UNITED STATES SECURITIES AND EXCHANGE COMMISSION
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
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For the Fiscal Year Ended:
| o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| or | ||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Fiscal Year Ended December 31, 2002 | ||
| or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File Number: December 31, 1999 0-16673
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NAM TAI ELECTRONICS, INC.
(Exact
Nam Tai Electronics, Inc.
British Virgin Islands
(Jurisdiction
15/F., Tower 1
China Merchants Tower
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 Shares, $0.01 par value per share
Common Share Purchase Warrants
NONE
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE
As of December 31, 1999,2002, there were 8,840,823 Common Shares12,019,668 common shares of the registrant outstanding.
Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes [X]þ No [ ]
o
Indicate by check mark which financial statement item the registrant has elected to follow: Item 17. [ ]o Item 18. [X]
Exhibit Index on Page 62
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þ
TABLE OF CONTENTS
| PART I | |||||
| Item 1. | 2 | ||||
| Item 2. | 2 | ||||
| Item 3. | 2 | ||||
| Item 4. | 14 | ||||
| Item 5. | 28 | ||||
| Item 6. | 45 | ||||
| Item 7. | 49 | ||||
| Item 8. | 51 | ||||
| Item 9. | 54 | ||||
| Item 10. | 55 | ||||
| Item 11. | 62 | ||||
| Item 12. | 62 | ||||
| PART II | |||||
| Item 13. Defaults, Dividend Arrearages and Delinquencies — Not applicable | 62 | ||||
| Item 14. Material Modifications to | 62 | ||||
| Item 15. | 62 | ||||
| Items 16. | 62 | ||||
| PART | |||||
| Item 17. | 63 | ||||
| Item 18. Financial Statements | 63 | ||||
| Item 19. | |||||
| SIGNATURES | |||||
| Consent of Independent Accountant (to incorporation of their report on Financial Statements into the | |||||
This Annual Report on Form 20-F contains forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled Risk Factors under Item 1. - Description of Business.
3. — Key Information.
Readers should not place undue reliance on forward-looking statements, which reflect management'smanagement’s view only as of the date of this Report. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. Readers should also carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission.
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and publishes its financial statements in United States dollars.
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1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Unless the context otherwise requires, all references in this annual report to “Nam Tai”, “we”, “our”, “us” and the “Company” refer to Nam Tai Electronics, Inc. (which togetherand its consolidated subsidiaries and their respective predecessors. References to “dollars” or $ are to United States dollars.
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
Selected Financial Data
Our historical consolidated financial statements are prepared in accordance with its wholly owned
subsidiaries is hereafter referred to asgenerally accepted accounting principles in the "Company" or "Nam Tai") was
incorporated as a limited liability International Business Company under the
lawsUnited States and are presented in U.S. dollars. The following selected statements of income data for each of the British Virgin Islands in August 1987. The Company's corporate
administrative matters are conductedthree years in the British Virgin Islands through its
registered agent, McW. Todman & Co., McNamara Chambers, P.O. Box 3342, Road
Town, Tortola, British Virgin Islands. The Company's principal executive officesperiod ended December 31, 2002 and the balance sheet data as of December 31, 2001 and 2002 are locatedderived from our consolidated financial statements and notes thereto included in the Hong Kong Special Administrative Region ("Hong Kong"), of the
People's Republic of China ("China"). Its address is Suite 4, 9/F., Tower 1,
China Hong Kong City, 33 Canton Road, TST, Kowloon, Hong Kong.
As an International Business Company, the Company is prohibited from
doing business with persons resident in the British Virgin Islands, owning real
estate in the British Virgin Islands, or acting as a bank or insurance company.
The Company does not believe these restrictions materially affect its
operations.
Nam Tai was incorporated in the British Virgin Islands principally to
facilitate trading in its shares. The government of Hong Kong imposes stamp duty
on the transfer of shares equal to 0.3% of the value of the transaction. There
is no such stamp duty imposed by the British Virgin Islands. The Company was
organized in this manner to avoid any such requirements for the collection of
stamp duties for share transactions.
COMPANY OVERVIEW
Nam Tai provides design and manufacturing services to original equipment
manufacturers ("OEMs") of consumer electronic products. Nam Tai's three
principal customers include Texas Instruments Incorporated, Sharp Corporation
and Epson Precision (HK) Ltd. The Company's principal design and manufacturing
operations are based in Shenzhen, China, approximately 30 miles from Hong Kong.
Products manufactured by Nam Tai include telecommunication products, palm-sized
PC's, personal digital assistants, linguistic products, calculators and smart
card readers. It also manufactures electronic components and subassemblies for
printed circuit boards ("PCBs"). This includes large scale integrated circuits
("LSI") bonded on PCBs that are used in the manufacture of products such as
electronic toys and telecommunication systems, and subassemblies for liquid
crystal display ("LCD") modules that are in turn used in the manufacture of
communication, camera and computer products. In the near future, Nam Tai expects
to begin manufacturing of lithium ion rechargeable battery packs which are used
in cellular phones, laptop computers, electronic toys and household appliances.
Nam Tai assists OEMs in the design and development of products and
furnishes full turnkey manufacturing services to its OEM customers utilizing
advanced processes such as chip on glass ("COG"), chip on board ("COB"),
multichip modulators ("MCM"), surface mount technology ("SMT"), tape automated
bonding ("TAB"), outer lead bonding ("OLB") and anisotropic conductive film
("ACF") heat seal technologies. The Company provides hardware and software
design, plastic molding, component purchasing, assembly into finished products
or electronic subassemblies, post-assembly testing and shipping. The Company
uses radio frequency ("RF") and digitally enhanced cordless telephone ("DECT")
technologies in the production of various telecommunication products. The
Company has also significantly increased its original design manufacturing
("ODM") whereby it develops and designs proprietary products which are sold by
OEM customers. Nam Tai also provides OEMs with silk screening services for
plastic parts, polyvinyl chloride ("PVC") products and metal parts.
The Company moved its manufacturing facilities to China in 1980 and later
located in Shenzhen, China in 1987 to take advantage of lower overhead costs,
lower material costs, and competitive labor rates and to position itself to
achieve low-cost, high volume, high quality manufacturing. The location of Nam
Tai's facility in Shenzhen, about 30 miles from Hong Kong, provides the Company
with access to Hong Kong's infrastructure of communication and banking. This
also facilitates transportation of the Company's products out of China through
the port of Hong Kong. The Company emphasizes high responsiveness to the needs
of OEM customers through the development and volume production of increasingly
sophisticated and specialized products. The Company seeks to build long-term
relationships with its customers through high quality standards (supported by
ISO 9001 Certification), competitive pricing, strong research
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and development support, advanced assembly processes and high volume
manufacturing, and with key suppliers through volume purchasing and reliable
forecasting of component purchases. The Company believes that the potential for
increased manufacturing outsourcing by Japanese and U.S. OEMs in China is
substantial and that it is in a position to take advantage of this because of
its available production capacity and experience. Management believes Nam Tai's
record of providing timely delivery in volume of high-quality, high technology,
low-cost products builds close customer relationships and positions the Company
to receive orders for more complex products. As the Company grows, management
will seek to maintain a low cost structure, reduce overhead where possible and
continuously strive to improve its manufacturing quality and processes.
THE COMPANY'S ORGANIZATIONAL STRUCTURE AND SUBSIDIARIES
The Company is a holding company for Nam Tai Electronic & Electrical Products
Limited and its subsidiaries, and Nam Tai Telecom (Hong Kong) Company Limited.
See Note 15 of Notes to Consolidated Financial Statements appearing in Item 18
of this Report. The chart below illustrates the organizational structureselected statements of income data for each of the Company and its subsidiaries.
-----------------------
/ Nam Tai /
/ Electronics, Inc. /
/ (A British Virgin /
/ Islands International /
/ Business Company) /
-----------------------
/
/
/
---------------------------------------------
/ /
/ 100% / 100%
----------------------- ------------------------
/ Nam Tai / / Nam Tai Electronic /
/ Telecom (Hong Kong) / / & Electrical Products / 75%
/ Company Limited / / Limited /-------------------------
/ (A Hong Kong Limited / / (A Hong Kong Limited / /
/ Liability Company) / / Liability Company / /
----------------------- ----------------------- /
/ /
/ /
--------------------------------------------- /
/ / /
/ 100% / 100% /
--------------------- ---------------------- /
/ Zastron Plastic & / / Namtai Electronic / /
/ Metal Products / / (Shenzhen) Co. Ltd. / /
/ (Shenzhen) Ltd. / / (A Limited Liability/ /
/ (A limited / / China Foreign / /
/ Liability China / / Operation / /
/ Foreign Operation) / ---------------------- /
--------------------- / /
/ /
/ /
/ ------------------------
/ / Shenzhen /
/ / Namtek Co., Ltd. /
/-----/ (A Limited Liability /
25% / China Foreign /
/ Operation) /
-----------------------
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Nam Tai Electronic & Electrical Products Limited
Nam Tai Electronic & Electrical Products Limited ("NTEE") was
incorporatedtwo years in November 1983 and became the holding company for Namtai
Electronic (Shenzhen) Co. Ltd. and Zastron Plastic & Metal Products (Shenzhen)
Ltd. in 1992. Marketing, customer relations and management operations are the
main functions handled by NTEE.
Namtai Electronic (Shenzhen) Co. Ltd.
Namtai Electronic (Shenzhen) Co. Ltd. ("NTSZ") was established as Baoan
(Nam Tai) Electronic Co. Ltd. in May 1989 as a joint venture company with
limited liability pursuant to the relevant laws of China. The equity of NTSZ was
owned 70% by NTEE and 30% by a Chinese government agency. During 1992, the joint
venture was dissolvedperiod ended December 31, 1999 and the company changed its name to NTSZ. As partbalance sheet data as of such
termination,December 31, 1998, 1999 and 2000 were derived from our audited financial statements, which are not included in this Report. The following data should be read in conjunction with the company returned to the Chinese government agency its real
property and investment, and NTSZ became a wholly owned subsidiary of NTEE.
NTSZ is the principal manufacturing armSection of the CompanyReport entitled Item 5. Operating and is engaged in
researchFinancial Review and development, manufacturingProspects and assemblingour consolidated financial statements including the Company's electronic
products in China.
Zastron Plastic & Metal Products (Shenzhen) Ltd.
Zastron Plastic & Metal Products (Shenzhen) Ltd. ("Zastron") was
organized in March 1992 as a limited liability company pursuant to the relevant
laws of China. Zastron is principally engaged in silk screening metal and PVC
products, much of which are used in products manufactured by the Company's
manufacturing subsidiary. Zastron also provides silk screening of products for
other unrelated companies.
Nam Tai Telecom (Hong Kong) Company Limited
Nam Tai Telecom (Hong Kong) Company Limited ("NT Telecom") was
established in July 1999, emerging from a successful acquisition of a Korea
based telecommunication business. Located in the same office building as NTEE,
and with a branch office in South Korea, NT Telecom develops and sells high
frequency wireless telecommunication products.
Shenzhen Namtek Co., Ltd.
Shenzhen Namtek Co., Ltd. ("Namtek") was organized in December 1995 as a
limited liability company pursuant to the relevant laws of China. Namtek
commenced operations in early 1996 developing and commercializing software for
the consumer electronics industry, particularly for the customers of the Company
and for products manufactured or to be manufactured by Nam Tai. Namtek employs
approximately 25 software engineers and provides the facilities and expertise to
assist in new product development and research, enabling Nam Tai to offer its
customers program design for microprocessors, enhanced software design and
development services, and strengthening the Company's ODM capabilities.
RISK FACTORS
The Companyrelated footnotes.
| Year ended December 31, | |||||||||||||||||||||
| 1998 | 1999 | 2000 | 2001 | 2002 | |||||||||||||||||
| (in thousands except per share data) | |||||||||||||||||||||
Consolidated statements of income data: | |||||||||||||||||||||
| Net sales | $ | 101,649 | $ | 145,054 | $ | 213,688 | $ | 234,006 | $ | 236,016 | |||||||||||
| Cost of sales | 76,939 | 120,074 | 182,096 | 203,974 | 197,956 | ||||||||||||||||
| Gross profit | 24,710 | 24,980 | 31,592 | 30,032 | 38,060 | ||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||
| Selling, general and administrative | 13,246 | 14,913 | 17,646 | 21,974 | 17,983 | ||||||||||||||||
| Research and development | 1,691 | 2,624 | 3,489 | 2,954 | 2,686 | ||||||||||||||||
| Impairment of goodwill | — | — | — | — | 339 | ||||||||||||||||
| Non-recurring (income) expense | 1,445 | (848 | ) | — | — | — | |||||||||||||||
| Total operating expenses | 16,382 | 16,689 | 21,135 | 24,928 | 21,008 | ||||||||||||||||
| Income from operations | 8,328 | 8,291 | 10,457 | 5,104 | 17,052 | ||||||||||||||||
| Equity in income (loss) of affiliated companies | 534 | 1,146 | (189 | ) | 1,867 | 10,741 | |||||||||||||||
| Equity in loss of an unconsolidated subsidiary | (1,708 | ) | — | — | — | — | |||||||||||||||
| Other income (expense) — net | 5,687 | 2,494 | 13,853 | 2,709 | (6,043 | ) | |||||||||||||||
| Interest expense | (1 | ) | (192 | ) | (165 | ) | (178 | ) | (790 | ) | |||||||||||
| Provision for/write off of investment in an unconsolidated subsidiary | (8,271 | ) | (1 | ) | — | — | — | ||||||||||||||
| Income before income taxes and minority interests | 4,569 | 11,738 | 23,956 | 9,502 | 20,960 | ||||||||||||||||
| Income taxes (expense) benefit | (1,040 | ) | 60 | 33 | (227 | ) | (773 | ) | |||||||||||||
| Income before minority interests | 3,529 | 11,798 | 23,989 | 9,275 | 20,187 | ||||||||||||||||
| Minority interests | — | — | 12 | (230 | ) | (164 | ) | ||||||||||||||
| Net income | $ | 3,529 | $ | 11,798 | $ | 24,001 | $ | 9,045 | $ | 20,023 | |||||||||||
2
| Year ended December 31, | |||||||||||||||||||||
| 1998 | 1999 | 2000 | 2001 | 2002 | |||||||||||||||||
| (in thousands except per share data) | |||||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||
| Basic | $ | 0.34 | $ | 1.26 | $ | 2.63 | $ | 0.88 | $ | 1.89 | |||||||||||
| Diluted | $ | 0.34 | $ | 1.25 | $ | 2.56 | $ | 0.87 | $ | 1.86 | |||||||||||
| Weighted average shares: | |||||||||||||||||||||
| Basic | 10,317 | 9,328 | 9,114 | 10,274 | 10,571 | ||||||||||||||||
| Diluted | 10,351 | 9,417 | 9,375 | 10,393 | 10,736 | ||||||||||||||||
| At December 31, | ||||||||||||||||||||
| 1998 | 1999 | 2000 | 2001 | 2002 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
Consolidated balance sheet data: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 71,215 | $ | 54,215 | $ | 58,896 | $ | 58,676 | $ | 82,477 | ||||||||||
| Working capital | 77,539 | 61,265 | 89,568 | 83,982 | 87,408 | |||||||||||||||
| Property, plant and equipment — net | 32,445 | 44,717 | 44,599 | 70,414 | 75,914 | |||||||||||||||
| Total assets | 147,228 | 158,747 | 208,370 | 224,573 | 275,086 | |||||||||||||||
| Short-term debt, including current portion of long-term debt | 329 | 6,949 | 1,523 | 3,687 | 14,970 | |||||||||||||||
| Long-term debt, less current portion | — | — | — | 12,860 | 2,812 | |||||||||||||||
| Total debt | 329 | 6,949 | 1,523 | 16,547 | 17,782 | |||||||||||||||
| Shareholders’ equity | 127,696 | 125,568 | 162,364 | 169,351 | 202,128 | |||||||||||||||
Risk Factors
We may from time to time make written or oral forward-looking statements. Written forward-looking statements may appear in this document and other documents filed with the Securities and Exchange Commission, in press releases, in reports to shareholders, on the Company'sour website, and other documents. 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 this "safe harbor" the Company is“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 or on behalf of the Company.our behalf. Any such statement is qualified by reference to the following cautionary statements:
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CUSTOMER CONCENTRATION; DEPENDENCE ON ELECTRONICS INDUSTRY
Risks Related to Our Business
| We are dependent on a few large customers, the loss of any of which could substantially harm our business and operating results. |
Historically, a substantial percentage of our sales have been to a small number of customers. During the years ended December 31, 1999, 1998,2000, 2001 and 1997,2002, sales to the
Company's four largestour customers accounting for 10% or more of our net sales aggregated approximately 85.5%72.4%, 92.4%,44.1% and 89.3%60.2% respectively, of the Company's totalour net sales. During the same periods,
sales to its three principal customers, i.e.The loss of Epson Precision (HK) Ltd., customersSony Ericsson Mobile Communications AB or Texas Instruments Incorporated, each of which accounted for more than 10% of the Company's totalour net sales during 1999, aggregated approximately
77.9%, 76.2%, and 73.3% respectively, of the Company's total sales. See "--
Customers and Marketing -- Customers." The Company's sales transactions to all
its OEM customers are based on purchase orders received by the Company from time
to time. Except for these purchase orders, the terms of which in a few cases are
supplemented by basic agreements dependent upon the receipt of purchase orders,
the Company has no written agreements with its OEM customers. The loss of any of
its largest customers, especially its principal customers,2002, or a substantial reduction in orders from any of them would have a material adverse effect on the
Company's business. There can be no assurance that Nam Tai will be able to
quickly replace expired, canceled or reduced orders with new business. See "--
Risk Factors -- Potential Fluctuations in Operating Results."
Most of the Company's salesmaterially and adversely impact our business and operating results.
3
Our quarterly and annual operating results are to customers in the electronics
industry, which is subject to rapid technological change and product
obsolescence. The factors affecting the electronics industry in general, or anysignificant fluctuations from a wide variety of the Company's major customers or competitors in particular, could have a
material adverse effect on the Company's results of operations. Nam Tai's
success will depend to a significant extent on the success achieved by its
customers in developing and marketing their products, some of which may be new
and untested. If customers' products become obsolete or fail to gain widespread
commercial acceptance, the Company's business may be materially adversely
affected.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company'sfactors.
Our quarterly and annual operating results are affected by a wide variety of factors that could materially and adversely affect net sales,
gross profitour business and profitability.operating results during any period. This could result from any one or a combination of factors, such as, but not limited to, the cancellation or postponement of
orders, the timing and amount of significant orders from the Company's principal
customers, customers' announcement and introduction of new products or new
generations of products, evolutions in the life cycles of customers' products,
the Company's timing of expenditures in anticipation of future orders,
effectiveness in managing manufacturing processes including, interruptions or
slowdowns in production as a result of technical difficulties with equipment,
and changes in cost and availability of components, mix of orders filled,
adverse effects to the Company's financial statements resulting from
acquisitions, local factors and events that may affect production volumes such
as local holidays and seasonality of customers' production requirements, and
changes or anticipated changes in economic conditions.as:
| • | the timing, cancellation or postponement of orders, | |
| • | the type of product and related margins, | |
| • | our customers’ announcement and introduction of new products or new generations of products, | |
| • | the life cycles of our customers’ products, | |
| • | our timing of expenditures in anticipation of future orders, | |
| • | our effectiveness in managing manufacturing processes, including, interruptions or slowdowns in production and changes in cost and availability of components, and | |
| • | the mix of orders filled. |
The volume and timing of orders received during a quarter are difficult to forecast. The Company's
customers fromFrom time to time, our customers encounter uncertain and changing demand for their products. Customers generally order based on their forecasts. If demand falls below such forecasts or if customers do not control inventories effectively, they may reduce, cancel or postpone shipments of orders.
The Company's expense levels during
As a consequence of any particular period are based, in
part, on expectations of future sales. If sales in a particular quarter do not
meet expectations, operating results could be materially adversely affected. In
addition, the Company's operating results are often affected by seasonality
during the second and third quarters in anticipation of the start of the school
year and Christmas buying season and in the first quarter resulting from both
the closing of the Company's factories in China for one-half of a month for the
Chinese New Year holidays and the general reduction in sales following the
holiday season. See Item 9. Management's Discussion and Analysis of Results of
Operations and Financial Condition. The market segments served by the Company
are also subject to economic cycles and have in the past experienced, and are
likely in the future to experience, recession periods. A recession period
affecting the industry segments served by the Company could have a material
adverse effect on the Company'sabove factors, results of operations. 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 shares. Our results of operations in future periods may fall below the Company's Common Shares.
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POLITICAL, LEGAL, ECONOMIC AND OTHER UNCERTAINTIES OF OPERATIONS IN
CHINA AND HONG KONG
Internal Politicalexpectations of public market analysts and Other Risks.investors. This failure to meet expectations could cause the trading price of our common shares to decline substantially.
| 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. In 2001, we made an inventory provision of $3.8 million for slow-moving raw materials relating to cancelled, reduced or delayed orders. Subsequently, we were able to use some of these raw materials in production or we received compensation for the unused raw materials from certain of our customers, resulting in a partial reversal of $2.0 million of the provision in 2002. Of the remaining $1.8 million of slow-moving inventory, $1.2 million was scrapped and $600,000 will be scrapped in the next six months.
| If we are unable to produce our new products in a high quality and cost-effective manner, our gross margins and business and operating results could be materially and adversely affected. |
We have experienced increased costs associated with developing advanced manufacturing techniques to produce our complex products on a mass scale and at a low cost. This has negatively impacted our gross margins. For example, our initial production runs of liquid crystal display, or LCD, modules experienced low production yields and other inefficiencies. We have currently commenced production of radio frequency, or RF, modules, thin film transistor, or TFT, modules and color LCD modules, in relation to which we have limited manufacturing experience. We expect that a substantial portion of our growth will come from our
4
| Our inability to utilize capacity at our new factory could materially and adversely affect our business and operating results. |
In order to expand production capacity, we intend to use approximately $40 million to construct and equip a new factory consisting of approximately 250,000 square feet on land adjacent to our principal manufacturing facilities in Shenzhen, China. Once our new factory is complete, we will have committed substantial expenditures and resources to constructing and equipping this factory but cannot guarantee that we will fully utilize such additional capacity. Our factory utilization is dependent on our success in providing manufacturing services for new or other products that we intend to produce at that factory, including RF modules, TFT and color LCD modules, and handset assemblies for cellular phones, at a price and volume sufficient to absorb our increased overhead expenses. Demand for contract manufacturing of these products may not be as high as we expect, and we may fail to realize the expected benefit from our investment in our new factory.
We face increasing competition, which has had an adverse effect on our margins.
Competition in the EMS industry is intense and is characterized by price erosion, rapid technological change, and competition from major international companies. This intense competition has resulted in pricing pressures, lower sales and reduced margins. Over the last several years our margins have declined substantially, from 24.3% in 1998 to approximately 15.3% in 2002, as adjusted to take into account a $2.0 million partial reversal of a provision we made in 2001. Continuing competitive pressures could materially and adversely affect our business and operating results.
| We may not be able to compete successfully with our competitors, many of which have substantially greater resources than we do. |
The electronics manufacturing services we provide are available from many independent sources as well as from our current and potential customers with in-house manufacturing capabilities. Our EMS competitors include Celestica, Inc., Flextronics International Ltd., Hon Hai Precision Industry Co., Ltd., Jabil Circuit, Inc., Sanmina-SCI Corporation and Solectron Corporation. Our principal competitors in the manufacture of our traditional product lines of calculators, personal organizers and linguistic products include Kinpo Electronics, Inc. and Inventec Co. Ltd. We have numerous competitors in the telecommunication, subassemblies and components product lines, including Philips, Samsung and Varitronics. Many of our competitors have greater financial, technical, marketing, manufacturing, regional shipping capabilities and logistics support and personnel resources than we do. As a result, we may be unable to compete successfully with these organizations in the future.
| We must spend substantial amounts to maintain and develop advanced manufacturing processes and engage additional engineering personnel in order to attract new customers and business. |
We operate in rapidly changing industries. Technological advances, the introduction of new products, and new manufacturing and design techniques could materially and adversely affect our business unless we are able to adapt to those changing conditions. As a result, we are continually required to commit substantial
5
Our future operating results will depend to a significant extent on our ability to continue to provide new manufacturing solutions that compare favorably on the basis of time to introduction, cost, and performance with the manufacturing capabilities of OEMs and competitive third-party suppliers. Our success in attracting new customers and developing new business depends on various factors, including:
| • | utilization of advances in technology; | |
| • | development of new or improved manufacturing processes for our customer’s products; | |
| • | delivery of efficient and cost-effective services; and | |
| • | timely completion of the manufacture of new products. |
| We generally have no written agreements with suppliers to obtain components and our margins and operating results could suffer from increases in component prices. |
We are typically responsible for purchasing components used in manufacturing products for our customers. We generally do not have written agreements with our suppliers of components. This typically results in our bearing the risk of component price increases because we may be unable to procure the required materials at a price level necessary to generate anticipated margins from the orders of our customers. Accordingly, increases in component prices could materially and adversely affect our gross margins and operating results.
Our business and operating results would be materially and adversely affected if our suppliers of needed components fail to meet our needs.
At various times, we have and continue to experience shortages of some of the electronic components that we use, and suppliers of some components lack sufficient capacity to meet the demand for these components. In some cases, supply shortages and delays in deliveries of particular components have resulted in curtailed production, or delays in production, of assemblies using that component, which contributed to an increase in our inventory levels and reduction in our gross margins. We expect that shortages and delays in deliveries of some components will continue. If we are unable to obtain sufficient components on a timely basis, we may experience manufacturing delays, which could harm our relationships with current or prospective customers and reduce our sales. We also depend on a small number of suppliers for certain of the components that we use in our business. For example, we purchase most of our integrated circuits from Toshiba Corporation and Sharp Corporation and certain of their affiliates. If we were unable to continue to purchase components from these limited source suppliers, our business and operating results would be materially and adversely affected.
| Factors affecting the electronics industry in general and our customers in particular could harm our operations. |
Most of our sales are to customers in the electronics industry, which is subject to rapid technological change, product obsolescence and short product life cycles and has suffered from an industry-wide slowdown since 2000. The factors affecting the electronics industry in general, or any of our major customers or competitors in particular, could have a material adverse effect on our business and operating results. Our success will depend to a significant extent on the success achieved by our customers in developing and marketing their products, including their products that use RF modules and color STN modules and TFT modules, some of which may be new and untested. If our customers’ products become obsolete, fail to gain widespread commercial acceptance or become the subject of intellectual property disputes, this could harm our business and operating results.
6
| Future acquisitions or strategic investments may not be successful and may harm our operating results. |
An important element of our strategy is to review prospects for acquisition or strategic investments that would complement our existing companies and products, augment our market coverage and distribution ability or enhance our technological capabilities.
Future acquisitions or strategic investments could have a material adverse effect on our business and operating results because of:
| • | possible charges to operating results for purchased technology, restructuring or impairment charges related to goodwill or amortization expenses associated with intangible assets, | |
| • | potential increase in our expenses and working capital requirements and the incurrence of debt and contingent liabilities, | |
| • | difficulties in successfully integrating any acquired operations, technologies, customers products and businesses with our operations, | |
| • | diversion of our capital and management’s attention to other business concerns, | |
| • | risks of entering markets or geographic areas in which we have limited prior experience, or | |
| • | potential loss of key employees of acquired organizations or inability to hire key employees necessary for expansion. |
For example, in 1998, we made a provision for, and subsequently wrote off, our entire $10.0 million investment in Albatronics.
Our customers are dependent on shipping companies for delivery of our products and interruptions to shipping could materially and adversely affect our business and operating results.
Typically, we sell our products F.O.B. Hong Kong and our customers are responsible for the transportation of products from Hong Kong to their final destinations. Our customers rely on a variety of carriers for product transportation through various world ports. A work stoppage, strike or shutdown of one or more major ports or airports could result in shipping delays materially and adversely affecting our customers, which in turn could have a material adverse effect on our business and operating results. Similarly, an increase in freight surcharges due to rising fuel costs or general price increases could materially and adversely affect our business and operating results.
Because our operations are international, we are subject to significant worldwide political, economic, legal and other uncertainties.
We are incorporated in the British Virgin Islands and have subsidiaries incorporated in the British Virgin Islands, the Cayman Islands, Hong Kong and China. Our executive and administrative offices are located in Hong Kong. We manufacture all of our products in China. As of December 31, 2002, approximately 72% of the net book value of our total fixed assets is located in China. We sell our products to customers in Hong Kong, North America, Europe, Japan, China and Southeast Asia. Our international operations may be subject to significant political and economic risks and legal uncertainties, including:
| • | changes in economic and political conditions and in governmental policies, | |
| • | changes in international and domestic customs regulations, | |
| • | wars, civil unrest, acts of terrorism and other conflicts, | |
| • | changes in tariffs, trade restrictions, trade agreements and taxation, | |
| • | difficulties in managing or overseeing foreign operations, and | |
| • | limitations on the repatriation of funds because of foreign exchange controls. |
7
The occurrence or consequences of any of these factors may restrict our ability to operate in the affected region and decrease the profitability of our operations in that region.
Our operating results could be negatively impacted by seasonality.
Historically, our sales and operating results have been affected by seasonality. Sales of calculators, personal organizers and linguistic products are typically higher during the second and third quarters in anticipation of the start of the school year and the Christmas buying season. Similarly, our consumer services for electronics products have historically been lower in the first quarter from both the closing of our factories in China for the Chinese New Year holidays and the general reduction in sales following the holiday season. The sales patterns may not be indicative of future performance.
Our results could be harmed if we have to comply with new environmental regulations.
Our operations create some environmentally sensitive waste that may increase in the future depending on the nature of our manufacturing operations. The general issue of the disposal of hazardous waste has received increasing attention from the PRC national and local governments and foreign governments and agencies and has been subject to increasing regulation. Our business and operating results could be materially and adversely affected if we were to increase expenditures to comply with environmental regulations affecting our operations.
If there is an adverse outcome in class action litigation that has been filed against us, our business could be seriously harmed.
On February 21, 2003, according to published accounts, several lawsuits were filed against us and certain of our officers and directors in the United States District Court for the Southern District of New York. To date, no complaint has been served on the Company or, to its knowledge, any officer or director. According to press releases made public by counsel claiming to have filed the complaints, these complaints are brought on behalf of a putative class of purchasers of our stock and raise various categories of claims including alleged violations of Section 10(b) of the Securities Exchange Act of 1934 by issuing false and misleading statements regarding our financial performance and failing to issue timely reports concerning adverse developments in certain material litigation. We believe that we have meritorious defenses to such allegations and, if the complaints are served and the actions prosecuted, we intend to defend this action vigorously. However, this litigation could be very costly and divert our management’s attention and resources. In addition, we have no insurance covering our liability, if any, or that of our officers and directors, and we will have to pay the costs of defense. Any adverse determination in this litigation could also subject us to significant liabilities, any or all of which could materially and adversely affect our business and operating results.
We are dependent on certain members of our senior management.
We are substantially dependent upon the services of Mr. Tadao Murakami, our Chairman of the Board of Directors, Mr. Joseph Li, our Chief Executive Officer, and, Mr. M. K. Koo, our Chief Financial Officer. We maintain no key person insurance on these individuals. The loss of the services of any of these officers could have a material adverse effect on our business and operating results.
We may be unable to succeed in recovering on our judgment debts against Tele-Art.
We have two judgments in our favor against Tele-Art, Inc. awarded by The High Court of Justice in the British Virgin Islands for approximately $35.0 million plus interests and costs. Because Tele-Art, Inc. is in liquidation, we may not realize the entire amount of our judgments, and the actual amount of the recovery, if any, is uncertain and dependent on a number of factors. We may incur substantial additional costs in pursuing our recovery and such costs may not be recoverable.
8
We could become involved in intellectual property disputes.
We do not have any patents, licenses, or trademarks material to our business. Instead, we rely on trade secrets, industry expertise and our customers sharing of intellectual property with us. We may be notified that we are infringing patents, copyrights or other intellectual property rights owned by other parties. In the event of an infringement claim, we may be required to spend a significant amount of money to develop a non-infringing alternative or to obtain licenses. We may not be successful in developing such an alternative or obtaining a license on reasonable terms, if at all. Any litigation, even without merit, could result in substantial costs and diversion of resources and could materially and adversely affect our business and operating results.
We may not pay dividends in the future.
Although we have declared dividends during each of the last 10 years, we may not be able to declare them or may decide not to declare them in the future. We will determine the amounts of the dividends when they are declared and even if dividends are declared in the future, we may not continue them in any future period.
Risks Related to Our Operations in China and Hong Kong
Our manufacturing facilities are located in China and our executive and sales office and several of our customers and suppliers are located in Hong Kong and China. As a result, the Company'sour operations and assets are subject to significant political, economic, taxation, legal and other uncertainties associated with doing business in China. ChangesChina and Hong Kong, which are discussed in policies by
themore detail below.
The Chinese government resulting in changes in laws, regulations,could change its policies toward, or the
interpretation and enforcement thereof, confiscatory or increased taxation,
restrictions on imports and sources of supply, import duties, corruption,
currency revaluations or the expropriation ofeven nationalize, private enterprise, which could materiallyharm our business and adversely affect the Company.operating results.
Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activityactivities and greaterdecentralization of economic decentralization. There can be no assurance that thederegulation. The Chinese government willmay not continue to pursue suchthese policies that such policies will be successful if
pursued, that such policies will not beor may significantly alteredalter them to our detriment from time to time without notice. Changes in policies by the Chinese government resulting in changes in laws, regulations, or thattheir interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion or imports and sources of supply could materially and adversely affect our business operations in China would not become subject toand operating results. The nationalization or other expropriation of private enterprises by the risk of
nationalization, whichChinese government could result in the total loss of our investment in that
country. Following theChina.
The Chinese government's program 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 the Company.
Economic development may be limited as well by the imposition of austerity
measures intended to reduce inflation, increase taxes, or reform money losing
state-owned enterprises, the inadequate development of infrastructure and the
potential unavailability of adequate power, water supplies, transportation,
communications, raw materials and parts or the deterioration of the general
political, economic or social environment in China, any of which could have a
material adverse effect on the Company's business. The Company maintains its own
electrical generator, water treatment and water storage facilities at the
factory sites in an attempt to address certain of these concerns. If for any
reason the Company were required to move its manufacturing operations outside of
China, the Company's profitability would be substantially impaired, its
competitiveness and market position would be materially jeopardized and there
can be no assurance that the Company could continue its operations.
Uncertain Legal System and Application of Laws. The legal system of
China relatinghas inherent uncertainties that could materially and adversely impact our ability to foreign investments is both newenforce the agreements governing our factories and continually evolving, and
currently there can be no certainty as to the application of its laws and
regulations in particular instances. China does not have a comprehensive system
of laws. Enforcement of existing laws or agreements may be sporadic and
implementation and interpretation of laws inconsistent. The Chinese judiciary is
relatively inexperienced in enforcing the laws that exist, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation. Even where
adequate law exists in China, it may not be possible to obtain swift and
equitable enforcement of that law.
Current Dependence on Single Factory Complex. The Company's products are
manufactured exclusively at its complex located in Baoan County, Shenzhen,
China. The Company doesdo business.
We do not own the land underlying its factory complex. It
occupies the siteon which our factories in China are located. We occupy our principal manufacturing facilities under land use agreements with the local Chinese government. In the
case of its original facility, the lease agreement covers an aggregate of
approximately 150,000 square feet of factory space and expires in August 2007.
In the caseagencies or enterprises of the newer facility, the Company is entitled to use the land upon
which it is situated until 2044. TheseChinese government and we occupy other facilities under lease agreements with peasant collectives or other companies. The performance of these agreements and the operations of the
Company's Shenzhenour factories are dependent on the Company'sour relationship with the local government. The Company'sOur operations and prospects would be materially and adversely affected by the failure of the local government to honor these agreements.agreements or an adverse change in the law governing them. In the event of a dispute, enforcement of these agreements could be difficult in China. Moreover, fireUnlike the United States, China has a civil law system based on written statutes in which judicial decisions have limited precedential value. The Chinese government has enacted laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, its experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes in China is unpredictable. These matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces and factors unrelated to the legal merits of a particular matter or dispute may influence their determination.
9
Fire, severe weather, flood or earthquake could cause significant damage to our facilities in China and disrupt our business operations.
Our products are manufactured exclusively at our factories located in China. Fire fighting and disaster relief or assistance in China is primitive by Western standards.not well developed. Material damage to, or the loss of, the
Company's factory complexour factories due to fire, severe weather, flood, earthquake or other acts of God or cause may not be adequately covered by proceeds of itsour insurance coverage and could have a material adverse effect on the Company's financial condition,materially and adversely affect our business and prospects.operating results. In addition, any interruptions to theour business caused by such disasters would have a material adverse effect on the Company's financial
condition,could harm our business and prospects.
Possible Changes and Uncertainties in Economic Policies. As partoperating results.
Controversies affecting China’s trade with the United States could harm our results of its
economic reform,operations or depress our stock price.
While China has designated certain areas, including Shenzhen where
the Nam Tai manufacturing complex is located, as Special Economic Zones. Foreign
enterprises in these areas benefit from greater economic autonomy and more
favorable tax treatment than enterprises in other parts of China. Changesbeen granted permanent most favored nation trade status in the policiesUnited States through its entry into the World Trade Organization, controversies between the United States and China may arise that threaten the status quo involving trade between the United States and China. These controversies could materially and adversely affect our business by, among other things, causing our products in the United States to become more expensive resulting in a reduction in the demand for our products by customers in the United States. Political or laws governing Special Economic Zonestrade friction between the United States and China, whether or not actually affecting our business, could have a material adverse
effect on the Company. Moreover, economic reformsalso materially and growth in China have been
more successful in certain provinces than others, and the continuation or
increase of such disparities couldadversely affect the political or social stabilityprevailing market price of China.
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8
Inherent Risks of Business in China. Conducting business in China, like
most developing countries, is inherently risky. Corruption, extortion, bribery,
pay-offs, theft,our common shares.
Changes to Chinese tax laws and other fraudulent practices may be more common in developing
countries. The Company has attemptedheightened efforts by the Chinese tax authorities to implement safeguardsincrease revenues could subject us to prevent losses
from such practices, but there can be no assurance that despite these safeguards
the Company will not suffer losses relating to such practices.
Uncertainty and Possible Changes in China Tax Laws or their
Interpretation. As a result of locating in a Special Economic Zone of China, the
Company enjoys favorable tax treatment. See Note 8 of Notes to Consolidated
Financial Statements included elsewhere herein. Because of this favorable tax
treatment and pursuant to the provisions ofgreater taxes.
Under applicable Chinese law, we have been afforded a number of tax concessions by, and tax refunds from, the Company
has receivedChinese tax authorities on a substantial refundsportion of income taxes paid over the years on itsour operations in China and management believes that under existing tax laws Nam Tai
will continue to qualify for favorable tax treatment inby reinvesting all or part of the future, particularly
if Nam Tai reinvests profits attributable to itsour Chinese operations in its
Chinese subsidiaries.manufacturing operations. However, the Chinese tax system is subject to substantial uncertainties and was subjectwith respect to significant changes enacted on January 1, 1994,
theits interpretation and enforcement of which are still uncertain. Moreover,
followingenforcement. Following the Chinese government'sgovernment’s program of privatizing many state owned enterprises, the Chinese government has attempted to augment its revenues through heightened tax collection efforts. In early 1999 the Company learned
that for the 1996 and 1997 tax years it would not receive a 100% tax refund on
taxes paid by its principal Chinese subsidiary because the large intercompany
receivable between that subsidiary and a Hong Kong subsidiary was not considered
by the tax authorities to be a reinvestment of profits. Continued efforts by the Chinese government to increase tax revenues could result in other decisions or interpretations of the tax laws by the taxingChinese tax authorities which are unfavorable
to Nam Tai and whichthat would increase itsour future tax liabilities. There can be no
assurance thatliabilities or deny us expected concessions or refunds.
Our results have been affected by changes in Chinese tax laws or their interpretation or
application will not subjectcurrency exchange rates. Changes in currency rates involving the Company to additional Chinese taxation in the
future.
MFN Status. China currently enjoys most favored nation ("MFN") trade
status, which provides China with the trading privileges generally available to
trading partners of the United States. Under current practice the United States
annually reconsiders the renewal of China's MFN status and annually, various
interest groups typically urge that the United States not renew MFN for China.
There can be no assurance that controversies will not arise that threaten the
status quo involving trade between the United States and China or that the
United States will not revoke or refuse to renew China's MFN status. In any of
such eventualities, the business of the Company could be adversely affected by,
among other things, causing the Company's products in the United States to
become more expensive, which could result in a reduction in the demand for the
Company's products by customers in the United States. Trade friction between the
United States and China, whether or not actually affecting Nam Tai's business,
could also adversely affect the prevailing market price of the Company's Common
Shares and Warrants.
Southeast Asia Economic Problems. Several countries in Southeast Asia,
including Korea, Thailand and Indonesia, experienced a significant devaluation
of their currencies and decline in the value of their capital markets in 1997
and 1998. In addition, these countries have experienced a number of bank
failures and consolidations. The decline in the currencies of other Southeast
Asian countries could render the Company's products less competitive if
competitors located in these countries are able to manufacture competitive
products at a lower effective cost. Management believes that the currency
declines in other countries have resulted in increased pressure from customers
for the Company to reduce its prices. There can be no assurance as to the
ability of the Company's products to continue to compete with products of other
competitors from other Southeast Asian countries suffering devaluations of their
currencies or that currency or other effects of the decline in Southeast Asia
will not have a material adverse effect on the Company's business, financial
condition, results of operations or market price of its securities.
Relations Between China and Taiwan. Relations between China and Taiwan
have been unresolved since Taiwan was established in 1949. Although not directly
a threat to Nam Tai, peaceful and normal relations between China and its
neighbors reduces the potential for events that could have an adverse impact on
the Company's business.
Operations in Hong Kong. The Company's executive and sales offices, and
several of its customers and suppliers are located in Hong Kong. The United
Kingdom transferred sovereignty over Hong Kong to China effective July 1, 1997.
There can be no assurance as to the continued stability of political, economic
or commercial conditions in Hong Kong, and any instability could have an adverse
impact on the Company's business.
TheJapanese yen, Hong Kong dollar and the United States dollaror Chinese renminbi could increase our expenses.
Our financial results have been fixed at
approximately 7.80 Hong Kong dollars to U.S.$1.00 since 1983. Althoughaffected by currency fluctuations, resulting in total foreign exchange losses of $345,000 during the Chinese government has expressed its intention to maintainyear ended December 31, 2002 and total foreign exchange gains of $530,000 and $51,000 during the stability of the
Hong Kong currency, there can be no assurance that the system of a fixed
exchange rate will be maintained at this rate
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9
or at all. Any change, or even expectations of a change, will increase the
currency risks for the Company. See "Exchange Rate Fluctuations."
RISKS ASSOCIATED WITH POTENTIAL FUTURE ACQUISITIONS
An important element of the Company's strategy is to review acquisition
prospects that would complement the Company's existing productsyears ended December 31, 2001 and services,
augment its market coverage and sales ability or enhance its technological
capabilities. Accordingly, the Company may acquire additional businesses,
products or technologies in the future. Future acquisitions by the Company could
result in charges similar to those incurred in connection with the 1998
acquisition of Albatronics (Far East) Company Limited ("Albatronics"), which are
discussed in Item 9 "Management's Discussion and Analysis of Results of
Operations and Financial Condition": potentially dilutive issuances of equity
securities; the incurrence of debt and contingent liabilities; and amortization
expenses related to goodwill and other intangible assets, any of which could
materially adversely affect the Company's business, financial condition and
results of operations and/or the price of the Company's Common Shares.
Acquisitions entail numerous risks, including the assimilation of the acquired
operations, technologies and products, diversion of management's attention to
other business concerns, risks of entering markets in which the Company has no
or limited prior experience, the potential loss of key employees of acquired
organizations, increased debt loads, and an increased risk of litigation.
Management has limited experience in assimilating or managing acquired
organizations. There can be no assurance as to the ability of the Company to
successfully integrate the products, technologies or personnel of any acquired
business now or in the future, and the failure of the Company to do so could
have a material adverse affect on the Company's business, financial condition
and results of operations.
EXCHANGE RATE FLUCTUATIONS
The Company sells2000, respectively. We sell most of itsour products in United States dollars and payspay our expenses in United States dollars, Japanese yen, Hong Kong dollars, and Chinese renminbi, and Korean won. The Company is subject torenminbi. While we face a variety of risks associated with changes among the relative value of these currencies, but
management believeswe believe the most significant exchange risk presently results from material purchases madewe make in Japanese yen. Approximately 15%14%, 18%,16% and 23%8% of Nam Tai'sour material costs have been in yen during the years ended December 31, 1999, 1998,2000, 2001 and 1997. Sales2002, respectively, but sales made in yen accounted for less than 1%7% of sales for the years
ended December 31, 1999 and 1998 and 6.3% of sales for the year ended December
31, 1997. The net currency exposure has decreased marginally in 1999 as a lower
percentage of material purchases were made in yen.
Based on oral agreements with its customers which are customary in the
industry, the Company believes its customers will accept an increase in the
selling price of manufactured products if the exchange rateeach of the Japanese yen
appreciates beyond a range of 5% to 10% although such customers may also request
a decrease in selling price in the event of a depreciation of the Japanese yen.
Additionally, there may be a considerable time lag between the time of the
fluctuation and the adjustment of product prices. Based on close working
relationships with its principal customers, and because management believes
similar oral agreements exist between these OEMs and their other suppliers, the
Company believes the oral nature of these agreements will not prevent its OEM
customers from honoring them. However, there can be no assurance that such
agreements will be honored. The refusal of a principal customer to honor such an
agreement in the event of a severe adverse fluctuation of the Japanese yen at a
time when sales made in yen are insufficient to cover material purchases in yen
would materially and adversely affect the Company's operations.
Approximately 12.7% of the Company's expenses were in Chinese renminbi
in 1999.last three years. An appreciation of the renminbiyen against the U.S. dollar increases the
expenses of the Company when translated into U.S. dollars. There can be no
assurances that the renminbi will notwould increase significantly in value relative
to the U.S. dollar in the future.
Approximately 1.5% and 26.6%, respectively, of the Company's revenues
and expenses were in Hong Kong dollars during 1999. The Hong Kong dollar is
currently pegged to the U.S. dollar however there has been pressure for a
devaluation of the currencies of Hong Kong and China. While the governments of
Hong Kong and China have indicated they will support their currencies, possible
devaluations may occur. Although the Company expects that it may initially
benefit from such devaluations through their effect of reducingour expenses when translated into U.S. dollars such benefitsand would materially and adversely affect our margins unless we made sufficient sales in yen to offset against material purchases made in yen.
Approximately 4% and 10% of our revenues and 18% and 15% of our expenses were in Chinese renminbi and Hong Kong dollars, respectively, during the year ended December 31, 2002. Approximately 5% and 11% of our revenues and 15% and 19% of our expenses were in Chinese renminbi and Hong Kong dollars, respectively, in 2001. An appreciation of the renminbi or Hong Kong dollar against the U.S. dollar would increase our expenses when translated into U.S. dollars and could be outweighedmaterially and adversely affect our margins. In addition, a significant devaluation in the renminbi or Hong Kong dollar could harm our business if it causes a
destabilizing downturn in China's
10
We have been affected this year and in the
past bysuffered losses from hedging against our currency fluctuations, resulting in total foreign exchange (losses)/gains of approximately ($413,000) in 1999, $394,000 in 1998, and
$500,000 in 1997.risk.
From time to time, the Company attemptswe have attempted to hedge itsour currency exchange risk. During 1999 and 1998 the CompanyWe recorded charges of $304,000 in 2000 and $566,000 and $840,000in 1999 on the write-off of option premiums purchased as a hedge against the appreciation of the Japanese yen and the decline of the Hong Kong dollar, respectively. In 1997 gain or loss from hedging transactions were nil. The
Company is continuing to review its hedging strategy and there can be no
assurance that Nam Tai will not suffer lossesWe have experienced in the past and may experience in the future losses as a result of currency hedging.
COMPETITION
General competition
Political and economic instability in Hong Kong could harm our operations.
Our executive and sales office and several of our customers and suppliers are located in Hong Kong, formerly a British Crown Colony. Sovereignty over Hong Kong was resumed by China effective July 1, 1997. Since then, Hong Kong has become a Special Administrative Region of China, enjoying a high degree of autonomy except for foreign and defense affairs. Moreover, China’s political system and policies are not practiced in Hong Kong. Under the principle of “one country, two systems,” Hong Kong maintains a legal system that is based on the common law and is different from that of China. It is generally acknowledged as an open question whether Hong Kong’s future prosperity in its role as a hub and gateway to China after China’s recent accession to the World Trade Organization (introducing a market liberalization in China) will be diminished. The continued stability of political, economic or commercial conditions in Hong Kong remains uncertain, and any instability could materially and adversely impact our business and operating results.
