and bonus plans (Continued) In October 1996, the Board of Directors approved the 1996 Stock Option Plan and 1996 Non-Employee Directors' Stock Option Plan. Under the 1996 Stock Option Plan, the Company may grant options of common stock to certain employees and directors of the Company for a maximum of 900,000 shares. The 1996 Stock Option Plan is administered by a committee appointed by the Board of Directors which determines the terms of options granted, including the exercise price, the option periods and the number of shares to be subject to each option. The exercise price of options granted under the 1996 Stock Option Plan may be less than the fair market value of the common shares on the date of grant. The maximum term of options granted under the 1996 Stock Option Plan is 10 years. The right to acquire the common shares is not assignable except for certain conditions stipulated in the 1996 Stock Option Plan. Under the 1996 Non-Employee Directors' Stock Option Plan, the non-employee directors are automatically granted stock options on the third business day following the day of each annual general meeting of the Company to purchase an aggregate of 600,000 shares of common stock. The exercise price of all options granted under the 1996 Non-Employee Directors' Stock Option Plan shall be one hundred percent of the fair market value per share of the common shares on the date of grant. The maximum term of options granted under the 1996 Non-Employee Directors' Stock Option Plan is 10 years. No stock option may be exercised during the first six months of its term except for certain conditions provided in the 1996 Non-Employee Directors' Stock Option Plan. The right to acquire the common shares is not assignable except for under certain conditions stipulated in the 1996 Non-Employee Directors' Stock Option Plan. In April 2003, the Company issued options to certain directors and non-employee directors of the Company to purchase an aggregate of 372,500 shares of common stock of the Company at an exercise price of $1.61. The options shall expire on March 31, 2013 and can be exercised at any time after granting. The exercise prices of these options were equal to the fair market value at the time of grant. No such options have been exercised during the year ended March 31, 2007. In March 2004, the Company issued options to certain non-employee directors of the Company to purchase an aggregate of 40,000 shares of common stock of the Company at an exercise price of $6.12. The options shall expire on March 25, 2014 and can be exercised at any time after granting. The exercise prices of these options were equal to the fair market value at the time of grant. No such options have been exercised during the year ended March 31, 2007. F-27 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 15 Stock option and bonus plans (Continued) In September 2004, the Company issued options to certain non-employee directors of the Company to purchase an aggregate of 40,000 shares of common stock of the Company at an exercise price of $6.20. The options shall expire on September 12, 2014 and can be exercised at any time after granting. The exercise prices of these options were equal to the fair market value at the time of grant. No such option was exercised during the year ended March 31, 2007. In December 2005, the Company issued options to certain non-employee directors of the Company to purchase an aggregate of 30,000 shares of common stock of the Company at an exercise price of $4.50. The options shall expire on December 4, 2015 and can be exercised at any time after granting. The exercise prices of these options were equal to the fair market value at the time of grant. No such options had been exercised during the year ended March 31, 2007. On November 16, 2006, the Board of Directors of the Company voted to rescind the Company's 1996 Non-Employee Directors' Stock Option Plan (the "Non-Employee Directors' Plan"). All options previously granted under the Non-Employee Directors' Plan continue in full force and effect pursuant to their terms of grant. During the year ended 31 March 2007, no shares or share options were granted. (b) The stock options summary as of March 31, 2007 is as follows: Weighted average Number exercise of options price Balance, March 31, 2004 1,084,500 $3.95 Exercised (50,000) ($1.99) Granted 40,000 $6.20 --------- ----- Balance, March 31, 2005 1,074,500 $4.13 Granted 30,000 $4.50 --------- ----- Balance, March 31, 2006 1,104,500 $4.13 Granted - - --------- ----- Balance, March 31, 2007 1,104,500 $4.13 ========= ===== F-28 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 15 Stock option and bonus plans (Continued) (c) The following table summarizes the information about all stock options of the Company outstanding as at March 31, 2007: Weighted Number average Exercisable Weighted average outstanding at remaining life shares at exercise price March 31, 2007 (years) March 31, 2007 -------------- -------------- ------- -------------- $1.61 342,500 6.0 342,500 $2.50 168,000 4.9 168,000 $2.55 10,000 4.5 10,000 $3.65 196,000 4.0 196,000 $4.50 30,000 8.75 30,000 $6.12 40,000 7.0 40,000 $6.20 40,000 7.5 40,000 $7.875 30,000 3.8 30,000 $8.00 228,000 2.8 228,000 $8.125 20,000 2.8 20,000 --------- --------- $4.131 1,104,500 4.85 1,104,500 ========= ========== The intrinsic value of options outstanding and exercisable was $1,354,295, $1,967,290 and $1,218,160 on March 31, 2005, 2006 and 2007. The intrinsic value represents the pre-tax intrinsic value (the difference between the closing stock price of the Company's common stock on balance sheet date and the exercise price for both the outstanding and exercisable options) that would have been received by the option holders if all options had been exercised on March 31, 2005, 2006 and 2007. For the options exercised in the year ended March 31, 2005, the intrinsic value is $221,700. New shares will be issued by the Company upon future exercise of stock options. F-29 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 15 Stock option and bonus plans (Continued) (d) Prior to 1 April 2006, the Company applies Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock options. Under APB Opinion No. 25, as the exercise price of all the options issued by the Company was equal to or higher than the market price of the underlying stock on the date of grant, no compensation expense has been recognized for the years ended March 31, 2005 and 2006. Effective April 1, 2006, the Company adopted the SFAS No. 123(R) in accounting for its employee stock option. Under the provisions of SFAS No. 123(R), the Company is required to measure the cost of employee services received in exchange for stock-based compensation measured at the fair value of the award as of the grant date. According to the modified prospective application method, the Company applies SFAS No. 123(R) for: (1) new awards granted after April 1, 2006 and (2) any portion of awards that were granted after April 1, 1995 and have not vested by April 1, 2006. As the Company did not have any unvested stock-based compensation as of April 1, 2006, the adoption of SFAS No. 123(R) did not have impact on the Company's financial statement. The weighted average fair value of options granted during the years ended March 31, 2005, 2006 and 2007 amounted to $191,712, $83,605 and $nil respectively. 