Risks Related to Our Industry
We are exposed to general economic conditions. The current slowdown in the contract electronic manufacturingtechnology products industry is
intense. The Company has two primary competitorsaffected and we expect it to continue to affect our business and operating results adversely.
As a result of recent unfavorable economic conditions and reduced capital spending, sales to OEMs in the manufacture of its
traditional product lines of calculators, personal organizerselectronics industry declined during 2002 and linguistic
products - Kinpo Electronics, Inc. (formerly Cal-Comp Electronics, Inc.)2001. Lower consumer demand and Inventec Co. Ltd. There are numerous competitorshigh customer inventory levels have resulted in the telecommunicationdelay and sub-assemblies product lines. Manycancellation of Nam Tai's competitors have greater
technical, financialorders for nearly all types of electronic products. As a result of order cancellations in 2001 we were required to make a provision for slow-moving inventory, which materially and marketing resources thanadversely impacted our net income in 2001. If the Company.
The Company's strategy is to produce more advanced and specialized
products as management believes that there is less competition in more advanced
products due to the complexity involved in manufacturing. There can be no
assurance that the Company will be successful in obtaining or developing the
technology, expertise, and business for such products and failure to move into
more advanced products may resulteconomic conditions in the Company facing increasing competitionUnited States or Asia worsen generally or in the electronics and reduced profit margins.
TECHNOLOGICAL CHANGES AND PROCESS DEVELOPMENT
contract manufacturing businesses particularly, or if a wider or global economic slowdown occurs, this could materially and adversely impact our business and operating results.
The market forcurrent economic downturn in the Company'selectronics manufacturing services is characterized by
rapidly changing technology and continuing process development. The Company is
continually evaluating the advantages and feasibility of new manufacturing
processes, such as COB, COG, SMT, TAB, OLB, and ACF and technologies such as RF
and DECT. The Company believes that its future success may depend upon its
abilityindustry could continue to develop and market manufacturing services which meet changing
customer needs, maintain technological leadership and successfully anticipate or
respond to technological changes in manufacturing processes on a cost-effective
and timely basis. There can be no assurance that the Company's process
development efforts will prove successful. There is a learning curve that must
be overcome when any new technologies are introduced. Failure to integrate the
new technology on a timely basis may occur resulting in reduced production, lost
sales, lower gross margins and losses.
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the abilities and continued
participation of Mr. Tadao Murakami, its Chairman of the Board and Mr. M. K.
Koo, its Senior Executive Officer, Corporate Strategy, Finance and
Administration. The loss of the services of Mr. Murakami or Mr. Koo could have a material adverse effect on our business and operating results.
The EMS industry is currently in an economic slowdown with an uncertain outlook. Some of the Company's business.
ENFORCEABILITY OF CIVIL LIABILITIESmajor contract manufacturers and OEMs worldwide have announced job reductions and plant closures aimed at reducing costs. Industry analysts have reduced their projections of the future growth of the EMS segment. Furthermore, Wall Street analysts have reduced earnings and revenue estimates across the entire EMS sector and have reported that the EMS industry has excess capacity. For example, the EMS industry in which we operate experienced a decrease in demand in 2001 and 2002. Softening demand for our products and services caused by the ongoing economic downturn was responsible in part for a decline in our operating income in 2001, as well as our provision for slow-moving inventory.
The Company isglobal economy may remain weak and market conditions continue to be challenging in the EMS industry. As a result, individuals and companies may continue delaying or reducing expenditures, including those for electronic products. Further delays or reductions in spending in our industry in particular, and economic weakness generally, could materially and adversely affect our business and operating results.
11
Risks Related to Ownership of Our Common Shares
The market price of our shares will likely be subject to substantial price and volume fluctuations.
The markets for equity securities have been volatile and the price of our common shares has been and could continue to be subject to wide fluctuations in response to variations in operating results, news announcements, trading volume, sales of common shares by our officers, directors and our principal shareholders, customers, suppliers or other publicly traded companies, general market trends both domestically and internationally, currency movements and interest rate fluctuations. Certain events, such as the issuance of common shares upon the exercise of our outstanding stock options could also materially and adversely affect the prevailing market price of our common shares.
Further, the stock markets have recently experienced extreme price and volume fluctuations that have affected the market prices of equity securities of many companies and that have been unrelated or disproportionate to the operating performance of such companies. These fluctuations may materially and adversely affect the market price of our common shares.
The concentration of share ownership in our senior management allows them to control or substantially influence the outcome of matters requiring shareholder approval.
At January 31, 2003, members of our management and board of directors as a group beneficially owned approximately 46% of our common shares. As a result, acting together they may be able to control and substantially influence the outcome of all matters requiring approval by our shareholders, including the election of directors and approval of significant corporate transactions. This ability may have the effect of delaying or preventing a change in control of Nam Tai, or causing a change in control of Nam Tai that may not be favored by our other shareholders.
Risks Related to Our Foreign Private Issuer Status
It may be difficult to serve us with legal process or enforce judgments against our management or us.
We are a British Virgin Islands holding corporation organizedhaving our principal executive offices in Hong Kong. We have appointed Stephen Seung, 2 Mott St., Suite 601, New York, New York 10013 as an International
Business Companyour agent upon whom process may be served in any action brought against us under the securities laws of the British Virgin Islands and its principal
operating subsidiary is organized underUnited States. However, outside the laws of Hong Kong, where the
Company's principal executive offices are also located. ItUnited States, it may be difficult for investors to enforce judgments against the Companyus obtained in the United States based onin any of these actions, predicatedincluding actions based upon civil liability provisions of the Federal securities laws. In addition, all of the Company'sour officers and most of itsour directors reside outside the United States and nearly all of our assets, and the assets of thesethose persons andwho reside outside of the CompanyUnited States, 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 suchthose persons, or to enforce against the Companythose persons or such
personsus judgments predicatedobtained in United States courts grounded upon the liability provisions of U.S.the United States securities laws. The Company has been advised by its Hong Kong counsel and its British
Virgin Islands counsel that thereThere is substantial doubt as to the enforceability against the Companyus or any of itsour directors and officers located outside of the United States in original actions or in actions for enforcement of judgments of U.S.United States courts of liabilities predicatedbased solely on the civil liability provisions of Federalthe securities laws.
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CERTAIN LEGAL CONSEQUENCES OF INCORPORATION IN THE BRITISH VIRGIN ISLANDS
The Company is organized under the laws of the United States.
No treaty exists between Hong Kong or the British Virgin Islands.
PursuantIslands and the United States providing for the reciprocal enforcement of foreign judgments. However, the courts of Hong Kong and the British Virgin Islands are generally prepared to accept a foreign judgment as evidence of a debt due. An action may then be commenced in Hong Kong or the Company'sBritish Virgin Islands for recovery of this debt. A Hong Kong or British Virgin Islands court will only accept a foreign judgment as evidence of a debt due if:
| • | the judgment is for a liquidated amount in a civil matter; | |
| • | the judgment is final and conclusive and has not been stayed or satisfied in full; |
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| • | the judgment is not, directly or indirectly, for the payment of foreign taxes, penalties, fines or charges of a like nature (in this regard, a Hong Kong or British Virgin Islands court is unlikely to accept a judgment for an amount obtained by doubling, trebling or otherwise multiplying a sum assessed as compensation for the loss or damage sustained by the person in whose favor the judgment was given); | |
| • | the judgment was not obtained by actual or constructive fraud or duress; | |
| • | the foreign court has taken jurisdiction on grounds that are recognized by the common law rules as to conflict of laws in Hong Kong or the British Virgin Islands; | |
| • | the proceedings in which the judgment was obtained were not contrary to natural justice (i.e., the concept of fair adjudication); | |
| • | the proceedings in which the judgment was obtained, the judgment itself and the enforcement of the judgment are not contrary to the public policy of Hong Kong or the British Virgin Islands; | |
| • | the person against whom the judgment is given is subject to the jurisdiction of the Hong Kong or the British Virgin Islands court; and | |
| • | the judgment is not on a claim for contribution in respect of damages awarded by a judgment, which does not satisfy the criteria stated previously. |
Enforcement of a foreign judgment in Hong Kong or the British Virgin Islands may also be limited or affected by applicable bankruptcy, insolvency, liquidation, arrangement, and moratorium or similar laws relating to or affecting creditors’ rights generally, and will be subject to a statutory limitation of time within which proceedings may be brought.
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 board of directors may amend our Memorandum and Articles of Association and pursuant to the lawscreate from time to time one or more classes of the British Virgin Islands, the Board of Directors may amend the
Company's Memorandum and Articles of Association without shareholder approval.
This includes, but is not limitedpreference shares (which are analogous to amendments increasing or reducing the
authorized capitalpreferred stock of the Company and increasing or reducing the par value
of its shares. In addition, the Board of Directors may approve certain
fundamental corporate transactions, including reorganizations, certain mergers
or consolidations and the sale or transfer of assets, without shareholder
approval. The ability of the Company to amend its Memorandum and Articles of
Association without shareholder approval could have the effect of delaying,
deterring or preventing a change in control of Nam Tai without any further
action by the shareholders including, but not limited to, a tender offer to
purchase the Common Shares at a premium above current market prices.
Under U.S. law, management, directors and controlling shareholders
generally have certain fiduciary responsibilities to the minority shareholders.
Shareholder action must be taken in good faith and actions by controlling
shareholders which are obviously unreasonable may be declared null and void. The
British Virgin Islands law protecting the interests of minority shareholders
differs from, and may not be as protective of shareholders as, the law
protecting minority shareholders in jurisdictionscorporations organized in the United States.States). While British Virgin Islands law does permit a shareholdercurrently no preference shares are issued or outstanding, we may issue preference shares in the future. Future issuance of a British Virgin Islands
company to sue its directors derivatively,preference shares could materially and to sue Nam Tai and its directors
for his or her benefit and the benefit of others similarly situated, the
circumstances in which any such action may be brought and the procedures and
defenses that may be available in respect of any such action may result inadversely affect the rights of shareholdersthe holders of our common shares or delay or prevent a British Virgin Islands company being more limited
than those rightschange of shareholders incontrol.
Our status as a company incorporated in a jurisdiction
within the United States. Moreover, lawsuits brought in the British Virgin
Islands appear,foreign private issuer exempts us from the Company's experience, to take longer to reach interim
or final resolution.
RISKS OF INTERNATIONAL SALES
The productscertain of the Company are sold inreporting requirements under the United StatesExchange Act and internationally, principally in Japan, Europe and Hong Kong. International sales
may be subject to political and economic risks, including political instability,
currency controls and exchange rate fluctuations, and changes in import/export
regulations, tariff and freight rates. Changes in tariffs or other trade
policies could adversely affect the Company's customers or suppliers or decrease
the cost of products for Nam Tai's competitors relative to such costs for the
Company.
VOLATILITY OF MARKET PRICE OF COMPANY'S SECURITIES
The markets for equity securities have been volatile and the pricecorporate governance standards of the Company's Common Shares has beenNew York Stock Exchange, limiting the protections and could continueinformation afforded to be subject to wide
fluctuations in response to quarter to quarter variations in operating results,
news announcements, trading volume, sales of Common Shares by officers,
directors and principal shareholders of the Company, news issued from affiliated
companies or other publicly traded companies, general market trends both
domestically and internationally, currency movements and interest rate
fluctuations. These same factors can be expected to affect the market price of
the Company's Warrants that were publicly issued in late November 1997. Certain
events, such as the issuance of Common Shares upon the exercise of the Warrants
or other outstanding stock options or warrants of the Company could also
adversely affect the prevailing market prices of the Company's securities.
EXEMPTIONS UNDER THE EXCHANGE ACT AS A FOREIGN PRIVATE ISSUER
The Company isinvestors.
We are a foreign private issuer within the meaning of rules promulgated under the Securities Exchange Act.Act of 1934. As such, and though its Common Shares and
Warrantswe are registered under Section 12(g) of the Exchange Act, it is exempt from certain provisions of the Exchange Act applicable to United States public companies including:
| • | the rules under the Exchange Act requiring the filing with the Commission of quarterly reports on Form 10-Q, current reports on Form 8-K or annual reports on Form 10-K; | |
| • | the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; | |
| • | the provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; 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 less than six months). |
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In addition, because the rules under the Exchange Act requiring the filing with
the Commission of quarterly reports on Form 10-Q or current reports on Form 8-K;
the sectionsCompany is a foreign private issuer, certain of the Exchange Act regulating the solicitation of proxies,
consents or authorizations with respect to a security registered under the
Exchange Act; and the sectionscorporate governance standards of the New York Stock Exchange Act requiring insidersthat are applied 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).domestic companies listed on that exchange may not be applied to us.
Because of thethese exemptions, under
the Exchange Act applicable to foreign private issuers,
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shareholders of the Companyinvestors are not afforded the same protections or information generally available to investors holding shares in public companies organized in the United States.
PRODUCTSStates or traded on the New York Stock Exchange.
Item 4. Information on the Company
History and Development of Nam Tai
Nam Tai Electronics, Inc. was founded in 1975 by M.K. Koo, Nam Tai’s Chief Financial Officer and a member of the Board of Directors, as an electronic products trading company based in Hong Kong. We shifted our focus to manufacturing of electronic products in 1978. We moved our manufacturing facilities to the People’s Republic of China, or China, in 1980 to take advantage of lower overhead costs, lower material costs and competitive labor rates available and subsequently relocated to Shenzhen, China in order to capitalize on opportunities offered in Southern China. We were reincorporated as a limited liability International Business Company under the laws of the British Virgin Islands in August 1987. Our principal design and manufacturing operations are based in Shenzhen, China, approximately 30 miles from Hong Kong. Our principal executive offices are located in Hong Kong, which provides us access to Hong Kong’s infrastructure of communication and banking and facilitates management of our China operations and transportation of our products out of China through the port of Hong Kong.
Our corporate administrative matters are conducted in the British Virgin Islands through its registered agent, McW. Todman & Co., McNamara Chambers, P.O. Box 3342, Road Town, Tortola, British Virgin Islands. Our agent for service of process in the United States is Stephen Seung, 2 Mott Street, Suite 601, New York, New York 10013. Our principal executive offices are located in the Hong Kong Special Administrative Region, or Hong Kong, of China. Its address is 15/ F., China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road, Central, Hong Kong and its telephone number is (852) 2341-0273.
In 1978, Mr. Koo began recruiting operating executives from the Japanese electronics industry. These executives brought years of experience in Japanese manufacturing methods, which emphasize quality, precision, and efficiency in manufacturing. Senior management currently includes Japanese professionals who provide technical expertise and work closely with both our Japanese component suppliers and customers.
For a number of years, we specialized in manufacturing large-volume, hand-held digital consumer electronics products and established a leading position in electronic calculators and handheld organizers for OEMs such as Texas Instruments Incorporated and Sharp Corporation. Over the years, we have developed into an original equipment manufacturer and broadened our product mix to include a range of digital products for business and personal use, as well as key components and subassemblies for telecommunications and consumer electronic products. In August 1999, we established Nam Tai Telecom (Hong Kong) Co. Ltd., which targets the expanding market for telecommunications components including liquid crystal display, or LCD, modules as well as end products including cordless phones and family radio systems.
In September 2000, we acquired for $2.0 million a 5% indirect equity interest in both TCL Mobile Communication (HK) Co., Ltd. and Huizhou TCL Mobile Communication Co., Ltd., or together known as TCL Mobile, through the acquisition of 25% of the outstanding shares of Mate Fair Group Limited, or Mate Fair, an investment holding company owning a 20% shareholding interest in the communications companies. TCL Mobile is engaged in manufacturing, distributing and trading of digital mobile phones and accessories in China and overseas markets. In October 2002, we began to provide TCL Mobile with mobile LCD modules used in its mobile phones. However, sales to TCL Mobile were not material for the year ended December 31, 2002. In January 2002, we acquired a 6% equity interest in TCL Corporation Ltd. (formerly known as TCL Holdings Corporation Ltd.), the parent of the TCL Group of companies, for approximately $12.0 million. In November 2002, Mate Fair Group Limited sold a portion of its equity interest in Huizhou TCL Mobile Communication Company Limited for which we received proceeds of approximately $10.4 million, reducing
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In October 2000, we completed the acquisition of the J.I.C. Group (BVI) Limited, or the JIC Group. The JIC Group is engaged in the manufacture and marketing of transformers and LCD panels, a key component for a variety of consumer electronic products. Of the purchase price of $32.8 million, we paid $11.0 million in cash and issued 1.16 million of our common shares.
In January 2002, we entered into a transaction, which resulted in the listing of a company holding JIC Group’s business on the Hong Kong Stock Exchange. To effect the transaction, we entered a restructuring agreement with the liquidators of Albatronics (Far East) Company Limited, a company whose shares had been listed on the Hong Kong Stock Exchange and which was placed into voluntary liquidation in August 1999. Under the restructuring agreement we agreed to transfer JIC Group into J.I.C. Technology Company Limited, a new company, for a controlling interest in J.I.C. Technology Company Limited. For our contribution to J.I.C. Technology Company Limited, we received a combination of ordinary and preference shares, which are analogous to common stock and convertible preferred stock, respectively, of companies organized under U.S. law and which upon their full conversion, could result in us, the creditors and the Hong Kong public owning approximately 92.9%, 5.8% and 1.3%, respectively, of the outstanding ordinary shares of J.I.C. Technology Company Limited. The preference shares are non-redeemable, non-voting shares that rank pari passu with ordinary shares of the new company on the payment of dividends or other distribution other than on a winding-up. No holder of preference shares (including Nam Tai) may convert them if such conversion would result in the minimum public float of 25% that is required under the Hong Kong Stock Exchange Listing Rules not being met. On June 4, 2002, the restructuring was completed and all the shares of Albatronics were transferred to the liquidators for a nominal consideration.
In January 2003 we invested $10.0 million for a 25% equity interest in Alpha Star Investments Ltd., the ultimate parent of Hong Kong based JCT Wireless Technology Company Limited, or JCT. JCT is engaged in the design, development and marketing of wireless communication terminals and wireless application software and is using us to manufacture wireless communication terminals and their related radio frequency, or RF, modules.
Also refer to the section of this Report entitled Item 5. Operating and Financial Review and Prospects for a further discussion of our investments and acquisitions.
An important element of our strategy is to acquire companies that would complement our existing products and services, augment our market coverage and sales ability or enhance our technological capabilities. Accordingly, we may acquire additional businesses, products or technologies in the future or make investments in related businesses for strategic business purposes.
Capital Expenditures
Our principal capital expenditures and divestitures over the last three years include the following:
| 2000 | 2001 | 2002 | ||||||||||
| Property, plant and equipment (net) | $ | 3,579,000 | $ | 36,013,000 | 18,485,000 | |||||||
Our capital expenditures in 2002 included a $12.3 million new STN LCD panel production line and $4.0 million for completion of the new factory expansion.
Our major capital expenditures in 2001 included:
| • | $13.0 million for the purchase and interior improvements on 23,000 square feet of contiguous prime office space at Shun Tak Centre in the Central district of Hong Kong, | |
| • | $6.4 million for the purchase of new staff residences in Hong Kong, |
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| • | $5.5 million for the construction and machinery for a new 138,000 square foot five-story factory building within the Company’s existing manufacturing complex, | |
| • | $5.5 million for the purchase of new chip on glass production lines, and | |
| • | $2.0 million for the expansion of the front end process for producing LCD panels. |
In order to expand production capacity, we also plan to build a new factory consisting of approximately 250,000 square feet adjacent to our principal manufacturing facilities in Shenzhen, China. Planning for the project began in January 2003 and we expect construction to be completed by the end of September in 2004. We have budgeted $40.0 million to cover the cost of construction and fixtures and equipment for the new factory. We plan to finance these improvements to our manufacturing facilities from proceeds raised through capital market transactions.
Other capital expenditures we have planned for 2003 include:
| • | $12.0 million for machinery for manufacturing RF modules, | |
| • | $8.9 million for other capital equipment, and | |
| • | $10.0 million for investment in a 25% interest in Alpha Star Investments Ltd., which we made in January 2003. |
Our plans for capital expenditures are subject to change from time to time and could result from, among other things, our consummation of any significant amount of additional acquisition or strategic investment opportunities, which we regularly explore.
Business Overview
We are an electronics manufacturing and design services provider to a select group of the world’s leading original equipment manufacturers, or OEMs, of telecommunication and consumer electronic products. Our largest customers include Epson Precision (HK) Ltd., Sony Ericsson Mobile Communications AB and Texas Instruments Incorporated. Through our electronics manufacturing services, or EMS, operations, we manufacture electronic components and subassemblies, including liquid crystal display, or LCD, panels, transformers, LCD modules and radio frequency, or RF, modules. These components are used in various electronic products, including cellular phones, laptop computers, digital cameras, copiers, fax machines, electronic toys and microwave ovens. We also manufacture finished products, including cordless phones, palm-sized PC’s, personal digital assistants, electronic dictionaries, calculators and digital camera accessories for use with cellular phones.
We assist our OEM customers in the design and development of their products and furnish full turnkey manufacturing services that utilize advanced manufacturing processes and production technologies. Our services include hardware and software design, component purchasing, assembly into finished products or electronic subassemblies and post-assembly testing. We also provide original design manufacturing, or ODM, services, in which we design and develop proprietary products that are sold by our OEM customers using their brand name.
We were founded in 1975 as an electronic products trading company based in Hong Kong and shifted our focus to manufacturing of electronic products in 1978. We moved our manufacturing facilities to China in 1980 to take advantage of lower overhead costs, lower material costs and competitive labor rates available and subsequently relocated to Shenzhen, China in order to capitalize on opportunities offered in Southern China. We were reincorporated as a limited liability International Business Company under the laws of the British Virgin Islands in August 1987. Our principal manufacturing and design operations are based in Shenzhen, China, approximately 30 miles from Hong Kong. Our principal executive offices are located in Hong Kong, which provides us access to Hong Kong’s infrastructure of communication and banking and facilitates management of our China operations and transportation of our products out of China through the port of Hong Kong.
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Our Customers
Historically, we have had substantial recurring sales from existing customers. About 96.2% of our 2002 net sales came from customers that also used our services in 2001. While we seek to diversify our customer base, a small number of customers currently generate a significant portion of our sales. Sales to our 10 largest customers accounted for 90.2%, 83.7% and 84.8% of our net sales during the years ended December 31, 2000, 2001 and 2002, respectively. Sales to customers accounting for 10% or more of our net sales in the year ended December 31, 2000, 2001 or 2002 were as follows:
| Year ended | ||||||||||||
| December 31, | ||||||||||||
| 2000 | 2001 | 2002 | ||||||||||
| Epson Precision (HK) Ltd. | 23.8 | % | 29.9 | % | 32.2 | % | ||||||
| Sony Ericsson Mobile Communications AB | N/A | * | 16.9 | |||||||||
| Texas Instruments Incorporated | 23.9 | 14.2 | 11.1 | |||||||||
| Sharp Corporation | 14.7 | * | * | |||||||||
| Seiko Instruments Inc. | 10.0 | * | * | |||||||||
| * | Less than 10% of our total net sales. |
Our largest OEM customers based on net sales during 2002 include the following table sets forth the percentage(listed alphabetically):
| Customer | Product | |
| Advance Watch Co. (Far East) Ltd. | LCD panels for watches | |
| Canon Electronic Business Machines (H.K.) Co. Ltd. | Electronic dictionaries and calculators | |
| Casine Electronics Ind. Co. | LCD panels for calculators and clocks | |
| Epson Precision (H.K.) Ltd | PCB modules for cellular phones | |
| Hitachi Ferrite Electronics Ltd. | Transformers | |
| Hitachi Media Electronics Co. Ltd. | Transformers | |
| Kanda Tsushin Kogyo Co Ltd (affiliate of Fujitsu) | Caller ID function phones | |
| Maeda Global Net (HK) Co Ltd | LCD modules for cellular phones | |
| Nanox Ltd | LCD panels for cordless phones and household appliances | |
| Nishimura Musen Denki Co. Ltd | Transformers | |
| Optrex Corporation | Assemblies for LCD modules | |
| Seiko Instruments Inc. | Electronic dictionaries | |
| Sharp Corporation | Calculators, pocket computers and control panel modules | |
| Sony Corporation | Electronic dictionaries | |
| Sony Ericsson Mobile Communications AB | Mobile phone digital camera accessories | |
| Stanley Electric (Asia Pacific) Ltd. | LCD panels for car audio devices | |
| Texas Instruments Incorporated | Calculators | |
| Toshiba Battery Company Ltd* | Rechargeable battery packs for cellular phones | |
| Vtech Telecommunications Ltd. | LCD panels for phones | |
| Zexus Technology Ltd. | LCD panels for watches |
| * | We sold rechargeable battery packs to Toshiba Battery Company Ltd., through a joint venture we had with this customer. We sold our interest in the joint venture to a Toshiba related company and ceased manufacturing rechargeable battery packs as of April 30, 2002. |
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At any given time, different customers account for a significant portion of our business. Percentages of net sales to customers vary from quarter to quarter and year to year and fluctuate depending on the timing of eachproduction cycles for particular products.
Sales to our OEM customers are primarily based on purchase orders we receive from time to time rather than firm, long-term purchase commitments from our customers. 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. Uncertain economic conditions and our general lack of long-term purchase commitments with our customers make it difficult for us to accurately predict revenue over the longer term. Even in those cases where customers are contractually obligated to purchase products from us or repurchase unused inventory from us, we may elect not to immediately enforce our contractual rights because of the Company'slong-term nature of our customer relationships and for other business reasons, and instead may negotiate accommodations with customers regarding particular situations.
Our Products
The dollar amount (in thousands) and percentage of our net sales by business segment and product linescategory for the years ended December 31, 1999, 1998,2000, 2001 and 1997.
2002 were as follows:
| Year ended December 31, | |||||||||||||||||||||||||
| 2000 | 2001 | 2002 | |||||||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Dollars | Percent | ||||||||||||||||||||
| Consumer Electronic Products: | |||||||||||||||||||||||||
| Component assembly(1) | $ | 103,288 | 48 | % | $ | 121,781 | 52 | % | $ | 103,628 | 44 | % | |||||||||||||
| LCD consumer products | 98,043 | 46 | 73,596 | 32 | 94,207 | 40 | |||||||||||||||||||
| Software development services | 2,073 | 1 | 2,701 | 1 | 2,923 | 1 | |||||||||||||||||||
| LCD Panels and Transformers(2) | |||||||||||||||||||||||||
| LCD panels | 6,606 | 3 | 24,977 | 11 | 23,937 | 10 | |||||||||||||||||||
| Transformers | 3,678 | 2 | 10,981 | 4 | 11,324 | 5 | |||||||||||||||||||
| $ | 213,688 | 100 | % | $ | 234,006 | 100 | % | $ | 236,016 | 100 | % | ||||||||||||||
| (1) | Included in component assembly are our sales from our manufacture of rechargeable battery packs through a joint venture we had with Toshiba Battery Co., Ltd. We sold our interest in the joint venture to a Toshiba related company and ceased manufacturing rechargeable battery packs as of April 30, 2002. Accordingly, revenue from sales of battery packs were not included after that date. |
| (2) | LCD panels and components consist of products manufactured and |
Consumer Electronic Calculators
The Company manufactures a wide range of electronic calculators that
include basic function calculators from small credit card size to desktop
display style, scientific, and advanced graphic calculators.
Subassemblies and Components
Nam Tai manufacturesProducts
| Component Assembly |
We manufacture the following subassemblies and components:
-
| • | Color and monochrome LCD modules to display information as part of telecommunication products such as cellular telephones and telephone systems, appliances and office automation products, such as copiers and facsimile machines. Our LCD modules could be manufactured for use in most other hand-held consumer electronic devices, such as electronic games and digital cameras. | |
| • | RF modules, which we began manufacturing in December 2002, for integration into cellular phones. These modules could be manufactured for use in most other hand-held consumer electronic products, such as PDAs, laptop computers and other products with wireless connectivity. |
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| • | 1.9 and 2.4 GHz high frequency cordless telephones, home feature phones, family radio systems and transceivers. |
| LCD Consumer Products |
The LCD-based consumer electronic products as
portable telephones, telephone systems, portable computers and
facsimile machines;
- Control panel modules for incorporation into microwave ovens; and
- LSIs bonded on PCBs whichwe manufacture are incorporated into such products as
telecommunication products, electronic toys and games.
Nam Tai expects to begin Battery Pack production in May 2000, producing
lithium ion rechargeable battery packs for use in personal computers, cellular
phones and personal digital assistants ("PDAs") as well as audio-visual devices
such as camcorders and miniature audio appliances.
Personal Digital Assistants and Linguistic Products
The Company produces various types of PDAs and electronic organizers,
particularly telephone directories and business card organizers with scheduler,
clock, memo pad and calculator functions. The linguistic products manufactured
by Nam Tai include electronic spell checkers, dictionaries and language
translators, including some models with voice functions. Linguistic products
generally include a built-in calculator. Some also include built in personal
organizers. The Company has successfully developed its first ODM product, an
electronic dictionary. Nam Tai has also been appointed to manufacture a
palm-sized PC with a Chinese version of Windows CE(R) software pre-installed and
is currently assisting in the development of a second more advanced model.
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Telecommunication Products
The Company produces 900 MHz cordless telephones and family radio
systems ("FRS") from its existing manufacturing facility in Shenzhen, China.
Future products to be developed over the next two years may include digitally
enhanced cordless telephones, and 2.4 GHz high frequency telecommunication
products.
Other Products and Services
Otherprimarily finished products and services provided by Nam Tai include:
IC Card Balance Readers. IC card balance readers are hand-held devices
used to check information contained on the IC cards "Smart Cards". IC cards are
being developed by certain major banks in Europe and North America as an
alternative to the use of cash and mass production of the card readers has not
started as the "Smart Cards" are currently still undergoing market testing. Nam
Tai has developed and manufactured a number of prototype card reader models
which are used for market testing purposes.
Software Development Services. Through Namtek, the Company offers
| • | Digital camera accessories for use with the cellular telephones. | |
| • | Electronic calculators that include basic function calculators, desktop display style, scientific and advanced graphic calculators. | |
| • | Digital management devices that include personal digital assistants, or PDAs, and electronic personal organizers. | |
| • | Linguistic products, including electronic dictionaries, spell checkers, and language translators. |
| Software Development Services |
We offer our OEM customers software development services principally for the designoperation of electronic dictionary products, many of which are manufactured by us, as well as personal organizers and electronic dictionary products.
Silk Screening. Through Zastron,MP3 devices. In addition to generating revenue from our development services, our software design, which typically occurs at the Company providesproduct design stage, often results in our providing manufacturing services to the OEM assembly customers.
| LCD Panels and Transformers |
With the acquisition of JIC Group in October 2000, we began producing LCD panels and silk screeningtransformers.
| LCD Panels |
LCD panels are information display components and are featured in numerous electronics products, including watches, clocks, calculators, pocket games, PDAs and cellular and wireless telephones. Currently, we use only a small portion of the LCD panels in our assembly operations. We plan to customers for plastic parts, PVC productsincrease the volume of LCD panels we supply to our assembly business.
| Transformers |
Transformers are generally used to increase or reduce the voltage of an electric power supply to allow a particular part of electrical equipment to be used. The transformers we produce are used in home appliances, telecommunications equipment, computers and metal parts.
This service is also supplied to other firms for incorporation into their
finished products.
Electro Luminescent (EL) Panels. The Company has developed Electro
Luminescent (EL) Panels for use as LCD back-lightingcomputer peripherals.
Our Manufacturing and Assembly Capabilities
We utilize the following production techniques:
| • | Chip on Film. COF is an assembly method for bonding integrated circuit chips and other components onto a flexible printed circuit. This process allows for greater compression of the size of a product when assembled enabling the production and miniaturization of small form factor devices like cellular phones, PDAs, digital cameras and notebook PCs. At December 31, 2002, we had two COF machines. | |
| • | Chip On Glass. COG is a process that connects integrated circuits directly to LCD panels without the need for wire bonding. We apply this technology to produce advanced LCD modules for high-end electronic products, such as cellular phones and PDAs. At December 31, 2002, we had seven COG lines. |
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| • | Chip On Board. COB is a technology that utilizes wire bonding to connect large-scale integrated circuits directly to printed circuit boards. We use COB in the assembly of consumer products such as calculators, personal organizers and linguistic products. At December 31, 2002, we had 79 COB machines. | |
| • | Ball Grid Array. BGA is a method of mounting an integrated circuit or other component to a printed circuit board, or PCB. Rather than using pins that consume a large area of the PCB, the component is attached to the circuit board with small balls of solder at each contact. This method allows for greater component density and is used in more complex PCBs. At December 31, 2002, we had 12 BGA machines. | |
| • | Outer Lead Bonding. OLB is an advanced technology used to connect PCBs and large-scale integrated circuits with a large number of connectors. We use this technology to manufacture complex miniaturized products, such as high-memory PDAs. At December 31, 2002, we had three OLB machines. | |
| • | Tape Automated Bonding with Anisotropic Conductive Film.TAB with ACF is an advanced heat sealing technology that connects a liquid crystal display component with an integrated circuit in very small LCD modules, such as those used in cellular phones and pagers. At December 31, 2002, we had seven systems of TAB with ACF machines. | |
| • | Fine Pitch Heat Seal Technology. FPHS technology allows us to connect LCD displays to PCBs produced by chip on board and outer lead bonding that enable very thin connections. This method is highly specialized and is used in the production of finished products such as PDAs. At December 31, 2002, we had eight machines utilizing FPHS technology. | |
| • | Surface Mount Technology. SMT is a process by which electronic components are mounted directly on both sides of a printed circuit board, increasing board capacity, facilitating product miniaturization and enabling advanced automation of production. We use SMT for products such as electronic linguistic devices. At December 31, 2002, we had 16 SMT productions lines. | |
| • | Twisted Nematic LCDs. A TN type LCD is the most conventional and economical and is suitable for most common LCDs used in devices like calculators and watches. At December 31, 2002, we had two TN LCD lines. | |
| • | Super-Twisted Nematic LCDs.STN-type LCDs allow for clearer visibility and wider viewing angle than TN-type LCDs. STN LCDs are suitable for use in devices like pocket games and PDA personal digital assistants. We began manufacturing these LCDs in the second quarter of 2002 and at December 31, 2002, we had one STN LCD line. |
At December 31, 2002, we had three clean rooms at our principal manufacturing facilities, which housed COF and COG capabilities for LCD modules, notebook
computers, games, electronic dictionaries,module manufacturing. We also had three clean rooms at another of our factories, which are used to manufacture LCD panels. Of our seven clean rooms at January 31, 2003, four were Class ten thousand and LCD watches.
MANUFACTURING
three were Class one thousand.
Quality Control
The Company maintains
We maintain strict quality control programs for itsour products, including the use of total quality management, ("TQM")or TQM, systems and advanceadvanced testing and calibration equipment. AllOur quality control personnel test the quality of incoming raw materials and components are
checked by the Company's quality control personnel.components. During the production stage, Nam Tai'sour quality control personnel check allalso test the quality work-in-progress at several points in the production process. Finally, after the assembly stage, the Company
conducts randomwe conduct testing of finished products. In addition, the Company provideswe provide office space at its Chinaour principal manufacturing facilityfacilities for representatives of itsour major customers to permit them to monitor production of their products and towe provide them with direct access to the Company'sour manufacturing personnel. Manufactured
products have a low level
The facilities of product defect, as required by the Company's OEM
customers. When requested, Nam Tai provides a limited warrantyNamtai Electronic (Shenzhen) Co. Ltd., or NTSZ, one of six months to
one year for products it manufactures. To date, claims under the Company's
warranty program have been negligible.
The Company's Hong Kong and Chinaour subsidiaries, have maintained ISO 9002 Certification sincefrom December 1993 until February 1996, and thereafter they maintained ISO 9001 Certification since February
1996. The "ISO"Certification. All of our manufacturing facilities are either ISO 9001 or ISO 9002 certified, the International
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Our Suppliers
We purchase thousands of qualifying
their own operations.
For four consecutive years through 1999 the Company was awarded the prestigious
Texas Instruments Supplier Excellence Award. The award recognizes suppliers who
have achieved world class performance in the following categories: product
quality; quality management; continuous on-time delivery of products; cycle
times; leadership in
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product pricing and value; customer service; technology; and environmental
leadership. To qualify for the award the first time requires very high scores in
each of the categories. To receive the award in subsequent years requires
continuous improvement over the high scores required for the first year.
Component Parts and Suppliers
The Company purchases over 3,000 different component parts from more
than 100 major suppliers and isnumerous suppliers. We are not dependent upon any single supplier for any key component. The Company purchasesWe purchase components for its electronic products from suppliers in Japan, China and elsewhere. OrdersWe generally base component orders on received purchase orders in an effort to minimize our inventory risk by ordering components and products only to the extent necessary although for components arecertain customers we will occasionally purchase raw materials based on forecasts
that Nam Tai receives from its OEM customers, which reflect anticipated
shipments during the production cycle for a particular model.such customer’s rolling forecasts.
The major component parts purchased bywe purchase include the Companyfollowing:
| • | off-the-shelf and custom integrated circuits or “chips,” most of which we purchase presently from Toshiba Corporation and Sharp Corporation and certain of their affiliates; | |
| • | LCD panels, which are available from many manufacturers. In the past we have used two major suppliers, Epson Hong Kong Ltd. and Sharp Corporation for LCD panels and in the future we may produce some LCD supplies internally; | |
| • | solar cells and batteries, which are standard “off-the-shelf” items, that we generally purchase in Hong Kong from agents of Japanese manufacturers; and | |
| • | various mechanical components such as plastic parts, rubber keypads, PCBs, indium tin oxide, or ITO, glass used in the production of LCD panels, and packaging materials from various local suppliers in China. |
Whenever practical, we use domestic China suppliers who are integrated
circuits or "chips", LCDs, solar cells, printer heads and batteries. The Company
purchases both stock "off-the-shelf" chips and custom chips, the latter being
the most expensive component parts purchased by Nam Tai. At the present time,
the Company purchases most of its chips from Toshiba Corporation, Sharp
Corporation and certain of their affiliates, although there are many additional
suppliers from which the Company could purchase chips.
LCDs are readily available from many manufacturers and the Company
currently has two major suppliers, Epson Hong Kong Ltd. and Sharp Corporation.
PCBs and other circuit boards are purchased from circuit board manufacturers in
Hong Kong, China and solar cells are purchased from Matsushita Battery
Industrial Company Ltd. Batteries are standard "off-the-shelf"often able to provide items generally
purchased in Hong Kong from agents of Japanese manufacturers. The Company also
purchases various mechanical components such as plastic parts, rubber keypads,
PCBs and packaging materials locally in China. Management believes theat low costs for locally supplied parts adds to the Company's competitive advantage.and with short lead times.
Certain components may be subject to limited allocation by certain of Nam Tai'sour suppliers. During 19992000 there was an industry-wide shortage of components in the electronics industry especially from Japan, resulting from
the earthquake in Taiwan which reducedas supply at a time ofwas unable to satisfy growing world demand. Nam Tai was not totally immune from these shortages. There can be no assuranceIn some cases, supply shortages and delays in deliveries of particular components have resulted in curtailed production, or delays in production of assemblies using scarce components. These supply shortages have contributed to an increase in our inventory levels and reduction in our margins. We expect that any future allocationshortages and delays in deliveries of some components will continue. If we are unable to obtain sufficient components on a timely basis, we may experience manufacturing delays, which could harm our relationships with current or shortages would not have a material adverse effect
on the Company's results of operations.
CUSTOMERS AND MARKETING
Approximate percentages of net sales to customers by geographic area
based upon location of product delivery are set forth below for the periods
indicated:
Production Scheduling
The typical cycle for a product to be designed, manufactured and sold to an OEM customer is threeone to fourtwo years, includingwhich includes the production period, the development period and the period for market research and data collection (which is undertaken primarily by Nam Tai'sour OEM customers). Initially an OEM customer gathers data from its sales personnel on products for which there is market interest, including features and unit costs. The OEM customer then contacts the
Company,us, and possibly other prospective manufacturers, with forecasted total production quantities and design specifications or renderings. From that information, the Companywe in turn contacts itscontact our suppliers and determinesdetermine estimated component and material costs. The CompanyWe later advises theadvise our OEM customer of the development costs, charges (including molds, tooling and development costs such as software design)design, if applicable) and unit cost based on the forecasted production quantities desired during the expected production cycle.
Once the Companywe and the OEM customer agree to the Company's quotation for the development costs and the unit cost, the Company beginswe begin the product development.development if we are engaged to do so. This development period typically lasts less than six
21
The production period usually lasts approximately 18six to 3012 months. In some cases, our customer handles all product design and development and engages us only at the point of initial production. Typically, more advanced products have longershorter production runs. If total production quantities change, the OEM customer often provides six monthsonly limited notice before discontinuing orders for a product. At any point in time the Company iswe are in different stages of the development and production periods for the various models it has under development or in production for our OEM customers.
The majority of the Company's
Generally, our production is based on forecastspurchase orders received from OEM customers covering the next six month period, the first three months of
whichcustomers. Purchase orders are scheduled shipments. These forecasts are reviewed and adjusted, where
necessary, at the beginning of each month with confirmed orders covering the
first three months. In many cases, confirmed orders areoften supported by letters of credit or written confirmation from the OEM customer and generally may not be canceledcancelled once confirmed without the customer becoming
responsible for all costsmutual consent of the remaining components includedparties. Even in those cases where customers are contractually obligated to purchase products from us or repurchase unused inventory from us, we may elect not to immediately enforce our contractual rights because of the long-term nature of our customer relationships and for that order. During
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the years ended December 31, 1999, 1998other business reasons, and 1997 the Companyinstead may negotiate accommodations with customers regarding particular situations.
We did not suffer a material loss resulting from the cancellation of an OEM customer confirmed
order.
Transportation
Sinceorders in 2000 or 2002. In 2001, we made an inventory provision of $3.8 million for slow-moving raw materials relating to cancelled, reduced or delayed orders. However, subsequently we were able to use some of these raw materials in production or we received compensation for the Company sells itsunused raw materials from certain of our customers, resulting in our partial reversal of $2.0 million of the provision in 2002. Of the remaining $1.8 million of slow-moving inventory, $1.2 million was scrapped and $600,000 will be scrapped in the next six months.
Sales and Marketing
We focus on developing close relationships with our customers at the development and design phases and continuing throughout all stages of production. We identify, develop and market new technologies that benefit our customers and position us well as an EMS provider.
Sales and marketing operations are integrated processes involving direct salespersons, project managers and senior executives. We direct our sales resources and activities at several management and staff levels within our customers and prospective customers. We receive unsolicited inquiries resulting from word of mouth, from public relations activities, and through referrals from current customers. We evaluate these opportunities against our customer selection criteria and assign direct salespersons.
Transportation
Typically, we sell products F.O.B. Hong Kong, itswhich means that our customers are responsible for the transportation of finished products from Hong Kong to their final destination. Transportation of components and finished products to and from Shenzhen is by truck. Component parts purchased from Japan are generally shipped by air. To date, the Company haswe have not been materially affected by any transportation problems. RESEARCH AND DEVELOPMENTHowever, transportation difficulties affecting air cargo or shipping such as an extended closure of ports that materially disrupt 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.
Competition
General competition in the contract EMS industry is intense and characterized by price erosion, rapid technological change, and competition from major international companies. This intense competition has
22
The Company continues to place an increased emphasis onEMS services we provide are available from many independent sources as well as from current and potential customers with in-house manufacturing capabilities. Our EMS competitors include Celestica, Inc., Flextronics International Ltd., Jabil Circuit, Inc., Sanmina-SCI Corporation, Hon Hai Precision Industry Co., Ltd. and Solectron Corporation. Our principal competitors in the manufacture of our traditional product lines of calculators, personal organizers and linguistic products include Kinpo Electronics, Inc. and Inventec Co. Ltd. We have numerous competitors in the telecommunication, subassemblies and components product lines, including, Philips, Samsung and Varitronics.
Research and Development
We invest in research and development which provides greater servicefor manufacturing and assembly technology that provide us with the potential to offer better and more technologically advanced services to our OEM customers and assistsor assist us in working with our OEM customers in the design and development of future products. Research and development expenses
increased to $2,624,000 in 1999 from $1,691,000 in 1998 due to: (1) the
Company's customers requesting the Company to bear increased responsibility for
development charges; and, (2) the establishment of two telecommunication
research and development branches, one in Korea and the second in the Shenzhen
factory.
ODM DEVELOPMENT
Nam Tai has focused special attention on furthering the research and
development capabilities of its engineering division. This included hiring two
new senior executives, to oversee the development of Nam Tai's product
development capabilities. The Company plansWe plan to continue acquiring state-of-the-artadvanced design equipment and enhancing itsto enhance our technological expertise through continued education for alltraining of our engineers and further recruitinghiring of qualified system engineers. These investments are intended to improve the speed, efficiency and quality of our assembly processes.
In our ODM business, we are responsible for the design and development of new products, the rights to which we own. We sell these products to OEM customers to be marketed to end users under the customers’ brand names. To date, we have successfully developed a number of electronic dictionaries, cordless telephones and calculator products. Our efforts to expand or maintain the ODM business may not be successful and we may not achieve material revenues or profits from our efforts. To date, our ODM design activities have not been a material portion of our research and development budget.
Patents, Licenses and Trademarks
We do not have any patents, licenses or trademarks on which our business is substantially dependent. Instead, we rely instead on our trade secrets, industry expertise and long-term relationships with our customers and suppliers.
Organizational Structure
We are a holding company for Nam Tai Group Management Ltd., Namtek Software Development Company Limited and J. I. C. Technology Company Limited and their subsidiaries. The chart below illustrates the organizational structure of the Company and our principal operating subsidiaries at January 31, 2003.
23
Our significant operating entities are described below:
JIC Technology Company Ltd.
JIC Technology was formed in the Cayman Islands in January 2002 in connection with a restructuring agreement with Albatronics (Far East) Company Limited, of which we owned slightly more than 50% of the outstanding capital stock. JIC Technology is a holding company of JIC Group (B.V.I.) Limited and it is listed on the Hong Kong Stock Exchange. We currently hold 75% of the ordinary shares of JIC Technology, and upon conversion of the preference shares we own, we would own approximately 94% of JIC Technology.
J.I.C. Enterprises (Hong Kong) Ltd.
JIC Enterprises, incorporated in Hong Kong, was established in 1983 and has been in the LCD business for almost 20 years. Originally a small trading company for LCD panels and electronics products, JIC Enterprises is now strategically focused on the sales and marketing of LCD panels and is responsible for customer relationship development.
24
Jetup Electronic (Shenzhen) Co. Ltd.
Jetup Electronic was incorporated in 1993 in China and handles the manufacturing and processing works of LCD panels through its factory plants in Baoan County, Shenzhen.
Jieyao Electronics (Shenzhen) Co. Ltd.
Jieyao was incorporated in 1995 as a wholly foreign-owned enterprise with its factory located in Baoan County District, Shenzhen. The company acts as another manufacturing arm of JIC Group’s transformer division.
Nam Tai Group Management Limited
Nam Tai Group Management was established on March 9, 2001 in Hong Kong and provides management services to other group companies.
| Nam Tai Telecom (Hong Kong) Company Limited |
Nam Tai Telecom (Hong Kong) Company Limited was established in Hong Kong in August 1999, emerging from a successful acquisition of a Korea based telecommunication business. Located in the same office building as Nam Tai Electronic & Electrical Products Limited, Nam Tai Telecom develops and sells high frequency wireless telecommunication products and LCD modules.
| Zastron Electronic (Shenzhen) Company Limited |
Zastron Electronic (Shenzhen) Company Ltd. was organized as Zastron Plastic & Metal Products Electronic (Shenzhen) Co. Ltd. in March 1992 as a limited liability company pursuant to the relevant laws of China. Zastron engaged in production of metallic parts and PVC plastic products, much of which is used in products manufactured in our principal manufacturing facilities. In August 2002, Zastron Plastic & Metal Products Electronic (Shenzhen) Co. Ltd. changed its name to Zastron Electronic (Shenzhen) Co. Ltd. and the nature of business was expanded to include manufacturing of telecommunication products and LCD modules. In June 2002, Zastron’s equity interest was transferred from Nam Tai Electronic & Electrical Products Limited to Nam Tai Group Management Limited. In October 2002, Zastron’s silk screening business was transferred to Jieyao Electronics (Shenzhen) Co. Ltd. In December 2002, the equity interest of Zastron was transferred from Nam Tai Group Management Limited to Nam Tai Telecom (Hong Kong) Company Limited.
Nam Tai Electronic & Electrical Products Limited
Nam Tai Electronic & Electrical Products Limited was incorporated in November 1983 and became the holding company for Namtai Electronic (Shenzhen) Co. Ltd. in 1992. Marketing and customer relations are the main functions handled by Nam Tai Electronic & Electrical Products.
Namtai Electronic (Shenzhen) Co. Ltd.
Namtai Electronic (Shenzhen) Co. Ltd. was established as Baoan (Nam Tai) Electronic Co. Ltd. in June 1989 as a contractual joint venture company with limited liability pursuant to the relevant laws of China. The equity of Baoan (Nam Tai) Electronic Co. Ltd. was owned 70% by Nam Tai Electronic & Electrical Products Limited and 30% by a Chinese company. In 1992, the Chinese company transferred all of its equity interest in the contractual joint venture to Nam Tai Electronic & Electrical Products and the company changed its name to Namtai Electronic (Shenzhen) Co. Ltd. Namtai Electronic (Shenzhen) became a wholly owned subsidiary of Nam Tai Electronic & Electrical Products. Namtai Electronic (Shenzhen) is our principal manufacturing arm and is engaged in research and development, manufacturing and assembling our electronic products in China.
25
Namtek Software Development Company Limited
Namtek Software Development Company was established in May 2002 and is a holding company for Shenzhen Namtek Co., Ltd.
Shenzhen Namtek Co., Ltd.
Shenzhen Namtek Co., Ltd. was organized in December 1995 as a limited liability company pursuant to the relevant laws of China. Shenzhen Namtek commenced operations in early 1996 developing and commercializing software for the consumer electronics industry, particularly for our customers and for products we manufacture or we will manufacture in the future. At December 31, 2002, Shenzhen Namtek employed approximately 70 software engineers and provides the facilities and expertise to assist in new product development and research, and development, offering itsenabling us to offer our customers program design for microprocessors, enhanced software design and development services, and strengthening the Company'sour ODM capabilities.
In the ODM business, Nam Tai is responsible for the design
Property, Plant and development of new products, the rights to which it owns. Nam Tai sells these
products to OEM customers to be marketed to end users under the customers' brand
names. To date the Company has successfully developed a growing number of
electronic dictionaries, cordless telephones, and calculator products. Nam Tai
hopes to further augment its OEM business with additional ODM product offeringsEquipment
Our registered office in the future. There can be no assurance that Nam Tai's efforts to expand or
maintain the ODM business will be successful or that it will achieve material
revenues or profits from its efforts.
COMPETITION
Competition in the contract electronic manufacturing industry is intense
with numerous other companies in the contract electronic manufacturing industry.
For Nam Tai's traditional products competition has been limited by OEMs to a
small number of companies who satisfy the requirements to become approved
suppliers. The Company's two primary competitors in the manufacture of its
product lines of calculators, personal organizers and linguistic products, are
Kinpo Electronics, Inc. (formerly Cal-Comp Electronics, Inc.) and Inventec Co.
Ltd., Taiwanese companies manufacturing in China. While an OEM may prefer its
approved suppliers, management believes OEMs tend to order from several
suppliers in order to lessen dependence on any one of them. Competition for OEM
sales is based primarily on unit price, product quality and availability,
promptness of service, reputation for reliability and OEM confidence in the
manufacturer. The Company believes it competes favorably in each of these areas.
Within its telecommunication and sub-assemblies product lines there are numerous
competitors and the market remains very competitive. Certain competitors have
greater technical, financial and marketing resources than the Company.
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EMPLOYEES
At December 31, 1999, Nam Tai employed approximately 2,600 persons on a
full-time basis, of which 2,550 were working in China, 42 in Hong Kong, and 8 in
Korea. Of these, approximately 2000 were engaged in manufacturing, 500 were
engaged in administrative, research and development, quality control,
engineering and marketing positions, and the balance in supporting jobs such as
security, janitorial, food and medical services. The Company is not a party to
any material labor contract or collective bargaining agreement. The nature of
its arrangement with its manufacturing employees is such that it can increase or
reduce staffing levels without significant difficulty, cost or penalty.
Although, the Company has experienced no significant labor stoppages and
believes relations with its employees are satisfactory, there can be no
assurances that this situation will continue in the future, and any labor
difficulties lead to increased costs and/or interruptions in production.
The Company maintains an employee incentive compensation program in
China whereby a regular bonus is paid to employees on the employee's return to
work following the Chinese New Year holiday. Management believes this method has
contributed to low employee turnover in the factory.
PATENTS, LICENSES AND TRADEMARKS
In 1999 the Company concluded a Technical Collaboration Agreement with
Toshiba Battery Co., Ltd. ("Toshiba Battery") in Japan regarding technology
introduction from Toshiba Battery for designing and manufacturing the battery
packs. It has also obtained licenses to use RF and DECT technologies. Otherwise,
the Company has no patents, trademarks, licenses, franchises, concessions or
royalty agreements that are material to its business as a whole. Due to rapid
technological change in the products manufactured, the Company does not believe
the absence of patents has had or will have a material impact on its business.
ITEM 2. PROPERTIES British Virgin Islands
The registered office of the Company is located at McNamara Chambers, P.O. Box 3342, Road Town, Tortola, British Virgin Islands. Only corporateTortola. Corporate administrative matters are conducted at this office through Nam Tai'sour registered agent, McW. Todman & Co. The CompanyMcNamara Corporate Services Limited. We neither ownsown nor leaseslease property in the British Virgin Islands. The table below lists the locations, square footage, principal use and lease expiration dates of the facilities used in our principal operations.
| Owned or lease | ||||||||||||
| Location | Square Footage | Principal Use | expiration date(1) | |||||||||
| Hong Kong | 23,000 | Executive offices | Owned | |||||||||
Principal Manufacturing Facilities | ||||||||||||
| Shenzhen, China | 300,700 | Manufacturing | 2043 | |||||||||
| 39,380 | Offices | 2043 | ||||||||||
| 231,943 | Dormitories and cafeteria | 2043 | ||||||||||
| 6,596 | Recreational | 2043 | ||||||||||
Other facilities | ||||||||||||
| Shenzhen, China | 72,360 | Manufacturing transformers | 2009 | |||||||||
| 27,093 | Dormitories | 2009 | ||||||||||
| 151,738 | Manufacturing LCD panels | 2007 | ||||||||||
| 108,181 | Dormitories | 2007 | ||||||||||
| 25,900 | Silk screening operations | 2007 | ||||||||||
| Shekou, Shenzhen, China | 6,650 | Software development | 2003 | |||||||||
| Shanghai, China | 4,754 | Software development | 2005 | |||||||||
| (1) | Only the Chinese government and peasant collectives may own land in China. Our principal manufacturing facilities are located on land in which we have entered into a land lease agreement with the Chinese government that gives us the right to use the land for 50 years. Based on our understanding of the practice as exists today, at the expiration of the land lease we may be given the right to renew the lease. However, at the end of the lease term, all improvement we have made will revert to the government. For our other facilities, we have entered into factory building lease agreements with peasant collectives or other companies for 10 years or less. |
In order to expand production capacity, we plan to build a new factory consisting of approximately 250,000 square feet on portions of the vacant land adjacent to our existing factory complex in Shenzhen, China. Planning for the project began in January 2003 and we expect it to be completed by the end of the second quarter in 2004. We have budgeted $40.0 million to cover the cost of construction and fixtures and
26
Hong Kong
The Company's
In 2001, our principal executive office was relocated to 15/F., China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road, Central, Hong Kong. The office is conveniently located above the ferry terminal and beside the highway, permitting easy transportation by sea or by land to and from the manufacturing facilities in Shenzhen. The purchase and renovation of the 23,000 square feet of contiguous prime office space, including transaction fees, cost us $13.0 million.
We own 2,722 square feet of office space at Suite 4, 9th
floor,Room 811, Tower 1, China Hong Kong City, 33 CantonB, Hunghom Commercial Centre, 37 Ma Tau Wai Road, TST,Hunghom, Kowloon, Hong Kong with itswhich was previously used by the JIC Group for administration and marketing office located in the same building on the 15th floor. The
combined rental rateand is approximately $23,200 per month with the lease expiring
on May 31, 2001.
The Company owns anow being leased out.
We own five residential flatflats in Hong Kong that was purchased for total consideration of $1,850,000. This property was$8,312,000. These properties are occupied by the Chairman of
the Company, Mr. Murakami until December 1998senior management and is now occupied by Mr.
Takizawa, Chief Executive Officer and President and formsform part of his overalltheir compensation. See Item 11. Compensation of Directors and Officers.
Since 1984 the Company
Until 1996, we owned approximately ten acres of land in Hong Kong carried on theour books of the Company at itsa cost of approximately $523,000. ThroughoutBetween 1997 the Company disposed ofand 2001 we sold approximately six7.7 acres of its land
holdings for net proceeds of $5,750,000$7,272,000, realizing a gain of $5,548,000. In 1998$7,018,000. We plan to sell the Company disposed of approximately 0.6 acres of its land holdings for net
proceeds of $815,000 realizing a gain of $795,000. In 1999 the Company disposed
of 0.5 acres for net proceeds of $316,000 realizing a gain of $302,000. The remaining land thatand, pending the Company planssale, to sell continuescontinue to be carried oncarry the books of the Companyland at its cost of approximately $162,000.
$134,000.
Shenzhen, China
Nam Tai's
| Principal Manufacturing Facilities |
Our principal manufacturing complex isfacilities located in Baoan County, Shenzhen, China. It includes the original facility and Phase I of the factory expansion
completed in May 1996. The original facility consists of 150,000 square feet of
manufacturing space under a 15 year lease expiring in 2007. The rental rate is
approximately $38,400 per month
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due to increase by 20% in August 2002. Phase I of the complex expansion is
located on 286,600 square feet of leasehold land adjacent to the original
facility. The lease for this land was purchased for approximately $2,450,000$2.45 million in 1994December 1993 and has a term of 50 years. The newThis facility consists of 160,000 additional square feet of manufacturing space, 39,000 square feet of offices, 212,000 square feet of new dormitories, 26,000 square feet of full service cafeteria and recreation facilities and a swimming pool. The total cost of the new factorythis addition to our complex, excluding land, was approximately $21,800,000. The complex contains
vacant land reserved$21.8 million. In November 2000 we began construction of another addition to our factory complex. We completed construction in October 2002, adding a new five-story factory with 138,000 square feet of production facilities, including one floor for assembling, one floor of office space, one floor for warehouse use and prepared fortwo floors of class one thousand clean room facilities. Prior to this addition, we had only one floor of class ten thousand clean room facilities at our factory complex. As of December 31, 2002 we had spent $9.1 million to complete the construction of another 118,000the new facility. With the new addition, we had approximately 626,000 square feet of manufacturing facility that is scheduled for completion in early 2001.
space at our principal manufacturing complex as of December 31, 2002.
In July 1999, the Companywe purchased a vacant lot of approximately 280,000 square feet (6.5foot (approximately 6.5 acres) vacant lot bordering itsour current manufacturing complex located in Baoan County, Shenzhen, China at a cost of approximately $1.2 million. The lot is leasehold
land with a termWe plan to build another factory consisting of 50 years. It is zoned industrialapproximately 250,000 square feet. Planning for the project began in January 2003 and is plannedwe expect it to be usedcompleted by the end of the third quarter in 2004. We have budgeted $40,000,000 to cover the cost of construction and fixtures and equipment for the constructionnew factory. We currently plan to finance these improvements to our manufacturing facilities from a portion of up tothe proceeds from a public offering of our common shares.
| Transformer Factory |
Our transformer factory was leased in 1999 and has six floors of manufacturing space totaling about 72,000 square feet. The factory has an additional 200,000average monthly output of 2,534,335 units. The facility is under a ten-year lease that expires on October 31, 2009.
27
| LCD Factory |
Our LCD factory was leased since 1997 and has over about 150,000 square feet of manufacturing office or dormitory facilities.space. The landfacility produces LCD panels to the specifications of our OEM customers and has an average monthly output of 10 to 12 million pieces. The lease of the facility will be reserved for
future expansionexpired on August 31, 2007.
| Software Development |
We currently lease two offices in a new project for a high technology product.
The Company alsowhich we conduct software development. Our Shekou, Shenzhen, China office has a 26,000approximately 6,650 square feet, facilitywhich we lease under a one-year lease expiring in Shenzhen, locatedAugust 2003. The monthly rental is approximately one mile from the manufacturing complex. This contains 28
apartment units to house certain factory managers who are married$4,480. Our Shanghai, China office, has approximately 4,754 square feet, which we lease under a three-year lease expiring in July 2005. The monthly rental is approximately $4,033.
Item 5. Operating and have
families. The Company purchased this buildingFinancial Review and Prospects
Except for approximately $1,000,000,
paying the final installment in June 1993.
General
The Company believes its existing land, manufacturing and office
facilities are adequate for the operation of its business for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings other than routine
litigation incidental to its business and there are no material legal
proceedings pending with respect to the property of the Company, other than as
described below.
In June 1997, the Company filed a petition in the British Virgin Islands
for the winding up of Tele-Art Inc. on account of an unpaid judgement debt owing
to the Company. The High Court of Justice granted an order to wind up Tele-Art
Inc. and the Caribbean Court of Appeal upheld the decision on January 25, 1999.
On January 22, 1999, pursuant to its Articles of Association, the Company
redeemed and cancelled 138,500 shares of the Company registered in the name of
Tele-Art, Inc. at a price of $11.19 per share to offset substantially all of the
judgement debt, interest and legal costs of $667,000 totaling $1,600,000. On
February 12, 1999, the liquidator of Tele-Art Inc. filed a summons in the
British Virgin Islands on its behalf seeking, among other things, a declaration
setting aside the redemption. The Courts of the British Virgin Islands have
delayed the fixing of a specific date for the hearing of the substantive
application, pending the outcome of an application by the Company to remove the
liquidator on the grounds of conflict of interest and bias. In the interim, the
Company is prevented from redeeming the remaining 169,727 shares to satisfy the
current unpaid judgement debt until a determination of the liquidator's February
12, 1999 application.
Management believes that the claim mentioned above is without merit and
will vigorously defend them and believes that the outcome of the cases will not
have a significant effect on the financial position, results of operation or
cash flows.
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ITEM 4. CONTROL OF THE COMPANY
The Company is not directly owned or controlled by another corporation
or by any foreign government. The following table sets forth, as of March 1,
2000, the beneficial ownership of the Company's Common Shares by each person
known by the Company to own beneficially more than 10% of the Common Shares of
the Company outstanding as of such date and by the officers and directors of the
Company as a group.
IDENTITY OF NUMBER OF COMMON SHARES
PERSONS OR GROUPS BENEFICIALLY OWNED PERCENT OF CLASS
- ----------------- ------------------ ----------------
M. K. Koo 3,187,481 (1) 32.6%
Peter R. Kellogg 100,000 (2) 1.1%
I.A.T. Reinsurance Syndicate Ltd. 1,000,000 (3) 11.3%
("IAT")
Officers and directors as a group 4,222,230 (4) 41.5%
(nine persons)
(1) Includes 2,260,631 Common Shares which are owned by Mr. Koo, and 926,850
shares issuable to Mr. Koo upon exercise of Warrants.
(2) These shares are personally owned by Mr. Kellogg and do not include
1,000,000 shares owned by IAT (See note 3). By virtue of Mr. Kellogg's
control over IAT he may be deemed to be the beneficial owner of these
shares. If so, he would beneficially own 1,100,000 Common Shares
representing 12.4% of Nam Tai's outstanding Common Shares as of December
31, 1999.
(3) Mr. Kellogg is the sole holder of voting stock of I.A.T. Reinsurance
Syndicate Ltd., a Bermuda corporation of which Mr. Kellogg disclaims
beneficial ownership.
(4) Includes 2,885,786 Common Shares owned by officers and directors as a
group, an aggregate of up to 210,500 Common Shares issuable to officers
upon exercise of employee options exercisable within 60 days of March 1,
2000, and 1,125,944 Common Shares issuable to officers and directors as
a group upon exercise of Warrants.
ITEM 5. NATURE OF TRADING MARKET
COMMON SHARES
The Company's authorized capital consists of 20,000,000 Common Shares,
$0.01 par value per share. The Company's Common Shares are traded on The Nasdaq
National Market under the symbol NTAI. Prior to March 12, 1999 the shares traded
under the symbol "NTAIF".
The following table sets forth the high and low closing sale prices as
reported by The Nasdaq National Market during each of the quarters in the
two-year period ended December 31, 1999.
QUARTER ENDED HIGH LOW
------------- ----- -----
December 31, 1999 19.00 12.13
September 30, 1999 15.50 12.00
June 30, 1999 12.63 8.00
March 31, 1999 12.56 8.88
December 31, 1998 14.50 9.68
September 30, 1998 14.94 9.38
June 30, 1998 17.25 14.88
March 31, 1998 17.63 12.88
Of the 8,840,823 Common Shares of the Company outstanding as of December
31, 1999, 5,773,848 are held by 959 holders of record in the United States.
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WARRANTS
In November 1997, the Company completed rights and standby offerings
(the "1997 Offerings") selling 2,267,917 and 729,212 units at $17.00 and $16.75
respectively. Each unit consisted of one Common Share and one Warrant. The
Common Shares and the Warrants included in the units were separately
transferable immediately.
Each Warrant is exercisable to purchase one Common Share at a price of
$20.40 per share at any time until November 24, 2000. The Warrants are
redeemable by the Company at $0.05 per Warrant on 30 days' written notice
provided the closing sale price of the Common Shares for 20 consecutive trading
days within the 30-day period preceding the date of the notice of redemption
equals or exceeds $25.50. In the event the Company exercises the right to redeem
the Warrants, a holder will be forced either to sell or exercise the Warrants
within 30 days of the notice of redemption, or accept the redemption price.
The Company's Warrants are traded on The Nasdaq National Market under
the symbol "NTAIW". Prior to March 12, 1999, the Warrants traded under the
symbol "NTAWF".
The following table sets forth the high and low closing sale prices as
reported by The Nasdaq National Market during each of the quarters since the
listing of the Warrants.
QUARTER ENDED HIGH LOW
------------- ---- ----
December 31, 1999 3.88 .75
September 30, 1999 1.84 .94
June 30, 1999 .94 .44
March 31, 1999 1.44 .78
December 31, 1998 1.69 0.88
September 30, 1998 1.94 0.75
June 30, 1998 3.44 1.88
March 31, 1998 3.50 2.44
Of the 2,997,129 warrants of the Company outstanding as of December 31,
1999, 116 holders of record in the United States hold 1,872,719.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are no exchange control restrictions on payments of dividends on
the Company's Common Shares or on the conduct of the Company's operations in
Hong Kong, where the Company's principal executive offices are located or the
British Virgin Islands, where Nam Tai is incorporated. Other jurisdictions in
which the Company conducts operations may have various exchange controls.
Dividend distribution and repatriation by Nam Tai's subsidiaries in China are
regulated by Chinese laws and regulations. To date these controls have not had a
material impact on the Company's financial results as sales to customers are
generally made in Hong Kong.
There are no material British Virgin Islands laws which impose foreign
exchange controls on the Company or that affect the payment of dividends,
interest, or other payments to nonresident holders of Nam Tai's securities.
British Virgin Islands law and the Company's Memorandum and Articles of
Association impose no limitations on the right of nonresident or foreign owners
to hold or vote such securities of the Company.
ITEM 7. TAXATION
No reciprocal tax treaty regarding withholding tax exists between the
United States and the British Virgin Islands. Under current British Virgin
Islands law, dividends, interest or royalties paid by the Company to individuals
and gains realized on the sale or disposition of shares are not subject to tax
as long as the recipient is not a resident of the British Virgin Islands. The
Company is not obligated to withhold any tax for payments of dividends and
shareholders receive gross dividends irrespective of their residential or
national status.
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ITEM 8. SELECTED FINANCIAL DATA
The selected financial information set forth below is derived from
consolidated financial statements of the Company. The selected information is
qualified in its entirety by reference to, and should be read in conjunction
with, such consolidated financial statements, related notes and "Management's
Discussion and Analysis of Results of Operations and Financial Condition" under
Item 9. inhistorical facts, this report.
SELECTED FINANCIAL INFORMATION
(In thousands of U.S. dollars except per share data)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Income Statement Data(1)
- ------------------------
Net sales $145,054 $101,649 $132,854 $108,234 $121,240
Gross margin 24,980 24,710 34,724 22,185 23,152
Net income 11,798 3,529 30,839 9,416 11,419
Dividends declared 2,942 2,829 786 243 120
Per share amounts
- -----------------
Basic earnings per share(2) $ 1.26 $ 0.34 $ 3.70 $ 1.17 $ 1.42
Diluted earnings per share(3) $ 1.25 $ 0.34 $ 3.68 $ 1.16 $ 1.40
Dividend declared $ 0.32 $ 0.28 $ 0.10 $ 0.03 $ 0.015
Balance Sheet Data(1)
- ---------------------
Current assets $ 94,436 $ 97,015 $133,022 $ 46,609 $ 47,011
Property, plant and
equipment - net 44,717 32,445 32,442 36,487 27,635
Total assets 158,747 147,228 167,788 88,391 79,281
Current liabilities 33,171 19,476 19,552 21,401 19,108
Non-current liabilities 8 56 - - -
Shareholders' equity 125,568 127,696 148,236 66,990 60,173
- ------------
(1) Assets and liabilities are translated into United States dollars using
the appropriate rates of exchange at the balance sheet date. Income and
expenses are translated at the average exchange rate in effect during
the year.
(2) For purposes of calculating basic earnings per share, the weighted
average number of common shares outstanding for the years ended December
31, 1999, 1998, 1997, 1996, and 1995 were 9,328,213, 10,316,510,
8,324,320, 8,040,497, and 8,018,252, respectively.
(3) For purposes of calculating fully diluted earnings per share, the
weighted average number of common shares outstanding for the years ended
December 31, 1999, 1998, 1997, 1996, and 1995 were 9,416,780,
10,351,100, 8,391,290, 8,142,131, and 8,171,750, respectively.
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ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This section contains forward-looking statements involving risks and uncertainties. The Company'sYou can identify these statements by forward-looking words including “expect,” “anticipate,” “believe,” “seek,” “estimate,” “intends,” “should,” or “may.” Forward-looking statements are not guarantees of our future performance or results and our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the section of this Report entitled Item 1.
Description of Business - "Risk Factors".3. Key Information – “Risk Factors.” This section should be read in conjunction with the Company'sour Consolidated Financial Statements included elsewhere herein.
RESULTS OF OPERATIONS
General
The Company derives its revenuesas Item 18 of this Report.
Operating Results
Overview
We are an electronics manufacturing and design services provider to a select group of the world’s leading original equipment manufacturers, or OEMs, of telecommunication and consumer electronic products. Our largest customers include Epson Precision (HK) Ltd., Sony Ericsson Mobile Communications AB and Texas Instruments Incorporated. Through our electronics manufacturing services, or EMS, operations, we manufacture electronic components and subassemblies, including liquid crystal display, or LCD, panels, transformers, LCD modules and radio frequency, or RF modules. These components are used in various electronic products, including cellular phones, laptop computers, digital cameras, copiers, fax machines, electronic toys and microwave ovens. We also manufacture finished products, including cordless phones, palm-sized PC’s, personal digital assistants, electronic dictionaries, calculators and digital camera accessories for use with cellular phones.
We assist our OEM customers in the design and development of their products and furnish full turnkey manufacturing services that utilize advanced manufacturing processes and production technologies. Our services include hardware and software design, component purchasing, assembly of finished electronic products, or electronic subassemblies and post-assembly testing. We also provide original design manufacturing, or ODM, services, in which we design and develop proprietary products that are sold by our OEM customers using their brand name.
| Net Sales and Cost of Sales |
We derive our net sales principally from manufacturing services that we provide to OEMs of telecommunications and consumer electronic products. The market for the products we manufacture is generally characterized by declining unit prices and short product life cycles. Sales to our OEM customers are primarily based on purchase orders we receive from time to time rather than firm, long-term purchase commitments from our customers. We recognize sales, net of product returns and warranty costs, typically at the time of product shipment or, in some cases, as services are rendered.
A substantial percentage of our net sales are to a small number of customers. During the years ended December 31, 2000, 2001 and 2002, sales to our ten largest customers were 90.2%, 83.7% and 84.8% of our net sales, respectively. Furthermore, our customers accounting for 10% or more of our net sales aggregated
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Our production is typically based on purchase orders received from OEM customers. However, for certain customers we will occasionally purchase raw materials based on such customers’ rolling forecasts. Purchase orders are often supported by letters of credit or written confirmation from our OEM customer. We generally do not obtain firm, long-term commitments from our customers. Uncertain economic conditions and our general lack of long-term purchase commitments with our customers make it difficult for us to accurately predict our revenue over the longer term. Even in those cases where customers are contractually obligated to purchase products from us or to repurchase unused inventory from us, we may elect not to immediately enforce our contractual rights because of the long-term nature of our customer relationships and for other business reasons, and instead may negotiate accommodations with customers regarding particular situations.
We did not suffer a material loss resulting from the cancellation of OEM customer orders in 2000 or 2002. In 2001 however, we made an inventory provision of $3.8 million to cost of sales for slow moving raw materials relating to cancelled, reduced or delayed orders. Subsequently, we were able to use some of these raw materials in production or we received compensation for the unused raw materials from certain of our customers, resulting in a partial reversal of $2.0 million of the provision in 2002. Of the remaining $1.8 million of slow-moving inventory, $1.2 million was scrapped and $600,000 will be scrapped in the next six months.
| Gross Margins |
Our gross margins and operating income generally improve during periods of high-volume and high-capacity utilization in our manufacturing facilities and decline during periods of low-volume and low-capacity utilization. Over the last several years our gross profit margins have declined substantially, from 24.3% in 1998, to 17.2% for 1999, to 14.8% for 2000, to 12.8% in 2001 and increasing to 16.1% in 2002. Before the $3.8 million inventory provision in 2001 and our subsequent reversal of $2.0 million of this provision in 2002 discussed above, our gross margin was 14.5% in 2001 and 15.3% in 2002.
An increased mix of more complex products that generally have relatively high material costs as a percentage of total unit costs has historically been a factor that has adversely affected our gross margins. This is the primary reason for the decline in our gross margins between 1998 and 2001. During this period, we diversified our product mix from predominantly low complexity electronic products, including calculators and electronic dictionaries, to include more complex components and subassemblies, like LCD modules. We believe our gross margin improved in 2002 as a result of the experience we acquired in manufacturing these more complex products as we changed our strategic focus. Despite the lower gross margin on more complex products, we believe that the opportunity for growth in the demand for these complex products justifies the shift in our strategic focus. Furthermore, we believe that the manufacturing processes and know-how that we have developed from producing more complex products are a competitive advantage for us relative to many of our competitors.
The increased costs associated with developing advanced manufacturing techniques to produce complex products on a mass scale and at a low cost has also negatively impacted our gross margins. For example, in our initial production runs of LCD modules we experienced low production yields and other inefficiencies that caused our gross margin to decrease. Although we believe we have improved the efficiency and quality of our manufacturing processes relating to LCD modules, we may not be able to improve or maintain our gross margin for these products. Furthermore, in December 2002 we began to produce RF modules, and, in January 2003, we began to produce color and thin film transistor, or TFT, LCD modules, each a complex component used in a variety of devices. The increased costs associated with manufacturing these products and other new complex products could have a negative impact on our future gross margins. The complex manufacturing processes involved in the production of complex products is also capital intensive thereby increasing our fixed overhead costs.
29
| Selling, General and Administrative Expenses |
Our selling, general and administrative, or SG&A, expenses, consist primarily of salary and benefits, depreciation and amortization of our non-manufacturing fixed and intangible assets, office expenses, and professional fees.
Research and Development
We invest in research and development for manufacturing and assembly technology that provide us with the potential to offer better and more technologically advanced services to our OEM customers or assist us in the design and development of future products for them. We plan to continue acquiring advanced design equipment and to enhance our technological expertise through continued training of our engineers and further hiring of qualified system engineers. These investments are intended to improve the speed, efficiency and quality of our manufacturing processes.
Operating Realignment
In 2001, we restructured certain of our operations to better align our manufacturing, engineering and administrative resources. Related to this restructuring, we incurred $300,000 of costs related to employee severance charges that were included in cost of sales. We also incurred severance charges of approximately $700,000 related to the elimination of certain administrative positions that were included in selling, general and administrative expenses in that year.
Income Taxes
Our principal operations, which are conducted through subsidiaries, are in Hong Kong and China. We calculate the provision for current income taxes of our subsidiaries operating in Hong Kong by applying the current rate of taxation of 16% to the estimated taxable income earned in or derived from Hong Kong during the period.
The basic corporate tax rate for Foreign Investment Enterprises in China, such as our China subsidiaries, is currently 33% (30% state tax and 3% local tax). However, because all of our China subsidiaries are located in Shenzhen and are involved in production operations, they qualify for a special reduced state tax rate of 15%. In addition, the local tax authorities in the regions in which our subsidiaries operate in Shenzhen are not currently assessing any local tax. Moreover, several of our China subsidiaries are entitled to certain tax benefits and certain of our China subsidiaries have qualified for tax refunds as a result of reinvesting their profits earned in previous years in China for a minimum period of five years.
Efforts by the Chinese government to increase tax revenues could result in decisions or interpretations of the tax laws by the Chinese tax authorities, which are unfavorable to us and which increase our future tax liabilities, or deny us expected refunds. Changes in Chinese tax laws or their interpretation or application may subject us to additional Chinese taxation in the future.
Strategic Investments
An important element of our strategy is to make investments in companies that provide the potential to complement our existing products and services, become new customers, augment our market coverage and sales ability, enhance our technological capabilities and expand our service offerings. We account for investments of less than 20% under the cost method and we account for investments between 20% and 50% under the equity method. Our material investments over the last five years include:
Alpha Star/ JCT Wireless. In January 2003 we invested $10.0 million for a 25% equity interest in Alpha Star Investments Ltd., the ultimate parent of Hong Kong based JCT Wireless Technology Company Limited, or JCT. JCT is engaged in the design, development and marketing of wireless communication terminals and wireless application software and is using us to manufacture wireless communication terminals and their related RF modules.
30
TCL Group. Over the period from September 2000 through November 2002, we made three investments in the TCL Group of companies and disposed of a portion of one investment. The TCL Group of companies is a leading OEM for numerous consumer electronic and telecommunications products in the domestic Chinese market.
| • | In September 2000, we made a strategic investment of $2.0 million to acquire a 5% indirect equity interest (through a 25% direct equity interest in Mate Fair Group Limited) in both TCL Mobile Communication (HK) Co., Ltd. and Huizhou TCL Mobile Communication Co., Ltd., or together known as TCL Mobile. TCL Mobile is engaged in manufacturing, distributing and trading of digital mobile phones and accessories in China and overseas markets. In October 2002, we began to provide TCL Mobile with LCD modules used in its mobile phones. However, sales to TCL Mobile were not material for 2002. | |
| • | In January 2002, we acquired a 6% equity interest in TCL Corporation (formerly known as TCL Holdings Corporation Ltd.), the parent of the TCL Group of companies, for approximately $12.0 million. | |
| • | In November 2002, Mate Fair Group Limited sold a portion of its equity interest in Huizhou TCL Mobile Communication Co. Ltd. for which we received proceeds of approximately $10.4 million, reducing our indirect equity interest (held through Mate Fair Group Limited) in TCL Mobile to approximately 3%. | |
| • | In November 2002, we invested $5.1 million in 3% convertible notes of TCL International Holdings Limited that are due in November 2005. TCL International Holdings Limited is another company in the TCL Group and is publicly listed on the Hong Kong Stock Exchange. |
Deswell Industries. In September 2000, we purchased 500,000 common shares in Deswell Industries Inc., a Nasdaq-listed company, representing approximately 9% of the outstanding shares of Deswell at the time of the purchase for an aggregate of $7.5 million. Deswell is a manufacturer of injection-molded plastic parts and components, electronic products and subassemblies and metallic molds and accessory parts for OEMs and contract manufacturers. During the first quarter of 2002, we sold our Deswell shares in the open market for aggregate proceeds of $10.1 million.
Group Sense. In May 1998, we acquired 20% of the outstanding shares of Group Sense (International) Limited, a Hong Kong public listed company, for cash of $16.3 million, which was reduced by a pre-acquisition dividend of $460,000. Group Sense and its subsidiaries manufacture consumer electronics products. During the period from February to November 2000, we disposed of our Group Sense shares for cash aggregating $28.1 million.
Albatronics. In December 1998, we acquired slightly over 50% of the outstanding shares of Albatronics (Far East) Company Limited, a Hong Kong public listed company, for cash of approximately $10.0 million. Albatronics and its subsidiaries were engaged in the trading of electronic components and manufacturing of consumer electronics products. Despite our direct cash investment, Albatronics’ financial position weakened dramatically and it became unable to pay its liabilities as they came due. As a result, we wrote off our entire investment in Albatronics.
Toshiba Joint Venture
In March 2000, we formed a joint venture with Toshiba Battery Company Ltd. called BPC (Shenzhen) Co., Ltd., or BPC, to manufacture rechargeable lithium ion battery packs at our manufacturing complex in Shenzhen, China. Toshiba Battery Company Ltd. owned a 13% interest in BPC and we owned the balance of BPC for a cash investment of $1.3 million. During 2000 and 2001 and from January 1 to April 30, 2002, we recognized net sales of $6.2 million, $21.1 million, and $7.8 million, respectively, from Toshiba and its related companies. In 2002, we sold our 87% joint venture interest in BPC and a related manufacturing license to a Toshiba related company for an aggregate of $2.9 million, resulting in a gain of $77,000.
31
JIC Group Acquisition
We acquired J.I.C. Group (BVI) Limited, or the JIC Group, in October 2000 for $32.8 million. We paid a portion of the purchase price to the seller by issuing approximately 1.16 million of our common shares and paid $11.0 million in cash. The JIC Group is engaged in the manufacture and marketing of transformers and LCD panels, a key component for a variety of consumer electronic products. We accounted for the acquisition of the JIC Group under the purchase method of accounting and the results of the JIC Group’s operations have been consolidated with our results since the date of its acquisition.
JIC Group Minority Interest
In June 2002, through a restructuring of our interest in the JIC Group, we arranged for the listing of the JIC Group on The Stock Exchange of Hong Kong Limited. As a result, our effective interest in the JIC Group reduced from 100% to 92.9%. However, our interest in the JIC Group became publicly tradable shares on the Hong Kong Stock Exchange. In the second quarter of 2002, we accounted for the restructuring by the creation of a minority interest and a comparable reduction in the value of the net assets of JIC. We discussed the accounting treatment of the JIC restructuring in our consolidated financial statements for the six months ended June 30, 2002 with HLB Hodgson Impey Cheng, our auditor at the time. We believed, and HLB concurred, at the time we released our consolidated financial statements for the six months ended June 30, 2002 that our accounting treatment complied, where applicable, with the relevant generally accepted accounting principles of Hong Kong and the United States.
During the third quarter, in connection with this transaction we were then considering, we were requested to engage Deloitte Touche Tohmatsu to review our interim operations for the six months ended June 30, 2002. On October 23, 2002, Deloitte Touche Tohmatsu communicated that, based on its review, the financial results for the six months ended June 30, 2002 may be materially misstated as a result of a departure from generally accepted accounting principles with respect to the absence of a $1.5 million goodwill charge relating to the creation of the 7.1% minority interest in our subsidiary, JIC. As a result, management and our Board of Directors again discussed the accounting treatment with HLB. Shortly thereafter, HLB resigned as our auditors for unrelated reasons described in “Change in Public Accountants”. In doing so, HLB provided us with no additional information as to the appropriate accounting treatment for the $1.5 million goodwill in question and suggested that the issue would most appropriately be addressed by the independent auditors that succeeded them.
We brought the issue to the attention of Grant Thornton, whom we had retained as our independent auditors in December 2002. While we believed that our original accounting was accurate, based on our consultations with Grant Thornton, we determined that it would be more prudent and conservative to include a charge of $1.5 million in other income/(expense), net in 2002. We then decided to revise our previously issued financial information issued in the second quarter of 2002 in order to reflect the charge for the 7.1% JIC minority interest, which we announced in a press release issued before the market opened on February 18, 2002.
Operating Segments
Our operations are generally organized in two segments, Consumer Electronics Products, or CEP, and LCD panels and transformers, or LPT. The activities of our LPT segment relate primarily to our JIC subsidiary that we acquired in October 2000. Prior to our acquisition of JIC, we operated as a single segment; therefore, our comparison of operating results for the years ended December 31, 2001 and 2000 presented below is not described on a segment basis.
Consumer Electronics Products. Our CEP segment is primarily engaged in the manufacture and assembly of electronic components, subassemblies and finished products for OEMs of electronic and telecommunications products. The electronic components and subassemblies that our CEP segment produces are primarily LCD modules used in a wide variety of consumer electronic products and subassemblies for OEM
customers in the electronics industry. Products manufactured by Nam Tai include
telecommunication products, palm-sized PC's,including cellular phones, personal digital assistants, linguistic products, calculators, smart card readersor PDAs, digital cameras and various components
including LCDmicrowave ovens. In December 2002, our CEP segment also began producing RF modules, and in the near future, lithium ion rechargeable battery
packs which are used in cellular phones laptopand other electronic devices with wireless
32
LCD Panels and Transformers. Our LPT segment manufactures LCD panels for use in numerous electronic products, including watches, clocks, calculators, pocket games, PDAs and cellular and wireless telephones. The transformers produced by our LPT segment are used in home appliances, telecommunications equipment, computers electronic toys and household appliances.computer peripherals.
Seasonality
Historically, our sales and operating results are often affected by seasonality. Sales of calculators, personal organizers and linguistic products are often higher during the second and third quarters in anticipation of the start of the school year and Christmas buying season. Similarly, our consumer services for electronics products have historically been lower in the first quarter resulting from both the closing of our factories in China for the Chinese New Year holidays and the general reduction in sales following the holiday season. As we have diversified our services for complex components, we expect that seasonality may be less of a factor affecting our business.
Application of Critical Accounting Policies
The preparation of our financial statements and related disclosures in conformity with generally accepted accounting principles in the United States requires management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
| Revenue Recognition |
Revenue from sales of personal organizers, linguistic products is generally recognized when the title is passed to customers upon shipment and calculatorswhen collectibility is assured. Provision for discounts and rebates to its OEM customers, will continue to be an important line of
business for the Company for the next several years. Management expects
telecommunication products, subassemblies, components,returns and other products, along
with new products will contribute to an increasing proportion of total revenueadjustments are provided for in the future. See Item 1. Description of Business -- Customers and Marketing.
The consumer electronics industry is very competitive andsame period the Company is
continuously under pressure to lower the selling price of its existing product
lines. In response to these pressures, the Company seeks to reduce its material
costs by negotiating lower prices on components and upgrading its technology and
human resources in order to be capable of manufacturing more advanced and
specialized products with higher unit margins. It also strives to improve
customer and supplier relations and production quality. The Company desires to
produce more advanced and specialized products as management believes that there
is more growth potential in more advanced products due to the complexity
involved in manufacturing and the lower number of direct competitors. There can
be no assurance that the Company will be successful in obtaining business for
such products and failure to move into more advanced products may result in the
Company facing increasing competition and reduced profit margins.
The Company moved its manufacturing operations to China in 1987 and
derives substantially all of its operating income from these operations. Nam Tai
plans to continue increasing the scope of its operations and investment in
China.
Under current British Virgin Islands law, Nam Tai is not subject to tax
on its income. Most of the Company's operating profits accrue in China, where
its effective tax rate is 10%, and in Hong Kong, where the corporate tax rate on
assessable profits is currently 16% in 1999. The Company receives tax credits in
China related to its reinvestment of profits on China operations into share
capital and tax benefits for being a "High and New Technology Enterprise". This
reduces the overall tax payable by the Company. See Note 8 of Notes to
Consolidated Financial Statements.
The Company values its inventorysales are recorded.
| Inventory Reserves |
Our inventories are stated at the lower of cost andor market value. Until March 1997,We determine cost on the Company usedfirst-in, first-out basis. Our industry is characterized by rapid technological change, short-term customer commitments and rapid changes in demand, as well as many other lower of cost or market considerations. We make provisions for estimated excess and obsolete inventory based on our regular reviews of inventory quantities on hand and the latest forecasts of product demand and production requirements from our customers. If actual market conditions or our customers’ product demands are less favorable than those projected, additional provisions may be required. Our current reserve for slow moving or obsolete raw materials is $1.5 million. We did not make any material provisions relating to inventory for 2002.
In 2001, we made an inventory provision of $3.8 million for slow-moving raw materials relating to cancelled, reduced or delayed orders. However, subsequently, we were able to use some of these raw materials in production or we received compensation for the unused raw materials from certain of our customers, resulting in a standard cost systempartial reversal of $2.0 million of the provision in 2002. Of the remaining $1.8 million of slow-moving inventory, $1.2 million was scrapped and $600,000 will be scrapped in the next six months.
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| Impairment or disposal of long-lived assets |
In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”, that was applicable to value its
inventory, whichfinancial statements issued for fiscal years beginning after December 15, 2001. The FASB’s new rules on asset impairment supersede SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and portions of Accounting Principles Board Opinion No. 30,“Reporting the Results for Operations”. The statement requires a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is purchased in U.S. dollars, Japanese yenan important distinction since such assets are not depreciated and Hong Kong
dollars. Under this system, the Company revalued its inventoryare stated at the lower of fair value or carrying amount. The statement also requires expected future operating losses from discontinued operations to be recorded in the period(s) in which the losses are incurred, rather than as of the measurement date as previously required. On January 1, 2002, we adopted SFAS No. 144. The adoption of SFAS No. 144 did not have any significant impact on our financial position and results of operations. We continually review our long-lived assets for impairment. In 2002, we determined that long-lived assets were not impaired.
| Goodwill |
The excess of the purchase price over the fair value of net assets acquired is recorded on our consolidated balance sheet as goodwill. As of December 31, 2002, we had goodwill of $21.3 million, the majority of which was from our acquisition of JIC in 2000. Prior to January 1, 2002, we amortized goodwill to expense on a straight-line basis over various periods ranging from 4 to 15 years.
In June 2001, the Financial Accounting Standard Board, or the FASB, issued SFAS No. 142,“Goodwill and Other Intangible Assets”. This statement provides that goodwill and other intangible assets with indefinite lives will not be amortized but will be evaluated for impairment on an annual basis. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. We adopted SFAS No. 142 on January 1, 2002.
In order to assist us in our evaluation of goodwill upon adoption of SFAS No. 142, we retained the services of an independent appraisal firm, whose reports assisted us in determining that our goodwill was not impaired as of January 1, 2002. After our impairment evaluation, we determined that $339,000 of the net assets we acquired in 1999 from Micro Business Systems Industries Company Limited, a telecommunication business, was obsolete and recorded an impairment for that amount in our financial statements at December 31, 2002.
| Income Taxes |
We provide for all taxes based on profits whether due at year end or estimated to become due in future periods but based on profits earned to date. However, under the current tax legislation in the PRC, we have reasonable grounds to believe that income taxes paid by Namtai Electronic (Shenzhen) Co., Ltd., Zastron Electronic (Shenzhen) Co. Ltd (formerly known as Zastron Plastic & Metal Products (Shenzhen) Ltd), Shenzhen Namtek Company Limited, Jieyao Electronics (Shenzhen) Co., Ltd. and Jetup Electronic (Shenzhen) Co., Ltd. in respect of each quarter based upon actual costsany year would be refunded after the profits earned in that year are reinvested in the business by way of capital injection. Accordingly, any PRC tax paid by these subsidiaries during the year is recorded as an amount recoverable at the balance sheet date when an application for reinvestment of profits has been filed and the resulting standard cost revaluation
flowed through cost of sales when the inventory was sold. Since March 1997, the
Company uses a cost system whichrefund is expected unless there is an actual cost system based on FIFO
inventory flow.
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The first quarter is historically a slower sales period for the Company
as its factories are closed for two weeks for the Chinese New Year holiday as is
customary in China. The following table sets forth selected operating data for
the quarters indicated. This information has been derivedindication from the unaudited
consolidated financial statementsPRC tax authority that the refund will be refused. Deferred income taxes are provided to recognize the effect of the Companydifference between the financial statement and income tax bases of measuring assets and liabilities.
Investments
We apply the equity method of accounting for investments in affiliates when we have a 20% to 50% interest in those entities. Under the equity method, original investments are recorded at cost and adjusted by our share of undistributed earnings or losses of these entities, which results in our recording corresponding earnings or losses in our income statement. Nonmarketable investments in which we have less than 20% interest and in which we do not have the opinionability to exercise significant influence over the investee are
34
Operating Results
The following table presents selected consolidated financial information stated as a percentage of net sales for the years ended December 31, 1999, 1998,2000, 2001, and 1997:
2002 (certain amounts may not calculate due to rounding and amounts may not add due to rounding).
| 2000 | 2001 | 2002 | ||||||||||||||||||||||||||
| Total | CEP | LPT | Total | CEP | LPT | Total | ||||||||||||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||
| Cost of sales | (85.2 | ) | (88.3 | ) | (81.0 | ) | (87.2 | ) | (83.4 | ) | (86.5 | ) | (83.9 | ) | ||||||||||||||
| Gross profit | 14.8 | 11.7 | 19.0 | 12.8 | 16.6 | 13.5 | 16.1 | |||||||||||||||||||||
| Selling, general and administrative expenses | (8.3 | ) | (8.3 | ) | (15.2 | ) | (9.4 | ) | (7.4 | ) | (8.6 | ) | (7.6 | ) | ||||||||||||||
| Research and development expenses | (1.6 | ) | (1.4 | ) | (0.6 | ) | (1.2 | ) | (1.1 | ) | (1.5 | ) | (1.1 | ) | ||||||||||||||
| Impairment of goodwill | — | — | — | — | (0.2 | ) | — | (0.2 | ) | |||||||||||||||||||
| Income from operations | 4.9 | 2.0 | 3.2 | 2.2 | 7.9 | 3.4 | 7.2 | |||||||||||||||||||||
| Equity in (loss) income of affiliated companies | (0.1 | ) | 0.9 | — | 0.8 | 5.4 | — | 4.6 | ||||||||||||||||||||
| Other income (expense) | �� | 6.5 | 0.5 | 5.1 | 1.2 | (2.4 | ) | (3.4 | ) | (2.6 | ) | |||||||||||||||||
| Interest expense | (0.1 | ) | (0.1 | ) | (0.0 | ) | (0.1 | ) | (0.4 | ) | (0.2 | ) | (0.3 | ) | ||||||||||||||
| Income (loss) before income taxes and minority interests | 11.2 | 3.3 | 8.3 | 4.1 | 10.5 | (0.2 | ) | 8.9 | ||||||||||||||||||||
| Income taxes benefit (expense) | 0.0 | (0.1 | ) | (0.2 | ) | (0.1 | ) | (0.4 | ) | (0.2 | ) | (0.3 | ) | |||||||||||||||
| Income (loss) before minority interests | 11.2 | 3.2 | 8.1 | 4.0 | 10.1 | (0.4 | ) | 8.6 | ||||||||||||||||||||
| Minority interests | 0.0 | (0.1 | ) | — | (0.1 | ) | — | (0.1 | ) | (0.1 | ) | |||||||||||||||||
| Net income (loss) | 11.2 | % | 3.1 | % | 8.1 | % | 3.9 | % | 10.1 | % | (0.5 | )% | 8.5 | % | ||||||||||||||
| Year ended December 31, |
Net Sales.Our net sales remained flat, increasing by 0.9%, to Year ended December 31, 1998
Nam Tai's sales$236.0 million for 2002 compared to $234.0 million for 2001. Sales in the CEP segment increased by 43%1.4% to $145,054,000$200.8 million for 2002 compared to $198.0 million for 2001. The primary reason for the increase was sales of digital camera accessories for cellular phones that we first produced in 2001 of approximately $39.8 million in 2002 compared to only $3.2 million in 2001, an increase of $36.6 million. This increase was partially offset by the sale of our joint venture interest in BPC (Shenzhen) Co., Ltd. to a Toshiba-related company on April 30, 2002 resulting in a decrease of our sales of approximately $13.2 million in 2002 as compared to sales in 2001. We also experienced decreased sales in 2002 of calculators, personal digital assistants, and linguistics products and LCD modules of $9.6 million, $6.7 million and $3.5 million, respectively, as compared to levels in 2001. We believe that these decreases resulted from pricing pressures and the completion of the lifecycle or obsolescence of certain of these products that were not replaced by comparable devices.