2005 2006 $ $ Net income as reported 3,349,612 484,128 Deduct: Total stock-based employee compensation expense determined under fair value based method for all stock options, net of related tax effects (191,712) (83,605) --------- ------- Pro forma net income 3,157,900 400,523 Basic earnings per share As reported $0.59 $0.09 Pro forma $0.56 $0.07 Diluted earnings per share As reported $0.55 $0.08 Pro forma $0.52 $0.07 The fair value for these options was estimated at the date of grant using a Black-Scholes Option Valuation model. As there was no option granted during the year ended March 31, 2007, the following table only indicates the weighted-average assumptions for the years ended March 31, 2005 and 2006: 2005 2006 $ $ Weighted risk-free interest rate 4.46% 4.29% Dividend yield 1.80% 2% Weighted volatility factor of the expected market price of the Company's common share 110% 69.14% Weighted average expected life of the option 7.2 years 10 years The weighted volatility factor of the expected market price of the Company's common share is calculated by annualising the standard deviation of daily changes in price of the Company's common shares based on a period of 360 days. As the market price of the Company's common share fluctuated at lesser extent in the past 360 days before the day of grant of the option in 2006 than the corresponding period before the date of grant in 2005, the weighted volatility factor dropped in 2006. The calculation of weighted average expected life of the option is based on the historical performance and the anticipated performance of the Company's common share price. F-30 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 16 Business segment information (a) The Group is organized based on the products it offers. Under this organizational structure, the Group's operation can be classified into 3 business segments, Scales, Telecommunications products and Other. Scales operations principally involves production and marketing of sensor based scales products. These include bathroom, kitchen, office, jewelry, laboratory, postal and industrial scales that are used in consumer, commercial and industrial applications. Telecommunication products operations principally involve production and modification of two-way radios and cordless telephones that are used in consumer and commercial applications. The Group established the "Other" segment which principally includes the activities of (i) tooling and mould charges for scales and telecommunication products, and (ii) sales of scrap materials. The accounting policies of the Group's reportable segments are the same as those described in the description of business and significant accounting policies. F-31 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 16 Business segment information (Continued) (a) Summarized financial information by business segment for 2005, 2006 and 2007 is as follows: Identifiable Depreciation Operating assets as of and Capital Net sales profit/(loss) March 31 amortization expenditure --------- ------------- ----------- ------------- ----------- $ $ $ $ $ 2007 Scales 49,904,959 3,971,549 20,543,345 749,466 84,687 Telecommunication products 16,248,261 (1,392,106) 9,107,007 1,037,083 127,031 Other 338,160 60,869 - - - ---------- --------- ---------- --------- --------- Total operating segments 66,491,380 2,640,312 29,650,352 1,786,549 211,718 Corporate - (2,898,638) 17,868,263 851,966 130,392 ---------- --------- ---------- --------- --------- Group 66,491,380 (258,326) 47,518,615 2,638,515 342,110 ========== ========= ========== ========= ========= 2006 Scales 43,553,161 5,545,751 25,951,769 798,653 339,449 Telecommunication products 20,750,920 (959,436) 9,084,368 1,110,862 509,173 Other 238,882 42,999 - - - ---------- --------- ---------- --------- --------- Total operating segments 64,542,963 4,629,314 35,036,137 1,909,515 848,622 Corporate - (3,718,271) 14,442,751 760,671 491,512 ---------- --------- ---------- --------- --------- Group 64,542,963 911,043 49,478,888 2,670,186 1,340,134 ========== ========= ========== ========= ========= F-32 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 16 Business segment information (Continued) (a) (Continued) Identifiable Depreciation Operating assets as of and Capital Net sales profit/(loss) March 31 amortization expenditure --------- ------------- ----------- ------------- ----------- $ $ $ $ $ 2005 ---- Scales 47,256,574 9,047,028 28,455,668 501,818 169,357 Telecommunication products 20,656,491 (1,508,617) 8,461,183 793,796 113,524 Other 1,689,127 304,595 - - - ---------- --------- ---------- --------- ------- Total operating segments 69,602,192 7,843,006 36,916,851 1,295,614 282,881 Corporate - (4,179,800) 15,545,905 1,477,472 401,517 ---------- --------- ---------- --------- ------- Group 69,602,192 3,663,206 52,462,756 2,773,086 684,398 ========== ========= ========== ========= ======== Operating profit by segment equals total operating revenues less expenses which are related to the segment's operating revenues. Operating loss of the corporate segment consists principally of salaries and related costs of administrative staff, and administration and general expenses of the Group. Identifiable assets by segment are those assets that are used in the operation of that segment. Corporate assets consist principally of cash and cash equivalents, deferred income tax assets and other identifiable assets not related specifically to individual segments. Goodwill of $1,100,962, $842,821 and $842,821 arising from the purchase of Korona and Gram, is allocated to scales segment as of March 31, 2005, 2006 and 2007 respectively. (b) The Group primarily operates in Hong Kong, the PRC, Germany, Canada, the United States and the United Kingdom. The manufacture of components and their assembly into finished products is carried out in the PRC. The Hong Kong office is mainly responsible for the purchase of raw materials, arrangement of shipments and research and development. Subsidiaries in Germany, Canada, the United States and the United Kingdom are responsible for the distribution of electronics scales and telecommunication products in Europe and North America. As the operations are integrated, it is not practicable to distinguish the net income derived among the activities in Hong Kong, the PRC, Germany, Canada, the United States and the United Kingdom. Total property, plant and equipment, net by geographical areas are as follows: 2006 2007 $ $ Hong Kong 3,685,511 3,585,124 The PRC 8,674,403 7,048,045 Germany 136,495 115,655 Canada 270,194 239,497 United States of America 66,474 50,281 Poland 852 571 ---------- ---------- Total assets 12,833,929 11,039,173 ========== ========== F-33 Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 16 Business segment information (Continued) (c) The following is a summary of net export sales by geographical areas, which are defined by the final shipment destination, constituting 10% or more of total sales of the Group for the years ended March 31, 2005, 2006 and 2007: Year ended March 31 -------------------------------------------------------------------------- 2005 % 2006 % 2007 % $ $ $ United States of America 38,638,906 55 37,352,618 58 36,432,384 55 Germany 15,025,103 22 13,302,506 21 17,545,242 26 Canada 2,686,951 4 1,637,447 3 2,239,419 3 United Kingdom 2,769,900 4 2,262,160 3 1,480,464 2 Other EC countries 7,948,970 11 7,997,740 12 5,739,117 9 Asia and others 2,532,362 4 1,990,492 3 3,054,754 5 -- ------- --- ---------- --- ---------- --- 69,602,192 100 64,542,963 100 66,491,380 100 ========== === ========== === ========== === (d) The details of sales made to customers constituting 10% or more of total sales of the Group are as follows: Year ended March 31 -------------------------------------------------------------- 2005 % 2006 % 2007 % $ $ $ Sunbeam Products, Inc. Business (USA) segment scales 11,708,143 17 10,269,375 16 15,387,967 23 TTI Tech Co., Ltd. Tele-communication products 7,309,546 11 10,264,500 16 7,752,573 12 Global Link Tele- Corporation Ltd. communication products 11,893,578 17 10,462,434 16 8,457,868 13 ---------- --- ---------- --- --------- --- 30,911,267 45 30,996,309 48 31,598,408 48 ========== === ========== === ========== === F-34
Bonso Electronics International Inc. Notes to Consolidated Financial Statements (Expressed in United States Dollars) 17 Fair value of financial instruments SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" defines the fair value of a financial instrument at which the instrument could be exchanged in a current transaction between willing parties. The carrying value of all of the Group's financial instruments classified as current assets or current liabilities are deemed to approximate fair value because of the short maturities of these instruments. These would include cash and cash equivalents, accounts receivable, accounts payable and accrued and other liabilities, which are reflected on the consolidated balance sheets. In the opinion of management, the carrying amount of the Group's long-term debt approximates fair values as the interest rate applicable is believed to approximate the market rates that would be offered to the Group for debts with the same remaining maturities. 18 Subsequent events In April 2007, the Group set up a new wholly-owned subsidiary, namely Bonso USA, incorporated in the State of Nevada, US. The new subsidiary will focus on the sales of industrial scales in the US market. The set up of this new subsidiary will allow Bonso to further streamline its business and to tailor market strategies in the targeted market. F-35 EX-4.1 2 bonsoexh41.txt BANKING FACILITY LETTER (3-23-20070 Exhibit 4.1 KBC Bank Hong Kong Branch 39/F, Central Plaza 16 Harbour Road, Wanchai Hong Kong Telephone +852 2879 3388 Telefax +852 2879 3300 KBC Bank Hong Kong Branch 23rd March, 2007 Bonso Electronics Limited Unit 1106-1110, 11/F., Star House, 3 Salisbury Road, Tsimshatsui, Kowloon Attn: Ms. Pang Kit Teng, Cathy Director of Finance Dear Sirs, Banking Facilities KBC Bank N.V. (the "Bank") is pleased to set out below the revised terms and conditions upon which the Bank will consider requests made by the borrower(s) named in paragraph 1 of this letter (the "Borrower(s)" or each "Borrower") for the following facilities (the "Facilities"). The terms set out in this letter supersede and replace those set out in any of our banking facilities letters previously sent to you. 1. Borrower(s). ----------- Bonso Electronics Limited 2. Trade Facilities ---------------- (a) Total Facility Amount: HK$10,500,000.00 and EUR3,300,000.00 (Hong Kong Dollars Ten Million Five Hundred Thousand and EURO Three Million and Three Hundred Thousand Only) maximum but in no circumstances that the outstandings of any facility shall exceed the respective facility limits set out below. (b) Purpose: For short term trade financing and general working capital requirements. (c) Available for: Trade facilities facility limit Line 1 with aggregate limit of: HK$10,000,000.00 ---------------- (i) Commercial Letters of Credit ("L/C's"): Bonso Electronics Limited KBC - -------------------------- Issuance of sight and/or up to 120 days usance commercial L/C's with or without title documents, L/C's with offshore shipment or L/C's calling for cargo receipt HK$10,000,000.00 ---------------- (ii) Documents against Payment ("D/P") and Documents against Acceptance ("D/A") Financing: Advances (with recourse to the Borrower(s)) against D/A and/or D/P bills at sight and/or with tenors of up to 120 days drawn on parties acceptable to the Bank up to HK$4,000,000.00 per each drawee. HK$10,000,000.00 ---------------- (iii) Advances against Trust Receipts: Advances against Trust Receipts covering merchandise called for under:- (a) import L/C's with tenor of up to 120 days, which shall include the usance period granted by supplier under the respective import L/C's HK$10, 000,000.00 (b) suppliers' invoices with tenor of up to 120 days from date of advance with individual supplier limit of HKD4,000,000.00 HK$10,000,000.00 ----------------- (c) incoming D/P or D/A with tenor of up to 120 days from date of advance HK$10,000,000.00 ----------------- (iv) Skipping Guarantees: Issuance of Shipping Guarantees supported by Trust Receipts covering merchandise called for under import L/C's HK$10,000,000.00 ---------------- (v) Indemnities for Negotiation under L/C's: Indemnities for negotiation of documents (with or without discrepancies) drawn under export L/C's HK$10,000,000.00 (vi) Advances Against Export Invoices: Advances with tenors of up to 120 days from bill of lading date for up to 100% of the net invoice amount of export invoices for customers approved by the Bank, with individual buyer limit of HKD4,000,00.00 HK$10,000,000.00 Line 2 with aggregate limit of: HK$500,000.00 (vii) Overdrafts: Overdraft on HK$ current account(s) with the Bank. HK$500, 000.00 Bonso Electronics Limited KBC - -------------------------- Line 3 with aggregate limit of: EUR3,300,,000.00 (viii) Standby Letters of Credit and Bank Guarantees: Issuance of Standby Letter of Credit or Bank Guarantees to KBC Bank Deutschland AG, Germany with tenors of up to 365 days to secure a trade facility to Korona Haushaltswaren GmbH & Co.; such payment undertakings must be in a form and supported by agreements o1 counter-indemnities acceptable to the Bank EUR3,300, 000.00 ---------------- Special Conditions/Remarks (a) Total limit for facilities (i), (ii), (iii), (iv), (v) and (vi). together under Line 1 shall not exceed HK$10,000,000.00 (b) The maximum tenor of any import facility shall not exceed 120 days which shall include the usance period granted by supplier under any import L/C's or incoming D/A (c) Available limit not utilized under Line 2 or Line 3 can be shifted to Line 1 at the request of the Borrower(s) 3. Foreign Exchange and Derivatives Facility ----------------------------------------- (a) Same Day Settlement Limit: For foreign exchange and derivative products same day settlements EUR2, 000,000.00 ---------------- (b) Notional Amount: For booking of foreign exchange contracts and derivatives products acceptable to the Bank, with maximum tenor of 12 months. The notional limit stated in this letter is for reference only and is subject to the Bank's acceptance of the relevant applications EUR 7,500,000.00 ---------------- 4. Applications for Facilities --------------------------- (a) No application made by the Borrower to use any of the Facilities will be considered by the Bank unless the Bank has received all of the documents listed in the Schedule hereto each in form and substance satisfactory to the Bank. (b) Each application made by the Borrower to use any of the Facilities in whole or Bonso Electronics Limited KBC - -------------------------- in part shall be a request by the Borrower to the Bank to extend financing on the terms and conditions set out or referred to in this letter. No commitment by the Bank to extend financing shall arise under this letter until any application by the Borrower is accepted by the Bank either expressly or by its extending such facilities to the Borrower. (c) Such applications shall be made, where applicable, on the Bank's standard forms and supported by such documentation that the Bank may require. (d) No application by the Borrower to use any of the Facilities will be accepted by the Bank unless the Borrower complies with the terms and conditions set out or referred to in this letter and such other conditions as the Bank may impose from time to time. (e) Acceptance by the Bank in respect of any application made by the Borrower is subject to the Bank's overriding right of repayment on demand, amending, cancelling and/or restructuring any of the Facilities and/or pricing at the Bank's sole discretion 5. Currency: -------- Borrowings in any currency are subject to availability of funds in that currency at the time the borrowings are requested. 6. Repayment --------- (a) Repayment must be made in full on maturity of each advance or on demand whichever occurs first. (b) If there are more than one Borrower named in paragraph I of this letter, each Borrower shall be jointly and severally liable with the other Borrower(s) for the repayment obligations under any of the Facilities. Each Borrower further agrees that the Bank is not required to make any reference to the other Borrower(s) in relation to the utilitsation of the Facilities by any Borrower. 