Sales in the LPT segment decreased by 1.9% to $35.3 million for 2002 compared to $36.0 million for 2001. The primary reason for the decrease in sales was the reduction in LCD panel selling price caused by market competition partially offset by an increase in the number of LCD panels sold.
Gross Profit. Our gross profit increased by 26.7%, to $38.1 million for 2002 from $30.0 million for 2001. Our gross profit margin also increased in 2002 to 16.1% from 12.8% in 2001. Before the inventory provision of $3.8 million in 2001 for slow-moving raw materials relating to cancelled, reduced or delayed orders and our subsequent reversal of $2.0 million of this provision in 2002 discussed below, our consolidated gross margin was 14.5% in 2001 and 15.3% in 2002.
35
Gross profit in the CEP segment increased 43.7% to $33.3 million, or 16.6% of net sales, for 2002 compared to $23.2 million, or 11.7% of net sales, for 2001. The primary reason for this increase was our inventory provision in 2001 of $3.8 million for slow-moving raw materials relating to cancelled, reduced or delayed orders within the CEP segment that was recorded in our cost of sales. In 2002, we were able to use some of these raw materials in production or we received compensation for the unused raw materials from certain of our customers, resulting in our partial reversal of $2.0 million of the provision to cost of sales in 2002. Before the inventory provision of $3.8 million in 2001 and our subsequent reversal of $2.0 million of this provision in 2002, our gross margin for the CEP segment was 13.6% in 2001 and 15.6% in 2002. Also contributing to the increase in gross profit in 2002 is a $300,000 non-recurring charge to our cost of sales in 2001 related to employee severance charges for direct labor in the CEP segment. In addition to these specific factors, our gross profit increased in 2002 due to our ability to negotiate advantageous price terms with certain of our suppliers and our focus on reducing overhead costs.
Gross profit in the LPT segment decreased 30.7% to $4.8 million, or 13.5% of net sales, for 2002 compared to $6.8 million, or 19.0% of net sales, for 2001 as a result of lower selling prices for LCD panels driven by increased competitor as well as increased depreciation charges in relation to a new STN LCD panel line that commenced operations in June 2002.
Selling, general and administrative expenses.SG&A expenses for 2002 decreased approximately $4.0 million to $18.0 million or, 7.6% of net sales, from $22.0 million or 9.4% of net sales in 2001.
SG&A expenses in the CEP segment decreased 9.6% to $14.9 million, or 7.4% of net sales, for 2002 compared to $16.5 million, or 8.3% of net sales, for 2001. This decrease was driven primarily by our cost realignment and tightened cost controls that reduced salaries and benefits to $6.0 million from $8.1 million in 2001. Our salaries and benefits expense in 2001 included $700,000 of restructuring expenses primarily related to severance for certain administrative positions that we eliminated. The decreases in our CEP segment were partially offset by increases in selling expenses of $600,000 due to implementation of a new commission incentive program in January 2002.
SG&A expenses in our LPT segment also decreased in 2002 to $3.0 million, or 8.6% of net sales, from $5.5 million, or 15.2% of net sales, in 2001. The decrease in SG&A expenses in our LPT segment in 2002 is primarily related to terminating the amortization of goodwill as a result of our adoption of the new accounting rule, SFAS No. 142, effective January 1, 2002. During the year ended December 31, 19992001 our amortization of goodwill in the LPT segment was approximately $1.6 million. SG&A expenses in our LPT segment were also lower in 2002 due to the decrease in stock option compensation expense of $839,000 in 2002 compared to $101,649,0002001.
Research and development expenses.Research and development expenses for 2002 decreased to $2.7 million or 1.1% of net sales, from $3.0 million, or 1.2% of net sales in 2001. On a segment basis, research and development expenses decreased in the CEP segment by $584,000, or 21.3%, due to a reduction in related staff, which was partially offset by an increase in the LPT segment of $316,000 in relation to the addition of a new STN LCD line for the development of new products, including the development of LCD panels for TCL Mobile.
Goodwill impairment.In 2002, we determined that $339,000 of unamortized goodwill related to our 1999 acquisition of a telecommunications company was impaired as the technology of the acquired company had become obsolete.
Income from Operations. Income from operations increased by approximately $11.9 million to $17.1 million, or 7.2% of sales, for 2002 compared to $5.1 million, or 2.2% of sales, for 2001. On a segment basis, the operating income of our CEP segment increased $12.0 million to $15.9 million, or 7.9% of net sales, in 2002 compared to $3.9 million, or 2.0% of net sales, in 2001. This increase in operating income is attributable to the increase in gross profit and decrease in SG&A expenses and R&D expenses described above. The operating income of our LPT segment remained constant at $1.2 million in both 2002 and 2001.
Equity in Income of Affiliated Companies. Equity in income of affiliated companies was $10.7 million in 2002 compared to $1.9 million in 2001. The income in 2002 includes $8.6 million, which represents our share of the gain from the sale by Mate Fair of a portion of its interest in TCL Mobile, and $2.1 million for our
36
Other Income/(Expense), net. Other expense, net, during the year ended December 31, 1998.
Sales increases were experienced in all product categories and2002 was $6.0 million. This amount included expenses of $5.2 million for all major
customers as a resultour provision of increased demand by end users. Management attributes
this growth in saleslegal contingencies related to the liquidation of Tele-Art Inc., $2.7 million of loss related to the creation of a minority interest in our JIC Group subsidiary, including the release of unamortized goodwill, $1.4 million of legal and professional fees related to the JIC minority interest transaction, $610,000 of finance charges related to the early repayment of a $12.9 million fixed term loan, $520,000 for release of unamortized goodwill of affiliated companies - Mate Fair $307,000 of finance charges and $771,000 of miscellaneous expenses primarily related to non-operating legal fees. These expenses were partially off set by gains of $3.3 million related to the partial recovery of a judgment debt in the Asian economy, increased production
capabilities resultingTele-Art case, net of expenses, $917,000 of dividend income primarily from itsour indirect investment in additional high-technology
equipment, expansionTCL Corporation $799,000 of interest income and $642,000 of realized gain from the Company's ODM business,disposal of marketable securities. The costs of defending the recently announced class action litigation could substantially increase our expenses in future periods, and entry into the
telecommunication business.
The Company's gross profit increased marginally to $24,980,000 for the
year ended December 31, 1999 from $24,710,000 for the year ended December 31,
1998. Nam Tai's gross profit failed to increase correspondingly with sales
because of the decrease in the gross profit margin to 17.2% in 1999 from 24.3%
in 1998. A number of reasons combined to lower gross profit margins including
(1) lowering unit prices caused by the increasingly competitive environment; (2)
a changing product mix towards more capital intensive products; (3) startup
learning costs associated with entry into the highly competitive
telecommunication business; (4) increased costs for material and costs
denominated in yen; (5) increased material costs resulting from increases in
world-wide demand as well as a reduction in supply from Taiwan after the
earthquake of September 21, 1999; (6) increased defect rates resulting from
technical difficulties with the Company's COG production; and (7) a write-off of
some slow moving inventory.
Selling, general and administrativeany adverse determination could be significant.
Interest Expense. Interest expenses for the year ended December
31, 1999 increased to $15,242,000 or 10.5% of sales from $13,246,000 or 13.0% of
sales in the year ended December 31, 1998.$790,000 for 2002 compared to $178,000 for 2001. The increase in absolute dollars
reflects increased direct selling expenses incurred as a result of the increase
in sales, amortizationinterest charges related to good will and advisors warrants, and
increased salary expenses incurred with the addition of the telecommunication
business. The decrease in such expenses as a percent of sales wasis the result of the Company maintaining tight control over fixed general and administrative
expenses during a time of increasing sales.
Research and development expenses for the year ended December 31, 1999
increased to $2,624,000 or 1.8% of sales from $1,691,000 or 1.6% of sales$15 million in long-term debt that we obtained in the year ended December 31, 1998. Researchfourth quarter of 2001 and development expenses
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26
increased as a result of increased customer orders that involved
non-reimbursable expenses for research and development work. The increase in
research and development expenses also reflects additional costs from the
Company's newly established Korean branch office.
Normally, the Company does not have to pay custom duties in China on
foreign purchases which are incorporated into manufactured goods that are
subsequently exported. The non-recurring income amount in 1999 of $848,000
represents the write-back of the remaining balance of the provision on the
settlement of a non-recurring customs assessment$4.5 million obtained in the PRC which was recorded
as non-recurring expensesecond quarter of $1,445,000 in 1998.
Loss on disposal of property, plant and equipment was $143,000 for the
year ended December 31, 1999 as compared to $29,000 for the year ended December
31, 1998.
Gain on disposal of property, plant and equipment was $302,000 for the
year ended December 31, 1999 as compared to $795,000 for the year ended December
31, 1998. The gains in both 1999 and 1998 related primarily to the sale of
portions of the Company's landholdings in Hong Kong. See the discussion
regarding the sale in 1999 under Liquidity and Capital Resources below.
For the year ended December 31, 1998 a provision for the impairment of
value of $8,271,000 was made to reduce to a nominal carrying value Nam Tai's
investment in Albatronics. This nominal amount was written off in 1999 as
Albatronics entered voluntary liquidation in August 1999. See the discussion
regarding the Albatronics investment under Liquidity and Capital Resources
below.
Other income decreased to $2,521,000 for the year ended December 31,
1999 compared to $4,892,000 for the year ended December 31,1998. Other income in
1999 consisted of interest income of $3,330,000, gains on marketable securities
of $144,000, and other miscellaneous income/2002.
Income Taxes. Income tax expenses of $337,000. Such gains
were offset by the write-off of a $566,000 option premium, exchange difference
expenses of $413,000 and bank charges of $311,000.
The income tax benefit of $60,000$773,000 for the year ended December 31, 19992002 compares to an expense of $1,040,000$227,000 for the prior year, withyear. The increase is primarily the change
resultingresult of our not receiving tax refunds for two of our PRC entities for taxes paid in previous years that we have normally been eligible to receive in the past.
Minority Interest. Minority interest decreased $66,000, or 28.7%, to $164,000 in 2002 from $230,000 in 2001. Minority interest in 2002 included $107,000 from the reversalminority shareholder’s share of profits of BPC from January 1, 2002 through April 30, 2002, the date we sold BPC and $57,000 from the minority shareholder’s share of profits of JIC Group from June 4, 2002, the date of listing, through December 31, 2002. Minority interest in 2001 represented an over-provision of tax expense in 1998. The
income tax expense relates to income taxes on the Hong Kong and China
operations. (See note 8entire year of the Notes to the Consolidated Financial Statements.)
In the past, the Company received 100% tax credits in China related to its
reinvestmentminority shareholder’s share of profits into additional share capital of the China subsidiaries.
This reduced the overall tax payable by the Company in China. For the years 1993
through 1995, the Company received a full refund of China taxes paid as a result
of reinvesting its profits into share capital. As a result of its expectations
that it would receive a full refund of income taxes attributable to China
operations as it had in the past, the Company recorded tax payments in 1996 and
1997 as income tax recoverable. In early 1999, the Company learned that for the
1996 and 1997 tax years it would not receive a 100% tax refund on taxes already
paid, and was required to reduce the income tax recoverable by the amount of the
refund that was not obtained. For 1996, the Company received tax refunds of
$506,000 on taxes paid of $917,000. For 1997, the Company received a refund of
$1,322,000 on taxes paid of $1,769,000. A full refund was denied for 1997 and
1996 because the large intercompany receivable between the China subsidiary and
the Hong Kong subsidiary was not considered by the China Tax Authorities to be a
reinvestment of profits. For years 1999 and 1998 the Company paid taxes of
$606,000 and $1,391,000 and has not received a refund to date as its application
for reinvestment of profits is still in progress.BPC’s profit.
Net Income. Net income increased $8,269,000by $11.0 million, or 234%121.4%, to $11,798,000 (8.1%$20.0 million or 8.5% of sales)net sales, for the year ended December 31, 19992002 compared to $3,529,000 (or 3.5%$9.0 million, or 3.9% of sales)net sales, for the year ended December 31, 1998.2001. This resulted in diluted earnings per share for the year ended December 31, 19992002 of $1.25$1.86 ($1.261.89 basic) compared to diluted earnings per share of $0.34$0.87 ($0.340.88 basic) for 2001. Net income for the year ended December
31, 1998.CEP segment increased 230% to $20.2 million for 2002 compared to $6.1 million for 2001. The increase in CEP’s net income and earnings per share is the result of:
(i) anof a higher gross profit margin, the increase in sales sufficientequity in income from affiliated companies, and decreased general and administrative expenses described above. Net Income for the LPT segment decreased by $3.1 million or 106.6% to cover the lower profit margins; (ii)
recoverya loss of a portion of the 1998 non-recurring customs assessment; (iii) the
$8,271,000 provision for impairment of value for Albatronics in 1998; (iv) the
$1,708,000 share of Albatronics losses in 1998; (v) reduced income tax expenses;
and (vi) an increase in Nam Tai's share of Group Sense (International) Limited's
("Group Sense")$191,000 compared to net income of $2.9 million for 2001. The net loss position in year 2002 for LPT was the first six monthsresult of fiscal 1999 (ending
September 30, 1999) of $1,146,000. The increase in net income was partially
offset by; (i) increases in general, administration and selling expenses; (ii)
increases in research and development expenses; and (iii) reduced interest
income.
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The diluted weighted average number of common shares outstanding
decreased to 9,417,000 (basic 9,328,000) for the year ended December 31, 1999
from 10,351,000 (basic 10,317,000) for the year ended December 31, 1998
reflecting the issuance of 36,500 common shares upon exercise of employee stock
option, the issuance of 10,000 common shares as employment compensation, the
redemption of 138,500 shares registered in the name of Tele-Art Inc.lower gross profit margin, and the repurchaserelease of 879,700 common shares pursuant to the Company's repurchase
program.unamortized goodwill as described above.
Year ended December 31, 19982001 Compared to Year ended December 31, 1997
Nam Tai's2000
Net Sales. Our net sales increased by 9.5% to $234.0 million for 2001 compared to $213.7 million for 2000. We attribute this growth in sales to our acquisition of the JIC Group, full year results from our battery pack joint venture and our focus on manufacturing key components for telecommunication products and other complex components and subassemblies resulting from our investment in high-technology manufacturing equipment. The acquisition of the JIC Group in October 2000 contributed $36.0 million in sales for 2001 compared to $10.3 million in 2000. The startup of our battery pack joint venture with a Toshiba-related company in June of 2000 contributed $21.1 million to our net sales in 2001 compared to $6.2 million for 2000. Sales of subassemblies and components, particularly LCD modules for mobile phones, increased by approximately $14.7 million in 2001 compared to 2000. Sales increases in these categories were partially offset by sales of calculators, telecommunication products, and PDAs and linguistic products, which decreased by 24% to $101,649,000 for the year ended
December 31, 1998$23.4 million, $9.3 million and $4.3 million, respectively, compared to $132,854,000 for the prior year ended December 31, 1997,
primarily due to the decrease in customer orders from all of its major
customers. As a result of the Asian economic turmoil, both sales quantities and
unit prices fell. Management believes that the quantity of products ordered by
Asian OEM customers fell as a result of reduced demand by end users. Sales also
declined as a result of reductions in unit prices. Management reduced unit
prices to maintain market share as a result of the increasingly competitive
environment, and it reduced unit prices to pass material and component cost
savings resulting from currency depreciations on to its OEM customers.
The Company'speriod.
Gross Profit. Our gross profit decreased 4.9% to $24,710,000$30.0 million for 2001 from $31.6 million for 2000. Our gross margin also decreased in 2001 to 12.8% from 14.8% in 2000. Our inventory provision of $3.8 million for
37
Selling, General and the fact that fixed depreciation overhead costs
accounted forAdministrative Expenses. For 2001, SG&A increased 24.5% to $22.0 million from $17.6 million in 2000. As a larger percentage of costnet sales, SG&A expense increased to 9.4% in 2001 from 8.3% in 2000. This increase reflected amortization charges related to the acquisition of sales.
Selling, generalJIC Group of $1.6 million in 2001 compared to $406,000 in 2000, the addition of JIC Group’s SG&A expenses, excluding goodwill amortization, of $3.0 million for an entire year in 2001 compared to $2.0 million for the fourth quarter of 2000, stock option compensation expense of $839,000 in 2001 compared to nil in 2000 and administrative expenses decreased to $13,246,000 or
13.0%various realignment charges, including employee severance charges, of sales from $15,348,000 or 11.6% of sales$700,000 in the year ended December 31,
1997. The decrease in absolute dollars principally reflected reduced direct
selling expenses incurred as a result of the decrease in sales. The increase in
such expenses as a percent of sales was the result of the Company having to
cover fixed general2001.
Research and administrative expenses during a time of declining
sales.Development Expenses. Research and development expenses for 2001 decreased 15.3% to $3.0 million or 1.2% of net sales from $3.5 million or 1.6% of net sales in 2000. The decrease was related to a reduction of some R&D related staff in 2001 as a percentagewell as the closure of sales were
essentially the same in 1998 and 1997 at 1.6% and 1.4% respectively. Research
and development expenses decreased to $1,691,000 in 1998 from $1,909,000 in 1997
in part because there were fewer customer orders that involved non-reimbursable
expenses forour Korean research and development work. Namtek,office in the Company's software
development subsidiary which beganlatter part of 2000.
Income from Operations. Income from operations decreased by approximately $5.4 million to $5.1 million, or 2.2% of sales, for 2001 compared to $10.5 million, or 4.9% of sales, for 2000. This decrease in early 1996, accountedoperating income is attributable to the decrease in gross profit and our increase in SG&A expense, as described above.
Equity in Income of Affiliated Companies. Equity in income of affiliated companies was $1.9 million for approximately 7%2001 compared to a loss of the research and development expenses$189,000 for 2000. The gain in 1998 and 14%2001 was primarily related to our indirect investment in TCL Mobile. Equity in loss of the
research and development expensesaffiliated companies in 1997. These expenses were recovered2000 was related to $18,000 gain from fees paid by third parties.
Normally, the Company does not have to pay custom dutiesour indirect investment in China on
foreign purchases which are incorporated into manufactured goodsTCL Mobile, that are
subsequently exported. During the last audit, China customs was not satisfied
with supporting documentation providedmade in September 2000 offset by the Company$207,000 loss on the write off of our investment in Shanghai Q&T Tech. Co., Ltd.
Other Income (Expense), net. Other income, net, decreased to $2.7 million for certain material
purchases of prior years. As a result, a non-recurring expense of $1,445,000 was
incurred relating to customs assessment in China in 1998.
Loss on disposal of property, plant and equipment was $29,000 for the
year ended December 31, 1998 as2001 compared to $1,198,000$13.9 million for the year ended
December 31, 1997. The loss in 1998 related primarily to the relocation of the
Canadian office and the write-off of the unamortized leasehold improvements.
Gain on disposal of property, plant and equipment was $795,000 for the
year ended December 31, 1998 as compared to $5,548,000 for the year ended
December 31, 1997. The gains in both 1998 and 1997 related primarily to the sale
of portions of the Company's landholdings in Hong Kong. (See the discussion
regarding the sale in 1998 under Liquidity and Capital Resources, below.)
A provision for the impairment of value of $8,271,000 was made to reduce
to a nominal carrying value Nam Tai's investment in Albatronics. (See the
discussion regarding the Albatronics investment under Liquidity and Capital
Resources below.)
Other income decreased to $4,892,000 for the year ended December 31,
1998 compared to $8,142,000 for the year ended December 31,1997.2000. Other income in 1998 consisted primarily2001 included unrealized gains on marketable securities of $1.6 million interest income of $5,047,000, a gain$1.2 million, foreign exchange gains of $1,207,000
on the disposal$530,000, and dividend income received from marketable securities of the Company's investment in Deswell Industries Inc.
("Deswell") and a gain of $394,000
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28
on foreign exchange. Such gains were$525,000 offset by the write-off of the $840,000
premiuma non-trade receivable of an option purchased by Nam Tai as a hedge against the devaluation$500,000, bank charges of the Hong Kong dollar against the U.S. dollar, unrealized losses of $468,000
incurred as a result of the decline in the market value of short-term
investments$333,000 and miscellaneous expenses of $196,000. Other$294,000. In 2000, other income in 1997 derived
principally fromwas comprised primarily of gains related to sales of investments of $10.8 million and interest income of $1,847,000 and gain on$3.3 million. The decrease in interest income from 2000 to 2001 was the sale of shares of
Deswell of $5,488,000. Interest income increased in 1998 as a result of lower cash balances and lower interest earned onrates in 2001 compared to 2000.
Interest Expense. Interest expenses rose to $178,000 for 2001 compared to $165,000 for 2000. The increase in interest charges is the proceeds receivedresult of $15.0 million in November 1997 from the sale of securitieslong-term debt that we obtained in the Company's rights and standby offerings.
fourth quarter of 2001 offset by a reduction in interest rates.
Income from continuing operations from consolidated companies before
income tax was $5,743,000 for the year ended December 31, 1998 compared to
$31,118,000 for the year ended December 31, 1997. The decrease of 82% was
primarily due to the 24% decrease in 1998 sales, tightening gross profit margins
and the provisions for the impairment of value of Albatronics.Taxes. The income tax expense of $1,040,000$227,000 for 2001 compares to a benefit of $33,000 for 2000. The primary reason for the year ended December 31,
1998 comparesincrease in 2001 was an increase in our taxable income compared to an expense2000.
Minority Interest. Minority interest changed $242,000 from a loss of $279,000 for$12,000 in 2000 to a profit of $230,000 in 2001. Minority interest in 2001 represented the prior year.minority shareholder’s share of BPC’s profit. The income tax
expense relates to income taxes onminority interest in 2000 represented the Hong Kong and China operations. In the
past the Company received 100% tax credits in China related to its reinvestment
of profits into additionalminority shareholder’s share capital of the China subsidiaries. This reduced
the overall tax payable by the Company in China. For the years 1993 through
1995, the Company received a full refundloss of China taxes paid as a result of
reinvesting its profits into share capital. As a result of its expectations that
it would receive a full refund of income taxes attributable to China operations
as it had in the past, the Company recorded tax payments in 1996 and 1997 as
prepayments. In early 1999, the Company learned that for the 1996 and 1997 tax
years it would not receive a 100% tax refund on taxes already paid, and was
required to reduce the prepayment by the amount of the refund that was not
obtained. For 1996, the Company received tax refunds of $484,000 on taxes paid
of $917,000. For 1997, the Company now expects to receive a refund of $1,329,000
on taxes paid of $1,769,000. Only $6,000 of the expected refund had been
received as of December 31, 1998. A full refund was denied for 1997 and 1996
because the large intercompany receivable between the China subsidiary and the
Hong Kong subsidiary was not considered by the China Tax Authorities to be a
reinvestment of profits. In January 1999, the Company's Shenzhen manufacturing
facility was recognized as a "High and New Technology Enterprise" which entitles
it to various tax benefits including lowering the corporate profits tax rate to
7.5% until January 7, 2004.BPC.
Net Income. Net income decreased $27,310,000by $15.0 million, or 89%62.3%; to $3,529,000 (3.5%$9.0 million or 3.9% of sales)net sales, for the year ended December 31, 19982001 compared to $30,839,000 (or 23.2%$24.0 million, or 11.2% of sales)net sales for the year ended December 31, 1997.2000. This resulted in diluted earnings per share for the year ended December 31, 19982001 of $0.34$0.87 ($0.340.88 basic) compared to diluted earnings per share of $3.68$2.56 ($3.702.63 basic) for the year ended December
31, 1997.2000. The decrease in net income and earnings per share is the result of:
(i)of the decrease in gross profit, the increase in SG&A expense and the decrease in income, as described above.
38
Liquidity and Capital Resources
| Liquidity |
We have financed our growth and cash needs to date primarily from internally generated funds, proceeds from the sale of our strategic investments, sales of our stock 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 investments in potential customers and suppliers and to fund increases in inventory and accounts receivable resulting from increased sales.
We had positive net working capital of $87.4 million at December 31, 2002 compared to positive net working capital of $84.0 million at December 31, 2001. We believe that our cash flows from operations, our current cash balance and funds available under our working capital and credit facilities will be sufficient to meet our working capital needs and planned capital expenditures for the next 12 months.
Net cash provided by operating activities was $39.5 million in 2002. Cash provided by operating activities in 2002 was primarily attributable to net income of $20.0 million plus depreciation and amortization expense of $10.6 million, dividends of $10.5 million and the non-cash loss on restructuring of JIC Group of $2.7 million, non-cash equity in income of affiliated companies of $10.7 million and non-cash gain on share redemption of $3.5 million. Our working capital related to operating activities also decreased driven by an increase of $17.0 million in accounts payable and accrued expenses and $10.1 million of proceeds from marketable securities offset by increases in accounts receivable of $8.5 million and inventory of $7.6 million.
Our inventory increased in 2002 as a result of our anticipation of increase in sales. Accounts receivable increased due to increased sales in the fourth quarter relative to sales in the prior year period. The increase in accrued expenses is primarily related to a $5.2 million provision for legal contingencies. Accounts payable increased due to support for higher inventory levels. The proceeds from marketable securities relates to the disposal of our holdings in Deswell Industries, Inc. during 2002.
Net cash provided by operating activities in 2001 was $23.2 million. Cash provided by operating activities in 2001 was primarily attributable to net income of $9.0 million, plus depreciation of $9.1 million, amortization of intangible assets of $2.0 million and stock option costs of $839,000 offset by non-cash equity in income of affiliates of $1.9 million and unrealized gain on marketable securities of $1.6 million. Our decrease in working capital related to operating activities was driven by a decrease in sales; (ii) lower operating margins; (iii) fixed generalinventory of $15.3 million offset by a decrease in accounts payable and administrative expenses; (iv) fewer gainsaccrued expenses of $6.1 million and an increase in accounts receivable of $4.4 million.
Our inventory decreased in 2001 due to our increased focus on inventory management and our increased use of domestic China suppliers with shorter delivery lead times. Inventory also decreased due to our $3.8 million provision for slow-moving raw materials relating to cancelled, reduced or delayed orders. The increase in our accounts receivable was primarily related to the increase in our net sales while the decrease in our accounts payable and accrued expenses related to the decrease in inventory levels.
Net cash used in investing activities was $33.8 million in 2002. Cash used in investing activities was primarily related to our $12.0 million strategic investment in TCL Holdings Corporation and $5.1 million in convertible notes of TCL International Holdings Ltd as well as capital expenditures of $18.5 million offset by proceeds of $1.7 million related to the disposal of our joint venture interest in BPC. Our capital expenditures in 2002 included a $12.3 million new STN LCD panel production line and $4.0 million for completion of the new factory expansion.
Net cash used in investing activities was $35.4 million in 2001. Cash used in investing activities was primarily related to capital expenditures of $36.0 million offset by proceeds from the disposal of fixed assets; (v)property, plant and equipment of $698,000. Our major capital expenditures in 2001 included:
| • | $13.0 million for the purchase and interior improvements on 23,000 square feet of contiguous prime office space at Shun Tak Centre in the Central district of Hong Kong, |
39
| • | $6.4 million for the purchase of new staff residences in Hong Kong, | |
| • | $5.5 million for the construction and machinery for a new 138,000 square foot five-story factory building within our principal manufacturing facilities, | |
| • | $5.5 million for the purchase of new chip on glass production lines, and | |
| • | $2.0 million for the expansion of the front end process for producing LCD panels. |
In the provision for impairmentpast three years we have invested significant amounts of value for Albatronics; (vi) a non-recurring
customs assessment; (vii) increased income tax expenses as a result of 1997cash to expand our manufacturing capacity and 1996 tax refunds not being received as expected; (viii) Nam Tai's share of
Albatronics' losses in December 1998 of $1,708,000; and (ix) an increaseto upgrade our equipment to produce increasingly complex products. We believe that we will continue to make significant cash investments in the weighted average numberfuture to broaden our manufacturing capabilities and increase our capacity. In this regard, we intend to spend approximately $40.0 million to construct and equip another factory consisting of shares outstanding resultingapproximately 250,000 square feet on land adjacent to our principal manufacturing facilities in Shenzhen, China.
Net cash provided by financing activities was $18.1 million for 2002. Cash provided by financing activities for 2002 primarily resulted from net proceeds of $36.5 million received from the issuanceexercise of approximately 3,000,000 additional shares in late November 1997. The decrease in
net income was partiallyoptions and warrants and $4.5 million received from a four-year variable rate term loan offset by Nam Tai's share of Group Sense
(International) Limited's ("Group Sense") net income$16.7 million paid to shareholders as dividends, $2.7 million for the first six monthsrepayment of fiscal 1999 (ended September 30, 1998) of $534,000bank loans and an increase in net
interest income of $3,200,000 as a result of the increased amount of cash on
hand throughout the year.
The diluted weighted average number of common shares outstanding
increased to 10,351,000 (basic 10,317,000)$3.5 million for the year ended December 31, 1998
from 8,391,000 (basic 8,324,000) for the year ended December 31, 1997,
reflecting the issuancerepurchase of approximately 3,000,000 additional shares around the
end of November 1997 in the Company's rights and standby offerings, offset by
the repurchase during 1998 ofour common shares pursuant to our share buy-back program.
Net cash provided by financing activities was $12.0 million for 2001, which primarily resulted from $15.0 million of proceeds from a bank loan and $4.3 million of proceeds received from the Company's repurchase
program.
LIQUIDITY AND CAPITAL RESOURCES
Current assets decreased to $94,436,000exercise of options and warrants offset by $3.9 million of cash dividends and $3.4 million for the year endedrepurchase of the our shares.
| Capital Resources |
As of December 31, 1999 compared to $97,015,000 for the year ended December 31, 1998. Cash2002, we had $82.5 million in cash and cash equivalents, consisting of cash and short-term term deposits decreasedcompared to $54,215,000 for the year ended December 31, 1999 versus $71,215,000 for the year
ended December 31, 1998. The principal reasons for the decrease in cash and cash
equivalents were: (i) the repurchase of an aggregate of
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879,700 common shares of the Company for $10,260,000; (ii) fixed assets
purchases of $17,888,000; and (iii) dividends paid of $2,889,000.
Accounts receivable$58.7 million at December 31, 1999 increased to $24,283,000 from
$16,138,0002001. Our short-term debt were $15.0 million and $3.7 million at December 31, 1998 reflecting the 84% increase in sales in the
last quarter of 1999 compared to 1998. Inventories2002 and at December 31, 1999
increased to $10,901,000 from $4,355,000 up 150% from levels at December 31,
1998, reflecting an inventory turnover period of 33 days in 1999 versus 21 days
in 1998. The increase in inventory levels is a result of both increased sales
levels and a buildup of telecommunication inventory as a result of delivery
difficulties to one of the Company's telecommunication customers.
On September 12, 1998, Nam Tai signed an agreement to acquire
Albatronics by subscribing for slightly over 50% of the outstanding shares of
Albatronics. The transaction was completed on November 30, 1998 for $9.98
million, including transaction fees. When Nam Tai announced the completion of
the Albatronics acquisition on December 2, 1998, the Company indicated that it
would take steps to support Albatronics depending on the results of a
comprehensive study investigating opportunities for corporate restructuring and
the streamlining of Albatronics' overhead expenses. Since that time, the
December 31, 1998 Albatronics' accounts have been prepared and show a company in
financial difficulty with a deficiency in shareholders' equity of $43.9 million,
up from the $22.6 million adjusted deficiency in shareholders' equity reported
in Albatronics' unaudited August 31, 1998 accounts. The deficiency increased
despite the capital injection from Nam Tai's share subscription, reflecting
Albatronics' continuing losses, which for the month of December 1998 were $1.71
million. In January 1999 Albatronics started receiving demands from creditors
for repayment of past due obligations. As Albatronics was unable to pay its
liabilities as they came due, management of Nam Tai and Albatronics undertook
negotiations with Albatronics' major trade creditor and bankers for forbearance
on demands for repayment and concessions as to amounts payable. At that time,
management of Nam Tai believed it was probable these parties would not grant the
concessions necessary to permit Albatronics to survive and such discussions were
ultimately unsuccessful. Due to the troubled financial condition of Albatronics
at December 31, 1998, and the probability that Nam Tai would never be in a
position to exercise control over Albatronics, such control would rest with the
creditors, Nam Tai did not consolidate Albatronics' financial statements as of
and for the one month ended December 31, 1998. Instead, Nam Tai accounted for
Albatronics on an equity basis and recorded as separate line items on its
Consolidated Statements of Income all of Albatronics' December 1998 losses of
$1.71 million as "Equity in loss of unconsolidated subsidiary" and also made a
"Provision for impairment of value" of $8.27 million against the remaining
carrying value of this investment. As a result, the carrying value of Nam Tai's
investment in Albatronics was recorded on Nam Tai's Consolidated Balance Sheet
at December 31, 1998 at a nominal value as "Investment in an unconsolidated
subsidiary (less provision for impairment of value)." In June 1999, Albatronics
ceased its operations after creditors threatened to take legal action to force
Albatronics into involuntary liquidation. The directors of Albatronics voted on
June 30, 1999 to submit to its shareholders a proposal to liquidate Albatronics
and such proposal was approved at a shareholders' meeting in August 1999. Nam
Tai has written off the nominal value of its investment in Albatronics as
"Investment in an unconsolidated subsidiary" in 1999.
On May 27, 1998, Nam Tai completed a strategic investment of $16 million
for approximately 20% of the outstanding shares of Group Sense, a publicly
listed Hong Kong company (Hang Seng company #601). During 1999, the Company
received dividend payments from Group Sense of $263,000 and earned $1,146,000 as
its share of Group Sense's results less amortization of goodwill for the last
twelve month period ended September 30, 1999, which are the most recent results
announced to date. In February and March 2000, the Company disposed of a total
of 100 million shares of Group Sense for cash of $15,081,000. After the
disposal, the shareholding in Group Sense was reduced to approximately 10%.
Property, plant and equipment - net of $44,717,000 as at December 31,
1999 is up from $32,445,000 as at December 31, 1998. Depreciation on fixed
assets for 1999 was $5,288,000 while additions to plant and equipment during
1999 were $17,888,000. New equipment and machines purchased in 1999 included 10
sets of SMT systems, 2 sets of ACF heat seal machines, 3 lines of Chip on Glass
assembly and other equipment.2001, respectively.
At December 31, 1999, 64.7% and 35.3% of the Company's identifiable
assets were located in Hong Kong and China, respectively, as compared to 58% and
29%, respectively, at December 31, 1998. No cash and cash equivalents were held
by the Company in North America at December 31, 1999 compared to 23% of the
total cash and cash equivalents of $71,215,000 at December 31, 1998 as the
Company decided to transfer the finance and accounting
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function to Hong Kong from North America. Identifiable assets in North America
declined to 0% of total assets at December 31, 1999 compared to 13% of total
assets at December 31, 1998.
Since 1996, the Company's working capital requirements have been
financed from internally generated funds, and short-term borrowing was nil at
December 31, 1999 and 1998 respectively. The Company had working capital of
$61,265,000 and $77,539,000 as of December 31, 1999 and 1998 respectively.
At December 31, 1999, Nam Tai2002, we had in place general banking facilities with threetwo financial institutions aggregating $38,020,000. For the three years
ended December 31, 1999,$58.2 million. The maturity of these facilities is generally up to 90 days. These banking facilities bore Nam Tai's corporate guaranteeare guaranteed by us and there wasis an undertaking not to pledge any assets to any other banks without the prior consent of our bankers. Interest rates are generally based on the Company's bankers. Suchbanks’ reference lending rates. Our facilities which are subject
to annual review, permit the Companyus to obtain overdrafts, lines of credit for forward exchange contracts, letters of credit, import facilities, trust receipt financing, shipping guarantees and working capital, as well as fixed loans.capital. These facilities are subject to annual review and approval. As at December 31, 1999, the Company2002, we had utilized approximately $9,667,000$8.9 million under such general credit facilities and had available unused credit facilities of $28,353,000. Interest on notes payable averaged 3.7% per annum during the year
ended$66.1 million.
As at December 31, 1999. During2002, we had debt of $16.8 million, including the year endedcurrent portion of $14.0 million, compared to debt of $15.0 million, including the current portion of $2.1 million at December 31, 1999,2001. A portion of this debt was obtained in the Company
paidfourth quarter of 2001, had a totalseven-year term and carried a fixed rate of $192,000 in interest on indebtedness.
Accounts payable increased by 39% to $25,504,000of 5.05% for the year endedfirst four years changing to a floating rate of 1% over the Singapore Interbank Money Market Offer Rate, or SIBOR, for the final three years. The loan was secured by a property with net book value of $11.4 million. Principal repayments of $535,000 were made on a quarterly basis for the term of the loan. At December 31, 1999 from $18,377,000 for2002, the year endedoutstanding balance of the loan was $12.9 million. On January 3, 2003, we repaid the entire outstanding balance of this loan.
40
Our debt as of December 31, 1998,
principally as a result of increased purchases from suppliers to support the
increase sales.
The Company had no2002 also included unsecured long-term debt during either 1999 or 1998.
Cash flow from operations for 1999of $4.5 million that we obtained in May 2002. This debt has a term of four years and bears interest of 1.5% over 3 month LIBOR (with a cap at 7.5%), with principal repayments of $281,250 due on a quarterly basis. At December 31, 2002, the outstanding balance of the loan was $8,953,000 including net income
of $11,798,000, depreciation of $5,288,000 and other non-working capital
adjustments of ($291,000) a decrease from $19,400,000 for 1998. The net cash
decrease due to changes in working capital (excluding cash and bank borrowings)
was $7,842,000.
During 1999, the Company's net investment activities used $18,589,000,$3.9 million, including the purchasecurrent portion of property, plant$1.1 million.
A summary of our contractual obligations and equipment using $17,888,000 and
the acquisitioncommercial commitments as of business for $951,000.
Net cash used by financing activities was approximately $7,355,000 in
1999. Financing activities during 1999 included share repurchases of
$10,260,000, redemption of shares for $1,549,000, notes payable of $6,949,000
and the payment of dividends of $2,889,000. The Company also received $394,000
from the issuance of shares upon the exercise of options.
The Company believes thereDecember 31, 2002 is as follows:
| Payments due by period | ||||||||||||||||||||||||||||
| 2008 and | ||||||||||||||||||||||||||||
| Contractual obligation | Total | 2003 | 2004 | 2005 | 2006 | 2007 | thereafter | |||||||||||||||||||||
| Long-term debt | $ | 16,797,000 | $ | 13,985,000 | $ | 1,125,000 | $ | 1,125,000 | $ | 562,000 | $ | — | $ | — | ||||||||||||||
| Operating leases | 3,935,000 | 779,000 | 727,000 | 745,000 | 731,000 | 565,000 | 388,000 | |||||||||||||||||||||
| Capital expenditures | 20,856,000 | 20,856,000 | — | — | — | — | — | |||||||||||||||||||||
| Total | $ | 41,588,000 | $ | 35,620,000 | $ | 1,852,000 | $ | 1,870,000 | $ | 1,293,000 | $ | 565,000 | $ | 388,000 | ||||||||||||||
There are no material restrictions (including foreign exchange controls) on the ability of Nam Tai'sour non-China subsidiaries to transfer funds to the Companyus in the form of cash dividends, loans, advances or product/product or material purchases. With respect to the Company'sour China subsidiaries, with the exception of a requirement that 10% of profits be reserved for future developments, there are no restrictions on the payment of dividends and the removal of dividends from China due to the Company's reinvestment program for tax purposesonce all taxes are paid and the
10% reserve fund. (See note 15 of the Notes to the Consolidated Financial
Statements.)assessed and losses, if any, from previous years have been made good. In the event that dividends are paid by the Company'sour China subsidiaries, they wouldsuch dividends will reduce the amount available for the reinvestment
programof reinvested profits and accordingly the refund of taxes wouldpaid will be payable onreduced to the extent of tax applicable to profits not reinvested.
The Company believes such restrictions will not have a material effect on the
Company's liquidity or cash flow.
In 1994, the Company resumed paying annual dividends, paying
shareholders aggregate dividends
Impact of $65,000 ($0.01 per share) in 1994. Since
then dividends paid per share have increased annually to $120,000 ($0.015 per
share) in 1995, $243,000 ($0.03 per share) in 1996, $786,000 ($0.10 per share)
in 1997, $2,829,000 or ($0.28 per share) in 1998,Inflation
Inflation and $2,942,000 or ($0.32 per
share) in 1999. On January 31, 2000 the Company announced that it was increasing
the annual dividend to $0.36 per share to be paid on a quarterly basis
commencing with the first quarter 2000 dividend of $0.09 per share. It is the
general policy of Nam Tai to determine the actual annual amount of future
dividends based upon the Company's growth during the preceding year. Future
dividends will be in the form of cash or stock or a combination of both. There
can be no assurance that any dividend on the Common Shares will be declared, or
if declared, what the amounts of dividends will be or whether such dividends,
once declared, will continue for any future period.
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IMPACT OF INFLATION
Inflation/(deflation)deflation in China and Hong Kong in 1999, estimated at -1.3%
and -4.0% respectively, has not had a material effect on Nam Tai'sour past business. During times of inflation, the Company haswe have generally been able to increase the price of its products in order to keep pace with inflation.
Furthermore, increases
Exchange Controls
There are no exchange control restrictions on payments of dividends, interest, or other payments to nonresident holders of our securities or on the conduct of our operations in labor costs,Hong Kong, where our principal executive offices are located, or in the British Virgin Islands, where we are incorporated. Other jurisdictions in which representwe conduct operations may have various exchange controls. With respect to our China subsidiaries, with the most significant
componentexception of a requirement that 10% of profits be reserved for future developments, there are no restrictions on the payment of dividends and the removal of dividends from China once all taxes are paid and assessed and losses, if any, from previous years have been made good. We believe such restrictions will not have a material effect on our liquidity or cash flows.
Recent changes in accounting standards
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires a company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. SFAS No. 143 also requires a company to record the contra to the initial obligation as an increase to the carrying amount of the Company's production costs (other than materialrelated long-lived asset (i.e. the associated asset retirement costs), would
not materially affect its business because and to depreciate that cost over the remaining useful life of the Company's utilizationasset. The liability is adjusted at the end of less
expensive labor througheach period to reflect the passage of time (i.e. accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. Companies are required to adopt SFAS No. 143 for fiscal years beginning after June 15, 2002. We adopted
41
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and overhead expenses64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS 145 eliminates extraordinary accounting treatment for reporting gain or loss on debt extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 related to Nam Tai's Chinese factory amountedthe rescission of SFAS No. 4 are applicable in fiscal years beginning after May 15, 2002, the provisions related to 12.7%SFAS No. 13 are effective for transactions occurring after May 15, 2002, and all other provisions are effective for financial statements issued on or after May 15, 2002; however, early application is encouraged. Debt extinguishments reported as extraordinary items prior to scheduled or early adoption of SFAS No. 145 would be reclassified in most cases following adoption. In the current year, we adopted the provisions of SFAS No. 145 related to the accounting treatment for the gain or loss on debt extinguishment. The result of this adoption is that a $610,000 finance charge incurred for the early extinguishment of our long term debt that would have been recorded as an extraordinary item under the previous accounting rules has been included as an expense from continuing operations. We do not expect the adoption of the Company's total
expensesremaining provisions of SFAS No. 145 to have a material effect on our financial position, results of operations, or cash flows.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before operating income during the year endedan actual liability has been incurred. The requirements of SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 19992002; however, early application is encouraged. We do not expect the adoption of SFAS No. 146 to have a material effect on our financial position, results of operations, or cash flows.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and 13.7% duringDisclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the year endedfair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 1998.
EXCHANGE RATES2002. The Company sellsdisclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We are currently evaluating the effects of FIN 45; however, we do not expect that the adoption of FIN 45 will have a material effect on our financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123 “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The expanded annual disclosure requirements and the transition provisions are effective for fiscal years ending after December 15, 2002. We do not expect the adoption of SFAS 148 to have a material effect on our financial position, results of operations, or cash flows.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Currency Fluctuations
We sell a majority of itsour products in U.S. dollars and payspay for itsour material components in Japanese yen, U.S. dollars, and Hong Kong dollars.
It paysdollars, and Chinese renminbi. We pay labor costs and overhead expenses in renminbi, the currency of China (the basic unit of which is the yuan), Hong Kong dollars, and Japanese yen, and
Korean won. yen.
42
We believe our most significant foreign exchange risk results from material purchases made in Japanese yen. Approximately 15%14%, 18%16%, and 23%8% of Nam Tai'sour material costs have been in Japanese yen during the years ended December 31, 1999, 19982000, 2001, and 1997, respectively.2002. Sales made in yen account for less than 1%7% of sales for the years ended December 31, 19992000, 2001 and 19982002. Our business and 6.3% of sales for the year ended December 31, 1997. The net currency exposure
has decreased as a result a lower % of material being purchased in yen. The
Company believes its customers will accept an increase in the selling price of
manufactured products if the exchange rate of the yen appreciates beyond a range
of 5% to 10%, although such customers may also request a decrease in selling
price in the event of a depreciation of the Japanese yen. There may alsooperating results could be a
delay between the time of the exchange rate fluctuationmaterially and the eventual
adjustment in selling prices. The Company's belief is based on oral agreements
with its principal customers which management believes are customary between
OEMs and their suppliers. However, there can be no assurance that such
agreements will be honored, and the refusal to honor such an agreementadversely affected in the event of a severe fluctuationincrease in the value of the yen to the US dollar at a time when our sales made in yen are insufficient to cover our material purchases in yen would materially and adversely
affect the Company's operations.yen.
Effective January 1, 1994, China adopted a floating currency system whereby the official exchange rate equaled the market rate. Since the market and official renminbi rates were unified, the value of the renminbi against the dollar has been stable. This is in spite of significant inflation during 1994
and 1995 that placed devaluation pressure on the renminbi. The Chinese
Government took steps to restrict credit to counteract these pressures, which
taken together with the net inflow of capital into China, resulted in stability
of the currency against the U.S. dollar.
The Company believes that because its Chinese operations are presently
confined to manufacturing products for export,We believe any devaluation of the renminbi would benefit Nam Taius by reducing itsour costs in China, provided that devaluation or other economic pressures do not lead to fundamental changes in the present economic climate in China.
Foreign exchange transactions involving the renminbi take place through the Bank of China or other institutions authorized to buy and sell foreign exchange or at an approved foreign exchange adjustment center (known as a "swap
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center"“swap center”). In the past, when exchanging Hong Kong dollars for Chinese renminbi, the Companywe used a swap center to obtain the best possible rate. When translating the Chinese company accountaccounts into U.S. dollars, the Company useswe use the same exchange rate as quoted by the People'sPeople’s Bank of China. Since January 1, 1994, when China adopted a floating currency system (whereby the official rate is equal to the market rate), swap centers and banks in China offer essentially the same market rates, facilitating the exchange of Hong Kong dollars for renminbi. The adoption of a floating currency system has had no material impact on the Company.us.
Beginning on November 30,December 1, 1996, the Chinese renminbi became fully convertible under the current accounts. There are no restrictions on trade-related foreign exchange receipts and disbursements in China. Capital account foreign exchange receipts and disbursements are subject to control, and organizations in China are restricted in foreign currency transactions whichthat must take place through designated banks.
The Company
We may elect to hedge itsour currency exchange risk when it judgeswe judge such action may be required. In an attempt to lower the costs of expenditures in foreign currencies, managementwe will periodically enter into forward contracts or option contracts to buy or sell foreign currency(ies) against the U.S. dollar through one of itsour banks. As a result, the Companywe may suffer losses resulting from the fluctuation between the buy forward exchange rate and the sell forward exchange rate, or from the price of the option premium.
At December 31, 19992002 we held no option or future contracts and during the Company held an option toyear we did not purchase $20,000,000
worth of Japanese yen at a fixed exchange rate with a maturity of less than 6
months. The option was purchased as a hedge against anticipated, but not yet
firmly committed transactions. No options were held at December 31, 1998. At
December 31, 1999, Nam Tai had outstanding forward contracts to purchase
$1,755,000 Japanese yen for the purpose of hedging firmly committed transactions
compared with nil at December 31, 1998. In 1999, Nam Tai recorded a $566,000
loss upon the sale of an option that was purchased as a hedge against the
appreciation of the Japanese yen. During 1998, the Company recorded a charge of
$840,000 on the write-off of a premium on an option. The Company isor sell any commodity or currency options. We are continuing to review itsour hedging strategy and there can be no assurance that Nam Taiwe will not suffer losses in the future as a result of currency hedging.
NEW ACCOUNTING STANDARDShedging activities.
Foreign Currency Risk
As at December 31, 2002 we had no open forward contracts or option contracts to purchase or sell foreign currencies.