7. Pricing ------- (a) L/C issuance fee and commission in lieu of exchange: US$50,000 or below : 1/4 % Over US$50,000 : 1/32% (b) Interest rates for import and export bills: For all HK$ / US$ drawings -------------------------- 1.5% p.a. over HIBOR / LIBOR (c) Interest rates for Overdraft Bonso Electronics Limited KBC - -------------------------- (d) Standby Letters of Credit and/or Bank Guarantees issuance fee: .8% pa. For any drawing unpaid at its maturity date, the Bank may, at its sole discretion, charge a default interest at maximum of Prime +6% p.a. ("Prime" means the best lending rate determined by the Bank from time to time.) 8. Security -------- Unconditional continuing corporate guarantee executed by Bonso Electronics International Inc. (the "Corporate Guarantor") for the facilities amount plus accrued interest and recovery expenses. 9. Arrangement Fee --------------- HKD10,000.00 payable up-front which is non-refundable in any event. 10. Undertakings ------------ (a) Submission of the following statements: (i) No later than 180 days after the end of each fiscal year, the audited financial statements of the Borrower(s) and the Corporate Guarantor(s), if any. (ii) No later than 90 days after the end of each half-year, a certified copy of the unaudited financial statements of the Borrower(s) and the Corporate Guarantor(s), if any. (iii) Any other documents as requested by the Bank from time to time. 11. Others ------ The Facilities shall be subject to: (a) the terms and conditions of the General Customer Agreement and General Agreement-for Trade Financing executed and delivered by the Borrower(s) to the Bank, and (b) the terms and conditions set out in all other standard agreements or documentation executed and delivered by the Borrower(s) to the Bank and other banking facilities and services provided by or continued by the Bank to the Borrower(s). Bonso Electronics Limited KBC - -------------------------- 12. Costs and Expenses: ------------------- The Borrower(s) shall, upon demand by the Bank, indemnify the Bank against (a) all costs and expenses (including legal fees on a full indemnity basis) incurred by the Bank in connection with the negotiation, preparation, execution and enforcement of or the preservation of any of its rights under, this letter and any other documents referred to herein; and (b) all costs, losses or liabilities incurred by the Bank as a result of providing any part of the Facilities to the Borrower(s). 13. Assignment ----------- (a) The Borrower(s) may not assign any of its rights or transfer any of its rights and/or obligations under this letter. (b) The Bank may assign any of its rights or transfer any of its rights and/or obligations under this letter. 14. Governing Law ------------- This letter is governed by and construed in accordance with the laws of the Hong Kong Special Administrative Region. Please confirm your agreement to the tents and conditions of this letter by signing and returning to us the enclosed duplicate copy of this letter at your earliest convenience. Yours faithfully, For and on behalf of KBC Bank N.V. /s/ ------------------------------- Authorised Signatories We confirm our agreement to the terms and conditions set out above. For and on behalf of /s/ --------------------------- Bonso Electronics Ltd. (Borrower) For and on behalf of /s/ -------------------------------- Bonso Electronics International Inc. (Corporate Guarantor) Bonso Electronics Limited KBC - -------------------------- Schedule -------- List of Required Documents -------------------------- 1. Certified extracts of the board resolutions of the Borrower(s) and the Corporate Guarantor(s), if any, approving execution, delivery and performance of, and the terms of, the agreement and other documents required by the Bank evidencing the Facilities and the guarantee(s) (the "Facility Documents"), and authorizing named person or persons to sign those and any ancillary document. 2. The duly executed Facility Documents including but not limited to the following: (a) ISDA Master Agreement and Schedule to the ISDA Master Agreement by the Borrower 3. A copy of these Resolutions certified by the Chairman of the Meeting, any Director or the Secretary of the Company be delivered to the Bank. 4. Signature specimen of the Authorized Persons: Name of the Authorized Persons So Hung Gun Anthony /s/ So Hung Gun Anthony ----------------------- Chung Kim Wah /s/ Chung Kim Wah ----------------------- Pang Kit Tang /s/ Pang Kit Tang ----------------------- It is hereby certified and confirmed that the above Resolutions: - (i) have been duly entered in the minute book for meetings of the Directors of the Company and the minutes recording the above Resolutions have been signed by the Chairman of the Meeting; (ii) are still in fill force and effect in all respects; (iii) do not exceed the objects or powers of the Company or the powers of its Directors; and (iv) the specimen signature(s) set out in paragraph 4 above is (are) the true signature(s) of the Authorized Person(s). /s/ So Hung Gun, Anthony - ------------------------ Chairman of the Meeting Date: March 27, 2007 ------------------------ Name: So Hung Gun,Anthony ------------------- (please print) EX-4.2 3 bonsoexh42.txt BANKING FACILITY LETTER (6/6/2007) Exhibit 4.2 Standard Chartered Date; 6th June 2007 Our Ref: CR/LC/TEAM4/BKA CONFIDENTIAL Bonso Electronics Limited Units 1106-1110, 11/F., Star House, 3 Salisbury Road, Tsimshatsui, Kowloon. Attn. Mr. Anthony So/Ms Cathy Pang - ---------------------------------- Dear Sirs, BANKING FACILITIES Standard Chartered Bank (Hong Kong) Limited ItJft () "jEJ (the "Bank") is pleased to offer the following banking facilities (the "Facilities") to the Customer below for the purpose(s) of general working capital, trade finance and treasury requirement, subject to the Bank's Standard Terms and Conditions for Banking Facilities and Services (including the Trade Finance Supplement) and Terms and Conditions for Foreign Exchange Business attached and the terms and conditions set out in this facility letter. A. CUSTOMER: Bonso Electronics Limited B;- FACILITY LIMITS: (1) General Banking Facilities
------------------------------------------------------------------------------------- Type(s) of Facility Facility Limit(s) Designated Customer(s) and Sub-limit(s), if applicable ------------------------------------------------------------------------------------- 1. Current Account Overdraft HKD3000,000.- o The Customer ------------------------------------------------------------------------------------- 2. Trade Finance HKD55,000,000.- - (Please refer to Appendix I for product details.) ------------------------------------------------------------------------------------- (a) Trade Finance Group All o The Customer (HKD55, 000,000.-) ------------------------------------------------------------------------------------- (b) Trade Finance Group I o The Customer (HI0551 000, 000.-) ------------------------------------------------------------------------------------- (c) Trade Finance Group 2 o The Customer (HKD65,000,000.-) ------------------------------------------------------------------------------------- Standard Chartered Bank (Hong Kong) Limited Wholesale Bank Page 2 Bonso Electronics Limited o (d) Trade Finance Group 3 The Customer HKD55, 000,000.-) ------------------------------------------------------------------------------ 3. Factoring HKD20,000,000.- o The Customer (being FlU Limit) ------------------------------------------------------------------------------ Total Facility Limit: HKD78,000,000..- ------------------------------------------------------------------------------ Note:- o The aggregate outstanding of all Sub-limits shall not at any time exceed the Facility Limit of that Facility and the Total Facility Limit ------------------------------------------------------------------------------- o (2) Treasury Facilities (The Bank may arrange for these facilities to be available through Standard Chartered Bank or other members of the Standard Chartered Group and separate documentation would be executed where necessary.) --------------------------------------------------------------------- Type(s) of Facility Designated Customer(s) and Sub-limit(s) if applicable ------------------------------------------------------------------------------- 1. Foreign Exchange Contract(s) The Customer (Spot) Facility Limit to be determined by the Bank on a case by case basis. ------------------------------------------------------------------------------ 2. Currency and Interest Rate Risk Management The Customer ------------------------------------------------------------------------------ C. PRICING AND CONDITIONS: ------------------------------------- --------------------------------------------------------------------- 1. Current Account Overdraft Interest: the higher of Prime or HIBOR, payable monthly in arrears. ------------------------------------- --------------------------------------------------------------------- 2. Trade Finance Interest: - HKD import/export facilities: 1.5% per annum over HIBOR. Foreign currency import/export facilities: 1.5% per annum over LIBOR. Commission: Standard rates unless otherwise stipulated. Letters of Credit Opening Commission & Commission in lieu of --------------------------------------------------------------------- Exchange First USD50,000.- 1/4% Balance 1/8% Commission on other Trade Finance Facilities Import Invoice Financing 1/8% flat (minimum HKD400) Export Invoice Discounting 1/8% flat (minimum HKD400) Maximum tenor/advance percentage for: Import facilities: Combined usance and import loan period of any transaction is not to exceed 120 days. Export facilities 60 days ----------------------------------------------------------------------------------------------------------- Page 3 Bonso Electronics Limited ------------------------------------ ---------------------------------------------------------------------- Packing Credit: up to 90 days or expiry of the letter of credit, whichever is earlier, and up to 70% of the amount of the letter of credit. Discounting of "Documents Against Acceptance" ("D/A") is only available to the approved drawee by the Bank: Import Invoice Financing: allowed up to a maximum limit of HKD35,000,000.- for a tenor of 120 days up to 100% finance against presentation of certified true copy of invoice issued by suppliers approved by the Bank. Individual limit for any new suppliers to be approved by the Bank from time to time. Export Invoice Discounting: allowed up to 60 days, and up to 100% of the invoice amount. ------------------------------------ ---------------------------------------------------------------------- 3. Factoring Subject to terms and conditions stipulated in the Receivables Purchase Agreement executed between the Bank and the Customer. ------------------------------------ --------------------------------------------------------------------- 4. Foreign Exchange Tenor up to 2 days. Contract(s) (Spot) ------------------------------------ ---------------------------------------------------------------------- 5. Currency and Interest Rate Tenor up to 18 months. Risk Management Handling Fee of Facilities: HKD10,000. - payable upon your signing of this letter, and other handling fed to be mutually agreed and payable on each anniversary of the date of this letter if the Facilities are continuinq. ------------------------------------ ----------------------------------------------------------------------
D. SECURITY AND CONDITIONS PRECEDENT: The availability of the Facilities is conditional upon the Bank's holding/receipt of the following documents, items and evidence (both in form and substance) satisfactory to the Bank: 1. This letter duly executed by the Customer. 2. A corporate guarantee executed by Bonso Electronics International Inc. for an unlimited amount. 3. A Receivables Purchase Agreement executed by the Customer for the factoring facility. 4. Original/Certified copies of all necessary consents, approvals and other authorisations (including board resolutions) in connection with the execution, delivery and performance of this letter and all other documents mentioned above, if applicable. 5. (if any of the facilities referred to in this letter are to be made available by Standard Chartered Bank or other members of the Standard Chartered Group) All such documents, items or evidence with, in favour of or to Standard Chartered Bank or, as the case may be, such member of the Standard Chartered Group as the Bank may request. 6. Such other documents, items or evidence that the Bank may request from time to time. Bonso Electronics Limited Page 4 E. COVENANTS AND UNDERTAKINGS: The Customer undertakes to the Bank that it will: 1. ensure loan from Bonso Electronics International Inc. (being its holding company) at not less than HKD40,000,000.- at all times. 2. promptly submit to the Bank: certified copy of the audited financial statements of the Customer and Bonso Electronics International Inc. within g months after their respective financial year end; a certified copy of the quarterly financial statements of Bonso Electronics International Inc. within 3 months after the end of the releiant accounting period; and other information that the Bank may request from time to time. 3. immediately inform the Bank: o of any change of the Customer's directors or beneficial shareholders of amendment to its memorandum or articles of association or equivalent constitutional documents; o of any substantial change to the general nature of the Customer's existing business; or o if it becomes, or is aware that any of its directors, shareholders, partners or managers becomes, a Related Person (as defined in paragraph 5 of section F of this letter). F. OTHER TERMS AND CONDITIONS: 1. The Facilities are available at the sole discretion of the Bank. The Bank may at any time immediately terminate, cancel or suspend the Facilities or otherwise modify the Facilities without the consent of any party. 2. Notwithstanding any provisions stated in this letter, the Facilities (except for the factoring facility) are repayable on demand by the Bank. The Bank has the overriding right at any time to require immediate payment and/or cash collateralisation of all or any sums actually or contingently owing to it under the Facilities (except for the factoring facility). 3. The Bank's Standard Terms and Conditions for Banking Facilities and Services (including the Trade Finance Supplement) and Terms and Conditions for Foreign Exchange Business ("Standard Terms and Conditions") attached and/or referred to in this letter forms an integral part of this letter and the Customer agrees to observe and be bound by such Standard Terms and Conditions. 4. The terms and conditions set out or referred to in this letter supersede and replace those set out in our letter (if any) previously sent to the Customer. 5. Please note that section 83 of the Banking Ordinance imposes on the Bank certain limitations on advances to persons (including firms, partnerships and companies) related to its directors, employees with lending authority or controllers (each person so related shall be referred to as a "Related Person"). When acknowledging and accepting this facility letter, the Customer should advise the Bank if it is, or any of its directors, shareholders, partners or managers is, a Related Person within the meaning of the Banking Ordinance. If.subsequent to the acceptance of this facility letter, the Customer becomes, or is aware that any of its directors, shareholders, partners or managers is or becomes, a Related Person, it should immediately advise the Bank in writing. Page 5 Bonso Electronics Limited 6. The Customer acknowledges the following: (a) The Customer has received and read the Bank's Notice to Customers and Other Individuals relating to the Personal Data (Privacy) Ordinance (the "Ordinance') and the Code of Practice on Consumer Credit Data (the "Notice"); and (b) The Customer has, or will, notify each of its Relevant Individuals, the Bank may, in the course of providing banking services to the Customer, receive Customer information in respect of that Relevant Individual. For the purpose of the above, the Ordinance defines a Relevant Individual as being one of the following (but not limited to) Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, department heads, corporate officers (e.g. authorized signatories, company secretary etc.), directors, major shareholders, beneficial owners, and guarantors (where applicable). 