43
Cash on hand at December 31, 2002 of $82,477,000 was held in the following currencies.
| Equivalent | ||||
| U.S. Dollar | ||||
| Holdings | ||||
| December 31, 2002 | ||||
| Japanese yen | 438,000 | |||
| United States dollars | 78,408,000 | |||
| Hong Kong dollar | 3,293,000 | |||
| Chinese renminbi | 338,000 | |||
Interest Rate Risk
| Short-term interest rate risk |
Our interest expenses and income are sensitive to changes in interest rates. All of our cash reserves and short-term borrowings are subject to interest rate changes. Cash on hand of $82.5 million as of December 31, 2002 was invested in short-term interest bearing investments having a maturity of three months or less. As such, interest income will fluctuate with changes in short term interest rates. In February 1997,November 2002, we purchased a $5.1 million in principal amount of a 3% convertible note due in November 2005. As the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, Earnings Per Share.
The new rule requires specific disclosure of both diluted earnings per share and
earnings per common share calculated without the dilutive impacts of outstanding
stock options or convertible securities. As disclosed in Note 2(n) of Notes to
Consolidated Financial Statements appearing in Item 18. of this report, the
Company has adopted this method of accounting for earnings per share.
In 1998, the Company adopted a new disclosure standard, SFAS No. 130,
"Reporting Comprehensive Income." which requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from non-owner sources.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the FASB has issued a new standard SFAS No.133 "Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. Management has not yet completed the analysis of
the impact this would haveinterest rate on the consolidated financial statementsconvertible note is fixed, we do not expect fluctuations in interest rates to materially effect our cash flows and net income.
As of December 31, 2002, we had $8.9 million outstanding on our credit facilities, including $985,000 in short-term notes payable resulting in minimal interest rate risk.
| Long-term interest rate risk |
As of December 31, 2002, we had $16.8 million in long-term debt including the Company.
-32-
33
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANYcurrent portion of $14.0 million.
We obtained a seven-year $15.0 million term loan in the fourth quarter of 2001 with a fixed rate of interest of 5.05% for the first four years and 1% over the SIBOR rate for the last three years. The term loan had an outstanding balance of $12.9 million as of December 31, 2002. We repaid this term loan on January 3, 2003.
We also obtained a four-year term loan with borrowings in May 2002 totaling $4.5 million at a rate of 1.5% over three months LIBOR repayable in 16 quarterly installments of approximately $281,000 beginning August 2002. The term loan had an outstanding balance of $3.9 million as of December 31, 2002.
The potential effect of a hypothetical 1% increase in interest rates for 2002 indebtedness would be insignificant to our cash flows and net income.
44
Item 6. Directors, Senior Management Theand Employees
Directors and Senior Managers
Our directors and executive officerssenior management and their ages as of the CompanyJanuary 31, 2003 are as follows:
| Name | Age | Position with | ||||
| Tadao Murakami | 58 | Chairman of the Board and | ||||
| Joseph Li | 51 | Chief Executive Officer, President and | ||||
| M. K. Koo | 58 | Chief Financial Officer | ||||
| Karene Wong | 39 | Managing Director | ||||
| Y. C. Chang | 44 | Managing Director of | ||||
| Patinda Lei | 36 | Managing Director Nam Tai Telecom | ||||
| L. P. Wang | 46 | Managing Director of Zastron Electronic | ||||
| Kazuhiro Asano | 51 | Managing Director of Namtek Software | ||||
| Seitaro Furukawa | 61 | Chairman of the Board of JIC Technology Company Limited | ||||
| Ivan Chui | 44 | Managing Director of J.I.C. Enterprises (HK) Limited | ||||
| Lorne Waldman | 36 | Secretary | ||||
| Charles Chu | 45 | Member of the Board of Directors | ||||
| Peter R. Kellogg | 60 | Member of the Board of Directors | ||||
| Stephen Seung | 55 | Member of the Board of Directors | ||||
Tadao Murakami.Mr. Murakami has served the CompanyNam Tai in various executive capacities since 1984. He became our Secretary and a Director of the Company in December 1989. FromSince June 1989, he has been employed as the President of the
Company'sour Hong Kong subsidiary. In July 1994, Mr. Murakami succeeded Mr. Koo as President and in June 1995 became the Company'sour Chief Executive Officer.Officer until September 1998. Mr. Murakami assumed the position of Vice-Chairman in January 1996, and Chairman from September 1998 until March 1, 2001 and again starting February 1, 2002. He is in charge of theour manufacturing and marketing operations of the Company. In September 1998,operations. Mr. Murakami succeeded Mr. Koo as the Chairman of the Board of Directors. Mr.
Murakami graduated fromstudied technology in Japan Electronic Technology College in 1964.
SHIGERU TAKIZAWA
Joseph Li. Mr. Takizawa joined the CompanyLi, co-founder of JIC Group, has served in September 1998 after
a forty year career with Toshiba Corporation holding various senior management
and executive positions. Hepositions since we acquired the JIC Group in October 2000. Mr. Li assumed the positionsposition of President and Chief Executive Officer of the Company, succeedingin May 2002. Mr. Murakami. Mr. Takizawa is
responsible for the management and direction of allLi has directed JIC Group’s business operations and
technological development of the Nam Tai group of companies. He is also a
director.
since founding JIC Group in 1980.
M. K. KOO Koo.Mr. Koo hadhas served as Chairman of the Board and a Director of Nam Tai and its predecessor companies since inception. Mr. Koo assumed the role
as Chief Financial Officer of the Company from April 1997inception until JanuarySeptember 1998 and again in February 1998 to May 1998. Mr. Koo assumed the newly created position
ofas Senior Executive Officer, Corporate Strategy, Finance and Administration when
Mr. Murakami succeeded himand Chief Financial Officer. In addition to his current roles as Chairman of the Board. Mr. Koo also serves on the
Company's audit committee.Chief Financial Officer and a director, he remains responsible for mergers and acquisitions, and administrative matters. Mr. Koo received his Bachelor of Laws degree from National Taiwan University in 1970.
HIDEKAZU AMISHIMA
Karene Wong.Ms. Wong joined us in March 1989 and was promoted to Managing Director of our subsidiary Nam Tai Electronic & Electrical Products Ltd. on January 1, 2001. Before joining us, Ms. Wong was Assistant to the Sales Manager at Wright Joint & Co. Ltd. Ms. Wong is responsible for our sales and marketing operations and supporting employee recruitment and training.
Y. C. Chang.Mr. Amishima joined the Company in August 1996 as Vice
General Manager andChang assumed the responsibility for overseeing day-to-day factory
operationsposition of the Company's Shenzhen, ChinaManaging Director of our principal manufacturing complex as General
Manager in November 1996. From 1964 until joining the Company, Mr. Amishima was
employed by Kanda Tsushin Industrialsubsidiary, Namtai Electronic (Shenzhen) Co. Ltd., a Japanese electronics
manufacturer.
Y.C. CHANG Mr. Chang joined the Companyus in 1991 and assumed the position of Assistant General Manager of Production before being promoted to Vice General Manager of the Company'sour principal manufacturing facility in late 1997. Mr.
Chang is in charge of production at the Company's Shenzhen China manufacturing
facility.in late 1997, and Managing Director in 1999. Prior to joining -33-
34
Nam
45
Patinda Lei.Ms. Lei assumed the position of Managing Director of our subsidiary Nam Tai Telecom (Hong Kong) Company Limited since June 2002. Ms. Lei has worked with Nam Tai Group for 10 years specializing in promoting, generating and monitoring sales revenues on various high-end electronics products. She graduated from the Science University of Tokyo in 1990, majoring in Industrial Engineering.
L. P. Wang.Mr. Wang assumed the position of Managing Director of our subsidiary Zastron Electronic (Shenzhen) Co. Ltd. in August 2002. He has more than 23 years of experience in the electronics industry. He joined Nam Tai in April 19981997 as Vice General
Managerproduction engineering manager and was promoted to vice managing director in 2002. He was further promoted to managing director of Nam Tai's Research and Development DepartmentZastron Electronics (Shenzhen) Co. Ltd. in chargeAugust of design and
development. Beforethe same year. Prior to joining Nam Tai, Mr. Koike served Sharp CorporationWang held several management positions in various companies in Taiwan and China. Mr. Wang graduated from Chinese Military Academy in Taiwan in 1979.
Kazuhiro Asano.Mr. Asano assumed the position of Managing Director of our subsidiary Namtek Software Development Co. Ltd. in June 2002. Mr. Asano joined Nam Tai in 1995 as a general manager and was promoted to managing director of Shenzhen Namtek Company Limited in 1997. In his current position, he is responsible for thirty-five yearsthe overall corporate management and business development for our software business. Prior to joining Nam Tai, Mr. Asano was the general manager of Seiko Instruments Inc., a private Japanese consumer electronics company, and was responsible for its electronic dictionary division. Mr. Asano graduated from Tsuyama Government Industrial College, Japan with a degree in electrical engineering in 1972.
Seitaro Furukawa.Mr. Furukawa assumed the position of Chairman of the Board and Managing Director of our subsidiary J. I. C. Technology Company Limited in March 2002. He has extensive experience in international operational management. He held management positions in the Japan offices of General Electric, Admiral International Company and Thompson CSF. After joining the J.I.C. Group in 1992 as a managing director, he assumed responsibility for production management and monitoring daily operations of the LCD plant in Shenzhen. Mr. Furukawa received his Bachelor of English Literature degree from Aoyama University in 1965 and his Bachelor of Technology and Metallurgy degree from Kogakuin University in 1967.
Ivan Chui.Mr. Chui is the co-founder and Managing Director of our subsidiary J.I.C. Enterprises (Hong Kong) Ltd. Mr. Chui has directed JIC Group’s marketing activities since founding JIC Group in 1980.
Lorne Waldman.Mr. Waldman was appointed Secretary of Nam Tai Electronics, Inc. in October 1997. Mr. Waldman received a Bachelor of Commerce Degree from the University of Calgary in 1990. In 1994 he received his graduationLaw and MBA degrees from Osaka Electric Communication High
School in 1963.
CHARLES CHU the University of British Columbia.
Charles Chu.Mr. Chu originally served as Secretary and a Director of the
Company from August 1987 to September 1989. He was reappointed a Director in December 1992. Since July 1988, Mr. Chu has been engaged in the private practice of law in Hong Kong. Mr. Chu serves on Nam Tai'sour audit committee. Mr. Chu received his Bachelor of Laws degree and Post-Graduate Certificate of Laws from the University of Hong Kong in 1980 and 1981, respectively.
STEPHEN SEUNG
Peter R. Kellogg.Mr. Kellogg was elected to our Board of Directors in June 2000. Mr. Kellogg was a Senior Managing Director of Spear, Leeds & Kellogg, a registered broker-dealer in the United States and a specialist firm on the New York Stock Exchange until the firm merged with Goldman Sachs in 2000 when Mr. Kellogg became a Senior Advisory Director. Mr. Kellogg serves on our audit committee. Mr. Kellogg is also a member and Chairman of the Board of the Ziegler Companies.
Stephen Seung.Mr. Seung was appointed a Director of Nam Tai in 1995. Mr. Seung is an attorney and a C.P.A. and has been engaged in the private practice of law in New York since 1981. Mr. Seung received a B.S. degree in Engineering from the University of Minnesota in 1969, an M.S. degree in Engineering from the University of California at Berkeley in 1971, an MBA degree from New York University in 1973 and a J.D. degree from New York Law School in 1979. Mr. Seung serves on Nam Tai'sour audit committee and acts as Nam Tai'sour authorized agent in the United States. LORNE WALDMAN Mr. Waldman was appointed SecretarySeung also serves on the Board of Nam Tai
Electronics,Directors and audit committee of Deswell Industries, Inc. in October 1997. Mr. Waldman received a Bachelor of Commerce
Degree from the University of Calgary in 1990. In 1994 he received his LL.B. and
MBA degrees from the University of British Columbia.
46
No family relationship exists among any of the named directors, executive officers or key employees. No arrangement or understanding exists between any such directorof our directors or officerexecutive officers and any other personsperson pursuant to which any director or executive officer was elected as a director or executive officer of the Company.Nam Tai. Directors of the Company are elected each year at itsour annual meeting of shareholders and serve until their successors take office or until their death, resignation or removal. Executive officers serve at the pleasure of the Board of Directors.
Compensation of Directors of the Company.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERSand Senior Managers
The aggregate amount of compensation paid by Nam Taiwe and itsour subsidiaries paid during the year ended December 31, 19992002 to all directors and officers as a group for services in all capacities was approximately $2,409,000$1.7 million, including compensation in the form of housing in Hong Kong for itsour Chairman andof the Board, our Chief Executive Officer consistent with the practice of other companies in Hong
Kong.and President, and our Chief Financial Officer.
Directors who are not employees of the CompanyNam Tai nor any of its subsidiaries are paid $1,000$3,000 per month for services as a director, $750 per meeting attended in person, and $500 per meeting attended by telephone. In addition they are reimbursed for all reasonable expenses incurred in connection with services as a director.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY OR ITS SUBSIDIARIES
At March 1,
Members of our key staff are eligible for annual cash bonuses based on their performance and that of the division in which they are assigned for the relevant period. Key staff members of a division will be entitled to share up to 15% of the operating income from that division during the year. Our executive officers in charge of the business unit recommend the participating staff members and the amount, if any, to be allocated from the division’s profit pool to an eligible individual.
Prior to December 2000, we maintained staff contributory retirement plans (defined contribution pension plans), which covered certain of our employees. From December 2000 onwards, we terminated our existing staff contributory retirement plans and enrolled all of our eligible employees in Hong Kong into a Mandatory Provident Fund, or MPF, program. The MPF is a defined contribution program and independent trustees manage the Company had outstandingassets of the program. We make contributions of 5% based on the staff’s relevant income with the maximum relevant income for contribution purpose per employee of $2,565 per month. Our contribution cost to the contributory retirement plans (including the MPF) amounted to $174,000, $151,000 and $127,000 for the years ended December 31, 2000, 2001 and 2002, respectively.
In August 1990, we fixed compensation for loss of office at $500,000 for Mr. M.K. Koo and $300,000 for Mr. Tadao Murakami. We also fixed the age of retirement for directors, including Messrs. Koo and Murakami, at age 65 years. We have accrued the entire $800,000 on account of this compensation for loss of office.
Board Practices
All directors hold office until our next annual meeting of shareholders, which generally is in June of each calendar year, 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. Our board of directors has determined, effective December 31, 2002, to grant future options under our stock option plans only to our outside, non-employee directors.
The Audit Committee of the board of directors reviews, acts on and reports to the board of directors with respect to various auditing and accounting matters, including the selection of our auditors, the scope of the annual audits, fees to be paid to the auditors, the performance of our independent auditors and our accounting practices. Our Audit Committee currently consists of Messrs. Seung, Chu, and Kellogg.
The Compensation Committee of the board of directors determines the salaries and incentive compensation of the officers of Nam Tai (other than Messrs. Murakami, Li and Koo, whose salaries are decided each year by our board’s outside directors) and provides recommendations for the salaries and incentive compensation of all employees and consultants and administers various compensation, stock and benefit plans of Nam Tai. The Compensation Committee consists of Messrs. Murakami, Li and Koo.
47
The Investment Committee of the board of directors may make strategic investments in companies of amounts less than $5 million with approval of other members of the board. The Investment Committee consists of Messrs. Murakami, Li and Koo.
Options of Directors and Senior Management
The following table provides information concerning options owned by our Directors and Senior Management at January 31, 2003.
| Number of | ||||||||||||
| common shares | Exercise | |||||||||||
| subject to | Price ($) | Expiration | ||||||||||
| Name | options | per share | Date | |||||||||
| Tadao Murakami | 40,000 | 13.94 | 3/16/2004 | |||||||||
| 25,000 | 19.85 | 4/30/2005 | ||||||||||
| Joseph Li | 20,000 | 19.85 | 4/30/2005 | |||||||||
| M. K. Koo | 40,000 | 14.50 | 6/22/2004 | |||||||||
| 39,000 | 19.85 | 4/30/2005 | ||||||||||
| Karene Wong | 10,000 | 19.85 | 4/30/2005 | |||||||||
| Y.C. Chang | 12,000 | 19.85 | 4/30/2005 | |||||||||
| Patinda Lei | 3,000 | 13.94 | 3/16/2004 | |||||||||
| 10,000 | 19.85 | 4/30/2005 | ||||||||||
| L. P. Wang | 10,000 | 19.85 | 4/30/2005 | |||||||||
| Kazuhiro Asano | — | — | — | |||||||||
| Seitaro Furukawa | 10,000 | 19.85 | 4/30/2005 | |||||||||
| Ivan Chui | 10,000 | 19.85 | 4/30/2005 | |||||||||
| Lorne Waldman | 5,000 | 19.85 | 4/30/2005 | |||||||||
| Charles Chu | 5,000 | 16.38 | 6/8/2003 | |||||||||
| 5,000 | 14.50 | 6/22/2004 | ||||||||||
| 5,000 | 19.85 | 4/30/2005 | ||||||||||
| Peter R. Kellogg | 5,000 | 16.38 | 6/8/2003 | |||||||||
| 5,000 | 14.50 | 6/22/2004 | ||||||||||
| 5,000 | 19.85 | 4/30/2005 | ||||||||||
| Stephen Seung | 5,000 | 16.38 | 6/8/2003 | |||||||||
| 5,000 | 14.50 | 6/22/2004 | ||||||||||
| 5,000 | 19.85 | 4/30/2005 | ||||||||||
Employee Stock Option and Incentive Plan
Our 1993 and 2001 stock option plans provide for the grant of stock options to purchase an
aggregatedirectors, employees, (including officers) and consultants. The terms and conditions of 565,500 Common Shares, all of which were granted underindividual grants may vary subject to the Company's 1993 Stock Option Plan including; 1,500 options granted on March 16,
1998 with anfollowing: (i) the exercise price of $15.75 and expiringincentive stock options may not normally be less than market value on March 16, 2001; 262,000the date of grant; (ii) the term of incentive stock options granted on August 27, 1998 with anmay not exceed ten years from the date of grant; (iii) the exercise price of $10.50 per sharean option can not be altered once granted; and expiring(iv) every director who is not our employee shall, on March 16, 2001; and 302,000 optionan annual basis upon their election to the board of director at the Annual General Meeting, be automatically granted on February 1, 2000
with an exercise price of $13.875 per share and expiring on January 31, 2003.
All5,000 options, are granted with an exercise price equal to or exceeding the average100% of the dailyfair market value of the common shares on the date of grant. At January 31, 2003, options to purchase 372,000 shares were outstanding under our Stock Options Plans and 602,233 shares were available for future grant under them.
Our board of directors has determined, effective December 31, 2002, to grant future options under our stock option plans only to our non-employee directors. After December 31, 2002, incentive compensation paid to management and other key employees will be in the form of cash bonuses.
48
Employees
At December 31, 2002, we employed 4,274 persons on a full-time basis, of which 4,201 were employed in China and 73 were employed in Hong Kong. Of these employees, approximately 2,943 were engaged in manufacturing, approximately 1,331 were engaged in administrative, research and development, quality control, engineering and marketing positions, and the balance in supporting jobs such as security, janitorial, food and medical services.
We are not a party to any material labor contract or collective bargaining agreement. The nature of our arrangement with our manufacturing employees is such that we can increase or reduce staffing levels without significant difficulty, cost or penalty. Although we have experienced no significant labor stoppages and believe relations with our employees are satisfactory, this situation may not continue in the future, and any labor difficulties could lead to increased costs and/or interruptions in our production.
We maintain an employee incentive compensation program in China whereby a regular bonus is paid to employees on the employee’s return to work following the Chinese New Year holiday. We believe this program has contributed to a lower employee turnover in our factories relative to other China-based manufacturing enterprises. It is the practice of one of our subsidiaries to enter into a collective agreement with its trade union. The collective agreement usually sets out the minimum standard for the wages, working hours and other benefits of the workers. The prior collective agreement between our subsidiary and its trade union expired on December 31, 2002. Our subsidiary currently intends to enter into another agreement.
Item 7. Major Shareholders and Related Party Transactions
The following table sets forth certain information known to us regarding the beneficial ownership of our common shares as of January 31, 2003, by:
| • | each person (or group within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934) known by us to own beneficially 5% or more of our common shares; | |
| • | each of our directors and senior management; and | |
| • | each of the selling shareholders. |
We are not directly owned or controlled by another corporation or by any foreign government.
| Shares beneficially(1) | ||||||||
| owned | ||||||||
| Name | Number | Percent | ||||||
| M. K. Koo | 2,305,131 | (2) | 18.9 | |||||
| Peter R. Kellogg | 1,483,600 | (3) | 12.2 | |||||
| I.A.T. Reinsurance Syndicate Ltd. | 1,300,000 | (3) | 10.7 | |||||
| Li & Chui Holdings (BVI) Ltd. | 1,061,087 | 8.7 | ||||||
| Joseph Li | 1,099,987 | (4) | 9.1 | |||||
| Ivan Chui | 1,089,987 | (5) | 9.0 | |||||
| Tadao Murakami | 732,155 | (6) | 6.0 | |||||
| Karene Wong | 10,000 | (7) | * | |||||
| Y. C. Chang | 12,000 | (7) | * | |||||
| Patinda Lei | 13,000 | (7) | * | |||||
| L. P. Wang | 10,000 | (7) | * | |||||
| Kazuhiro Asano | — | — | ||||||
| Seitaro Furukawa | 10,000 | (7) | * | |||||
| Lorne Waldman | 5,600 | (8) | * | |||||
| Charles Chu | 25,000 | (9) | * | |||||
| Stephen Seung | 26,000 | (10) | * | |||||
49
| * | Less than 1%. |
| (1) | Pursuant to the rules of the Securities and Exchange Commission, shares of common shares that an individual or group has a right to acquire within 60 days pursuant to the exercise of options are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Percentage of ownership is based on 12,130,668 common shares outstanding as of January 31, 2003. |
| (2) | Includes options to purchase 79,000 common shares exercisable within 60 days of January 31, 2003. |
| (3) | Mr. Kellogg holds directly 168,600 common shares and options to purchase 15,000 common shares exercisable within 60 days of January 31, 2003. Indirectly, through I.A.T. Reinsurance Syndicate Ltd., Mr. Kellogg holds 1,300,000 common shares. I.A.T. Reinsurance Syndicate Ltd. is a Bermuda Corporation of which Mr. Kellogg is the sole holder of voting stock. Mr. Kellogg disclaims beneficial ownership of these shares. |
| (4) | Consists of shares held of record by Li & Chui Holdings (B.V.I.) Limited for which Mr. Li shares investment and voting control with Mr. Chui. These are the same shares shown in the table for Ivan Chui. In addition, Mr. Li holds 20,000 options to purchase common shares exercisable within 60 days of January 31, 2003. |
| (5) | Consists of shares held of record by Li & Chui Holdings (B.V.I.) Limited for which Mr. Chui shares investment and voting control with Mr. Li. These are the same shares shown in the table for Joseph Li. In addition, Mr. Chui holds options to purchase 10,000 common shares exercisable within 60 days of January 31, 2003. |
| (6) | Includes options to purchase 65,000 common shares exercisable within 60 days of January 31, 2003. |
| (7) | Consists of options to purchase common shares exercisable within 60 days of January 31, 2003. |
| (8) | Includes options to purchase 5,000 common shares exercisable within 60 days of January 31, 2003. |
| (9) | Includes options to purchase 15,000 common shares exercisable within 60 days of January 31, 2003. |
| (10) | Includes options to purchase 15,000 common shares, and 10,000 common shares that are registered to Violet Seung, Mr. Seung’s wife, as to which Mr. Seung disclaims beneficial ownership. |
All of the holders of our common shares have equal voting rights with respect to the number of common shares held. As of January 31, 2003, there were approximately 856 holders of record of our common shares. According to information supplied by our transfer agent, holders of record with addresses in the United States held 831 of our outstanding common shares.
The following table reflects the percentage ownership of our common shares beneficially owned by our major shareholders during the past three years:
| Percentage Ownership(1) | ||||||||||||
| February 28, | February 28, | January 31, | ||||||||||
| 2001 | 2002 | 2003 | ||||||||||
| M. K. Koo | 28.6 | 29.2 | 18.9 | |||||||||
| Peter R. Kellogg | 13.8 | 14.2 | 12.2 | |||||||||
| I.A.T. Reinsurance Syndicate Ltd. | 12.7 | 12.7 | 10.7 | |||||||||
| Li & Chui Holdings (BVI) Ltd. | 10.4 | 10.6 | 8.7 | |||||||||
| Joseph Li | 10.4 | 10.6 | 9.1 | |||||||||
| Ivan Chui | 10.4 | 10.6 | 9.0 | |||||||||
| Tadao Murakami | 8.1 | 8.9 | 6.0 | |||||||||
| (1) | Based on 10,218,340, 10,259,940, and 12,130,668 common shares outstanding on February 28, 2001 and 2002 and on January 31, 2003, respectively. |
50
Certain Relationships and Related Transactions
In 2000, we formed a joint venture company with Toshiba Battery Company Ltd., or Toshiba, called BPC (Shenzhen) Co., Ltd., to manufacture rechargeable lithium ion battery packs at our manufacturing complex in Shenzhen, China. Toshiba owned a 13.3% interest in BPC and we owned the balance. Since the establishment of BPC (Shenzhen) Co., Ltd in 2000, we recognized net sales of $6.2 million, $21.1 million and $7.8 million, purchased raw materials of $22.4 million, $23.1 million and $7.8 million, acquired property, plant and equipment of $814,000, $50,000 and zero, from Toshiba Battery Company Ltd and its related companies for the years ended December 31, 2000 and 2001 and for the period from January 1, 2002 through April 2002, respectively. In addition, we also acquired a license for $1.0 million from Toshiba Battery Company Ltd. During 2002, we sold the license and our joint venture interest in BPC (Shenzhen) Co., Ltd to a Toshiba related company for $800,000 and $2.1 million, respectively, resulting in a gain of $60,000 and $17,000, respectively.
In January 2003 we invested $10.0 million for a 25% equity interest in Alpha Star Investments Ltd., the ultimate parent of Hong Kong based JCT Wireless Technology Company Limited, or JCT. JCT is engaged in the design, development and marketing of wireless communication terminals and wireless application software. We are manufacturing wireless communication terminals and related modules for JCT. As part of our investment, Alpha Star agreed to have us manufacture the RF modules for at least 50 percent of the orders it or any of its subsidiaries receives for RF modules provided we perform such manufacturing services at a price comparable to the market price.
Item 8. Financial Information
Financial Statements
Our Consolidated Financial Statements are set forth under Item 18. Financial Statements
Change in Public Accountants
In May of 2002, upon consideration and to reduce our professional fees, our Board of Directors, including our Audit Committee, recommended that HLB Hodgson Impey Cheng replace Deloitte Touche Tohmatsu as our independent auditors. This change was included in our proxy statement and approved by our shareholders at our annual meeting on June 14, 2002. Deloitte did not resign or refuse to stand for re-election, and none of Deloitte Touche Tohmatsu’s reports on the financial statements for either of the two years prior to the change and included in this Report contained an adverse opinion, disclaimer, modification or qualification.
In November 2002, HLB advised us that they could not meet our audit requirements for the agreed fees and on a cost-effective basis because the increasingly complex regulatory guidelines for the auditing of public companies would require them to perform a significant portion of the final audit work with personnel from a U.S. affiliate. HLB submitted their resignation accordingly. There were no disagreements with HLB on any matter or accounting principle, practice, financial statement disclosure, or auditing scope or procedure.
In December 2002, in contemplation of our intention to list on the New York Stock Exchange, we sought a replacement firm with a strong U.S. and Asian presence and an ability to handle our audit requirements. Accordingly, our Board of Directors appointed Grant Thornton as our independent public accountants based on Grant Thornton’s ranking among accounting firms in the U.S. and our Board’s belief that Grant Thornton would be acceptable to our shareholders.
Legal Proceedings
We are not a party to any legal proceedings other than routine litigation incidental to our business and there are no material legal proceedings pending with respect to our property, other than as described below.
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Tele-Art Litigation
In June 1997, we filed a petition in the British Virgin Islands for the winding up of Tele-Art, Inc. on account of an unpaid judgment debt owed to us. The High Court of Justice granted an order to wind up Tele-Art, Inc. in July 1998 and the Eastern Caribbean Court of Appeal upheld the decision on January 25, 1999. On January 22, 1999, pursuant to our Articles of Association, we redeemed and cancelled 138,500 shares of Nam Tai registered in the name of Tele-Art, Inc. at a price of $11.19 per share to offset substantially all of the judgment debt of $799,000 plus interest and legal costs totalling approximately $1.7 million, including dividends that we had withheld and credited against the judgment debt.
Following the completion of the redemption, we received notice that the liquidator had obtained an ex-parte injunction preventing us from redeeming Nam Tai shares beneficially owned by Tele-Art, Inc. On February 4, 1999, the liquidator of Tele-Art, Inc. filed a further summons in the BVI on its behalf seeking, among other matters:
| • | A declaration as to the respective priorities of the debts of Tele-Art, Inc. to the Bank of China, us, and other creditors and their respective rights to have their debts discharged out the proceeds of the Tele-Art, Inc.’s Nam Tai shares; | |
| • | An order setting aside the redemption of 138,500 shares, and ordering delivery of all shares in our possession or control of to the liquidator; and | |
| • | Payment of all dividends in respect of Tele-Art, Inc.’s Nam Tai shares. |
On March 26, 2001, we filed a summons seeking to remove the liquidator for failing to act diligently in the performance of his duties and for knowingly misleading the court. On September 3, 2002, the liquidator submitted a letter of resignation prior to the scheduled removal hearing. As of February 11, 2003, new liquidators have not been appointed.
On July 5, 2002, upon our application, the court ordered the removal of the liquidator’s ex-parte injunction and ordered an inquiry into damages. On August 9, 2002, the court delivered a decision awarding us a judgment against Tele-Art, Inc. for approximately $34.0 million. On August 12, 2002, we redeemed and cancelled, pursuant to its Articles of Association, the remaining 169,727 shares beneficially owned by Tele-Art, Inc. at a price of $18.41 per share. Including the dividends which we had withheld and credited against the judgment, this offset a further $3.5 million, approximately, in judgment debts owed to us by Tele-Art, Inc. We recorded the $3.3 million redemption net of expenses as other income in the third quarter of 2002.
On January 21, 2003, judgment was delivered on the liquidators’ February 4, 1999 summons declaring that the redemption and set off of dividends on the 138,500 shares be set aside and that all Tele-Art Inc. property withheld by us be delivered to Tele-Art, Inc. in liquidation. The orders granted in the judgment were substantially different from the relief sought in the February 12, 1999 application. On February 4, 2003, we filed an application for a stay of execution and leave to appeal the decision listing eight grounds of appeal, for which the application is pending.
Our legal representatives have advised us that we have real prospects of success on appeal against the January 21, 2003 decision and we plan to vigorously fight for such an outcome. However, due to the uncertainty of the final outcome of the litigation as a result of the January 21, 2003 judgment and in accordance with SFAS No. 5,“Accounting for Contingencies”, we were advised by Grant Thornton and have made a 2002 provision for $5.2 million for both share redemption plus all dividends declared and withheld by us, pending a final determination of this matter by the courts. If our appeal is successful and all legal matters related to Tele Art, Inc. are finalized, then the $5.2 million will be reversed into income in the related period.
If our appeal is not successful, and the 308,227 share redemption is set aside, we believe that these shares would be sold by Tele-Art, Inc.’s liquidator, once appointed, in the open market at the market price prevailing at the time of sale. For example, if these shares had been sold at the February 21, 2003 closing price of $26.50, the proceeds the liquidator would have realized before commissions, plus withheld dividends of $518,000, would have been approximately $8.7 million for the estate of Tele-Art, Inc. (in liquidation). We have two judgments debts against Tele-Art Inc. in the aggregate amount, including interest, costs, and related expenses,
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Because Tele-Art, Inc. is in liquidation, we may not realize the entire amount of our judgment. The actual amount of the recovery, if any, is uncertain, and is dependent on a number of factors including the value of our shares when sold in the market, and the final determination of other creditors’ positions. We plan to continue to pursue vigorously all legal alternatives available to seek to recover the maximum amount of the outstanding debt from Tele-Art, Inc. (in liquidation) as well as to pursue other parties that may have assisted in any transfers of the assets from Tele-Art, Inc. We may incur substantial additional costs in pursuing our recovery and such costs may not be recoverable.
| Securities Class Actions |
On February 21, 2003, according to published accounts, several lawsuits were filed against us and certain of our officers and directors in the United States District Court for the Southern District of New York. To date, no complaint has been served on us, or, to our knowledge, any officer or director. According to press releases made public by counsel claiming to have filed the complaints, these complaints are brought on behalf of a putative class of purchasers of our stock and raise various categories of claims including alleged violations of Section 10(b) of the Securities Exchange Act of 1934 by issuing false and misleading statements regarding our financial performance and failing to issue timely reports concerning adverse developments in certain material litigation. We believe that we have meritorious defenses to such allegations and, if the complaints are served and the actions prosecuted, intend to defend this action vigorously. However, this litigation could be very costly and divert our management’s attention and resources. In addition, we have no insurance covering our liability, if any, or that of our officers and directors, and we will have to pay the costs of defense. Any adverse determination in this litigation could also subject us to significant liabilities, any or all of which could materially and adversely affect our business and operating results.
Export Sales
Geographic Markets
Approximate percentages of net sales to customers by geographic area based upon location of product delivery are set forth below for the periods indicated:
| Year ended December 31, | ||||||||||||
| Geographic Areas | 2000 | 2001 | 2002 | |||||||||
| Hong Kong | 46 | % | 27 | % | 24 | % | ||||||
| Europe | 9 | 10 | 26 | |||||||||
| North America | 24 | 24 | 17 | |||||||||
| China | 5 | 11 | 12 | |||||||||
| Japan | 9 | 10 | 11 | |||||||||
| Other | 7 | 18 | 10 | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||
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Dividend Policy
We have paid an annual dividend for the last 10 consecutive years. On February 14, 2003, we announced that we were increasing our regular annual dividend to $0.60 per share to be declared and paid quarterly commencing with the first quarter 2003 dividend of $0.15 per share. The following table sets forth the total cash dividends and dividends per share we have declared for each of the five years in the period ended December 31, 2002:
| Year ended December 31, | ||||||||||||||||||||
| 1998 | 1999 | 2000 | 2001 | 2002 | ||||||||||||||||
| Total dividends declared (in thousands) | $ | 2,829 | $ | 2,942 | $ | 12,190 | $ | 4,134 | $ | 17,056 | ||||||||||
| Regular dividends per share | $ | 0.28 | $ | 0.32 | $ | 0.36 | $ | 0.40 | $ | 0.48 | ||||||||||
| Special dividends | — | — | 1.00 | — | 1.00 | |||||||||||||||
| Total dividends per share | $ | 0.28 | $ | 0.32 | $ | 1.36 | $ | 0.40 | $ | 1.48 | ||||||||||
It is our general policy to determine the actual annual amount of future dividends, if any, based upon our growth during the preceding year. Future dividends will be in the form of cash or stock or a combination of both. We may not be able to pay dividends in the future or may decide not to declare them in any event. We will determine the amounts of the dividends when they are declared and even if dividends are declared in the future we may not continue them in any future period.
We declared special dividends in 2000 and 2002 for the reasons described below:
| • | In 2000, as a result of a realized gain we made from our sale of our investment in Group Sense (International) Ltd.; and | |
| • | In 2002, primarily as a result of a realized gain we made from our sale of approximately one-third of our indirect investment in Huizhou TCL Mobile Communication Company Ltd. |
We do no business in the United States that subjects us to United States income taxes on our income and we do not expect to receive dividends from any United States company or any foreign company that has income effectively connected with a United States trade or business. Accordingly, we expect that any cash dividends we pay to our shareholders who are subject to United States income tax will remain taxable if the recent tax proposal relating to exempting dividends from United States income tax is enacted as proposed.
Item 9. The Listing
Our common shares are traded exclusively in the United States. On January 23, 2003, our common shares were listed on the New York Stock Exchange under the symbol “NTE.” Prior to that, our common shares were quoted on the Nasdaq National Market under the symbol “NTAI.”
The following table sets forth the high and low closing sale prices for our common shares for the quarters indicated through February 27, 2003 as reported by the Nasdaq National Market before January 23, 2003 and the New York Stock Exchange since then:
| 2001 | 2002 | 2003 | ||||||||||||||||||||||
| High | Low | High | Low | High | Low | |||||||||||||||||||
| First Quarter | $ | 19.13 | $ | 12.13 | $ | 19.04 | $ | 15.45 | $ | 33.68 | $ | 25.50 | ||||||||||||
| Second Quarter | 15.01 | 12.25 | 23.18 | 18.30 | ||||||||||||||||||||
| Third Quarter | 15.31 | 11.30 | 20.59 | 16.00 | ||||||||||||||||||||
| Fourth Quarter | 17.91 | 12.50 | 27.20 | 18.50 | ||||||||||||||||||||
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The following table sets forth the high and low closing sale prices as reported by The Nasdaq National Market for each of the last five years ended December 31:
| Year ended | High | Low | ||||||
| December 31, 2002 | $27.20 | $15.45 | ||||||
| December 31, 2001 | 19.12 | 5 | 11.30 | |||||
| December 31, 2000 | 20.62 | 5 | 12.93 | 8 | ||||
| December 31, 1999 | 19.00 | 8.00 | ||||||
| December 31, 1998 | 17.62 | 5 | 9.37 | 5 | ||||
The following table sets forth the high and low closing sale prices during each of the most recent six months through January 31, 2003 as reported by the Nasdaq National Market before January 23, 2003 and the New York Stock Exchange since then:
| Month ended | High | Low | ||||||
| January 31, 2003 | $ | 33.68 | $ | 25.50 | ||||
| December 31, 2002 | 27.20 | 22.45 | ||||||
| November 30, 2002 | 22.33 | 20.25 | ||||||
| October 31, 2002 | 20.55 | 18.50 | ||||||
| September 30, 2002 | 19.62 | 17.28 | ||||||
| August 31, 2002 | 20.59 | 18.50 | ||||||
On February 27, 2003, the last reported sale price of our common shares on the New York Stock Exchange was $26.30 per share. As of January 31, 2003, there were 856 holders of record of our common shares.
Item 10. Additional Information
Share Capital
Our authorized capital consists of 20,000,000 common shares, $0.01 par value per share, of which 12,130,668 common shares were outstanding on January 31, 2003.
Memorandum and Articles of Association
Holders of our common shares 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 shares 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 shares have no preemptive rights to purchase any additional, unissued common shares. All of our outstanding common shares are, and the newly issued common shares we are offering pursuant to this prospectus, will be when issued and paid for, duly authorized, validly issued and nonassessable. All of our outstanding common shares are, and the newly issued common shares we are offering pursuant to this prospectus, will be, registered rather than bearer shares.
Pursuant to our Memorandum and Articles of Association and pursuant to the laws of the British Virgin Islands, 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 Nam Tai, including a tender offer to purchase our common shares at a premium over the then current market price.
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We have never had any class of stock outstanding other than our common shares nor have we ever changed the voting rights with respect to our common shares.
Our registered office is at McNamara Chambers, P.O. Box 3342, Road Town, Tortola, British Virgin Islands and we have been assigned company number 3805. Our object or purpose is to engage in any act or activity that is not prohibited under British Virgin Islands law as set forth in Clause 4 of the 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 these restrictions materially affect our operations.
Paragraph 60 of our Amended Articles of Association, or 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 shareholders, who are referred under the law of the British Virgin Islands as “members.” Paragraph 53 of the Articles allows the directors to vote compensation to themselves in respect of services rendered to us. Paragraph 69 of the Articles provides that the directors may by resolution exercise all the powers on our behalf to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever we borrow money or as security for any of our debts, liabilities or obligations or those of any third party. These borrowing powers can be altered by an amendment to the Articles. There is no provision in our Articles for the mandatory retirement of directors; however, we have fixed 65 as the mandatory age of retirement for our directors. Directors are not required to own our shares in order to serve as directors.
Paragraph 85 of the Articles allows us to deduct from any shareholder’s dividends amounts owing to us by that shareholder. Paragraph 13.1 provides that we can redeem shares at fair market value from any shareholder against whom we have a judgment debt.
Paragraph 12 of the Articles provides that without prejudice to any special rights previously conferred on the holders of any existing shares, any of our shares may be issued with such preferred, deferred or other special rights or such restrictions, whether in regard to dividends, voting, return of capital or otherwise as the directors may from time to time determine.
Paragraph 14 of the Articles 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.
Provisions in respect of the holding of general meetings and extraordinary general meetings are set out in Paragraphs 27 to 46 of the Articles and under the International Business Companies Act. The directors may convene meetings of our shareholders 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 shareholders holding more than 30 percent of the votes of our outstanding voting shares. Other than providing, if requested, reasonable proof of a holder’s status as a holder of our shares as of the applicable record date, there is no condition to the admission of a shareholder or his or her proxy holder to our meetings of shareholders.
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 our Memorandum of Association or Articles of Association governing the ownership threshold above which shareholder ownership must be disclosed.
The full text of our Amended Articles and Memorandum were filed as Exhibit 2.1 in the Company’s 1998 Annual Report on Form 20-F.
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Transfer Agent
Registrar and Transfer Agent Company, 10 consecutive trading daysCommerce Drive, Cranford, New Jersey 07016-3572, U.S.A., is the United States transfer agent and registrar for our common shares.
Material Contracts
The following summarizes each material contract, other than contracts entered into in the ordinary course of business, to which Nam Tai or any subsidiary of Nam Tai is a party, for the two years immediately preceding the grant date. Offiling of this report:
| • | Sale and Purchase Agreement dated March 27, 2001 between Nam Tai and Shun Tak Centre Limited for the 15th Floor of China Merchants Tower, Shun Tak Centre, Nos. 168-200 Connaught Road Central, Hong Kong for approximately US$11.3 million. | |
| • | On July 9, 2001 we entered into an indemnification agreement with each of our directors providing for basic indemnification and expense reimbursement. | |
| • | We signed a facility letter on September 24, 2001 with The Hong Kong and Shanghai Banking Corporation Limited for a $15,000,000 long-term loan the terms of which are described in Note 11 of the Notes to the Consolidated Financial Statements. | |
| • | On January 14, 2002 we entered into a restructuring agreement with the joint liquidators of Albatronics. Under the restructuring agreement we injected our wholly-owned subsidiary JIC Group into a new company for 92.9% ownership in the new company on a fully diluted basis after conversion of preference shares. Albatronics’ listing status on the Hong Kong Stock Exchange was withdrawn and the new company was listed on the Hong Kong Stock Exchange by way of introduction and free from the liabilities of Albatronics. Immediately following completion of the restructuring, we, the creditors and the public beneficially owned approximately 70.4%, 24.1% and 5.5% of the enlarged issued ordinary share capital of the new company, respectively, and we also hold preference shares. Upon our full conversion of the preference shares, we, the creditors and the public will own approximately 92.9%, 5.8% and 1.3% of the enlarged issued ordinary share capital of the new company respectively. No holder of preference shares is entitled to exercise its conversion right if such conversion would result in the minimum public float of 25% as required under the Hong Kong Stock Exchange Listing Rules not being met. Consummation of the restructuring agreement was subject to the fulfillment of a number of conditions including approval by Albatronics’ creditors and shareholders and the Listing Committee of the Stock Exchange of Hong Kong and the receipt of other regulatory and court approvals. The restructuring was consummated in the second quarter of 2002. | |
| • | Share Transfer Agreement dated January 25, 2002 between Hui Zhou City Investment Holdings Co., Ltd., as seller, and Namtai Electronic (Shenzhen) Co., Ltd., as buyer, under which Hui Zhou City agreed to transfer a 6% equity interest in TCL Holdings Corporation Ltd. to Namtai Electronic for RMB98,520,000 (approximately $12.0 million). | |
| • | J.I.C. Enterprises (Hong Kong) Ltd. signed a banking facility letter on March 27, 2002 with Shanghai Commercial Bank Ltd. for a four-year term loan with borrowings totaling $4,500,000. The loan is charged at an annual rate of 1.5% over the 3-month London Interbank Offered Rate and is repayable in 16 quarterly payments of US$281,250 plus interest accrued. | |
| • | On April 24, 2002, Nam Tai Electronic & Electrical Products Limited, or NTEE, entered into a Sale and Purchase Agreement with Toshiba Battery Co., Ltd., or Toshiba, and A&T Battery Corp., or ATB, under which NTEE agreed to transfer its 86.7% equity interest in BPC (Shenzhen) Co., Ltd. to ATB in exchange for $1,300,000 from ATB and $800,000 from Toshiba, which was related to the termination of a license. | |
| • | We entered into a Subscription Agreement with TCL International Holdings Ltd. on September 6, 2002 under which we agreed to purchase HK$40,000,000 (approximately $5.1 million) of 3% convertible notes of TCL International Holdings Ltd. that mature three years after issuance. |
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| • | We entered into a Subscription Agreement with Alpha Star Investments Ltd. (“Alpha Star”) on January 6, 2003 under which Nam Tai agreed to purchase 1,625,000 newly issued ordinary shares of Alpha Star (25% ownership) for $10,000,000. We agreed to sign a shareholders agreement and Alpha Star agreed to place with us or a party we nominate at least 50% of the orders for radio frequency modules that it or its subsidiaries receive. | |
| • | On January 8, 2003, we entered into a Shareholders Agreement with the other three shareholders of Alpha Star Investments Ltd. (“Alpha Star”) under which each shareholder is granted a right of first refusal and is generally prohibited from competing against Alpha Star. |
Exchange Controls
There are no exchange control restrictions on payments of dividends, interest, or other payments to nonresident holders of Nam Tai’s securities or on the 302,000 options grantedconduct of our operations in Hong Kong, or where our principal executive offices are located in the British Virgin Islands, where Nam Tai is incorporated. Other jurisdictions in which we conduct operations may have various exchange controls. With respect to our China subsidiaries, with the exception of a requirement that 10% of profits be reserved for future developments, there are no restrictions on February
1, 2000, 130,000 maythe payment of dividends and the removal of dividends from China once all taxes are paid and assessed and losses, if any, from previous years have been made good. In the event that dividends are paid by our China subsidiaries, such dividends will reduce the amount of reinvested profits and accordingly, the refund of taxes paid will be reduced to the extent of tax applicable to profits not reinvested. We believe such restrictions will not have a material effect on our liquidity or cash flow.
Taxation
United States Federal Income Tax Consequences
The discussion below is for general information only and is not, and should not be exercised until after May 31, 2001 whileinterpreted to be, tax advice to any holder of our common shares. Each holder of our common shares is urged to consult his, her or its own tax advisor.
General
This section is a general summary of the remaining 172,000material United States federal income tax consequences of the ownership and disposition of our common shares as of the date of this prospectus. The summary applies to you only if you hold our common shares as a capital asset for tax purposes (that is, generally for investment purposes), and it does not purport to be a comprehensive description of all the tax considerations that may be relevant to the ownership of our common shares. The summary is based on current law. Changes in the law may alter your tax treatment of holding our common shares, possibly on a retroactive basis. The United States Internal Revenue Service, or IRS, may challenge the tax consequences described below, and we have not requested, nor will we request, a ruling from the IRS or an opinion of counsel with respect to the United States federal income tax consequences of acquiring, holding or disposing of our common shares. The discussion below does not cover tax consequences that depend upon your particular tax circumstances nor does it cover any state, local or foreign law, or the possible application of United States federal estate or gift tax. You are urged to consult your own tax advisors regarding the application of the United States federal income tax laws to your particular situation as well as any state, local, foreign and the United States federal estate and gift tax consequences of the ownership and disposition of the common shares. In addition, this summary does not take into account any special United States federal income tax rules that apply to a particular holder of our common shares, including, without limitation, the following:
| • | a dealer in securities or currencies; | |
| • | a trader in securities that elects to use a market-to-market method of accounting for your securities holdings; | |
| • | a financial institution or a bank; |
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| • | an insurance company; | |
| • | a tax-exempt organization; | |
| • | a person that holds our common shares in a hedging transaction or as part of a straddle or a conversion transaction; | |
| • | a person whose functional currency for United States federal income tax purposes is not the U.S. dollar; | |
| • | a person liable for alternative minimum tax; | |
| • | a person that owns, or is treated as owning, 10% or more, by voting power or value, of our common shares; or | |
| • | a person who receives our shares pursuant to the exercise of employee stock options or otherwise as compensation. |
Tax Consequences to U.S. Holders
For purposes of the discussion below, you are a “U.S. Holder” if you are a beneficial owner of our common shares who or which is:
| • | an individual United States citizen or resident alien of the United States (as specifically defined for United States federal income tax purposes); | |
| • | a corporation created or organized in or under the laws of the United States or any State or political subdivision thereof; | |
| • | an estate whose income is subject to United States federal income tax regardless of its source; | |
| • | a trust (x) if a United States court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust or (y) if it was in existence on August 20, 1996, was treated as a U.S. person prior to that date and has a valid election in effect under applicable treasury regulations to be treated as a U.S. person; or | |
| • | any other person or entity that would be subject to United States federal income tax on a net income basis in respect of the common shares. |
Distributions
Subject to the passive foreign investment company considerations discussed below, for cash dividends, the gross amount of any such distribution (other than in liquidation) that you receive with respect to our common shares generally will be subject to tax as ordinary dividend income to the extent such distribution does not exceed our current or accumulated earnings and profits, or E&P, as calculated for United States federal income tax purposes. Such income will be includable in your gross income on the date of receipt. To the extent any distribution exceeds our E&P, such distribution will first be treated as a tax-free return of capital to the extent of your adjusted tax basis in our common shares and will be applied against and reduce such basis on a dollar-for-dollar basis (thereby increasing the amount of gain and decreasing the amount of loss recognized on a subsequent disposition of such shares). To the extent that such distribution exceeds your adjusted tax basis in our common shares, the distribution will be such to tax as gain recognized on a sale or exchange of our common shares. Because we are not a United States corporation, no dividends-received deduction will be allowed to corporations with respect to dividends paid by us.