7. This letter shall be governed by and construed in accordance with the laws of Hong Kong SAR. Please sign and return to us the enclosed copy of this letter together with the attached Standard Terms and Conditions for Banking Facilities and Services (including the Trade Finance Supplement) and Terms and Conditions for Foreign Exchange Business to the Bank's Credit Risk Control at 11th Floor, Standard Chartered Tower, 368 Kwup Tong Road, Kwun Tong, Kowloon within one month after the date of this letter, failing which this offer shall lapse.. If you have any queries, please feel free to contact any of the following persons:- ------------------------------------------------------------------------------ Queries on Name Telephone No. ----------------------------------------------------------------------------- Execution of bank documents Ms. Kane Leung, 2282-6193 Senior Credit Documentation Manager Banking arrangements . Ms. Sandra Mak, Relationship Manager 2821-1876 ------------------------------------------------------------------------------ Yours faithfully, For and on behalf of STANDARD CHARTERED BANK (HONG KONG) LIMITED /s/ Karie Leung - --------------- Karie Leung Senior Credit Documentation Manager KL/EW/wy Encl. We agree and accept all the terms and conditions set out above and the Bank's Standard Terms and Conditions for Banking Facilities and Services (including the Trade Finance Supplement) and Terms and Conditions for Foreign Exchange Business attached andlor referred to in this letter, which we have read and understood. For and on behalf of BONSO ELECTRONICS LIMITED - -------------------------------- Page 6 Bonso Electronics Limited Appendix 1 TRADE FINANCE FACILITY' Trade Finance Group All - ----------------------- Negotiation of export credit documents with discrepancies on a with recourse basis Trade Finance Group 1 - --------------------- o Purchase of documents against payment bills with title documents on parties acceptable to the Bank on a with recourse basis o Purchase of documents against acceptance bills with ECA/approved insurance cover on a with recourse basis o Issuance of back-to-back letters of credit o Issuance of import letters of credit - sight and usance -- with title documents Trade Finance Group 2 - --------------------- o Purchase of documents against acceptance bills without ECA/approved insurance cover on a with recourse basis o Purchase of documents against payment bills without title documents on parties acceptable to the Bank on a with recourse basis o Issuance of quasi back-to-back letters of credit -without title documents (i.e. Import letter of credit supported by export letter of credit acceptable to the Bank) o Issuance of import letters of credit - sight and usance -- without title documents o Shipping guarantees Trade Finance Group 3 - --------------------- o Pre-shipment loan - i.e. packing credit o Acceptance of drafts under import letters of credit o Release of documents against acceptance supported by trust receipts o Loans against trust receipts o Import loans o Import Invoice Financing / Export Invoice Discounting EX-4.3 4 bonsoexh43.txt BANKING LETTER (6/12/07) Exhibit 4.3 HSBC Commercial Banking-GP 1, Division C (CARM 060511) CONFIDENTIAL Bonso Electronics Ltd. 12 June 2006 Unit 1106-1110 11/F Star House 3 Salisbury Road Tsimshatsui Kowloon Attn: Ms Cathy Pang Dear Madam BANKING FACILITIES A/C NOS. 557-002615-001 / 500-696224 With reference to our recent discussion, we are pleased to advise that we have reviewed your banking facilities and offer a renewal within the following revised limits which will be made available on the specific terms and conditions Outlined below. These facilities are subject to review at any time and, in any event by 15 April 2007, and also subject to our overriding right of suspension, withdrawal and repayment on demand, including the right to call for cash cover on demand for prospective and contingent liabilities. New Previously Overdraft HKD500,000..- HKD500,000.- Interest on the overdraft facility will continue to be charged on daily balances at our best lending rate (currently 8% per annum, but subject to fluctuation at our discretion), payable monthly in arrears to the debit of your current account. - Combined Limit HKD37,000,,000.- HKD37,000,000. Documentary credits with import finance up to 120 days (less any usance or credit periods granted by your suppliers) and / or D/P bills purchased with ECIC cover assigned to us. Within which, aggregate of the following sub-limits should not exceed (HKD37,000,000.-) (HKD37,000,000) - Sub-limit for goods under your control and/or Trust Receipts. (HKD37,000,000.-) (HKD37,000,000.-) - Sub-limit for D/A bills purchased up to 90 days with ECIC cover assigned to us. (Nil) (HKD37,000,000.-) - Sub-limit for Clean Import Loan. (HKD19,000,000.-) (HKD19,000,000.-) The Hongkong and Shanghai Banking Corporation Limited HSBC Main Building, 1 Queen's Road Central, Hong Kong Tel: (852) 2822 1111 Fax: (852) 2524 6432 Page l of 4 Bonso Electronics Ltd 12 June 2006 - -------------------------------------------------------------------------------- Clean Import Loans are allowed for up to 120 days, less any usance/credit period, granted by your suppliers, against presentation of copy of suppliers' invoices and transport documents bearing your authorized signatures to indicate your receipt of goods. Our loan period plus any usance/credit period granted by your suppliers, however, should not exceed 180 days. The proceeds will be remitted or credited directly to your suppliers' accounts. We may, at our sole and absolute discretion, refuse to allow drawings under the facilities if the drawee is considered by us to be unacceptable and / or if the transaction in question does not meet our operational requirements in respect of these facilities. Interest on your HKD import loans will continue to be charged at 1.5% per annum over H1BOR (Hong Kong lnterbank Offered Rate) and payable at the end of each interest period to the debit of your current account Interest on foreign currency import loans will continue to be charged on a daily basis at our best lending rate for respective foreign currency and is payable monthly in arrears to the debit of your account Opening Commission on Documentary Credits (for each validity period of 6 months), Commission In Lieu of Exchange and HKD Bill Commission will continue to be charged as follows: For the first USD50,000.- or its equivalent : 1/4% For the balance in excess of USD50,000.- or its equivalent : 1/8% - Commission on CIL will continue to be charged as follows: For the first USD50,000.- or its equivalent : 1/8% For the balance in excess of USD50,000.- or its equivalent : 1/16% Default Interest ---------------- Please note that interest will be payable on sums which are overdue, drawings which are in excess of agreed limits and amounts demanded and not paid, at the maximum rate stipulated in the Bank's Tariff which is accessible at http://www.hsbc.com.hk/hk/commercial/tool/lpdf/c_tariff.pdf The Bank will provide you with a hard copy of the Tariff at your request. Interest at the applicable rate will be payable monthly in arrears to the debit of your current account. Accrual of Interest and Other Sums ---------------------------------- Please note that interest and other sums expressed to be chargeable or payable on a periodic basis will nonetheless accrue from day to day and amounts so accrued may be demanded at any time. Security -------- As security, we continue to hold: Bonso Electronics Ltd 12 June 2006 - -------------------------------------------------------------------------------- 1. A Corporate Guarantee for HKD37,500,000.- from Bonso Electronics International Inc together with a Board Resolution both dated 18 March 2004 and a Legal Opinion from Haney Westwood & Riegels dated 20 April 2004. 2. A Registered Assignment of DC Proceeds from Bonso Electronics Ltd together with a Board Resolution both dated 7 May 2001. Covenant -------- The Guarantor, Bonso Electronics International Inc., will be required for so long as these facilities are available to you to comply with the following covenant. The compliance or otherwise with the following covenant will not in any way prejudice or affect our right to suspend, withdraw or make demand in respect of the whole or any part of the facilities made available to you at any time. By signing this letter, you expressly acknowledge that we may suspend, withdraw or make demand for repayment of the whole or any part of the facilities at any time notwithstanding the fact that the following covenant is included in this letter and whether or not any such covenants are breached. Bonso Electronics International. Inc covenants and undertakes that it will at all times ensure to maintain its gearing below 1. "Gearing means the ratio of "Total Interest Bearing Debt" to "Tangible Net Worth plus Non-Redeemable Preference Shares and Minority Interest". "Tangible Net Worth" means the aggregate of:- - the amount paid up on the issued share capital (other than any redeemable share capital; and - the capital and revenue reserves (including but not limited to the share premium account, revaluation and retained profits or losses); but after deducting from such sum:- - goodwill and all other intangible assets; - all minority interests in subsidiaries; - all amounts set aside for tax;. - any dividend or other distribution declared/recommended; - the excess of the book value to the market value of the listed investments; and any amount standing to the debit of the your capital and reserves (including profit and loss account); - any amount due from the shareholders, directors, and/or related companies. We no longer require the covenant and undertaking from your company to direct to the Bank Import/Export business of not less than HKD8,000,000.- per month. Please note that all costs and expenses (including legal fees) incurred by us in connection with the extension of these facilities and any matters arising are to be reimbursed by you on demand. Please arrange for the authorised signatories of your company, in accordance with the terms of the mandate given to the bank, to sign and return to us the duplicate copy of this letter to signify your confirmation as to the correctness of the security held, and your continued understanding and acceptance of the terms and conditions under which these facilities are granted. We also require the authorised Bonso Electronics Ltd 12 June 2006 Bonso Electronics Ltd 12 June 2006 - -------------------------------------------------------------------------------- signers of Bonso Electronics International Inc to sign on the duplicate copy of this letter to signify its agreement and acceptance of the covenant undertaken by it as stated in this offer letter. A review fee of HKD13,500.- will be charged to the debit of your current account upon receipt of your acceptance of this facility letter. Unless expressed in writing from you to the contrary, we may provide any information relating to any of your accounts with us and any facilities we may provide to you from time to time or their conduct or any other information concerning your relationship with us to any other company or office which at the relevant time belongs to or is part of the HSBC Group. Section 83 of the Banking Ordinance Please note that Section 83 of the Banking Ordinance has imposed on us as a bank certain limitations on advances to persons related to our directors or employees. In acknowledging this facility letter you should advise us whether you are in any way related to any of our directors or employees within the meaning of Section 83 and in the absence of such advice we will assume that you are not so related. We would also ask, should you become so related subsequent to acknowledging this facility letter, that you immediately advise us in wilting. These revised facilities will remain open for acceptance until the close of business on 3 July 2006 and if not accepted by that date will be deemed to have lapsed. We are pleased to be of continued assistance. Yours faithfully /s/ Tony K F Kong ----------------- Tony K F Kong Vice President Page 4 or 4 EX-4.4 5 bonsoexh44.txt BANKING LETTER (3/2/07) Exhibit 4.4 Hang Seng Bank Our Reference : Commercial Banking - RLM Dept A (CARM Serial No. 070103 2 March 2007 Private & Confidential Bonso Electronics Limited Room 1106 11/F Star House 3 Salisbury Road Tsimshatsui Kowloon Attention: Mr Anthony So Dear Sirs BANKING FACILITIES With reference to our recent discussions, we are pleased to advise that we have reviewed your banking facilities and offer you the undermentioned revised limits (the "Facilities") which will be made available subject to the terms and conditions outlined herein and the security detailed below:-
Facilities and Limits - --------------------- For establishment of documentary letters of credit (LC) for your HK$48,000,000.00 account in favour of third parties and covering import of goods in the ways acceptable to us and/or acceptance of bills drawn thereunder, and/or for trust receipt facility (TR) relating to goods imported and financed under our documentary letters of credit established for your account, and/or for establishment of documentary letters of credit (Local LC) for your account in favour of local beneficiaries and covering delivery of goods in the ways acceptable to us and/or acceptance of bills drawn thereunder, and/or for trust receipt facility (IR under Local LC) relating to goods supplied and financed under our documentary letters of credit issued for your account, and/or - for purchase of documentary export DIP bills (DP) drawn on parties acceptable to us, and/or for purchase of documentary export D/P bills (IDA) unsecured by Bonso Electronics Limited goods drawn on parties acceptable to us, of which for extension of trade loans (ITL) to finance your import (HK$35,000,000.00) of goods as evidenced by your suppliers' invoices and any other relevant documents as required. The availability of any particular trade loan will be subject to such conditions as we may decide from time to time, for extension of trade loans (ETL) to finance your export of goods as evidenced by your (HK25,000,000.00) sale invoices to buyers and any other relevant documents as required. The availability of any particular trade loan will be subject to such conditions as we may decide from time to time, for overdraft facility (OD) on your current account no.259-229698-001 (HK$5,000,000.00) For negotiation of discrepant documents, secured or unsecured by HK$15,000,000.00 goods, presented under export letters of credit issued by banks acceptable to us. For factoring facility. (subject to terms and conditions set out in a US$2,400,000.00 separate letter issued by our Customized Trade Solutions Department.)