Dividends received on our common shares will be treated for United States federal income tax purposes, as foreign source income. A U.S. Holder may be eligible subject to a number of complex limitations, to claim a foreign tax credit in respect of foreign withholding taxes, if any, imposed on dividends received on our common shares.
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We do no business in the United States that subjects us to United States income taxes on our income, and we do not expect to receive dividends from any U.S. company or any foreign company that has income effectively connected with a U.S. trade or business. Accordingly, we expect that any cash dividends we pay to our shareholders who are subject to United States income tax will remain taxable if the recent tax proposal relating to exempting dividends from United States income tax is enacted as proposed.
Sale or Other Disposition of Our Common Shares
Subject to the passive foreign investment company considerations discussed below, generally, in connection with the sale or other taxable disposition of our common shares:
| • | you will recognize capital gain or loss equal to the difference (if any) between: |
| — | the amount realized on such sale or other taxable disposition and | |
| — | your adjusted tax basis in such common shares (your adjusted tax basis in the shares you hold generally will equal your U.S. dollar cost of such shares); |
| • | such gain or loss will be long-term capital gain or loss if your holding period for our common shares is more than one year at the time of such sale or other disposition; | |
| • | such gain or loss will generally be treated as United States source for United States foreign tax credit purposes; and | |
| • | your ability to deduct capital losses is subject to limitations. |
Passive Foreign Investment Company Considerations
A foreign corporation will be treated as a passive foreign investment company, or PFIC, for United States federal income tax purposes, if 75% or more of its gross income consists of certain types of passive income or 50% or more of its assets are passive. 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 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.
Tax Consequences to Non-U.S. Holders
If you are not a U.S. Holder, you are a “Non-U.S. Holder.”
Distributions
You generally will not be exercised untilsubject to United States federal income tax, including withholding tax, on distributions made on our common shares unless:
| • | you conduct a trade or business in the United States and | |
| • | the distributions are effectively connected with the conduct of that trade or business (and, if an applicable income tax treaty so requires as a condition for you to be subject to United States federal income tax on a net income basis in respect of income from our common shares, such distributions are attributable to a permanent establishment that you maintain in the United States). |
If you meet the requirements set forth above, you generally will be subject to tax in respect of such dividends in the same manner as a U.S. Holder, as described above. In addition, any effectively connected dividends received by a non-United States corporation may also, under certain circumstances, be subject to an
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Sale or Other Disposition of Our Common Shares
Generally, you will not be subject to United States federal income tax, including withholding tax, in respect of gain recognized on a sale or other taxable disposition of our common shares unless:
| • | your gain is effectively connected with a trade or business that you conduct in the United States (and, if an applicable income tax treaty so requires as a condition for you to be subject to United States federal income tax on a net income basis in respect of gain from the sale or other disposition of our common shares, such gain is attributable to a permanent establishment maintained by you in the United States), or | |
| • | you are an individual Non-U.S. Holder and are present in the United States for at least 183 days in the taxable year of the sale or other disposition, and certain other conditions exist. |
You will be subject to tax in respect of any gain effectively connected with your conduct of a trade or business in the United States generally in the same manner as a U.S. holder, as described above. Effectively connected gains realized by a non-United States corporation may also, under certain circumstances, be subject to an additional “branch profits tax” at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty.
Backup Withholding and Information Reporting
Payments (or other taxable distributions) in respect of our common shares that are made in the United States or by a United States related financial intermediary will be subject to United States information reporting rules. In addition, such payments may be subject to United States federal backup withholding tax. You will not be subject to backup withholding provided that:
| • | you are a corporation or other exempt recipient, or | |
| • | you provide your correct United States federal taxpayer identification number and certify, under penalties of perjury, that no loss of exemption from backup withholding has occurred. |
If you are a Non-U.S. Holder, you generally are not subject to information reporting and backup withholding, but you may be required to provide a certification of your non-United States status in order to establish that you are exempt.
Amounts withheld under the backup withholding rules may be credited against your United States federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS.
BRITISH VIRGIN ISLANDS TAX CONSIDERATIONS
Under the International Business Companies Act of the British Virgin Islands as currently in effect, a holder of common equity, such as our common shares, who is not a resident of the British Virgin Islands is exempt from British Virgin Islands income tax on dividends paid with respect to the common equity and is not liable to the British Virgin Islands for income tax on gains realized on sale or disposal of such shares. Furthermore, there are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on persons who are not residents of the British Virgin Islands. The British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated under the International Business Companies Act.
Our common shares are not subject to transfer taxes, stamp duties or similar charges. There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands.
61
Item 11. Quantitative and Qualitative Disclosure About Market Risk
Currency Fluctuations
See Exchange Rate Fluctuation discussion in risk factor section and MD&A on pages 10 and 42, respectively.
Foreign Currency Risk
See Foreign Currency Risk discussion in MD&A on page 43.
Interest Rate Risk
See Interest Rate Risk discussion in MD&A on page 44.
Item 12. Description of Securities Other Than Equity Securities
Not applicable
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicable
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Not applicable
Item 15. Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, after January 1, 2001 unlessevaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in US Exchange Act Rules 13a-14(c)) within 90 days of the date of this Form 20-F, have concluded that, as of such date, the Company’s disclosure controls and procedures were effective to ensure that material information relating to the Company has successfully redeemedwas made known to them by others within the outstanding Common Share Purchase Warrants
issuedCompany particularly during the period in which this Form 20-F was being prepared.
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the publicdate our Chief Executive Officer and our Chief Financial Officer completed their evaluation, nor were there any significant deficiencies or material weaknesses in the 1997 Offering.
At March 1, 2000, the Company had outstanding warrants to purchase an
aggregate of 3,427,129 Common Shares. Of these, 2,997,129 warrants which were
issued to the public in the 1997 Offering (the "Warrants") are exercisable to
purchase 2,997,129 Common Shares at $20.40 per share until November 24, 2000;
130,000 warrants are exercisable beginning November 30, 1998 to purchase 130,000
Units (consisting of one Common Share and one Warrant) at $20.40 per Unit until
November 24, 2000; and 300,000 warrants issued on October 5, 1998 are
exercisable to purchase 300,000 Commons Shares at $10.25 per share until October
4, 2001.
-34-
35
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
See Note 16 of Notes to ConsolidatedCompany’s internal controls requiring corrective actions.
Item 16. [Reserved]
62
PART III
Item 17. Financial Statements included
elsewhere herein.
PART II
ITEM 14. DESCRIPTION OF SECURITIES
Not Applicable
Item 18. Financial Statements
INDEX TO BE REGISTERED
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR THE COMPANY'S
SECURITIES
Not applicable.
PART IV
ITEM 17.CONSOLIDATED FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements are filed as part of this report:
| Independent Auditors’ Reports | F-1 | |||
| Consolidated Statements of Income for the years ended December 31, | F-3 | |||
| Consolidated Balance Sheets as of December 31, | F-4 | |||
| Consolidated | F-5 | |||
| Consolidated Statements of Cash Flows for the years ended December 31, | F-6 | |||
| Notes to Consolidated Financial | F-8 |
The information required within the schedules for which provisions are made in the applicable accounting regulations of the Securities and Exchange Commission areis either not required underapplicable or is included in the related instructions or are inapplicable, and therefore have been omitted.
-35-
36
[LETTERHEAD OF DELOITTE TOUCHE TOHMATSU]
INDEPENDENT AUDITORS' REPORT
notes to the Consolidated Financial Statements.
63
Independent Auditors’ Report
To the Shareholders and the Board of Directors of Nam Tai Electronics, Inc.:
We have audited the accompanying consolidated balance sheet of Nam Tai Electronics, Inc. and subsidiariesSubsidiaries (the “Company”) as of December 31, 1999 and 1998,2002, and the related consolidated statements of income, shareholders'shareholders’ equity and cash flows for the yearsyear then ended. These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of the Company as of December 31, 2001 and for the two years then ended were audited by other auditors whose report dated March 15, 2002, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, suchthe consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nam Tai Electronics, Inc. and subsidiariesSubsidiaries at December 31, 1999 and 1998,2002 and the results of their operations and their cash flows for the yearsyear then ended in conformity with accounting principles generally accepted in the United States of America.
/S/ Deloitte Touch Tohmatsu
DELOITTE TOUCHE TOHMATSU
March 27, 2000
As discussed in note 2(f) to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangibles.
/s/ GRANT THORNTON
Hong Kong
-36-
37
[LETTERHEAD OF PRICE WATERHOUSE]
REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
NAM TAI ELECTRONICS, INC.
F-1
Independent Auditors’ Report
To the Shareholders and the Board of Directors of Nam Tai Electronics, Inc.:
We have audited the accompanying consolidated balance sheet of Nam Tai Electronics, Inc. and Subsidiaries (the “Company”) as of December 31, 2001, and the related consolidated statements of income, shareholders'shareholders’ equity and cash flows for each of the yeartwo years in the period ended December 31, 1997.2001. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, thesuch consolidated financial statements referred to above present fairly, in all material respects, the results of the operations and the cash flowsfinancial position of Nam Tai Electronics, Inc. and its subsidiariesSubsidiaries as of December 31, 2001, and the results of their operations and their cash flows for each of the yeartwo years in the period ended December 31, 19972001 in conformity with accounting principles generally accepted in the United States of America.
/S/Price Waterhouse
- ----------------------------------------
PRICE WATERHOUSE
Certified Public Accountants
HONG KONG
/s/ DELOITTE TOUCHE TOHMATSU
Hong Kong
F-2
Nam Tai Electronics, Inc. and Subsidiaries
Consolidated Statements of Income
| Year Ended December 31, | ||||||||||||
| 2000 | 2001 | 2002 | ||||||||||
| (In thousands of US dollars, | ||||||||||||
| except per share data) | ||||||||||||
| Net sales | $ | 213,688 | $ | 234,006 | $ | 236,016 | ||||||
| Cost of sales | 182,096 | 203,974 | 197,956 | |||||||||
| Gross profit | 31,592 | 30,032 | 38,060 | |||||||||
| Selling, general and administrative expenses | 17,646 | 21,974 | 17,983 | |||||||||
| Research and development expenses | 3,489 | 2,954 | 2,686 | |||||||||
| Impairment of goodwill | — | — | 339 | |||||||||
| Total operating expenses | 21,135 | 24,928 | 21,008 | |||||||||
| Income from operations | 10,457 | 5,104 | 17,052 | |||||||||
| Equity in (loss) income of affiliated companies | (189 | ) | 1,867 | 10,741 | ||||||||
| Other income (expense), net | 13,853 | 2,709 | (6,043 | ) | ||||||||
| Interest expense | (165 | ) | (178 | ) | (790 | ) | ||||||
| Income before income taxes and minority interests | 23,956 | 9,502 | 20,960 | |||||||||
| Income taxes benefit (expense) | 33 | (227 | ) | (773 | ) | |||||||
| Income before minority interests | 23,989 | 9,275 | 20,187 | |||||||||
| Minority interests | 12 | (230 | ) | (164 | ) | |||||||
| Net income | $ | 24,001 | $ | 9,045 | $ | 20,023 | ||||||
| Basic earnings per share | $ | 2.63 | $ | 0.88 | $ | 1.89 | ||||||
| Diluted earnings per share | $ | 2.56 | $ | 0.87 | $ | 1.86 | ||||||
See accompanying notes to the consolidated financial statements.
-38-
39
NAM TAI ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
statements
DECEMBER 31,
----------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 54,215 $ 71,215
Marketable securities (Note 10) - 513
Accounts receivable, net 24,283 16,138
Inventories (Note 11) 10,901 4,355
Prepaid expenses and deposits 2,967 2,054
Income taxes recoverable (Note 8) 2,070 2,740
-------- --------
Total current assets 94,436 97,015
Investment in an unconsolidated subsidiary (Note 1b) - 1
Investment in an affiliated company (Note 12) 17,308 16,223
Property, plant and equipment - net (Note 13) 44,717 32,445
Intangible assets - net (Note 14) 839 -
Other assets 1,447 1,544
-------- --------
Total assets $158,747 $147,228
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 6,949 $ 329
Accounts payable and accrued expenses 25,504 18,377
Dividend payable 718 665
Income taxes payable - 105
-------- --------
Total current liabilities 33,171 19,476
Deferred income taxes (Note 8) 8 56
-------- --------
Total liabilities 33,179 19,532
-------- --------
Commitments and contingencies (Note 17)
Shareholders' equity:
Common shares ($0.01 par value - authorized 20,000,000 shares; shares issued
and outstanding at December 31, 1999 - 8,840,823
December 31, 1998 - 9,812,523) 88 98
Additional paid-in capital 80,870 80,044
Retained earnings 44,566 47,509
Accumulated other comprehensive income 44 45
-------- --------
Total shareholders' equity 125,568 127,696
-------- --------
Total liabilities and shareholders' equity $158,747 $147,228
======== ========
F-3
Nam Tai Electronics, Inc. and Subsidiaries
Consolidated Balance Sheets
| December 31, | ||||||||
| 2001 | 2002 | |||||||
| (In thousands of | ||||||||
| US dollars, except | ||||||||
| share data) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 58,676 | $ | 82,477 | ||||
| Marketable securities | 9,505 | — | ||||||
| Accounts receivable, less allowance for doubtful accounts of $31 and $122 at December 31, 2001 and 2002, respectively | 41,968 | 50,944 | ||||||
| Inventories, net | 11,892 | 19,200 | ||||||
| Prepaid expenses and deposits | 2,377 | 1,867 | ||||||
| Income taxes recoverable | 1,353 | 855 | ||||||
| Total current assets | 125,771 | 155,343 | ||||||
| Investment in affiliated companies, equity method | 3,921 | — | ||||||
| Investments, at cost | — | 15,982 | ||||||
| Convertible notes | — | 5,128 | ||||||
| Property, plant and equipment, net | 70,414 | 75,914 | ||||||
| Goodwill, net | 22,089 | 21,308 | ||||||
| Intangible assets, net | 971 | — | ||||||
| Other assets | 1,407 | 1,411 | ||||||
| Total assets | $ | 224,573 | $ | 275,086 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Notes payable | $ | 1,547 | $ | 985 | ||||
| Long term bank loans — current portion | 2,140 | 13,985 | ||||||
| Accounts payable | 27,929 | 38,714 | ||||||
| Accrued expenses | 6,329 | 12,609 | ||||||
| Amount due to a related party | 2,733 | — | ||||||
| Dividend payable | 1,023 | 1,442 | ||||||
| Income taxes payable | 88 | 200 | ||||||
| Total current liabilities | 41,789 | 67,935 | ||||||
| Deferred income taxes | 151 | 112 | ||||||
| Long term bank loans — non-current portion | 12,860 | 2,812 | ||||||
| Total liabilities | 54,800 | 70,859 | ||||||
| Minority interests | 422 | 2,099 | ||||||
| Commitments and contingencies | — | — | ||||||
| Shareholders’ equity | ||||||||
| Common shares ($0.01 par value — authorized 20,000,000 shares; shares issued and outstanding at December 31, 2001 — 10,401,940, December 31, 2002 — 12,019,668) | 104 | 120 | ||||||
| Additional paid-in capital | 111,368 | 147,828 | ||||||
| Retained earnings | 57,864 | 54,182 | ||||||
| Accumulated other comprehensive income (loss) | 15 | (2 | ) | |||||
| Total shareholders’ equity | 169,351 | 202,128 | ||||||
| Total liabilities and shareholders’ equity | $ | 224,573 | $ | 275,086 | ||||
See accompanying notes to the consolidated financial statements.
-39-
40
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
ACCUMULATED TOTAL
COMMON COMMON ADDITIONAL STOCK OTHER SHARE-
SHARES SHARES PAID-IN OPTIONS RETAINED COMPREHENSIVE HOLDERS'
OUTSTANDING AMOUNT CAPITAL GRANTED EARNINGS INCOME EQUITY
----------- ------ ------- ------- -------- ------ ------
Balance at January 1, 1997 7,837,227 $ 78 $28,572 $ 305 $ 38,007 $ 28 $ 66,990
----------- ----- ------- ----- -------- ---- ---------
Share buy-back program (1,000) - - - (10) - (10)
Shares issued on exercise of options 386,667 4 3,802 (305) - - 3,501
Shares and warrants
issued on rights offering 2,997,129 30 47,670 - - - 47,700
Comprehensive income:
Net income - - - - 30,839 - 30,839
Foreign currency translation - - - - - 2 2
Dividends ($0.10 per share) - - - - (786) - (786)
----------- ----- ------- ----- -------- ---- ---------
Balance at December 31, 1997 11,220,023 112 80,044 - 68,050 30 148,236
Share buy-back program (1,407,500) (14) - - (21,241) - (21,255)
Issue of options - - - 75 - - 75
Options cancelled - - - (75) - - (75)
Comprehensive income:
Net income - - - - 3,529 - 3,529
Foreign currency translation - - - - - 15 15
Dividends ($0.28 per share) - - - - (2,829) - (2,829)
----------- ----- ------- ----- -------- ---- ---------
Balance at December 31, 1998 9,812,523 98 80,044 - 47,509 45 127,696
Share buy-back program (879,700) (9) - - (10,251) - (10,260)
Share redemption (Note 17d) (138,500) (1) - - (1,548) - (1,549)
Shares issued as compensation 10,000 - 103 - - - 103
Shares issued on exercise of options 36,500 - 394 - - - 394
Advisors' warrants - - 329 - - - 329
Comprehensive income:
Net income - - - - 11,798 - 11,798
Foreign currency translation - - - - - (1) (1)
Dividends ($0.32 per share) - - - - (2,942) - (2,942)
----------- ----- ------- ----- -------- ---- ---------
Balance at December 31, 1999 8,840,823 $ 88 $80,870 $ - $ 44,566 $ 44 $ 125,568
=========== ===== ======= ===== ======== ==== =========
Accumulated other comprehensive income represents foreign currency translation
adjustments.
The comprehensive incomestatements
F-4
Nam Tai Electronics, Inc. and Subsidiaries
Consolidated Statements of the Company was $11,797, $3,544 and $30,841 for the
years ended December 31, 1999, 1998 and 1997, respectively.
Shareholders’ Equity
| Accumulated | |||||||||||||||||||||||||
| Common | Common | Additional | other | Total | |||||||||||||||||||||
| shares | shares | paid-in | Retained | comprehensive | shareholders’ | ||||||||||||||||||||
| outstanding | amount | capital | earnings | income (loss) | equity | ||||||||||||||||||||
| (In thousands of US dollars, except share and per share data) | |||||||||||||||||||||||||
| Balance at January 1, 2000 | 8,840,823 | $ | 88 | $ | 80,870 | $ | 44,566 | $ | 44 | $ | 125,568 | ||||||||||||||
| Share buy-back program | (5,600 | ) | — | — | (73 | ) | — | (73 | ) | ||||||||||||||||
| Shares issued as compensation | 10,000 | — | 136 | — | — | 136 | |||||||||||||||||||
| Shares issued on exercise of advisors’ warrants | 58,030 | 1 | 1,183 | — | — | 1,184 | |||||||||||||||||||
| Shares issued on exercise of options | 149,500 | 1 | 1,568 | — | — | 1,569 | |||||||||||||||||||
| Shares issued for acquisition of subsidiaries | 1,161,087 | 12 | 21,783 | — | — | 21,795 | |||||||||||||||||||
| Advisors’ warrants and options | — | — | 423 | — | — | 423 | |||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||
| Net income | — | — | — | 24,001 | — | 24,001 | |||||||||||||||||||
| Foreign currency translation | — | — | — | — | (49 | ) | (49 | ) | |||||||||||||||||
| Dividends ($1.36 per share, including special dividend of $1 per share) | — | — | — | (12,190 | ) | — | (12,190 | ) | |||||||||||||||||
| Balance at December 31, 2000 | 10,213,840 | $ | 102 | $ | 105,963 | $ | 56,304 | $ | (5 | ) | $ | 162,364 | |||||||||||||
| Share buy-back program | (227,900 | ) | (2 | ) | — | (3,351 | ) | — | (3,353 | ) | |||||||||||||||
| Shares issued on exercise of advisors’ warrants | 300,000 | 3 | 3,072 | — | — | 3,075 | |||||||||||||||||||
| Shares issued on exercise of options | 116,000 | 1 | 1,231 | — | — | 1,232 | |||||||||||||||||||
| Advisors’ warrants | — | — | 263 | — | — | 263 | |||||||||||||||||||
| Issue of options | — | — | 839 | — | �� | 839 | |||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||
| Net income | — | — | — | 9,045 | — | 9,045 | |||||||||||||||||||
| Foreign currency translation | — | — | — | — | 20 | 20 | |||||||||||||||||||
| Dividends ($0.40 per share) | — | — | — | (4,134 | ) | — | (4,134 | ) | |||||||||||||||||
| Balance at December 31, 2001 | 10,401,940 | $ | 104 | $ | 111,368 | $ | 57,864 | $ | 15 | $ | 169,351 | ||||||||||||||
| Share buy-back program | (197,600 | ) | (2 | ) | — | (3,526 | ) | — | (3,528 | ) | |||||||||||||||
| Share redemption | (169,727 | ) | (2 | ) | — | (3,123 | ) | — | (3,125 | ) | |||||||||||||||
| Shares issued on exercise of public warrants | 1,460,655 | 15 | 29,782 | — | — | 29,797 | |||||||||||||||||||
| Shares issued on exercise of options | 524,400 | 5 | 6,668 | — | — | 6,673 | |||||||||||||||||||
| Advisors’ options | — | — | 10 | — | — | 10 | |||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||
| Net income | — | — | — | 20,023 | — | 20,023 | |||||||||||||||||||
| Foreign currency translation | — | — | — | — | (17 | ) | (17 | ) | |||||||||||||||||
| Dividends ($1.48 per share, including special dividend of $1 per share) | — | — | — | (17,056 | ) | — | (17,056 | ) | |||||||||||||||||
| Balance at December 31, 2002 | 12,019,668 | $ | 120 | $ | 147,828 | $ | 54,182 | $ | (2 | ) | $ | 202,128 | |||||||||||||
See accompanying notes to the consolidated financial statements.
-40-
41
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF US DOLLARS)
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net income $ 11,798 $ 3,529 $ 30,839
--------- --------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,288 4,258 4,331
Amortization of intangible assets 52 - -
Amortization of advisors' warrants 329 - -
Gain on disposal of property, plant and equipment (159) (766) (4,350)
Gain on disposal of long-term investments - (1,299) (5,488)
Loss on disposal of a subsidiary 290 - -
Unrealized loss on decline of market value of
marketable securities - 468 -
Equity in income of an affiliated company less dividend
received and amortization of goodwill (859) (404) -
Equity in loss of an unconsolidated subsidiary - 1,708 -
Write off/provision for impairment of investment in
an unconsolidated subsidiary 1 8,271 -
Fair value of shares issued as compensation 103 - -
Deferred income taxes (48) 56 -
Changes in current assets and liabilities:
Decrease (increase) in marketable securities 287 (981) -
(Increase) decrease in accounts receivable (8,147) 824 (396)
(Increase) decrease in inventories (6,546) 5,483 673
Increase in prepaid expenses and deposits (896) (832) (289)
Decrease (increase) in income taxes recoverable 670 (174) (1,731)
Decrease in notes payable (329) (1,485) (3,372)
Increase in accounts payable and accrued expenses 7,224 826 1,330
(Decrease) increase in income taxes payable (105) (82) 156
--------- --------- ---------
Total adjustments (2,845) 15,871 (9,136)
--------- --------- ---------
Net cash provided by operating activities 8,953 19,400 21,703
Cash flows from investing activities:
Purchase of property, plant and equipment (17,888) (4,699) (3,602)
Acquisition of business (note 1a) (951) - -
Purchase of other assets (53) (53) (246)
Cash outflow on disposal of a subsidiary (note 1c) (19) - -
Proceeds from disposal of property, plant and equipment 322 1,197 7,666
Purchase of interest in an affiliated company (note 1d) - (15,819) (12)
Purchase of interest in an unconsolidated
subsidiary (note 1b) - (9,980) -
Proceeds from disposal of long-term investments - 2,132 8,717
Net cash (used in) provided by investing activities (18,589) (27,222) 12,523
--------- --------- ---------
Cash flows from financing activities:
Share buy-back program (10,260) (21,255) (10)
Dividends paid (2,889) (2,141) (749)
Share redemption (1,549) - -
Notes payable 6,949 - -
Proceeds from shares issued on exercise of options 394 - -
Proceeds from shares issued in rights offering, net - - 47,700
Proceeds from shares issued, net - - 3,501
--------- --------- ---------
Net cash (used in) provided by financing activities (7,355) (23,396) 50,442
--------- --------- ---------
Foreign currency translation adjustments (9) 22 2
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (17,000) (31,196) 84,670
Cash and cash equivalents at beginning of period 71,215 102,411 17,741
--------- --------- ---------
Cash and cash equivalents at end of period $ 54,215 $ 71,215 $ 102,411
========= ========= =========
-41-
42
NAM TAI ELECTRONICS. INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF US DOLLARS)
statements
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
Supplemental schedule of cash flow information:
Interest paid $ 192 $ 1 $ 39
--------- --------- ---------
Income taxes paid $ - $ 161 $ 123
--------- --------- ---------
F-5
Nam Tai Electronics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| Year Ended December 31, | |||||||||||||
| 2000 | 2001 | 2002 | |||||||||||
| (In thousands of US dollars) | |||||||||||||
Cash flows from operating activities: | |||||||||||||
| Net income | $ | 24,001 | $ | 9,045 | $ | 20,023 | |||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||||||||
| Depreciation | 6,965 | 9,136 | 10,397 | ||||||||||
| Amortization of intangible assets | 733 | 2,035 | 222 | ||||||||||
| Impairment of goodwill — Micro Business Systems Industries Company Limited (“MBS”) | — | — | 339 | ||||||||||
| Amortization of advisors’ warrants and options | 423 | 263 | 10 | ||||||||||
| Staff option costs | — | 839 | — | ||||||||||
| Share redemption and dividend withheld — Tele-Art, Inc. (“Tele-Art”) | — | — | (3,519 | ) | |||||||||
| (Gain) Loss on disposal of property, plant and equipment | (244 | ) | 378 | 977 | |||||||||
| Gain on disposal of investments — Group Sense (International) Limited (“Group Sense”) | (9,435 | ) | — | — | |||||||||
| Gain on disposal of investment in an affiliated company — Group Sense | (1,346 | ) | — | — | |||||||||
| Release of unamortized goodwill of affiliated companies — Mate Fair Group Limited (“Mate Fair”) | — | — | 520 | ||||||||||
| Gain on disposal of a subsidiary and related intangible assets — BPC (Shenzhen) Co., Ltd. (“BPC”) | — | — | (77 | ) | |||||||||
| Loss on disposal of other assets | — | — | 21 | ||||||||||
| Loss on restructuring of subsidiaries — J.I.C. Group (B.V.I.) Limited and its subsidiaries (“JIC Group”) | — | — | 2,655 | ||||||||||
| Unrealized gain on marketable securities | (433 | ) | (1,568 | ) | — | ||||||||
| Realized gain on marketable securities | — | — | (642 | ) | |||||||||
| Equity in loss (income) of affiliated companies | 189 | (1,867 | ) | (10,741 | ) | ||||||||
| Dividend income from affiliated companies — Mate Fair | — | — | 10,456 | ||||||||||
| Fair value of shares issued as compensation | 136 | — | — | ||||||||||
| Deferred income taxes | (110 | ) | 117 | (39 | ) | ||||||||
| Minority interests | (12 | ) | 230 | 164 | |||||||||
| Changes in current assets and liabilities (net of effects of acquisitions and disposals): | |||||||||||||
| (Acquisition of) Proceeds from marketable securities | (7,504 | ) | — | 10,147 | |||||||||
| Increase in accounts receivable | (5,137 | ) | (4,378 | ) | (8,531 | ) | |||||||
| (Increase) Decrease in inventories | (13,245 | ) | 15,302 | (7,625 | ) | ||||||||
| Decrease (Increase) in prepaid expenses and deposits | 407 | (620 | ) | 496 | |||||||||
| Decrease in income taxes recoverable | 28 | 689 | 498 | ||||||||||
| (Decrease) Increase in notes payable | (6,331 | ) | 48 | (562 | ) | ||||||||
| Increase (Decrease) in accounts payable and accrued expenses | 7,203 | (6,062 | ) | 16,967 | |||||||||
| (Decrease) Increase in income taxes payable | (114 | ) | (354 | ) | 112 | ||||||||
| Increase (Decrease) in amount due to a related party | 2,691 | 2 | (2,766 | ) | |||||||||
| Total adjustments | (25,136 | ) | 14,190 | 19,479 | |||||||||
Net cash (used in) provided by operating activities | (1,135 | ) | 23,235 | 39,502 | |||||||||
F-6
Consolidated Statements of Cash Flows — (Continued)
| Year Ended December 31, | ||||||||||||
| 2000 | 2001 | 2002 | ||||||||||
| (In thousands of US dollars) | ||||||||||||
Cash flows from investing activities: | ||||||||||||
| Acquisition of long term investment — TCL Corporation | — | — | (11,968 | ) | ||||||||
| Acquisition of convertible notes — TCL International Holdings Limited | — | — | (5,128 | ) | ||||||||
| Purchase of property, plant and equipment | (3,579 | ) | (36,013 | ) | (18,485 | ) | ||||||
| Acquisition of JIC Group, net of cash acquired | (7,872 | ) | — | — | ||||||||
| Acquisition of additional shares in subsidiaries, net of cash acquired — JIC Group and Mate Fair | — | (85 | ) | (436 | ) | |||||||
| Decrease (Increase) in other assets | 123 | (38 | ) | (25 | ) | |||||||
| Proceeds from disposal of property, plant and equipment | 388 | 698 | 628 | |||||||||
| Purchase of interest in affiliated companies | (2,243 | ) | — | — | ||||||||
| Proceeds from disposal of investment | 24,214 | — | — | |||||||||
| Proceeds from disposal of investment in an affiliated company | 3,875 | — | — | |||||||||
| Proceeds from disposal of a subsidiary and related intangible assets, net of cash disposed of — BPC | — | — | 1,654 | |||||||||
Net cash provided by (used in) investing activities | 14,906 | (35,438 | ) | (33,760 | ) | |||||||
Cash flows from financing activities: | ||||||||||||
| Dividends paid | (11,973 | ) | (3,947 | ) | (16,654 | ) | ||||||
| Share buy-back program | (73 | ) | (3,353 | ) | (3,528 | ) | ||||||
| Repayment of bank loans | — | — | (2,703 | ) | ||||||||
| Repayment of short term debt | (1 | ) | (24 | ) | — | |||||||
| Proceeds from bank loans | — | 15,000 | 4,500 | |||||||||
| Proceeds from shares issued on exercise of options and warrants | 2,753 | 4,307 | 36,470 | |||||||||
| Contribution by minority interests | 200 | — | — | |||||||||
Net cash (used in) provided by financing activities | (9,094 | ) | 11,983 | 18,085 | ||||||||
| Effect of foreign currencies on cash flows | 4 | — | (26 | ) | ||||||||
| Net increase (decrease) in cash and cash equivalents | 4,681 | (220 | ) | 23,801 | ||||||||
| Cash and cash equivalents at beginning of year | 54,215 | 58,896 | 58,676 | |||||||||
| Cash and cash equivalents at end of year | $ | 58,896 | $ | 58,676 | $ | 82,477 | ||||||
Supplemental schedule of cash flow information: | ||||||||||||
| Interest paid | $ | 165 | $ | 178 | $ | 790 | ||||||
| Income taxes paid (received) | $ | 129 | $ | (249 | ) | $ | 227 | |||||
Non cash investing transaction: | ||||||||||||
| Acquisition of subsidiaries by issue of shares — JIC Group | $ | 21,795 | $ | — | $ | — | ||||||
Non cash financing transaction: | ||||||||||||
| Share redemption and dividend withheld — Tele-Art | $ | — | $ | — | $ | 3,519 | ||||||
See accompanying notes to consolidated financial statements.
-42-
43
NAM TAI ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
1. ACQUISITIONS AND DISPOSITIONS
a On May 28, 1999, the Company acquired from Micro Business Systems
Industries Company Limited telecommunication business including the
design, research and development, and marketing of telecommunication
products for a consideration of $951 including acquisition costs. The
acquisition was accounted for as a purchase and the results of
operations of the acquired business have been included in the
accompanying consolidated financial statements since the date of
acquisition. The excess of the purchase consideration over the fair
value of the assets acquired of $175 was $776 and has been recorded as
goodwill which is being amortized on a straight-line basis over 4 years.
The results of operations of the business acquired were not material in
relation to the consolidated results of operations of
F-7
Nam Tai Electronics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Company Information
Nam Tai Electronics, Inc. and Subsidiaries (the "Company"“Company” or “Nam Tai”).
b On December 2, 1998, is an electronics manufacturing and design services provider to a select group of the world’s leading original equipment manufacturers, or OEMs, of telecommunication and consumer electronic products. The Company’s largest customers include Epson Precision (HK) Ltd., Sony Ericsson Mobile Communications AB and Texas Instruments Incorporated. Through its electronics manufacturing services, or EMS, operations, the Company acquired 50.00025% of the outstanding
shares of Albatronics (Far East) Company Limited ("Albatronics"), a Hong
Kong public listed company, for cash of $9,980 including transaction
fees. Albatronics and its subsidiaries were engaged in the trading ofmanufactures electronic components and manufacturing ofsubassemblies, including liquid crystal display, or LCD, panels, transformers, LCD modules and radio frequency, or RF, modules. These components are used in various electronic products, including cellular phones, laptop computers, digital cameras, copiers, fax machines, electronic toys and microwave ovens. The Company also manufactures finished products, including cordless phones, palm-sized PC’s, personal digital assistants, electronic dictionaries, calculators and digital camera accessories for use with cellular phones.
The Company operates in two segments: consumer electronics
products.
On the completion of the Albatronics acquisition on December 2, 1998,
the Company indicated that it would take steps to support Albatronics
depending on the results of a comprehensive study investigating
opportunities for corporate restructuringelectronic products (“CEP”) and streamlining of overhead
expensesLCD panels and transformers (���LPT”). The Company’s principal operations, which are conducted through subsidiaries, are in Albatronics. Despite the Company's cash investment,
Albatronics' financial position weakened dramatically since the
agreement to invest in Albatronics was signed in September 1998. As
Albatronics became unable to pay its liabilities as they came due,
management of the Company and Albatronics undertook negotiations with
Albatronics' major trade creditors for forbearance on demands for
repayment and concessions as to amounts payable.
Due to the troubled financial condition of Albatronics at December 31,
1998, it was probable that the Company would never be in a position to
exercise control over Albatronics as such control would rest with the
creditors of Albatronics. Accordingly, the Company did not consolidate
Albatronics' financial statements at December 31, 1998, for the year
then ended or for any subsequent period. Instead, the Company recorded
as separate line items on its consolidated statements of income
Albatronics' loss for the month of December 1998 of $1,708 as "equity in
loss of an unconsolidated subsidiary" and a "provision for impairment of
investment in an unconsolidated subsidiary" of $8,271 against the
remaining carrying value of this investment. As a result, the carrying
value of the Company's investment in Albatronics was recorded on the
consolidated balance sheet at December 31, 1998 as "investment in an
unconsolidated subsidiary" at a nominal value of $1.
At the extraordinary general meeting held on August 20, 1999, a special
resolution for the voluntary winding up of Albatronics was approved by
the shareholders of Albatronics. As a result, the remaining nominal
investment value was written off in 1999. On February 1, 2000, the
Company received an invitation soliciting offers for the rescue or
restructuring of Albatronics from Albatronics' liquidator. According to
the invitation, such offers will likely be subject to the consent and
approval of the creditors, the Hong Kong Stock Exchange and shareholders
of Albatronics. The success of any rescue or restructuring proposal is
dependent upon acceptance from the Company which is the majority
shareholder of Albatronics. The Company will carefully consider the
terms of the solicitation and any proposals, coordinating with other
creditorsSpecial Administrative Region (“Hong Kong”) and the liquidator, with the objectivePeople’s Republic of maximizing its
return.
During 1999, the Company commenced legal proceedings against Albatronics
seeking compensation to recover its investment seeking damages for
breach of representations, warranties and undertakings.
-43-
44
1. ACQUISITIONS AND DISPOSITIONS - CONTINUED
c In June 1999, the Company sold its subsidiary, Nam Tai Electronics
(Canada) Ltd. ("NT Canada"China (the “PRC”), to management at a nominal value which the
board of directors believed represented the fair market value and
realized a loss on disposition of $290. NT Canada provided investor
relations, regulatory compliance and other services to the Company. NT
Canada, now no longer a subsidiary of the Company, was renamed Pan
Pacific I.R. Ltd. by its new owners and continues to provide similar
services to the Company.
d On May 27, 1998, the Company acquired 20% of the outstanding shares of
Group Sense (International) Limited ("Group Sense"), a. The PRC resumed sovereignty over Hong Kong public
listed company,effective July 1, 1997 and politically Hong Kong is an integral part of China. However, for cashsimplicity and as a matter of $16,279 which was reduced by a
pre-acquisition dividend of $460. Group Sense and its subsidiaries
manufacture consumer electronics products. In February and March 2000,
the Company disposed of a total of 100 million shares of Group Sense for
cash of $15,081. After the disposal, the shareholdingdefinition only, our references to PRC in Group Sense was
reduced to approximately 10%.
Group Sense has been accounted for as an affiliated company and the
results of Group Sense have been included in thethese consolidated financial statements means the PRC and all of its territories excluding Hong Kong.
The Company was founded in 1975 as an electronic products trading company based in Hong Kong and shifted its focus to manufacturing of electronic products in 1978. The Company moved its manufacturing facilities to the PRC in 1980 to take advantage of lower overhead costs, lower material costs and competitive labor rates available and subsequently relocated to Shenzhen, PRC in order to capitalize on opportunities offered in Southern China. The Company was reincorporated as a limited liability International Business Company under the laws of the British Virgin Islands in August 1987. The Company’s principal manufacturing and design operations are based in Shenzhen, PRC, approximately 30 miles from Hong Kong. Its principal executive offices are located in Hong Kong, which provides it access to Hong Kong’s infrastructure of communication and banking and facilitates management of its PRC operations and transportation of its products out of PRC through the dateport of acquisition to September 30, 1999 (interim
announcement dateHong Kong.
2. Summary of Group Sense, the dateSignificant Accounting Policies
(a) Principles of latest available results)
as permitted by Accounting Principles Board ("APB") Opinion No. 18 "The
equity method of accounting for investments in common stock". Upon the
reduction of shareholding in Group Sense below the 20% level, the equity
method was discontinued and the carrying amount at the date of
discontinuance became the cost of investment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a PRINCIPLES OF CONSOLIDATIONconsolidation
The consolidated financial statements include the financial statements of the Company and all its subsidiaries, excluding Albatronics.
Intercompanysubsidiaries. All significant intercompany accounts and transactions have been eliminated on consolidation. The details
(b) Cash and cash equivalents
Cash and cash equivalents include all cash balances and certificates of deposit having a maturity date of three months or less upon acquisition.
(c) Marketable securities
All marketable securities are classified as trading securities and are stated at fair market value. Market value is determined by the most recently traded price of the Company's subsidiariessecurity at the balance sheet date. Net realized and unrealized gains and losses on trading securities are describedincluded in Note 15.other income. The Company's investment in Group Sense, a 20% owned company,cost of securities sold is accounted for bybased on the equity method. Accordingly, the Company's share of
the earnings of this companyaverage cost method and income earned is included in consolidated netother income.
F-8
Notes to Consolidated Financial Statements — (Continued)
(d) Inventories
Inventories are stated at the lower of cost or market value. Cost is determined on the first-in, first-out basis. Provisions for potentially obsolete or slow-moving inventory are recorded based on management’s analysis of inventory levels. The following represents the movement in the inventory provision for the years ended December 31,
| 2000 | 2001 | 2002 | ||||||||||
| Balance at January 1, | $ | (479 | ) | $ | (487 | ) | $ | (4,741 | ) | |||
| (Provided for) Reversal during the year | (12 | ) | (4,247 | ) | 1,970 | |||||||
| Write off during the year | — | — | 1,271 | |||||||||
| Others | 4 | (7 | ) | 14 | ||||||||
| Balance at December 31, | $ | (487 | ) | $ | (4,741 | ) | $ | (1,486 | ) | |||
During 2002, the Company equity accounted for its sharewas able to use portions of the lossraw materials that had been previously provided for in production or the Company received compensation for the unused raw materials. This change in accounting estimate resulted in the partial reversal of Albatronics. As all investmentthe provision of approximately $2,000 in Albatronics has been written off2002.
(e) Property, plant and equipment
Property, plant and equipment are recorded at cost and include interest on funds borrowed to finance construction. No interest was capitalized for the years ended December 31, 2000, 2001 and 2002. The cost of major improvements and betterments is capitalized whereas the cost of maintenance and repairs is expensed in the year incurred. Assets under construction are not depreciated until construction is completed and the Company has ceasedassets are ready for their intended use. Gains and losses from the disposal of property, plant and equipment are included in income from operations and gains and losses from the disposal of unused land are reported in other income (expense) in the consolidated statements of income.
The majority of the land in Hong Kong is owned by the government of Hong Kong which leases the land at public auction to provide additional financial support,non-governmental entities. With the exception of those leases which expire after June 30, 1997 and before June 30, 2047 with no right of renewal, the Sino-British Joint Declaration extends the terms of all currently existing land leases for another 50 years beyond June 30, 1997. Thus, all of the Company’s leasehold land in 1999Hong Kong are considered to be medium-term assets. The cost of such leasehold land is amortized on the Company ceasedstraight-line basis over the respective terms of the leases.
All land in other regions of the PRC is owned by the PRC government. The government in the PRC, according to accountPRC law, may sell the right to use the land for any additional lossesa specified period of Albatronics.
b GOODWILL AND LICENSEtime. Thus all of the Company’s land purchases in the PRC are considered to be leasehold land and are amortized on the straight-line basis over the respective term of the right to use the land.
(f) Goodwill and licenses
The excess of the purchase price over the fair value of net assets acquired is recorded on the consolidated balance sheet as goodwill. Goodwill isPrior to January 1, 2002, goodwill was amortized to expense on a straight-line basis over various periods not exceeding 40ranging from 4 to 15 years. License cost isCosts incurred in the acquisition of licenses are capitalized and amortized to expense on a straight-line basis over the shorter of license period or 5 to 7 years.
c USE OF ESTIMATES
In June 2001, the Financial Accounting Standard Board (the “FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 142,“Goodwill and Other Intangible Assets”. This statement provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for
F-9
Notes to Consolidated Financial Statements — (Continued)
impairment on an annual basis. SFAS No. 142 was effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 142 on January 1, 2002. Upon adoption of SFAS No. 142, the Company evaluated goodwill for impairment and determined that there was no impairment at January 1, 2002. Later in 2002, the Company determined that goodwill was impaired by $339 related to Micro Business Systems Industries Company Limited (“MBS”) (see note 3(b)(ii)).
The following transitional disclosure represents the Company’s reported and adjusted net income, basic earnings per share, and fully diluted earnings per share adding back amortization beginning January 1, 2000:
| 2000 | 2001 | 2002 | ||||||||||
Net income | ||||||||||||
| As reported | $ | 24,001 | $ | 9,045 | $ | 20,023 | ||||||
| Add back: goodwill amortization | 600 | 1,826 | — | |||||||||
| As adjusted | $ | 24,601 | $ | 10,871 | $ | 20,023 | ||||||
Basic earnings per share | ||||||||||||
| As reported | $ | 2.63 | $ | 0.88 | $ | 1.89 | ||||||
| Add back: goodwill amortization | 0.07 | 0.18 | — | |||||||||
| As adjusted | $ | 2.70 | $ | 1.06 | $ | 1.89 | ||||||
Diluted earnings per share | ||||||||||||
| As reported | $ | 2.56 | $ | 0.87 | $ | 1.86 | ||||||
| Add back: goodwill amortization | 0.06 | 0.18 | — | |||||||||
| As adjusted | $ | 2.62 | $ | 1.05 | $ | 1.86 | ||||||
(g) Impairment or disposal of long-lived assets
In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”, that was applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB’s new rules on asset impairment supersede SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and portions of Accounting Principles Board (“APB”) Opinion No. 30,“Reporting the Results for Operations”. The statement requires a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value or carrying amount. The statement also requires expected future operating losses from discontinued operations to be recorded in the period(s) in which the losses are incurred, rather than as of the measurement date as previously required. On January 1, 2002, the Company adopted SFAS No. 144. The adoption of SFAS No. 144 did not have any significant impact on the financial position and results of operations of the Company.
(h) Equity method of accounting
The equity method of accounting is used when the Company has a 20% to 50% interest in other entities. Under the equity method, original investments are recorded at cost and adjusted by the Company’s share of undistributed earnings or losses of these entities. Nonmarketable investments in which the Company has less than 20% interest and in which it does not have the ability to exercise significant influence over the investee are initially recorded at cost and periodically reviewed for impairment.
F-10
Notes to Consolidated Financial Statements — (Continued)
(i) Revenue recognition
Revenue from sales of products is generally recognized when the title is passed to customers upon shipment and when collectibility is assured. Provision for discounts and rebates to customers, and returns and other adjustments are provided for in the same period the related sales are recorded.
(j) Research and development costs
Research and development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred.
| (k) | Advertising expenses |
The Company expenses advertising costs as incurred. Advertising expenses were $173, $141 and $528 for the years ended December 31, 2000, 2001 and 2002, respectively.
| (l) | Staff retirement plan costs |
The Company’s costs related to the staff retirement plans are charged to the consolidated statement of income as incurred.
| (m) | Income taxes |
The Company provides for all taxes based on profits whether due at year end or estimated to become due in future periods but based on profits earned to date. However, under the current tax legislation in the PRC, the Company has reasonable grounds to believe that income taxes paid by Namtai Electronic (Shenzhen) Co., Ltd. (“NTSZ”), Zastron Electronic (Shenzhen) Co. Ltd. (“Zastron”) (formerly known as Zastron Plastic & Metal Products (Shenzhen) Ltd.), Shenzhen Namtek Company Limited (“Namtek”), Jieyao Electronics (Shenzhen) Co., Ltd. (“Jieyao”) and Jetup Electronic (Shenzhen) Co., Ltd. (“Jetup”) in respect of any year would be refunded after the profits earned in that year are reinvested in the business by way of capital injection. Accordingly, any PRC tax paid by these subsidiaries during the year is recorded as an amount recoverable at the balance sheet date when an application for reinvestment of profits has been filed and a refund is expected unless there is an indication from the PRC tax authority that the refund will be refused. Deferred income taxes are provided to recognize the effect of the difference between the financial statement and income tax bases of measuring assets and liabilities.
| (n) | Foreign currency transactions and translations |
All transactions in currencies other than functional currencies during the year are translated at the exchange rates prevailing on the respective transaction dates. Monetary assets and liabilities existing at the balance sheet date denominated in currencies other than functional currencies are translated at the exchange rates existing on that date. Exchange differences are recorded in the consolidated statement of income.
The Company and its subsidiaries have adopted the U.S. dollar, Hong Kong dollar or the Renminbi as their functional currencies. The financial statements of all subsidiaries with functional currencies other than the U.S. dollar are translated in accordance with SFAS No. 52,“Foreign Currency Translation”. All assets and liabilities are translated at the rates of exchange ruling at the balance sheet date and all income and expense items are translated at the average rates of exchange over the year. All exchange differences arising from the translation of subsidiaries’ financial statements are recorded as a component of comprehensive income.
F-11
Notes to Consolidated Financial Statements — (Continued)
The exchange rate between the Hong Kong dollar and the U.S. dollar has been pegged (HK$7.80 to US$1.00) since October 1983. The exchange rate between Renminbi and the U.S. dollar is based on the prevailing market rate.
| (o) | Earnings per share |
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year.
Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the year. The weighted average number of common shares outstanding is adjusted to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.
| (p) | Stock options |
SFAS No. 123,“Accounting for Stock-Based Compensation”, allows companies which have stock-based compensation arrangements with employees to adopt a new fair value basis of accounting for stock options and other equity instruments or to continue to apply the existing accounting rules under APB Opinion No. 25,“Accounting for Stock Issued to Employees,” but with additional financial statement disclosure. The Company continues to account for stock-based compensation arrangements under APB Opinion No. 25 and provides additional disclosures required by SFAS No. 123.
| (q) | Use of estimates |
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
d CASH AND CASH EQUIVALENTS
Cash
| (r) | Comprehensive income |
The Company reports comprehensive income in accordance with SFAS No. 130,“Reporting Comprehensive Income”. Accumulated other comprehensive income (loss) represents foreign currency translation adjustments and cash equivalents include all cash balances and certificates of
deposit having a maturity date of three months or less upon acquisition.
e INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined on the first-in, first-out basis.
-44-
45
f MARKETABLE SECURITIES
All marketable securities are classified as trading securities and are
stated at fair market value. Market value is determined by the most
recently traded price of the security at the balance sheet date. Net
realized and unrealized gains and losses on trading securities are
included in other income. The cost of securities sold is based on the
average cost method and interest earned is included in other income.
g PROPERTY, PLANT AND EQUIPMENT
Property, plantthe consolidated statements of shareholders’ equity. The comprehensive income of the Company was $23,952, $9,065 and equipment are recorded at cost and include interest
on funds borrowed to finance construction. No interest was capitalized$20,006 for the years ended December 31, 1999, 19982000, 2001 and 1997. 2002, respectively.
| (s) | Fair value disclosures |
The costcarrying amounts of major
improvementscash and betterments is capitalized whereascash equivalents, marketable securities, accounts receivable, notes payable, accounts payable and amount due to a related party approximate fair value due to the costshort term maturity of maintenance and repairs is expensed in the year incurred. Gains and
losses from the disposal of property, plant and equipment are included
in income.
All land in the Hong Kong Special Administration Region ("Hong Kong") of
the People's Republic of China (the "PRC") is owned by the government of
Hong Kong which leases the land at public auction to nongovernmental
entities. With the exception of those leases which expire after June 30,
1997 and before June 30, 2047 with no right of renewal, the Sino-British
Joint Declaration extends the terms of all currently existing land
leases for another 50 years beyond June 30, 1997. Thus, all of the
Company's land leaseholds in Hong Kong are considered to be medium-term
assets.these instruments. The cost of such land leaseholds is amortized on the
straight-line basis over the respective terms of the leases.
All land in other regions in the PRC is owned by the PRC government. The
government in the PRC, according to PRC law, may sell the right to use
the land for a specified period of time. Thus all of the Company's land
purchases in the PRC are considered to be land leaseholds and are
amortized on the straight-line basis over the respective term of the
right to use the land.
Depreciation rates computed using the straight-line method are as
follows:
CLASSIFICATION RATE
-------------- ----
Medium-term leasehold buildings 2.0% - 4.5%
Freehold buildings 3.3% - 4.0%
Machinery and equipment 9.0% - 25.0%
Furniture and fixtures 18.0% - 25.0%
Tools and molds 18.0% - 25.0%
Automobiles 18.0% - 25.0%
Leasehold improvements 18.0% - 33.0%
h IMPAIRMENT
The Company reviews its long-lived assets, including goodwill and
license costs, for impairment whenever events or changes in
circumstances indicate that the carrying amount of anlong term debt also approximates fair value due to the variable nature of the interest calculations. The fair value of the Company’s convertible notes is estimated based on the current rates offered to the Company for notes of similar terms and maturities.
| (t) New accounting pronouncements |
In August 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations”. This Statement addresses financial accounting and reporting for obligations associated with the retirement of
F-12
Notes to Consolidated Financial Statements — (Continued)
tangible long-lived assets and the associated asset may no
longer be recoverable. An impairment loss, measured based onretirement costs. SFAS No. 143 requires a company to record the fair value of an asset retirement obligation as a liability in the assets, is recognized if expected future non-discounted
cash flows are less thanperiod in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. SFAS No. 143 also requires a company to record the contra to the initial obligation as an increase to the carrying amount of the assets.
i REVENUE RECOGNITION
Revenue from salesrelated long-lived asset (i.e. the associated asset retirement costs) and to depreciate that cost over the remaining useful life of productsthe asset. The liability is generally recognized upon shipmentadjusted at the end of each period to customers.
j RESEARCH AND DEVELOPMENT COSTS
Researchreflect the passage of time (i.e. accretion expense) and development costs relatingchanges in the estimated future cash flows underlying the initial fair value measurement. Companies are required to adopt SFAS No. 143 for fiscal years beginning after June 15, 2002. Management has adopted SFAS No. 143 on January 1, 2003, and does not believe its adoption will have a material effect on the Company’s financial position, results of operations, or cash flows.
In April 2002, the FASB issued SFAS No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 eliminates extraordinary accounting treatment for reporting gain or loss on debt extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 related to the developmentrescission of new
productsSFAS No. 4 are applicable in fiscal years beginning after May 15, 2002, the provisions related to SFAS No. 13 are effective for transactions occurring after May 15, 2002, and processes, including significant improvements and
refinementsall other provisions are effective for financial statements issued on or after May 15, 2002; however, early application is encouraged. Debt extinguishments reported as extraordinary items prior to existing products, are expensed as incurred. The amounts
charged against income were $2,624, $1,691and $1,909scheduled or early adoption of SFAS No. 145 would be reclassified in most cases following adoption. In the current year, management adopted the provisions of SFAS No. 145 related to the accounting treatment for the years ended
December 31, 1999, 1998 and 1997, respectively.
k STAFF RETIREMENT PLAN COSTSgain or loss on debt extinguishment. The Company's contributions toresult of this adoption is that $610 finance charge incurred for the staff retirement plans (Note 6) are
charged toearly extinguishment of the consolidated statement of income as incurred.
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46
l INCOME TAXES
The Company provides for all taxes based on income whether due at year
end or estimated to become due in future periods but based on profits
earned to date. However, under the current tax legislation in the PRC,
the Company has reasonable grounds to believeCompany’s long term debt (see note 11) that income taxes paid in
respect of any year would be refunded after the profits earned in that
year are reinvested in the business by way of subscription for new
shares. Accordingly, any PRC tax paid during the year ishave been recorded as an amount receivableextraordinary item under the previous accounting rules have been included as an expense from continuing operations. Management does not expect the adoption of the remaining provisions of SFAS No. 145 to have a material effect on the Company’s financial position, results of operations, or cash flows.
In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 requires recording costs associated with exit or disposal activities at year endtheir fair values when an application for reinvestment of
profitsa liability has been filedincurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. The requirements of SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002; however, early application is encouraged. Management does not expect the adoption of SFAS No. 146 to have a material effect on the Company’s financial position, results of operations, or cash flows.
In November 2002, the FASB issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 requires that upon issuance of a refundguarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Management is expected unless there is an
indication fromcurrently evaluating the PRC tax authorityeffects of FIN 45; however, it does not expect that the refundadoption of FIN 45 will be refused.
Deferred income taxes are providedhave a material effect on the Company’s financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation — Transition and Disclosure”. SFAS No. 148 amends SFAS No. 123“Accounting for Stock-Based Compensa-
F-13
Notes to recognizeConsolidated Financial Statements — (Continued)
tion,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the difference between the financial statement and income tax bases of
measuring assets and liabilities.
m FOREIGN CURRENCY TRANSLATIONS
The consolidated financial statements have been stated in U.S. dollars,
the official currencymethod used in the British Virgin Islands (the Company's
place of incorporation). Although the operating facilities are located
in Hong Kong and the PRC, the U.S. dollar is the currency of the primary
economic environment in which the Company's consolidated operations are
conducted. The exchange rate between the Hong Kong dollar and the U.S.
dollar has been pegged (HK$7.80 to US$1.00) since October 1983.
All transactions in currencies other than functional currencies during
the year are translated at the exchange rates prevailing on the
respective transaction dates. Related accounts payable or receivable
existing at the balance sheet date denominated in currencies other than
functional currencies are translated at the exchange rates existing on
that date. Exchange differences arising are dealt with in the
consolidated statement of income.
The Company's subsidiaries adopt the Hong Kong dollar or the Renminbi as
their functional currencies. The financial statements of all
subsidiaries with functional currencies other than the U.S. dollar are
translated in accordance withreported results. SFAS No. 52, "Foreign Currency
Translation". All assets and liabilities are translated at the rates of
exchange ruling at the balance sheet date and all income and expense
items are translated at the average rates of exchange over the year. All
exchange differences arising from the translation of subsidiaries'
financial statements are dealt with as a separate component of equity.
n EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding during the period.
Diluted earnings per share gives effect to all dilutive potential common
shares outstanding during the period. The weighted average number of
common shares outstanding is adjusted to include the number of
additional common shares that would have been outstanding if the
dilutive potential common shares had been issued.
In computing the dilutive effect of potential common shares, the average
stock price for the period is used in determining the number of treasury
shares assumed to be purchased with the proceeds from exercise of
warrants and options.
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47
o CURRENCY CONTRACTS
The Company enters into forward currency contracts in its management of
foreign currency exposures. Firmly committed transactions are hedged
with forward exchange contracts. Anticipated, but not yet firmly
committed transactions are hedged through the use of purchased options.
Gains and losses related to hedges of firmly committed transactions are
deferred and are recognized in income or as adjustments of carrying
amounts when the hedged transaction occurs. Other foreign exchange
contracts are marked to market with the net realized or unrealized gains
or losses recognized in other income - net. (Note 5). Premiums paid on
purchased options are included in prepaid expenses and deposits and are
recognized in income in the same period as the hedged transaction.
p STOCK OPTIONS
SFAS No. 123 allows companies which have stock-based compensation
arrangements with employees to adopt a new fair value basis of
accounting for stock options and other equity instruments or to continue
to apply the existing accounting rules under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," but with additional
financial statement disclosure. The Company continues to account for
stock-based compensation arrangements under APB Opinion No. 25 and
provides additional disclosure to that effect in Note 19(a).
q COMPREHENSIVE INCOME
In 1998, the Company adopted a new disclosure standard SFAS No.130,
"Reporting Comprehensive Income" which requires that an enterprise
reports, by major components and as a single total, the change in its
net assets during the period from non-owner sources.
r NEW ACCOUNTING STANDARD NOT YET ADOPTED
In June, 1998, the Financial Accounting Standards Board ("FASB") has
issued a new standard SFAS No.133 "Derivative Instruments and Hedging
Activities". SFAS No. 133148 is effective for fiscal years beginning after JuneDecember 15, 2000.2002. The expanded annual disclosure requirements and the transition provisions are effective for fiscal years ending after December 15, 2002. Management does not expect the adoption of SFAS No. 148 to have a material effect on the Company’s financial position, results of operations, or cash flows.
At December 31, 2002, the Company has two stock-based employee compensation plans, as more fully described in note 12(a). The Company accounts for these plans under the recognition and measurement principles of APB No. 25,“Accounting for Stock Issued to Employees”, and related interpretations. Stock-based employee compensation costs are not yet completedreflected in net income when options granted under the analysisplan had an exercise price equal to the market value of the impact this would haveunderlying common stock on the consolidated financial statementsdate of grant. During 2001, the Company recorded compensation cost of $839 as 105,400 options granted under the plan had an exercise price less than the market value of the Company.
s RECLASSIFICATIONSunderlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123,“Accounting for Stock-Based Compensation”, to stock-based employee compensation.
| Year ended December 31, | 2000 | 2001 | 2002 | |||||||||||||
| Net income, as reported | $ | 24,001 | $ | 9,045 | $ | 20,023 | ||||||||||
| Less: Stock based compensation costs under fair value based method for all awards | (2,216 | ) | (2,331 | ) | (1,491 | ) | ||||||||||
| Net income, pro forma | $ | 21,785 | $ | 6,714 | $ | 18,532 | ||||||||||
| Basic earnings per share | As reported | $ | 2.63 | $ | 0.88 | $ | 1.89 | |||||||||
| Pro forma | $ | 2.39 | $ | 0.65 | $ | 1.75 | ||||||||||
| Diluted earnings per share | As reported | $ | 2.56 | $ | 0.87 | $ | 1.86 | |||||||||
| Pro forma | $ | 2.32 | $ | 0.65 | $ | 1.73 | ||||||||||
| (u) Reclassification |
Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year'syear’s presentation. These reclassifications had no effect on the net income or financial position for any year presented.
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48
3. FINANCIAL INSTRUMENTS
The Company's financial instruments that are exposed
F-14
Notes to concentrations
of credit risk consist primarily of its cash equivalents, term deposits
and trade receivables.
The Company's cash and cash equivalents and term deposits are
high-quality deposits placed with banking institutions with high credit
ratings. This investment policy limits the Company's exposure to
concentrations of credit risk.
The trade receivable balances largely represent amounts due from the
Company's principal customers who are generally international
organizations with high credit ratings. Letters of credit are the
principal security obtained to support lines of credit or negotiated
contracts from a customer. As a consequence, concentrations of credit
risk are limited. During the years ended Consolidated Financial Statements — (Continued)
3. Investment in Subsidiaries
(a) Subsidiaries
| Percentage of | ||||||||||||||||
| ownership at | ||||||||||||||||
| December 31, | ||||||||||||||||
| Place of | ||||||||||||||||
| incorporation | Principal activity | 2001 | 2002 | |||||||||||||
Consolidated principal subsidiaries: | ||||||||||||||||
| J.I.C. Technology Company Limited | Cayman Islands | Investment holding | — | 93.97 | % | |||||||||||
| J.I.C. Enterprises (Hong Kong) Limited | Hong Kong | Investment holding, manufacturing and trading | 100 | % | 93.97 | % | ||||||||||
| J.I.C. Electronics Company Limited | Hong Kong | Inactive | 100 | % | 93.97 | % | ||||||||||
| J.I.C. Group (B.V.I.) Limited | BVI | Investment holding | 100 | % | 93.97 | % | ||||||||||
| Jetup Electronic (Shenzhen) Co., Ltd. | PRC | Manufacturing | 100 | % | 93.97 | % | ||||||||||
| Jieda Electronics (Shenzhen) Co., Ltd. | PRC | Inactive | 100 | % | 93.97 | % | ||||||||||
| Jieyao Electronics (Shenzhen) Co., Ltd. | PRC | Manufacturing | 100 | % | 93.97 | % | ||||||||||
| Nam Tai Group Management Limited | Hong Kong | Provision of management services | 100 | % | 100 | % | ||||||||||
| Nam Tai Electronic & Electrical Products Limited | Hong Kong | Trading | 100 | % | 100 | % | ||||||||||
| Nam Tai Telecom (Hong Kong) Company Limited | Hong Kong | Trading | 100 | % | 100 | % | ||||||||||
| Namtai Electronic (Shenzhen) Co., Ltd. | PRC | Manufacturing | 100 | % | 100 | % | ||||||||||
| Namtek Software Development Company Limited | Cayman Islands | Investment holding | — | 100 | % | |||||||||||
| Shenzhen Namtek Company Limited | PRC | Software development | 100 | % | 100 | % | ||||||||||
| Zastron Electronic (Shenzhen) Co. Ltd. (formerly known as Zastron Plastic & Metal Products (Shenzhen) Ltd.) | PRC | Manufacturing | 100 | % | 100 | % | ||||||||||
| Mate Fair Group Limited | BVI | Investment holding | 25 | % | 72.22 | % | ||||||||||
| BPC (Shenzhen) Co., Ltd. | PRC | Manufacturing | 86.67 | % | — | |||||||||||
Unconsolidated subsidiary: | ||||||||||||||||
| Albatronics (Far East) Company Limited (in liquidation) | Hong Kong | Ceased business in August 1999 | 50.00025 | % | — | |||||||||||
F-15
Notes to Consolidated Financial Statements — (Continued)
(b) Acquisitions and dispositions
| (i) | In 1998, the Company acquired 50.00025% of the outstanding shares of Albatronics (Far East) Company Limited (“Albatronics”), a Hong Kong publicly listed company. Albatronics and its subsidiaries were engaged in the trading of electronic components and manufacturing of consumer electronics products. Due to the troubled financial condition of Albatronics at December 31, 1998, it was probable that the Company would never be in a position to exercise control over Albatronics as such control would rest with the creditors of Albatronics. Accordingly, the Company did not consolidate Albatronics’ financial statements at December 31, 1998, for the year then ended or for any subsequent period. As of December 31, 1999 the investment was written off. On February 1, 2000, the Company received an invitation soliciting offers for the rescue or restructuring of Albatronics from Albatronics’ liquidators. |
During 1999, the Company has not incurred any bad debt expensecommenced legal proceedings against Albatronics seeking compensation to recover its investment and does not maintain
any allowancesseeking damages for doubtful accounts.
Allbreach of representations, warranties and undertakings. The case was settled and the Company's significant financial instrumentsCompany withdrew its legal proceedings against Albatronics at December 31, 2001.
In January 2002, the Company entered into a restructuring agreement with the liquidators of Albatronics (see note 3(b)(iv)).
| (ii) | In 1999, the Company acquired certain net assets from MBS, a telecommunication business including the design, research and development, and marketing of telecommunication products, for a consideration of $951 including acquisition costs. The acquisition was accounted for as a purchase and the results of operations of the acquired business have been included in the accompanying consolidated financial statements since the date of acquisition. The excess of the purchase consideration over the fair value of the assets acquired of $175 was $776 and was recorded as goodwill which was being amortized on a straight-line basis over 4 years. The results of operations of the business acquired were not material in relation to the consolidated results of operations of the Company. In 2002, the Company determined that the previously acquired technology had become obsolete. Therefore, the Company recorded an impairment for the remaining goodwill of $339 and accelerated the amortization of the license fees by $173. | |
| (iii) | In March 2000, Nam Tai Electronic & Electrical Products Limited (“NTEE”), a wholly-owned subsidiary of the Company, together with Toshiba Battery Co., Ltd. (“TBCL”), established BPC (Shenzhen) Co., Ltd. (“BPC”), a wholly foreign owned enterprise in Shenzhen, PRC. NTEE had a 86.67% interest in BPC and the investment cost of $1,300 was contributed in cash. BPC was located within the Company’s existing manufacturing complex where it produced and sold high-end, environmentally friendly, rechargeable lithium ion battery packs. Effective April 30, 2002, the Company sold its 86.67% joint venture interest in BPC to a TBCL related company for $2,131 resulting in a gain of $17. For the years ended December 31, 2000, 2001 and during the period from January 1, 2002 through April 30, 2002, the Company recognized net sales of $6,232, $21,072 and $7,849, respectively, from TBCL and its related companies. |
| (iv) | In October 2000, the Company acquired all of the outstanding shares of J.I.C. Group (B.V.I.) Limited (“JIC”), a company incorporated in the BVI. The purchase price was the initial consideration of $32,776, less a purchase price adjustment based on earnings. The initial consideration was satisfied by a cash consideration of $10,981 and the issuance of 1,161,087 shares in the Company at $18.77 each, being the average market closing price as reported on the Nasdaq Stock |
F-16
Notes to Consolidated Financial Statements — (Continued)
| Market (“Nasdaq”) for each day during the period from September 26, 2000 to October 24, 2000 (inclusive) on which Nasdaq is open for trading and on which at least 10,000 shares were traded. |
JIC and its subsidiaries (“JIC Group”) are reported in current assets or current liabilitiesprincipally engaged in the consolidated balance sheetmanufacture and trading of LCD panels and transformers. Their production base is located at carrying amountsShenzhen and Bao An, which approximate
their fair value dueare used by three subsidiaries of JIC namely, Jieda Electronics (Shenzhen) Co. Ltd. (“Jieda”), Jetup and Jieyao, all being wholly foreign owned enterprises in the PRC.
The purchase price adjustment based on earnings is the amount of shortfall, if any, between the net income of JIC Group for the year ended March 31, 2001 and the guaranteed profit amount of $3,846, multiplied by 8.5. As the net income of JIC Group for the year ended March 31, 2001 met this guaranteed profit requirement, no adjustment to the short maturitypurchase price was made.
The acquisition was accounted for as a purchase and the results of these instruments.
From time to time,JIC Group have been included in the Company hedges its currency exchange risk, which
primarily arises from materials purchased in currencies other than U.S.
dollars, throughaccompanying consolidated financial statements since the date of acquisition. The excess of the purchase and sale of currency forward contracts and
options. Such contracts typically allowconsideration over the Company to buy or sell
currencies at a fixed price with maturities that do not exceed one year.
The Company's forward contracts do not subject the Company to risk from
exchange rate movements because gains and losses from such contracts
offset losses and gains, respectively, of the liabilities being hedged.
As at December 31, 1999, the Company had outstanding forward contracts
and options to purchase Japanese Yen of approximately $1,755 and
$20,000, respectively with maturities that do not exceed six months. At
December 31, 1998, there were no open currency forward contracts and
options.
There is no carrying value for foreign currency forward contracts at
December 31, 1999. The estimated fair values represents the amount
required to enter into offsetting contracts with similar remaining
maturities based on quoted market prices. At December 31, 1999, the
difference between the contract amounts and fair values was immaterial.
The carrying value and fair value of foreign currency optionsthe net assets acquired of $10,002 was $22,774 and has been recorded as goodwill which was being amortized on a straight-line basis over 15 years. Upon the Company’s adoption of SFAS No. 142, the goodwill is $554
and $1,058, respectively. Fair value relating to foreign currency
options at December 31, 1999 is based on the amountno longer being amortized (see note 2(f)). During 2001, the Company would
receive or payincurred legal and professional fees of $85 to terminatecomplete the contracts based on quoted market prices
as at December 31, 1999.
4. NON-RECURRING (INCOME) EXPENSE
The amount in 1999 represents the write-backacquisition of the remaining balance of
the provision on the settlement of a non-recurring customs assessment in
the PRCJIC which was recorded as non-recurring expense in 1998.
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49
5. OTHER INCOME - NET
Other income - net consists of:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
------- ------- -------
Interest income $ 3,330 $ 5,047 $ 1,847
Miscellaneous income (expense) 337 (196) 650
Gain on disposal of securities, net 144 1,207 5,488
Currency option premium written off (566) (840) -
Foreign exchange (loss) gain (413) 394 500
Bank charges (311) (252) (343)
Unrealized loss on decline of market value of
marketable securities - (468) -
------- ------- -------
$ 2,521 $ 4,892 $ 8,142
======= ======= =======
6. STAFF RETIREMENT PLANS
The Company maintains staff contributory retirement plans (defined
contribution pension plans) which cover certainadjusted to goodwill.
Had the acquisition of its employees. The
costJIC occurred on January 1, 2000, the following would be the unaudited pro forma consolidated results of the Company's contributions amounted to $138, $79 and $55operations for
the years ended December 31, 1999, 1998 and 1997, respectively.
7. DEFERRED COMPENSATION ARRANGEMENT
In August 1990, the Company agreed to provide compensation in the event
of loss of office, for whatever reason, for two officers. The amount of
compensation to be ultimately provided is $500 for Mr. M.K. Koo, the
Senior Executive Officer of the Company and $300 for Mr. T. Murakami,
the Chairman of the Company and was fully expensed by December 31, 1995.
During the year ended December 31, 1996, pursuant to an agreement
between Mr. Koo and the Company, Mr. Koo elected to apply an amount of
$450 payable to him under the provision for compensation for loss of
office against an amount receivable from him. In July 1997, Mr. Koo
reversed the election and retained his right to receive the sum of $500
for the compensation of loss of office (Note 16) and the amount is
included in accounts payable and accrued expenses.
8. INCOME TAXES BENEFIT (EXPENSE)
The components of2000. Net sales, net income, before income taxes and equity in results of an
affiliated company and unconsolidated subsidiary are as follows:
In June 2002, through a restructuring of common shares at $15.75 and
warrants to purchase 2,997,129 shares of common shares at $20.40 and
130,000 shares of common shares plus 130,000 warrants at $20.40 were
outstanding at December 31, 1999 but were not includedthe Company’s interest in the computation of diluted earnings per share becauseJIC Group, the exercise priceCompany arranged for the listing of the share optionsJIC Group on The Stock Exchange of Hong Kong Limited. To effect the listing, the Company entered a restructuring agreement with the liquidators of Albatronics, whose shares had been listed on The Stock Exchange of Hong Kong Limited and warrantswhich was greaterplaced into voluntary liquidation in August 1999. The Company owned slightly more than the average market price50% of the common shares duringoutstanding capital stock of Albatronics (see note 3(b)(i)). Under the relevant period.
F-17
Notes to Consolidated Financial Statements — (Continued)
(including the Company) may convert them if such conversion would result in the minimum public float of 25% that is required under the Hong Kong Stock Exchange listing rules not being met.
Due to the Company’s restructuring of its interest in the JIC Group, the Company’s effective interest in the JIC Group reduced from 100% to 92.9%. As a result of this reduction in interest during 2002, the Company has released unamortized goodwill of $1,483, representing 7.1% of the goodwill that had previously been recorded upon purchasing the JIC Group Sensein October 2000. The release of $263 and $590 ($460 pre-acquisition dividend and $130
post-acquisition dividend), respectively. Retained earningsunamortized goodwill is included as part of the loss on restructuring of the JIC Group.
In August 2002, the Company acquired an additional 7,984,000 shares of JIC Technology Company Limited for a cash consideration of $437, resulting in additional goodwill of $253. As at December 31, 1999 and 1998 included undistributed earnings less amortization of
goodwill of affiliates of $1,680 and $534, respectively.
13. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists2002, the Company held 74.8% of the following:
(c) Establishment of subsidiaries
| (i) | In March 2001, the Company established Nam Tai | |
| (ii) | In May 2002, the Company established Namtek Software Development Company Limited, a wholly-owned subsidiary incorporated in the Cayman Islands, at an investment cost of $800. Its principal activity is an investment holding company of Shenzhen Namtek |
(d) Retained earnings
Retained earnings are not restricted as to the payment of dividends except to the extent dictated by prudent business practices. The Company believes that there are no material restrictions, including foreign exchange controls, on the ability of its non-PRC subsidiaries to transfer surplus funds to the Company in the form of cash dividends, loans, advances or purchases. With respect to the Company'sCompany’s PRC subsidiaries, there are restrictions on the purchase of materials by these companies, the payment of dividends and the removal of dividends from the PRC. In the event that dividends are paid by the Company'sCompany’s PRC subsidiaries, such dividends will reduce the amount of reinvested profits (Note 8) and accordingly, the refund of taxes paid will be reduced to the extent of tax applicable to profits not reinvested. However, the Company believes that such restrictions will not have a material effect on the Company'sCompany’s liquidity or cash flows.
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56
16. RELATED PARTY TRANSACTIONS
4. Marketable Securities
In June 1995, the Company completed the construction of a residential
property pursuant to an agreement dated January 13, 1995. As the
property had not been sold to a third party by December 31, 1995, Mr.
M.K. Koo, the then Chairman ofSeptember 2000, the Company purchased 500,000 common shares for $7,504. These marketable securities were classified as trading securities and included in current assets. During the propertyfirst quarter of 2002, the Company sold its interest for $2,620 being the higheran aggregate of $10,147 resulting in a realized gain of $642.
| December 31, | 2001 | 2002 | ||||||
| Cost | $ | 7,504 | $ | — | ||||
| Unrealized gain on marketable securities | 2,001 | — | ||||||
| Market value | $ | 9,505 | $ | — | ||||
F-18
Notes to Consolidated Financial Statements — (Continued)
5. Inventories
Inventories consist of the market valuefollowing:
| December 31, | 2001 | 2002 | ||||||
| Raw materials | $ | 13,332 | $ | 16,840 | ||||
| Work-in-progress | 1,823 | 1,937 | ||||||
| Finished goods | 1,478 | 1,909 | ||||||
| 16,633 | 20,686 | |||||||
| Less: Provision for inventories | (4,741 | ) | (1,486 | ) | ||||
| $ | 11,892 | $ | 19,200 | |||||
6. Property, Plant and the book valueEquipment
Property, plant and equipment consist of the property as required by the contract. At December 31, 1995 this amount
was included in accounts receivable. In March 1996, Mr. Koo elected to
apply $450 available from his compensation for loss of office against
the account receivable. The balance outstanding of the accounts
receivable at December 31, 1996 amounting to $2,120 was repayable by Mr.
Koo on or before December 31, 1997. In July 1997, Mr. Koo reversed his
election and retained his right to receive the sum of $500 for the
compensation for loss of office and agreed to pay the full purchase
price of $2,620 for the property. This amount was paid by Mr. Koo in
full in August 1997.
17. COMMITMENTS AND CONTINGENCIES
afollowing:
| Estimated | ||||||||||||
| December 31, | Useful Lives | 2001 | 2002 | |||||||||
| Land, land use right and buildings | 20 – 50 years | $ | 38,592 | $ | 41,938 | |||||||
| Machinery and equipment | 4 – 12 years | 41,974 | 51,648 | |||||||||
| Leasehold improvements | 3 – 7 years | 11,862 | 10,237 | |||||||||
| Furniture and fixtures | 4 – 7 years | 1,930 | 1,646 | |||||||||
| Automobiles | 4 – 6 years | 1,631 | 1,536 | |||||||||
| Tools and molds | 4 – 6 years | 127 | 77 | |||||||||
| Total | 96,116 | 107,082 | ||||||||||
| Less: accumulated depreciation and amortization | (35,122 | ) | (40,669 | ) | ||||||||
| Construction in progress | 5,321 | 9,501 | ||||||||||
| Deposit paid for the acquisition of leasehold land and buildings | 4,099 | — | ||||||||||
| Net book value | $ | 70,414 | $ | 75,914 | ||||||||
As at December 31, 1999,2002, the Company has entered into commitments for capital expenditures of approximately $7,146expenditure for property, plant and equipment of approximately $20,856, which are expected to be disbursed during the year ending December 31, 2003.
F-19
Notes to Consolidated Financial Statements — (Continued)
7. Goodwill
Goodwill consists of the following:
| CEP | LPT | ||||||||||||
| Segment | Segment | Total | |||||||||||
| Balance at January 1, 2001 | $ | 533 | $ | 23,297 | $ | 23,830 | |||||||
| Goodwill acquired during the year | — | 85 | 85 | ||||||||||
| Goodwill amortization | (194 | ) | (1,632 | ) | (1,826 | ) | |||||||
| Balance at December 31, 2001 | $ | 339 | $ | 21,750 | $ | 22,089 | |||||||
| Goodwill acquired during the year: | |||||||||||||
| Additional acquisition of JIC Technology Company Limited (see note 3(b)(iv)) | — | 253 | 253 | ||||||||||
| Additional goodwill of Mate Fair, net | 788 | — | 788 | ||||||||||
| Impairment of MBS goodwill (see note 3(b)(ii)) | (339 | ) | — | (339 | ) | ||||||||
| Goodwill release related to disposition of 7.1% interest in JIC Group (see note 3(b)(iv)) | — | (1,483 | ) | (1,483 | ) | ||||||||
| Balance at December 31, 2002 | $ | 788 | $ | 20,520 | $ | 21,308 | |||||||
8. Intangible Assets
Amortized intangible assets consist of licenses of the following:
| December 31, | 2001 | 2002 | ||||||
| Gross carrying amount | $ | 1,335 | $ | 1,335 | ||||
| Accumulated amortization | (364 | ) | (586 | ) | ||||
| Disposal (see note 17) | — | (749 | ) | |||||
| Net carrying amount | $ | 971 | $ | — | ||||
Amortization expense charged to income from operations for the years ended December 31, 2000, 2001 and 2002 was $133, $209 and $222, respectively.
9. Investment in Affiliated Companies, Equity Method
| (a) Mate Fair |
In September 2000, the Company acquired a 5% indirect shareholding in both Huizhou TCL Mobile Communication Co., Ltd. (“Huizhou TCL”) and TCL Mobile Communication (HK) Co., Ltd. (collectively “TCL Mobile”) through the acquisition of 25% of the outstanding shares of Mate Fair Group Limited (“Mate Fair”), an investment holding company incorporated in the BVI with a 20% shareholding interest in TCL Mobile. TCL Mobile is engaged in manufacturing, distributing and trading of digital mobile phones and accessories in the PRC as well as overseas markets. The acquisition in Mate Fair was satisfied by a cash consideration of approximately $2,036. The 25% share of the net book value of Mate Fair on that date was approximately $511. Goodwill of approximately $1,525 was recorded by the Company and was being amortized on a straight line basis over 10 years from September 2000 to August 2010. The amortization expense for the years ended December 31, 2000 and 2001 was $51 and $153, respectively. As of December 31, 2000 and 2001, the Company had a 5% indirect interest in Huizhou TCL since its acquisition of Mate Fair.
F-20
Notes to Consolidated Financial Statements — (Continued)
In May 2002, due to the increase of capital in Huizhou TCL, Mate Fair’s direct interest in Huizhou TCL was diluted from 20% to 18% and the Company’s 5% indirect interest in Huizhou TCL was diluted to 4.5%. As a result of the dilution, the Company recognized the release of unamortized goodwill of approximately $132 and the share of Mate Fair’s loss on deemed disposal of Huizhou TCL of approximately $336 as part of the equity in (loss) income of affiliated companies. Mate Fair ceased the equity accounting for Huizhou TCL since it no longer held at least a 20% interest in Huizhou TCL.
On November 11, 2002, the Company disposed of 1.467% of its indirect interest in Huizhou TCL at a consideration of approximately $10,424 through Mate Fair selling its 13.8% equity interest in Huizhou TCL. The Company invested $5,128 of the proceeds in TCL International Holdings Limited 3% convertible notes (see note 10(a)). Also on November 11, 2002, the Company increased its shareholding in Mate Fair from 25% to approximately 72.22% for $3. Effectively, the Company now has a 3.033% indirect interest in Huizhou TCL. As a result of the above shareholding change, the Company recognized an additional release of unamortized goodwill of approximately $388.
Prior to November 11, 2002, the Company held a 25% interest in Mate Fair. Therefore, Mate Fair had been accounted for as an affiliated company and the results of Mate Fair has been accounted for under the equity method in the consolidated financial statements from the date of acquisition. The Company shared the results of Mate Fair for the period from January 1, 2002 to November 10, 2002 of $10,741.
As the Company’s investment in Mate Fair has increased from 25% to 72.22%, the Company has consolidated Mate Fair for the first time as of November 11, 2002. The consolidated statement of income reflects Mate Fair’s equity in earnings through November 10, 2002, and consolidates Mate Fair’s results of operations for the period from November 11, 2002 through December 31, 2002.
In addition, the remaining unamortized goodwill of Mate Fair was transferred from investment in affiliated companies to the Company’s goodwill account.
The following table presents summarized financial information for Mate Fair until the point it became consolidated:
| For the Year | ||||||||
| Ended | For the Period from | |||||||
| December 31, | January 1, 2002 to | |||||||
| 2001 | November 10, 2002 | |||||||
| Operating income | $ | 8,077 | $ | 91,757 | ||||
| Net income | $ | 8,077 | $ | 91,757 | ||||
| Non-current assets | $ | 10,452 | $ | 4,014 | ||||
| Shareholders’ equity | $ | 10,452 | $ | 4,018 | ||||
(b) Shanghai Q&T
In March 2000, NTSZ, a wholly-owned subsidiary of the Company, acquired 42.5% of the equity interest in Shanghai Q&T Tech. Co., Ltd. (“Shanghai Q&T”) (formerly known as Red Net Technology Co., Ltd.), a company registered in the PRC for $207. The results of Shanghai Q&T have been accounted for under the equity method in the consolidated financial statements from the date of acquisition.
The Company’s interest in Shanghai Q&T was reduced to zero since December 31, 2000 as Shanghai Q&T incurred losses during the year ended December 31, 2000. b AsThe Company does not have any further financial commitment in this company.
F-21
Notes to Consolidated Financial Statements — (Continued)
(c) Group Sense
In 1998, the Company acquired 20% of the outstanding shares of Group Sense (International) Limited (“Group Sense”), a Hong Kong publicly listed company. Group Sense and its subsidiaries manufacture consumer electronics products.
Starting from February 2000, the Company began to dispose of its shareholding in Group Sense and up to November 2000, the Company had disposed of its entire interest in Group Sense for cash of $28,089 in aggregate. In February 2000, the Company sold a portion of its shareholding in Group Sense, resulting in a gain on disposal of investment in an affiliated company of $1,346 and the reduction of shareholding in Group Sense below the 20% level. Upon the reduction of shareholding in Group Sense below the 20% level in 2000, the equity method was discontinued and the carrying amount at the date of discontinuance became the cost of investment, which was subsequently included in the calculation of the gain on disposal of investment in 2000 upon sale of the Company’s remaining ownership interest. The Company then continued to dispose of all of its remaining shareholding in Group Sense, resulting in a gain of $9,435 in 2000. Total gain on disposal of the entire shareholdings in Group Sense during 2000 amounted to $10,781.
10. Investments in TCL
The Company has three investments in TCL group of companies. The Company has not incurred any material operating revenue or expenses from the TCL group of companies, for the years ended December 31, 2000, 2001 and 2002.
(a) Convertible Notes
On November 11, 2002, related to the disposal of 1.467% indirect interest in Huizhou TCL (see note 9(a)) for approximately $10,424, the Company purchased $5,128 in 3% convertible notes (“CB Note”) due in November 2005 of TCL International Holdings Limited, a publicly listed company on The Stock Exchange of Hong Kong Limited. The term of the CB Note is three years with an interest rate of 3% per annum. The CB Note is convertible into shares of TCL International Holdings Limited at the conversion price of approximately $0.33 per share.
(b) Investments, at Cost
(i) TCL Corporation
In January 2002, the Company acquired a 6% equity interest in TCL Corporation (formerly known as TCL Holdings Corporation Ltd.) for a consideration of $11,968. TCL Corporation, a PRC state-owned enterprise, is the parent company of the TCL group of companies. TCL Corporation’s scope of business includes the import and export of raw materials, the design, manufacturing and sales and marketing of telephones, VCD players, color television sets, mobile phones and other consumer electronic products.
(ii) Huizhou TCL
The Company has a 3.033% indirect interest in Huizhou TCL through the Company’s subsidiary, Mate Fair (see note 9(a)). This investment, at cost, is $4,014 at December 31, 1999, the Company has outstanding forward exchange
contracts to purchase approximately $1,755 of Japanese yen. These
contracts are for the purpose of hedging firmly committed transactions.
c Lease commitments
At December 31, 1999, the Company was obligated under operating leases,
which relate to land2002.
11. Bank Loans and buildings, requiring minimum rentals as
follows:
Year ending December 31,
- 2000 $ 800
- 2001 509
- 2002 423
- 2003 445
- 2004 445
- 2005 and thereafter 1,075
------
$3,697
======
d Significant legal proceedings
In June 1997, the Company filed a petition in the British Virgin Islands
for the winding up of Tele-Art Inc. on account of an unpaid judgement
debt owing to the Company. The High Court of Justice granted an order to
wind up Tele Art Inc. and the Caribbean Court of Appeal upheld the
decision on January 25, 1999. On January 22, 1999, pursuant to its
Articles of Association, the Company redeemed and cancelled 138,500
shares of the Company registered in the name of Tele-Art, Inc. at a
price of $11.19 per share to offset substantially all of the judgement
debt, interest and legal costs of $667 totaling $1,600. On February 12,
1999, the liquidator of Tele-Art Inc. filed a summons in the British
Virgin Islands on its behalf seeking, among other things, a declaration
setting aside the redemption. The Courts of the British Virgin Islands
have delayed the fixing of a specific date for the hearing of the
substantive application, pending the outcome of an application by the
Company to remove the liquidator on the grounds of conflict of interest
and bias. In the interim, the Company is prevented from redeeming the
remaining 169,727 shares to satisfy the current unpaid judgement debt
until a determination of the liquidator's February 12, 1999 application.
Management believes that the claim mentioned above is without merit and
will vigorously defend it and believes that the outcome of the case will
not have a significant effect on the financial position, results of
operation or cash flows.
-56-
57
18. BANKING FACILITIESBanking Facilities
The Company has credit linesfacilities with various banks representing notes payable, trade acceptances, import facilities and overdrafts. At December 31, 19992001 and 19982002, these facilities totaled $38,020totalled $76,494 and $50,100,$58,244, of which $10,711$9,730 and $1,201$8,889 were utilized at December 31, 19992001 and 1998,2002, respectively. The maturity of these
F-22
Notes to Consolidated Financial Statements — (Continued)
facilities is generally up to 90 days. Interest rates are generally based on the banks'banks’ usual lending rates in Hong Kong and the credit lines are normally subject to annual review. The banking facilities restrict the pledge of assets to any other banks without the prior consent of the Company'sCompany’s bankers.
The notes payable, which include trust receipts and shipping guarantees, may not agree to utilized banking facilities due to a timing difference between the Company receiving the goods and the bank issuing the trust receipt to cover financing of the purchase. The Company recognizes the outstanding letter of credit as a note payable when the goods are received, even though the bank may not have issued the trust receipt. However, this will not affect the total bank facility utilization, as an addition to the trust receipts will be offset by a reduction in the same amount of outstanding letters of credit.
AT DECEMBER 31,
------------------------
1999 1998
------- -------
Outstanding letters of credit $ 2,718 $ 1,174
Trust receipts 6,949 -
Usance bills pending maturity - 27
------- -------
Total banking facilities utilized 9,667 1,201
Less: Outstanding letters of credit (2,718) (1,174)
Plus: Goods received but trust receipts not issued by the bank - 302
------- -------
Notes payable per balance sheets $ 6,949 $ 329
======= =======
-57-
58
19. COMMON SHARES
| December 31, | 2001 | 2002 | ||||||
| Outstanding letters of credit | $ | 8,183 | $ | 7,904 | ||||
| Trust receipts | 994 | 908 | ||||||
| Usance bills pending maturity | 553 | 57 | ||||||
| Documents in transit | — | 20 | ||||||
| Total banking facilities utilized | 9,730 | 8,889 | ||||||
| Less: Outstanding letters of credit | (8,183 | ) | (7,904 | ) | ||||
| Notes payables | $ | 1,547 | $ | 985 | ||||
The Company has a STOCK OPTIONSseven-year term loan with borrowings in October 2001 totalling $15,000 at a fixed interest rate of 5.05% in the first four years and at a rate of 1% over Singapore Interbank Money Market Offer Rate (“SIBOR”) for the following three years. The loan is secured by a property with net book value of $11,400. At December 31, 2002, the bank loan had an outstanding balance of $12,860. On January 3, 2003, the Company repaid the entire outstanding balance due to the bank, resulting in a finance charge on early repayment of $610.
A subsidiary of the Company has an unsecured four-year term loan with borrowings in May 2002 totalling $4,500 at a rate of 1.5% over three months London Interbank Offered Rate (“LIBOR”), repayable in 16 quarterly instalments of approximately $281 beginning August 31, 2002. At December 31, 2002, the loan had an outstanding balance of $3,937.
The long term debt is repayable as follows for the years ending December 31,:
| 2003 | $ | 13,985 | ||
| 2004 | 1,125 | |||
| 2005 | 1,125 | |||
| 2006 | 562 | |||
| $ | 16,797 | |||
12. Common Shares
(a) Stock Options
In August 1993, the Board of Directors approved a stock option plan which authorized the issuance of 300,000 vested options to key employees, consultants or advisors of the Company at an exercise priceor any of $5.35. These options either
expired or were exercised in 1997 and 1998. Because the option's
exercise price was less than the market value of the Company's common
shares on the date of grant, the Company recorded compensation expense
of $690 reflecting the excess of the fair value of the underlying stock
over the exercise price.its subsidiaries. In December 1993, January 1996 and April 1999, the option plan was amended and the maximum number of
F-23
Notes to Consolidated Financial Statements — (Continued)
shares to be issued pursuant to the exercise of options granted was increased to 650,000 and 1,000,000 and 1,425,000, respectively.
In May 2001, the Board of Directors approved another stock option plan which would grant 5,000 options to each independent director of the Company elected at each annual general meeting of shareholders, and might grant options to key employees, consultants or advisors of the Company or any of its subsidiaries to subscribe for its shares in accordance with the terms of this stock option plan. The maximum number of shares to be issued pursuant to the exercise of options granted was 1,000,000 shares.
Effective January 1, 2003, the Company no longer plans to issue options to management and employees. Rather, the Board of Directors approved an incentive bonus program to reward management and employees with a cash bonus in lieu of stock options.
A summary of stock option activity during the three years ended December 31, 19992002 is as follows:
Number of Option price per share with the weighted
options average option price in parenthesis
--------- ----------------------------------------
Outstanding at January 1, 1997 537,300 $5.35, $10.50, $11.00 & $11.375
($9.47)
Exercised (386,667) $5.35, $10.50, $11.00 & $11.375
($9.06)
Cancelled (97,300) $5.35, $10.50, & $11.00 ($10.52)
---------
Outstanding at December 31, 1997 53,333 $10.50
Granted 596,500 $10.50 & $15.75 ($13.14)
Cancelled (296,500) $15.75
---------
Outstanding at December 31, 1998 353,333 $10.50 & $15.75 ($10.55)
Exercised (36,500) $10.50 & $15.75 ($10.79)
Cancelled (53,333) $10.50
---------
Outstanding at December 31, 1999 263,500 $10.50 & $15.75 ($10.53)
=========
Had compensation cost for
| Number | Option Price Per Share with the | ||||||
| of Options | Weighted Average Option Price in Parenthesis | ||||||
| Outstanding at January 1, 2000 | 263,500 | $10.50 & $15.75 ($10.53) | |||||
| Granted | 350,220 | $13.875, $14.81, $16.125 & $16.375 ($14.18) | |||||
| Exercised | (149,500 | ) | $10.50 | ||||
| Cancelled | (28,220 | ) | $16.125 | ||||
| Outstanding at December 31, 2000 | 436,000 | $10.50, $13.875, $14.81, $15.75 & $16.375 ($13.11) | |||||
| Granted | 438,253 | $13.94, $14.50 & $7.0 ($12.34) | |||||
| Exercised | (116,000 | ) | $10.50, $13.875 & $15.75 ($10.63) | ||||
| Cancelled | (50,853 | ) | $13.875, $13.94, $14.81 ($14.02) | ||||
| Outstanding at December 31, 2001 | 707,400 | $7.00, $13.875, $13.94, $14.50 & $16.375 ($12.97) | |||||
| Granted | 300,000 | $19.85 | |||||
| Exercised | (524,400 | ) | $7.00, $13.875, $13.94 & $19.85 ($12.73) | ||||
| Cancelled | — | ||||||
| Outstanding at December 31, 2002 | 483,000 | $13.875, $13.94, $14.50, $16.375 & $19.85 ($17.52) | |||||
Of the Company's stock option plan been
determined based on the fair value at the grant dates for awards under
those plans consistent with the method of SFAS No. 123, the Company's
net income and diluted earnings per share would have been reduced to the
pro forma amounts indicated below:
F-24
Notes to Consolidated Financial Statements — (Continued)
Details of the options granted by the Company in 2000, 2001 and 2002 are as follows:
| Number of Options Granted | Exercise Price | Exercisable Period | |||||||
In 2000 | |||||||||
| 172,000 | $ | 13.875 | January 1, 2001 to January 31, 2003 | ||||||
| 130,000 | $ | 13.875 | May 31, 2001 to January 31, 2003 | ||||||
| 5,000 | $ | 14.810 | January 1, 2001 to July 31, 2003 | ||||||
| 28,220 | $ | 16.125 | January 1, 2001 to April 5, 2003 | ||||||
| 15,000 | $ | 16.375 | June 9, 2001 to June 8, 2003 | ||||||
In 2001 | |||||||||
| 277,853 | $ | 13.94 | March 16, 2001 to March 16, 2004 | ||||||
| 55,000 | $ | 14.50 | June 22, 2001 to June 22, 2004 | ||||||
| 105,400 | $ | 7.00 | June 27, 2001 to June 22, 2002 | ||||||
In 2002 | |||||||||
| 300,000 | $ | 19.85 | April 30, 2002 to April 30, 2005 | ||||||
Stock option costs of $839 charged to the selling, general and administrative expenses in 2001 represented the difference between the market price and exercisable price of $7 for 105,400 options granted during 2001.