Security and Documentation We shall continue to hold the following:- A Deed of Guarantee dated 31 January 2000 for unlimited amount from Bonso Electronics International Inc. (the "Guarantor"). Interest Interest on financed bills/loans shall be charged at 1.5% per annum above 30/60/90/120/150 days LIBOR (London Interbank Offered Rate) for foreign currencies transactions or at 1.5% per annum above 30/60/90/120/150 days HIBOR (Hong Kong Interbank Offered Rate) for Hong Kong Dollar transactions, subject to market availability, as shall be quoted by us on the first day of the relevant interest period. Interest on loans will be payable on monthly basis. Interest on the overdraft facility shall be charged at 0.5% per annum over the Hong Kong Dollars Prime Lending Rate as quoted by us from time to time, with monthly rests and subject to fluctuation at our discretion. Tenor Maximum loan tenor for TR, TR under Local LC, TDA, DP and ETL facilities will be 120 days. Maximum loan tenor for ITL facility will be 150 days. Bonso Electronics Limited Fee We will debit the current account maintained by you with us for the facility review fee of HK$30,000.00 normally within 2 weeks from the date of this letter unless we receive your written notification within 7 business days that the Facilities are no longer required. Default Interest Notwithstanding the provisions above for the charging of interest, all sums (whether principal, interest, fees, charges or otherwise) due but unpaid in respect of the Facilities shall bear interest at such rate from time to time determined by us at our absolute discretion. Set-off We may, at any time and without notice, apply and set-off any credit balance to which you are entitled on any account with us or any other moneys owed by us to you in or towards satisfaction of any obligations owing to us by you. For this purpose, we are authorised to purchase, at our prevailing exchange rate, such other currencies as may be necessary to effect such application with the moneys standing to the credit of such account or to effect conversion of one currency into another in any other manner. Expenses We may, from time to time at our absolute discretion and without prior notice to or consent from you, impose further charges and fees which may be chargeable on the Facilities of the same type and change the terms of the existing and future charges and fees, including the rate thereof. All expenses, legal or otherwise, if any, in connection with the Facilities are to be borne by you. Taxes All payments of principal and interest on amounts due under the Facilities shall be made free and clear of all present and future taxes, withholdings of any nature whatsoever. Others (i) You and the Guarantor shell provide us with certified copies of the respective annual audited accounts within 6 months following the end of each financial year and such other relevant financial information as we shall from time to time reasonably request (ii) You shall pay to us upon demand or at the time agreed in this letter all fees, chatges, commissions, costs, expenses (legal or otherwise, including without limitation stamping, registration or other duties) and other sums incurred by us in connection with the negotiation, preparation, execution and registration 'of the documents contemplated hereby, the administration of the Facilities, any amendment, waiver or consent, or proposal for any of the foregoing, or the exercise, enforcement of or preservation of any Bonso Electronics Limited rights hereunder or under the related documents or otherwise in connection with the Facilities. We shall be entitled to debit all or any of the aforesaid sums from the current account or such other accounts maintained by you with is without prior notice. Governing Law These Facilities are subject to the laws of Hong Kong Special Administrative Region with nonexclusive jurisdiction of Hong Kong Special Administrative Region Courts. Notwithstanding anything to the contrary hereinbefore contained, we shall not be bound to grant any of the Facilities at all or beyond such sum as we may at our sole discretion consider. safe to the intent that we retain the absolute right to withdraw, suspend and/or reduce from time to time the Facilities or any of them and/or the extent of any of the Facilities for so long and to or in such amount as we may at our sole discretion deem fit without prior notice to or consent from you. The Facilities are subject to our usual review as well as our customary overriding right of repayment on demand and are also subject to our right to call for cash cover on demand for prospective and contingent liabilities. Kindly sign and return to us the duplicate of this letter together with the attached "Extracts from the Minutes of a Meeting of the Board of Directors" to indicate your acceptance of this credit facility arrangement within one month from the date of this letter and if not accepted by that date, unless extended by us at our sole and absolute discretion, will be deemed to have lapsed. All other security documentation required, if any, under the Facilities must also be executed to our complete satisfaction by the above specified date, failing which the Facilities are subject to withdrawal or revision at our absolute discretion. Our Insurance Agency Department offers a full range of insurance services and will be pleased to quote you competitive rates on fire, marine end other coverages upon your request. Should you have any queries, please do not hesitate to contact the following persons: Queries on Name Telephone No. Execution of documents Jeffy Chan 2198 2537 Banking arrangement Angus Wong 2198 5994 Insurance Yeung Tung 2198 4960 We are pleased to be of continued assistance. Yours faithfully /s/ Rose Cho - ---------------------------------------- Rose Cho Executive Vice President Department Head Relationship Management Commercial Banking _/s/ Kitty Cheng___________ Senior Vice President Team Head Relationship Mangement Commercial Banking EX-12.1 6 bonsoexh121.txt CERTIFICATION Exhibit 12.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Anthony So certify that: 1. I have reviewed this annual report on Form 20-F of Bonso Electronics International Inc. (the "Company"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this annual report; 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluations; and d. Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. 5. The company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the company's auditors and the audit committee of company's Board of Directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal controls over financial reporting. Date: September __, 2007 /s/ Anthony So ------------------------------- Anthony So, President and Chief Executive Officer EX-12.2 7 bonsoexh122.txt CERTIFICATION Exhibit 12.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Henry Ma certify that: 1. I have reviewed this annual report on Form 20-F of Bonso Electronics International Inc. (the "Company"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this annual report; 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluations; and d. Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. 5. The company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the company's auditors and the audit committee of company's Board of Directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal controls over financial reporting. Date: September __, 2007 /s/ Henry Ma ------------------------------- Henry Ma, Director of Finance EX-13.1 8 bonsoexh131.txt CERTIFICATION EXHIBIT 13.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Bonso Electronics International, Inc., a British Virgin Islands international business company (the "Corporation"), does hereby certify, to such officer's knowledge, that: The Annual Report on Form 20-F for the year ended March 31, 2007 (the "Form 20-F") of the Corporation fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of the Corporation. Dated: September __, 2007 /s/ Anthony So ------------------------------------- Anthony So President and Chief Executive Officer Dated: September __, 2007 /s/ Henry Ma ------------------------------------- Henry Ma Director of Finance -----END PRIVACY-ENHANCED MESSAGE-----