The following assumptions:
summarizes information about stock options outstanding at December 31, 2002. All stock options are exercisable as of December 31, 2002.
$15.75 $10.50
Options Options
------- -------
Risk-free interest rate 5.5% 5.0%
Expected life 3/15/01 3/15/01
Expected volatility 61.1% 60.9%
Expected dividends $ .070 $ .070
| Weighted Average | ||||||||
| Remaining Contractual | ||||||||
| Exercise Prices | Number of Options | Life in Months | ||||||
| $13.875 | 20,000 | 1.0 | ||||||
| $16.375 | 15,000 | 5.2 | ||||||
| $13.940 | 112,000 | 14.5 | ||||||
| $14.500 | 55,000 | 17.7 | ||||||
| $19.850 | 281,000 | 27.9 | ||||||
| 483,000 | 21.8 | |||||||
The weighted average remaining contractual life of the stock options outstanding at December 31, 19992000, 2001 and 19982002 was 15 months19, 18 and 2622 months, respectively. -58-
59
19. COMMON SHARES - CONTINUED
b SHARE BUY - BACK PROGRAM
The weighted average fair value of options granted during 2000, 2001 and 2002 was $5.67, $5.14 and $4.97, respectively, using the Black-Scholes option-pricing model based on the following assumptions:
| Year Ended December 31, | 2000 | 2001 | 2002 | |||||||||
| Risk-free interest rate | 6.13 – 6.67% | 5% | 4.5% | |||||||||
| Expected life | 3 years | 1 – 3 years | 3 years | |||||||||
| Expected volatility | 47.3 – 65.0% | 45.0% | 36.0% | |||||||||
| Expected dividend per quarter | $0.09 | $0.10 | $0.12 | |||||||||
(b) Advisors’ Warrants
On December 2, 1997, the Company repurchasedissued 130,000 units to its advisors. The holder of each unit is entitled to purchase from the Company at the purchase price of $20.40 per unit one common share and one
F-25
Notes to Consolidated Financial Statements — (Continued)
warrant exercisable to purchase one common share at $20.40 per share for the period from November 30, 1998 to November 24, 2000. In 2000, 58,030 advisors’ warrants were exercised, 61,970 advisors’ warrants had expired and the expiry date of exercisable period for the remaining 10,000 advisors’ warrants was extended to November 24, 2002. As a result, 58,030 common shares and 58,030 warrants were issued during the year ended December 31, 2000. The compensation expense for the extension of the expiry date of the 10,000 advisors’ warrants, using the Black-Scholes option-pricing model, was $43 and has been charged to the consolidated statement of income in 2000. The remaining 10,000 of these advisors’ warrants expired on November 24, 2002.
On October 5, 1998, the Company issued 300,000 warrants to an advisor as consideration of advisory services under its buy-back program as follows:
The fair values of the advisors’ warrants were calculated using the Black-Scholes option-pricing model based on the following assumptions:
| $20.4 | $10.25 | |||||||
| Advisors’ Warrants | Advisors’ Warrants | |||||||
| Risk-free interest rate | 6.50% | 6.50% | ||||||
| Expected life | November 24, 2002 | October 4, 2001 | ||||||
| Expected volatility | 50% | 50% | ||||||
| Expected dividend per quarter | $0.09 | $0.09 | ||||||
(c) Public Warrants
On October 10, 1997, the Company distributed to each holder of its common shares nontransferable rights (the "Rights"“Rights”) to subscribe for one unit for every three common shares owned at that date (referred to as the "Rights Offering"“Rights Offering”). The subscription price was $17.00 per unit. Each unit consisted of one common share and one redeemable common share purchase warrant. Each warrant is exercisable to purchase one common share at a price of $20.40 per share at any time from the date of their issuance until November 24, 2000. The common shares and the warrants included in the units will be separately transferable immediately on issuance of the common shares. The warrants are redeemable by the Company at any time at $0.05 per warrant if the average closing sale price of the common shares for 20 consecutive trading days within the 30-day period preceding the date the notice is given equals or exceeds $25.50 per share. The terms of the Rights Offering include an over subscription privilege available to shareholders subject to certain conditions and a Standby Purchase Commitment made by the Standby Underwriters to the Rights Offering, subject to the terms and conditions of a Standby Underwriting Agreement made between the Company and the Standby Underwriters, and which includes purchase by the Standby Underwriters of units not subscribed for by shareholders of the Company. Pursuant to the Rights Offering, 3,000,000 units were offered, with a subscription expiry date of November 24, 1997.
During the period of the Rights Offering, shareholders of the Company exercised Rights to purchase a total of 2,267,917 units at $17.00 per unit and the Standby Underwriters purchased a total of 729,212 units at a price of $16.75, being the lower of the subscription price per unit and the closing bid price per common share as reported on Thethe Nasdaq
National Market on the subscription expiry date, as provided for under the Standby Underwriting
F-26
Notes to Consolidated Financial Statements — (Continued)
Agreement. The gross proceeds raised amounted to $50,769 and the net proceeds raised after deduction of expenses associated with the Rights Offering amounted to $47,700.
d ADVISORS' WARRANTS
On December 2, 1997,April 1, 2000, the Company amended the terms of the warrant by extending the expiry date of the warrants from November 24, 2000 to November 24, 2002. The extension of the expiry date of the warrants created a new measurement date for the warrants, however, the resulting amount was immaterial. During 2002, 1,460,655 warrants were exercised. On November 24, 2002, all of the remaining warrants expired.
The 58,030 warrants issued 130,000 unitspursuant to the exercise of advisors’ warrants above bear the same rights as public warrants.
(d) Share Buy-Back Program
The Company repurchased shares under its buy-back programs as follows. All shares are purchased at the prevailing market price at the date of the buy back.
| Year | Shares Repurchased | Average Purchase Price | ||||||
| 2000 | 5,600 | $ | 13.00 | |||||
| 2001 | 227,900 | $ | 14.71 | |||||
| 2002 | 197,600 | $ | 17.86 | |||||
(e) Share Redemption
On January 22, 1999, pursuant to its advisors.Articles of Association, the Company redeemed and cancelled 138,500 shares of the Company registered in the name of Tele-Art, Inc. at a price of $11.19 per share for $1,549. (see note 19(b)).
On August 12, 2002, pursuant to its Articles of Association, the Company redeemed and cancelled an additional 169,727 shares of the Company beneficially owned by Tele-Art, Inc. at a price of $18.41 per share for $3,125 (see note 19(b)).
13. Earnings Per Share
The calculations of basic earnings per share and diluted earnings per share are computed as follows:
| Weighted Average | Per Share | |||||||||||
| Year Ended December 31, 2000 | Income | Shares | Amount | |||||||||
| Basic earnings per share | $ | 24,001 | 9,114,175 | $ | 2.63 | |||||||
| Effect of dilutive securities: | ||||||||||||
| — Stock options | — | 140,676 | ||||||||||
| — Warrants | — | 120,265 | �� | |||||||||
| Diluted earnings per share | $ | 24,001 | 9,375,116 | $ | 2.56 | |||||||
Warrants to purchase 3,055,159 common shares at $20.40 were outstanding at December 31, 2000 but were not included in the computation of diluted earnings per share because the exercise price of the warrants was greater than the average market price of the common shares during the relevant period.
F-27
Notes to Consolidated Financial Statements — (Continued)
| Weighted Average | Per Share | |||||||||||
| Year Ended December 31, 2001 | Income | Shares | Amount | |||||||||
| Basic earnings per share | $ | 9,045 | 10,274,377 | $ | 0.88 | |||||||
| Effect of dilutive securities: | ||||||||||||
| — Stock options | — | 56,660 | ||||||||||
| — Warrants | — | 62,374 | ||||||||||
| Diluted earnings per share | $ | 9,045 | 10,393,411 | $ | 0.87 | |||||||
Stock options to purchase 15,000 shares of common shares at $16.375, warrants to purchase 3,055,159 common shares at $20.40, and 10,000 advisors’ warrants were outstanding at December 31, 2001 but were not included in the computation of diluted earnings per share because the exercise price of the stock options and warrants was greater than the average market price of the common shares during the relevant period. The holder of each unitadvisors’ warrant is entitled to purchase from the Company at the purchase price of $20.40 per unit one common share and one warrant exercisable to purchase one common share at $20.40 per share.
| Weighted Average | Per Share | |||||||||||
| Year Ended December 31, 2002 | Income | Shares | Amount | |||||||||
| Basic earnings per share | $ | 20,023 | 10,571,323 | $ | 1.89 | |||||||
| Effect of dilutive securities: | ||||||||||||
| — Stock options | — | 144,496 | ||||||||||
| — Warrants | — | 20,580 | ||||||||||
| Diluted earnings per share | $ | 20,023 | 10,736,399 | $ | 1.86 | |||||||
All options and warrants to purchase shares of common stock were included in the computation of 2002 diluted earnings per share as the exercise price was less than the average market price of the common stock.
F-28
Notes to Consolidated Financial Statements — (Continued)
14. Other Income (Expense) — Net
Other income (expense) — net, consists of:
| Year Ended December 31, | 2000 | 2001 | 2002 | |||||||||
| Interest income | $ | 3,300 | $ | 1,195 | $ | 799 | ||||||
| Miscellaneous expense | (623 | ) | (294 | ) | (771 | ) | ||||||
| Non-trade receivable write-off | — | (500 | ) | — | ||||||||
| Gain on disposal of investment in an affiliated company | 1,346 | — | — | |||||||||
| Realized gain on disposal of investments, net | 9,435 | — | — | |||||||||
| Currency option premium written off | (304 | ) | — | — | ||||||||
| Foreign exchange (loss) gain | 51 | 530 | (345 | ) | ||||||||
| Bank charges | (328 | ) | (333 | ) | (307 | ) | ||||||
| Release of unamortized goodwill of affiliated companies — Mate Fair (see note 9(a)) | — | — | (520 | ) | ||||||||
| Realized gain on disposal of marketable securities | — | — | 642 | |||||||||
| Unrealized gain on marketable securities | 433 | 1,568 | — | |||||||||
| Dividend income received from marketable securities and investment | 188 | 525 | 917 | |||||||||
| Gain on disposal of intangible asset (see note 17) | — | — | 60 | |||||||||
| Gain on disposal of a subsidiary (see note 3(b)(iii)) | — | — | 17 | |||||||||
| Gain on disposal of land | 355 | 18 | — | |||||||||
| Redemption of shares in legal settlement, net of expenses — Tele Art case (see note 19(b)) | — | — | 3,333 | |||||||||
| Provision for Tele-Art case (see note 19(b)) | — | — | (5,192 | ) | ||||||||
| Loss on restructuring of JIC Group, including release of unamortized goodwill of $1,483 (see note 3(b)(iv)) | — | — | (2,655 | ) | ||||||||
| Legal expenses on restructuring of JIC Group | — | — | (1,411 | ) | ||||||||
| Finance charge on early repayment of the bank loan (see note 11) | — | — | (610 | ) | ||||||||
| $ | 13,853 | $ | 2,709 | $ | (6,043 | ) | ||||||
15. Staff Retirement Plans
Prior to December 2000, the Company maintained staff contributory retirement plans (defined contribution pension plans) which covered certain of its employees. From December 2000 onwards, the Company terminated its existing staff contributory retirement plans and enrolled all of its eligible employees in Hong Kong into a Mandatory Provident Fund (“MPF”) scheme. The MPF is a defined contribution scheme and the assets of the scheme are managed by the trustees independent to the Company.
The MPF is available to all employees aged 18 to 64 and with at least 60 days of service under the employment of the Company in Hong Kong. Contributions are made by the Company at 5% based on the staff’s relevant income. The maximum relevant income for contribution purpose per employee is $3 per month. Staff members are entitled to 100% of the Company’s contributions together with accrued returns irrespective of their length of service with the Company, but the benefits are required by law to be preserved until the retirement age of 65.
F-29
Notes to Consolidated Financial Statements — (Continued)
The cost of the Company’s contribution to the contributory retirement plans (including the MPF) amounted to $174, $151 and $127 for the years ended December 31, 2000, 2001 and 2002, respectively.
16. Income Taxes Benefit (Expense)
The components of income before income taxes and minority interests are as follows:
| Year Ended December 31, | 2000 | 2001 | 2002 | |||||||||
| PRC, excluding Hong Kong | $ | 6,384 | $ | 9,002 | $ | 18,823 | ||||||
| Hong Kong | 17,572 | 500 | 2,137 | |||||||||
| $ | 23,956 | $ | 9,502 | $ | 20,960 | |||||||
Under the current BVI law, the Company’s income is not subject to taxation. Subsidiaries, primarily operating in Hong Kong and the PRC, are subject to income taxes as described below.
The provision for current income taxes of the subsidiaries operating in Hong Kong has been calculated by applying the current rate of taxation of 16% to the estimated taxable income earned in or derived from Hong Kong during the period.
Deferred tax, where applicable, is provided under the liability method at the rate of 16%, being the effective Hong Kong statutory income tax rate applicable to the ensuing financial year, on the difference between the financial statement and income tax bases of measuring assets and liabilities.
The basic corporate tax rate for Foreign Investment Enterprises (“FIEs”) in the PRC, such as NTSZ, Zastron, Namtek, BPC, Jieda, Jetup, and Jieyao (the “PRC Subsidiaries”) is currently 33% (30% state tax and 3% local tax). However, because all the PRC subsidiaries are located in Shenzhen and are involved in production operations, they qualify for a special reduced state tax rate of 15%. In addition, the local tax authorities in Shenzhen are not currently assessing any local tax.
Since the PRC subsidiaries have agreed to operate for a minimum of 10 years in the PRC, a two-year tax holiday from the first profit making year is available, following which in the third through fifth years there is a 50% reduction to 7.5%. In any event, for FIEs such as NTSZ, Zastron and Namtek which export 70% or more of the production value of their products, a reduction in the tax rate is available; in all cases apart from the years in which a tax holiday is available, there is an overall minimum tax rate of 10%. The following details the tax concessions received for the Company’s PRC subsidiaries:
| • | For the years ended December 31, 1990 and 1991, NTSZ qualified for a tax holiday; tax was payable at the rate of 7.5% on the assessable profits of NTSZ for the years ended December 31, 1992 to 1994, and 10% in 1995 to 1998. On January 8, 1999, NTSZ received the recognition of “High and New Technology Enterprise” which entitles it to various tax benefits including a lower income tax rate of 7.5% until 2003. In July 2002, the Shenzhen local tax authority issued a notice to shorten the tax incentive period from 5 years to 3 years expiring in 2001. Nevertheless NTSZ was advised by the Shenzhen local tax authority that it would continue to provide a rebate of corporate tax paid for 2 years for 2002 and 2003. NTSZ reinvested the profits for 1999, 2000 and 2001. NTSZ has claimed and received a tax refund of $1,018 from the Shenzhen tax authority in October 2002 for taxes paid in 1999 to 2001. | |
| • | For the years ended December 31, 1992 and 1993, Zastron qualified for a tax holiday; tax was payable at the rate of 7.5% on the assessable profits of Zastron for the years ended December 31, 1994 to 1996 and 10% for the years ended December 31, 1997 to 2002. In 2002 Zastron claimed a refund of $56 |
F-30
Notes to Consolidated Financial Statements — (Continued)
| from reinvestment of profits for 1999 and 2000. During 2002, Zastron received a refund of $20 for being an export-oriented enterprise for 2000 and 2001. | ||
| • | In 1996 and 1997, Jieda qualified for a tax holiday. For the years ended December 31, 1998 to 2000, tax was payable at the rate of 7.5% on the assessable profit. For the years ended December 31, 2001 and 2002, the income tax of Jieda was payable at the rate of 15% on the assessable profit. | |
| • | In 1996 and 1997, Namtek also qualified for a tax holiday. For the years ended December 31, 1998 to 2000, tax was payable at the rate of 7.5% on the assessable profit. In February 2001, Namtek received the recognition of “Advanced Technology Enterprise” which entitles it to various tax benefits including a lower income tax rate of 7.5% until 2003. In 2002, Namtek claimed a refund of $41 from the reinvestment of profits for 1998 to 2000. | |
| • | Jetup enjoyed its tax holiday since 1997 and tax was payable at the rate of 7.5% on its assessable profit for the years ended December 31, 1999 to 2001. The Shenzhen local tax authority has granted Jetup the status of “High and New Technology Enterprise” and allowed it to enjoy a 50% reduction in corporate tax rate to 7.5% for 3 years from 2002 to 2004. The Shenzhen local tax authority has in June 2002 agreed to refund to Jetup the corporate tax paid in 2000 of $5, and in 2001 of $279, due to Jetup’s reinvestment of the profits for 2000 and 2001, respectively. | |
| • | For the years ended December 31, 1999 and 2000, Jieyao qualified for a tax holiday; tax was payable at the rate of 7.5% on the assessable profit of Jieyao for the years ended December 31, 2001 to 2003. | |
| • | For the year ended December 31, 2001, BPC qualified for its first year tax holiday. In addition, the Company has received notification from the PRC tax authority that BPC also qualified for a second year tax holiday in 2002. |
Notwithstanding the foregoing, an FIE whose foreign investor directly reinvests by way of capital injection its share of profits obtained from that FIE or another FIE owned by the same foreign investor in establishing or expanding an export-oriented or technologically advanced enterprise in the PRC for a minimum period of five years may obtain a refund of the taxes already paid on those profits. NTSZ, Zastron, Namtek and Jetup qualified for such refunds of taxes as a result of reinvesting their profit earned in previous years. As a result, the Company recorded tax expense net of the benefit related to the refunds. At December 31, 2001 and 2002, taxes recoverable under such arrangements were $1,271 and $789, respectively, which are included in income taxes recoverable and expected to be received during 2003. However, during 2002 the Shenzhen government did not refund approximately $501 in taxes the Company paid in 1999 to 2001. Therefore, the Company reversed the related receivable into current tax expense in 2002.
The current and deferred components of the income tax benefit (expense) appearing in the consolidated statements of income are as follows:
| Year Ended December 31, | 2000 | 2001 | 2002 | |||||||||
| Current tax | $ | (77 | ) | $ | (110 | ) | $ | (812 | ) | |||
| Deferred tax | 110 | (117 | ) | 39 | ||||||||
| $ | 33 | $ | (227 | ) | $ | (773 | ) | |||||
Deferred tax liabilities consist of tax allowances over depreciation and are $151 and $112 at December 31, 2001 and 2002, respectively.
At December 31, 2000, a subsidiary of the Company had tax loss carryforwards for Hong Kong tax purposes, subject to the agreement of the Hong Kong Inland Revenue Department, amounting to approxi-
F-31
Notes to Consolidated Financial Statements — (Continued)
mately $104. This tax loss carryforward was used in its entirety during 2001. At December 31, 2001 and 2002, the Company does not have any tax loss carryforwards.
A reconciliation of the income tax benefit (expense) to the amount computed by applying the current tax rate to the income before income taxes in the consolidated statements of income is as follows:
| Year Ended December 31, | 2000 | 2001 | 2002 | ||||||||||
| Income before income taxes and minority interests | $ | 23,956 | $ | 9,502 | $ | 20,960 | |||||||
| PRC tax rate | 15 | % | 15 | % | 15 | % | |||||||
| Income tax expense at PRC tax rate on income before income tax | (3,593 | ) | (1,425 | ) | (3,144 | ) | |||||||
| Effect of difference between Hong Kong and PRC tax rates applied to Hong Kong income | (7 | ) | (7 | ) | 42 | ||||||||
| Effect of income (loss) for which no income tax benefit/expense is receivable/payable | 2,527 | (35 | ) | 950 | |||||||||
| Tax holidays and tax incentives | 491 | 786 | 542 | ||||||||||
| Effect of PRC tax concessions, giving rise to no PRC tax liability | 508 | 564 | 2,153 | ||||||||||
| Tax benefit (expense) arising from items which are not assessable (deductible) for tax purposes: | |||||||||||||
| Gain on disposal of land in Hong Kong | 53 | 6 | — | ||||||||||
| Offshore and exempted interest income | 76 | 21 | 12 | ||||||||||
| Non deductible legal and professional fees | — | — | (234 | ) | |||||||||
| Non deductible other items | (252 | ) | (159 | ) | (466 | ) | |||||||
| Under provision of income tax expense in prior year: | |||||||||||||
| Taxes due by NTSZ for 10% reserve fund | — | — | (308 | ) | |||||||||
| Taxes due by Namtek due to dividends paid and profits not reinvested | — | — | (193 | ) | |||||||||
| Other | 230 | 22 | (127 | ) | |||||||||
| $ | 33 | $ | (227 | ) | $ | (773 | ) | ||||||
No income tax arose in the United States of America in any of the periods presented.
Tax that would otherwise have been payable without tax holidays and tax concessions amounts to approximately $999, $1,350 and $2,695 in the years ended December 31, 2000, 2001 and 2002, respectively (representing a decrease in the basic earnings and diluted earnings per share of $0.11, $0.13 and $0.25, in the years ended December 31, 2000, 2001 and 2002, respectively).
17. Related Party Transactions
As of December 31, 2001, the balance due to a related party represents the balance due to TBCL, a minority shareholder of BPC, and its related companies. Effective April 30, 2002, the Company sold its 86.67% joint venture interest in BPC to a TBCL related company (see note 3(b)(iii)). As of December 31, 2002, the Company had no balances due to a related party.
Since the establishment of BPC in 2000, the Company recognized net sales of $6,232, $21,072 and $7,849, purchased raw materials of $22,370, $23,065 and $7,751, acquired property, plant and equipment of $814, $50 and NIL, from TBCL and its related companies for the years ended December 31, 2000, 2001 and the period from November 30, 1998 to November 24, 2000.
On October 5, 1998,January 1, 2002 through April 2002 respectively. In addition, the Company issued 300,000 warrantsacquired a license for $1,000 from TBCL during the year ended December 31, 2000. During 2002, the license was disposed of for
F-32
Notes to an advisor asConsolidated Financial Statements — (Continued)
a consideration of advisory services under$800 together with the disposal of interest in BPC, plus the foreign exchange gain of $9, resulting in a service contract for a periodgain of 3 years.$60.
18. Financial Instruments
The holderCompany’s financial instruments that are exposed to concentrations of each warrant is entitledcredit risk consist primarily of its cash equivalents, trade receivables and marketable securities.
The Company’s cash and cash equivalents are high-quality deposits placed with banking institutions with high credit ratings. This investment policy limits the Company’s exposure to purchaseconcentrations of credit risk.
The trade receivable balances largely represent amounts due from the Company one common shareCompany’s principal customers who are generally international organizations with high credit ratings. Letters of credit are the principal security obtained to support lines of credit or negotiated contracts from a customer. As a consequence, concentrations of credit risk are limited. There was no allowance for doubtful debt for 2000. Allowance for doubtful debts was $31 and $122 in 2001 and 2002, respectively. There were no other movements in the provision for doubtful accounts.
All of the Company’s significant financial instruments at $10.25 per share forDecember 31, 2001 and 2002 are reported in current assets or current liabilities in the period from October
5, 1998consolidated balance sheet at carrying amounts which approximate their fair value due to October 4, 2001.the short maturity of these instruments.
The Company’s fair value of convertible notes was not significantly different from the warrants, usingcarrying value at December 31, 2002.
19. Commitments and Contingencies
(a) Lease Commitments
The Company leases premises under various operating leases, certain of which contain escalation clauses. Rental expense under operating leases was $812 in 2000, $1,501 in 2001 and $909 in 2002.
At December 31, 2002, the Black-Scholes option-pricing model,Company was $790obligated under operating leases, which relate to land and buildings, requiring minimum rentals as follows for the years ending December 31, :
| 2003 | $ | 779 | ||
| 2004 | 727 | |||
| 2005 | 745 | |||
| 2006 | 731 | |||
| 2007 | 565 | |||
| 2008 and thereafter | 388 | |||
| $ | 3,935 | |||
(b) Significant Legal Proceedings
In June 1997, the Company filed a petition in the British Virgin Islands for the winding up of Tele-Art, Inc. on account of an unpaid judgment debt owing to the Company. The High Court of Justice granted an order to wind up Tele-Art, Inc. in July 1998 and the Eastern Caribbean Court of Appeal upheld the decision on January 25, 1999. On January 22, 1999, pursuant to its Articles of Association, the Company redeemed and cancelled 138,500 shares of the Company registered in the name of Tele-Art, Inc. at a price of $11.19 per
F-33
Notes to Consolidated Financial Statements — (Continued)
share to offset substantially all of the judgment debt of $799, plus interest and legal costs totalling $1,673, including dividends that the Company had withheld and credited against the judgment debt.
Following the completion of the redemption, the Company received notice that the liquidator had obtained an ex-parte injunction preventing the Company from redeeming Nam Tai shares beneficially owned by Tele-Art, Inc. On February 4 1999, the liquidator of Tele-Art, Inc. filed a further summons in the BVI on its behalf seeking, among other matters:
| • | A declaration as to the respective priorities of the debts of Tele-Art, Inc. to the Bank of China, Nam Tai, and other creditors and their respective rights to have their debts discharged out the proceeds of the Tele-Art, Inc.’s Nam Tai shares; | |
| • | An order setting aside the redemption of 138,500 shares, and ordering delivery of all shares in possession or control of Nam Tai to the liquidator; and | |
| • | Payment of all dividends in respect of Tele-Art, Inc.’s Nam Tai shares. |
On March 26, 2001, the Company filed a summons seeking to remove the liquidators for failing to act diligently in the performance of his duties and for knowingly misleading the court. On September 3, 2002, the liquidator submitted a letter of resignation prior to the scheduled removal hearing. As of February 21, 2003, new liquidators have not been appointed.
On July 5, 2002, upon application by the Company, the court ordered the removal of the liquidator’s ex-parte injunction and ordered an inquiry into damages. On August 9, 2002, the court delivered a decision awarding a judgment in favor of the Company and against Tele-Art, Inc. for approximately $34,000. On August 12, 2002, the Company redeemed and cancelled, pursuant to its Articles of Association, the remaining 169,727 shares beneficially owned by Tele-Art, Inc. at a price of $18.41 per share. Including the dividends which the Company had withheld and credited against the judgment, this offset a further $3,519 in judgment debts owed to the Company by Tele-Art, Inc. The Company recorded the $3,333 redemption net of expenses as other income in the third quarter of 2002.
On January 21, 2003 judgment was delivered on the liquidators’ February 4, 1999 summons declaring that the redemption and set off of dividends on the 138,500 shares be set aside and that all Tele-Art Inc. property withheld by Nam Tai be delivered to Tele-Art, Inc. in liquidation. The orders granted in the judgment were substantially different from the relief sought in the February 12, 1999 application. On February 4, 2003, the Company filed an application for a stay of execution and leave to appeal the decision listing eight grounds of appeal, for which the application is pending.
The Company has been advised by its legal representatives that it has real prospects of success on appeal against the January 21, 2003 decision and plans to vigorously fight for such an outcome.
However, due to the uncertainty of the final outcome of the litigation as a result of the January 21, 2003 judgment and in accordance with SFAS No. 5,“Accounting for Contingencies”, the Company has made a 2002 provision for $5,192 for both share redemption plus all dividends declared and withheld by the Company, pending a final determination of this matter by the courts.
If the Company’s appeal is successful and all legal matters related to Tele Art, Inc. are finalized, then the $5,192 will be reversed into income in the related period.
If the Company’s appeal is not successful, and the 308,227 share redemption is set aside, the Company believes that these shares would be sold by Tele-Art, Inc.’s liquidator, once appointed, in the open market at the market price prevailing at the time of sale. For example, if these shares had been sold at the February 21, 2003 closing price of $26.50, the proceeds the liquidator would have realized before commissions, plus
F-34
Notes to Consolidated Financial Statements — (Continued)
withheld dividends of $518, would have been approximately $8,686 for the estate of Tele-Art, Inc. (in liquidation). Nam Tai has two judgments debts against Tele-Art Inc. in the aggregate amount, including interest, costs, and related expenses, of approximately $38,000. Furthermore, per the last liquidator report that was filed with the court there appear to be no proven unsecured creditors of Tele-Art, Inc. and the estimated liabilities for all other unsecured creditors are approximately $80. The Bank of China is claiming to be a secured creditor in the amount of $2,200, and the January 21, 2003 judgment found that the Bank of China is secured and Nam Tai is unsecured. Nam Tai disputes that finding, and among other matters, has argued that the Bank of China has not yet submitted any proof of an outstanding debt. The now resigned liquidator is claiming to have incurred approximately $385 in costs for work as liquidator. Accordingly, if the Company is not successful on its appeal of the January 21, 2003 judgment, the Company will seek to recover its $38,000 in judgment debts (including interest, costs, and related expenses) from the estate of Tele-Art, Inc. Accordingly, any amounts recovered from the estate of Tele-Art, Inc., which in management’s opinion could exceed the $5,192 provision based on the current market price of Nam Tai’s shares and current information regarding Tele-Art Inc. creditors, would be recognized as other income upon recovery. The actual amount of the recovery, if any, is uncertain, and is amortized overdependent on a number of factors including the lifevalue of Nam Tai’s shares when sold in the market, and the final determination of other creditors’ positions. The Company plans to continue to pursue vigorously all legal alternatives available to seek to recover the maximum amount of the contract commencingoutstanding debt from Tele-Art, Inc. (in liquidation) as well as to pursue other parties that may have assisted in any transfers of the assets from Tele-Art, Inc.
20. Segment Information
Prior to October 1998.2000, the Company operated in a single segment of the CEP industry. As a result of the acquisition of the JIC Group in late 2000, the Company added a second segment, LPT, principally relating to the operation of the JIC Group. The amortizationCompany operates and manages these segments as strategic business units. The chief operating decision maker evaluates the net income of each segment in assessing performance and allocating resources between segments.
F-35
Notes to Consolidated Financial Statements — (Continued)
The following table provides operating financial information for the two reportable segments. The information presented below for the year ended December 31, 1999 is $329.
-59-
60
20. BUSINESS SEGMENT INFORMATION2000 has been restated to reflect two operating segments.
| 2000 | 2001 | 2002 | ||||||||||||||||||||||||||||||||||
| CEP | LPT | Total | CEP | LPT | Total | CEP | LPT | Total | ||||||||||||||||||||||||||||
| Net sales | $ | 203,404 | $ | 10,284 | $ | 213,688 | $ | 198,048 | $ | 35,958 | $ | 234,006 | $ | 200,755 | $ | 35,261 | $ | 236,016 | ||||||||||||||||||
| Cost of sales | (173,878 | ) | (8,218 | ) | (182,096 | ) | (174,863 | ) | (29,111 | ) | (203,974 | ) | (167,440 | ) | (30,516 | ) | (197,956 | ) | ||||||||||||||||||
| Gross profit | 29,526 | 2,066 | 31,592 | 23,185 | 6,847 | 30,032 | 33,315 | 4,745 | 38,060 | |||||||||||||||||||||||||||
| Selling, general and administrative expenses | (15,196 | ) | (2,450 | ) | (17,646 | ) | (16,521 | ) | (5,453 | ) | (21,974 | ) | (14,940 | ) | (3,043 | ) | (17,983 | ) | ||||||||||||||||||
| Research and development expenses | (3,489 | ) | — | (3,489 | ) | (2,746 | ) | (208 | ) | (2,954 | ) | (2,162 | ) | (524 | ) | (2,686 | ) | |||||||||||||||||||
| Impairment of goodwill | — | — | — | — | — | — | (339 | ) | — | (339 | ) | |||||||||||||||||||||||||
| Interest expense | (149 | ) | (16 | ) | (165 | ) | (170 | ) | (8 | ) | (178 | ) | (705 | ) | (85 | ) | (790 | ) | ||||||||||||||||||
| Equity in (loss) income of affiliated companies | (189 | ) | — | (189 | ) | 1,867 | — | 1,867 | 10,741 | — | 10,741 | |||||||||||||||||||||||||
| Other income (expense) | 13,772 | 81 | 13,853 | 885 | 1,824 | 2,709 | (4,879 | ) | (1,164 | ) | (6,043 | ) | ||||||||||||||||||||||||
| Income (loss) before income taxes and minority interests | 24,275 | (319 | ) | 23,956 | 6,500 | 3,002 | 9,502 | 21,031 | (71 | ) | 20,960 | |||||||||||||||||||||||||
| Income taxes benefit (expense) | (144 | ) | 177 | 33 | (137 | ) | (90 | ) | (227 | ) | (710 | ) | (63 | ) | (773 | ) | ||||||||||||||||||||
| Income (loss) before minority interests | 24,131 | (142 | ) | 23,989 | 6,363 | 2,912 | 9,275 | 20,321 | (134 | ) | 20,187 | |||||||||||||||||||||||||
| Minority interests | 12 | — | 12 | (230 | ) | — | (230 | ) | (107 | ) | (57 | ) | (164 | ) | ||||||||||||||||||||||
| Net income (loss) | $ | 24,143 | $ | (142 | ) | $ | 24,001 | $ | 6,133 | $ | 2,912 | $ | 9,045 | $ | 20,214 | $ | (191 | ) | $ | 20,023 | ||||||||||||||||
| Depreciation and amortization | $ | 7,059 | $ | 639 | $ | 7,698 | $ | 8,454 | $ | 2,717 | $ | 11,171 | $ | 8,739 | $ | 1,880 | $ | 10,619 | ||||||||||||||||||
| Stock option costs | $ | 117 | $ | — | $ | 117 | $ | — | $ | 839 | $ | 839 | $ | — | $ | — | $ | — | ||||||||||||||||||
| Capital expenditures | $ | 3,141 | $ | 438 | $ | 3,579 | $ | 34,060 | $ | 1,953 | $ | 36,013 | $ | 5,962 | $ | 12,523 | $ | 18,485 | ||||||||||||||||||
| Identifiable assets | $ | 164,963 | $ | 43,407 | $ | 208,370 | $ | 188,262 | $ | 36,311 | $ | 224,573 | $ | 225,754 | $ | 49,332 | $ | 275,086 | ||||||||||||||||||
There were no material inter-segment sales for the years ended December 31, 2000, 2001 and 2002. During 2002, property, plant and equipment with a net book value of $312 was transferred from the CEP segment to the LPT segment. The Company operates principally in only one segmentcharges 100% of its corporate level related expenses to its reportable segments as management fees.
F-36
Notes to Consolidated Financial Statements — (Continued)
The following summary sets forth the percentage of net sales of each of the consumer
electronic products industry. Company’s product lines for each segment is as follows:
| Year Ended December 31, | 2000 | 2001 | 2002 | |||||||||||
| CEP: | ||||||||||||||
| — Assembling | ||||||||||||||
| — LCD consumer products | 46 | % | 32 | % | 40 | % | ||||||||
| — Telecom components assembly | 48 | % | 52 | % | 44 | % | ||||||||
| — Software development services | 1 | % | 1 | % | 1 | % | ||||||||
| 95 | % | 85 | % | 85 | % | |||||||||
| LPT: | ||||||||||||||
| — Parts & components | ||||||||||||||
| — LCD panels | 3 | % | 11 | % | 10 | % | ||||||||
| — Transformers | 2 | % | 4 | % | 5 | % | ||||||||
| 5 | % | 15 | % | 15 | % | |||||||||
| 100 | % | 100 | % | 100 | % | |||||||||
A summary of the net sales, income (loss) from operations and identifiable assets by geographic areas and net
sales to major customersgeographical area is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
Net sales from operations within:
- Hong Kong:
Unaffiliated customers $ 142,347 $ 100,081 $ 131,052
--------- --------- ---------
- PRC, excluding Hong Kong:
Unaffiliated customers 2,707 1,568 1,802
Intersegment sales 136,648 93,556 123,115
--------- --------- ---------
139,355 95,124 124,917
--------- --------- ---------
- Intersegment eliminations (136,648) (93,556) (123,115)
--------- --------- ---------
Total net sales $ 145,054 $ 101,649 $ 132,854
========= ========= =========
Income (loss) from operations within:
- - PRC, excluding Hong Kong 7,341 7,272 17,229
- - Hong Kong 4,462 (4,122) 5,501
- - Canada (5) 379 8,109
--------- --------- ---------
Total net income $ 11,798 $ 3,529 $ 30,839
========= ========= =========
AT DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Identifiable assets by geographic area:
- - PRC, excluding Hong Kong $ 55,962 $ 42,690 $ 44,781
- - Hong Kong 102,785 85,419 24,738
- - Canada - 19,119 98,269
-------- -------- --------
Total assets $158,747 $147,228 $167,788
======== ======== ========
Intersegment
| Year Ended December 31, | 2000 | 2001 | 2002 | ||||||||||
| Net sales from operations within: | |||||||||||||
| — Hong Kong: | |||||||||||||
| Unaffiliated customers | $ | 202,364 | $ | 206,902 | $ | 223,709 | |||||||
| Intercompany sales | — | — | 979 | ||||||||||
| 202,364 | 206,902 | 224,688 | |||||||||||
| — PRC, excluding Hong Kong: | |||||||||||||
| Affiliated customers (see note 17) | 6,232 | 21,072 | 7,849 | ||||||||||
| Unaffiliated customers | 5,092 | 6,032 | 4,458 | ||||||||||
| Intercompany sales | 180,065 | 160,503 | 179,411 | ||||||||||
| 191,389 | 187,607 | 191,718 | |||||||||||
| — Intercompany eliminations | (180,065 | ) | (160,503 | ) | (180,390 | ) | |||||||
| Total net sales | $ | 213,688 | $ | 234,006 | $ | 236,016 | |||||||
| Net income within: | |||||||||||||
| — PRC, excluding Hong Kong | $ | 6,549 | $ | 4,848 | $ | 17,930 | |||||||
| — Hong Kong | 17,452 | 4,197 | 2,093 | ||||||||||
| $ | 24,001 | $ | 9,045 | $ | 20,023 | ||||||||
F-37
Notes to Consolidated Financial Statements — (Continued)
| December 31, | 2000 | 2001 | 2002 | ||||||||||
| Identifiable assets within: | |||||||||||||
| — PRC, excluding Hong Kong | $ | 71,242 | $ | 60,866 | $ | 88,942 | |||||||
| — Hong Kong | 137,128 | 163,707 | 186,144 | ||||||||||
| Total assets | $ | 208,370 | $ | 224,573 | $ | 275,086 | |||||||
Intercompany sales arise from the transfer of finished goods between subsidiaries operating in different areas. These sales are generally at estimated market prices.
price.
At December 31, 19992000 and 1998,2001, the identifiable assets in Hong Kong included the investment in an affiliated companycompanies of $17,308$2,054 and $16,223$3,921, respectively.
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Net sales to customers by geographic area:
- Hong Kong $ 51,856 $ 8,731 $ 9,835
- North America 43,181 48,204 65,432
- Europe 25,520 18,770 19,105
- Japan 17,597 21,839 30,972
- Other 6,900 4,105 7,510
-------- -------- --------
Total net sales $145,054 $101,649 $132,854
======== ======== ========
| Year Ended December 31, | 2000 | 2001 | 2002 | ||||||||||
| Net sales to customers by geographical area: | |||||||||||||
| — Hong Kong | $ | 97,685 | $ | 64,391 | $ | 57,157 | |||||||
| — Europe | 20,032 | 22,437 | 62,603 | ||||||||||
| — North America | 52,244 | 54,994 | 39,694 | ||||||||||
| — PRC | 11,056 | 25,378 | 28,518 | ||||||||||
| — Japan | 19,388 | 22,767 | 25,276 | ||||||||||
| — Other | 13,283 | 44,039 | 22,768 | ||||||||||
| Total net sales | $ | 213,688 | $ | 234,006 | $ | 236,016 | |||||||
The Company'sCompany’s sales to the customers which accounted for 10% or more than 10% of its sales are as follows:
Customer
A $ 43,737 $ 32,478 $ 46,868
B 38,071 44,975 50,510
C 31,176 N/A N/A
-------- -------- --------
$112,984 $ 77,453 $ 97,378
======== ======== ========
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| Year Ended December 31, | 2000 | 2001 | 2002 | ||||||||||
| By customers: | |||||||||||||
| A | $ | 50,767 | $ | 69,996 | $ | 75,965 | |||||||
| B | N/A | N/A | 39,854 | ||||||||||
| C | 51,124 | 33,143 | 26,217 | ||||||||||
| D | 31,442 | N/A | N/A | ||||||||||
| E | 21,448 | N/A | N/A | ||||||||||
| $ | 154,781 | $ | 103,139 | $ | 142,036 | ||||||||
21. SUBSEQUENT EVENT
On February 28, 2000, a joint venture investment agreement was signed
between Subsequent Events
| (a) | In January 2003, the Company further expanded its business to include wireless communication technology and related products. The Company has made a strategic investment of $10,000 by purchasing a 25% shareholding in Alpha Star Investments Limited (“Alpha Star”), a BVI company, which is the ultimate holding company of the Hong Kong based JCT Wireless Technology Company Limited (“JCT”), a company engaged in the design, development and marketing of wireless communication terminals and wireless application software. The Company manufactures wireless communication terminals and related modules for JCT. As part of the investment, Alpha Star agreed to have the Company manufacture the RF modules for at least 50 percent of the orders it or any of its subsidiaries receives for RF modules provided the Company performs such manufacturing services at a price comparable to the market price. |
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Notes to Consolidated Financial Statements — (Continued)
| (b) | On January 20, 2003, one of the Company’s subsidiaries, J.I.C. Technology Company Limited, entered into a subscription agreement with iMagic Infomedia Technology Limited (“iMagic”) pursuant to which the J.I.C. Technology Company Limited agreed to subscribe for 60 shares of par value of HK$1 each in iMagic, representing 5.36% of the total issued capital of iMagic, for cash consideration of $385. On the same date, J.I.C. Technology Company Limited also entered into a deed of put option with a director of iMagic under which the director of iMagic grants J.I.C. Technology Company Limited an option to require the director to purchase the shares from J.I.C. Technology Company Limited at the consideration of $385. The put option shall commence on December 31, 2004 and expire on January 30, 2005. iMagic is the parent company of PowerPhone Network Limited, a company that has deployed interactive multimedia voice and data terminals in Asia and the United States. | |
| (c) | In January 2003, the Company sold a 20% interest in Namtek Software Development Company Limited for $160 to the management of Namtek Software Development Company Limited. | |
| (d) | On February 21, 2003, several lawsuits were filed against the Company and certain of its officers and directors in the United States District Court for the Southern District of New York. To date, no complaint has been served on the Company or, to its knowledge, any officer or director. According to press releases made public by counsel claiming to have filed the complaints, these complaints are brought on behalf of a putative class of purchasers of our stock and raise various categories of claims including alleged violations of Section 10(b) of the Securities Exchange Act of 1934 by issuing false and misleading statements regarding our financial performance and failing to issue timely reports concerning adverse developments in certain material litigation. The Company believes that it has meritorious defenses to such allegations and if the complaints are served and the actions prosecuted the Company, intends to defend this action vigorously. The ultimate outcome of this litigation cannot presently be determined. |
F-39
Item 18. of this Report
(b)19 Exhibits.
The following exhibits are filed withas part of this Report:
annual report:
| Exhibit | ||||
| Number | Description | |||
| 1.1 | Memorandum and Articles of Association, as amended (incorporated by reference to Exhibit | |||
| 4.1 | Nam Tai’s Amended and Restated 1993 Stock Option Plan (incorporated by reference to the Amended and Restated 1993 Stock Option Plan of Nam Tai Electronics, Inc. as adopted August 18, 1993, amended December 15, 1993, January 12, 1996, and amended and restated April 26, 1999) included as part of Nam Tai’s definite Proxy Statement for its 1999 Annual Meeting of Shareholders filed with the SEC as part of Nam Tai’s Form 6-K on June 24, 1999). | |||
| 4.2 | Nam Tai’s 2001 Stock Option Plan (incorporated by reference to the 2001 Stock Option Plan included as part of Nam Tai’s Proxy Statement for its 2001 Annual Meeting of Shareholders filed with the SEC as part of Nam Tai’s Form 6-K on June 27, 2001) | |||
| 4.3 | Sale and Purchase Agreement for the 15th Floor of China Merchants Tower, Shun Tak Centre, Nos. 168-200 Connaught Road Central, Hong Kong between Shun Tak Centre Limited and Nam Tai Group Management Limited dated March 27th 2001 (incorporated by reference to Exhibit | |||
| 4.4 | Agreement on Proposal for the listing of JIC Group common shares on the Hong Kong Stock Exchange dated January 14, 2002 between Nam Tai Electronics, Inc., J.I.C. Technology Company Limited, Albatronics (Far East) Company Limited (in liquidation) and Messrs. Toohey and Chung, the Joint Liquidators (incorporated by reference to Exhibit 4.7 of registrant’s Form 20-F for the year ended December 31, 2001 filed with the SEC on March 18, 2002). | |||
| 4.5 | Letter dated September 24, 2001 between The Hong Kong and Shanghai Banking Corporation Limited and the Company for a seven-year term-loan of $15,000,000 (incorporated by reference to Exhibit 4.8 of the Company’s Form 20-F for the year ended December 31, 2001 filed with the SEC on March 18, 2002). | |||
| 4.6 | Form of Indemnification Agreement entered into between the Company and each of its Director’s as of the 9th day of July 2001 (incorporated by reference to Exhibit 4.9 of the Company’s Form 20-F for the year ended December 31, 2001 filed with the SEC on March 18, 2002). | |||
| 4.7 | Banking Facility Letter, as amended, dated March 27, 2002 between Shanghai Commercial Bank Ltd. and J.I.C. Enterprises (Hong Kong) Ltd. for a four-year term loan of $4,500,000. | |||
| 4.8 | Subscription Agreement dated January 6, 2003 between Alpha Star Investments Ltd and the Company for the purchase of 1,625,000 ordinary shares. | |||
| 4.9 | Shareholders Agreement dated January 8, 2003 among Alpha Star Investments and its investors, including the Company. | |||
| 4.10 | Share Transfer Agreement of TCL Holdings dated January 25, 2002 between Hui Zhou City Investment Holdings Co., Ltd and Namtai Electronic (Shenzhen) Co., Ltd. | |||
| 4.11 | Subscription Agreement dated September 6, 2002 between TCL International Holdings Ltd. and Nam Tai Electronics, Inc. for the purchase of Convertible Notes of TCL International Holdings. | |||
| 4.12 | Sale and Purchase Agreement dated April 24, 2002 between A&T Battery Corporation, Nam Tai Electronic & Electrical Products Limited and Toshiba Battery Co., Ltd. | |||
| 4.13 | Sale and Purchase Agreement of 5 bearer shares in Mate Fair Group Limited between Spin King Limited and Nam Tai Electronics, Inc. dated September 6, 2000. (5% Indirect Ownership in TCL Mobile). (incorporated by reference to Exhibit 4.5 of the Company’s Form 20-F for the year ended December 31, 2000 filed with the SEC on March 21, 2001). | |||
| 4.14 | Common Share Purchase Agreement between Leesha Holdings Limited and Nam Tai Electronics, Inc. dated September 19, 2000 for purchase of 500,000 Deswell Industries Inc. common shares (incorporated by reference to Exhibit A of the Schedule 13D of the Company in relation to Deswell Industries, Inc. filed with the SEC on October 6, 2000). | |||
| 4.15 | Sale and Purchase Agreement of entire issued share capital of J.I.C. Group between J.I.C. Holdings (B.V.I.) Ltd., Mr. Joseph Li Shi Yuen, Mr. Chui Kam Wai and Nam Tai Electronics, Inc. dated September 26, 2000, including service agreements with Messrs. Li and Chui (incorporated by reference to Exhibit A of the Schedule 13D of Joseph Li Shi Yuen, Chui Kam Wai and J.I.C. Holdings (B.V.I.) Limited filed with the SEC on November 7, 2000). | |||
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| Exhibit | ||||
| Number | Description | |||
| 4.16 | Contract for Use of Land dated March 25, 1996 between Shenzhen City Baoan Xinan Gu Su Estate Residents Committee and Namtai Electronic (Shenzhen) Co. Ltd. regarding the use for 50 years of land situated at Zhuao, Gu Su Industrial Estate, Xihan, Baoan (incorporated by reference to Exhibit 2.7 of the Company’s Form 20-F for the year ended December 31, 1996 filed with the SEC on April 2, 1997). | |||
| 4.17 | Contract to Transfer the Right of Utilization of Land in Shenzhen dated April 26, 1999 between Shenzhen National Land Planning Bureau and Namtai Electronic (Shenzhen) Co., Ltd. | |||
| 8.1 | Diagram of Company’s subsidiaries. See Pages 24 to 26 of this Report. | |||
| 10.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the | |||
| 10.2 | Letter from MCW. Todman & Co. | |||
| 10.3 | Letter from MCW. Todman & | |||
| 23.1 | Consent of | |||
| 23.2 | Consent of | |||
65
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its
behalf byand authorized the undersigned thereunto duly authorized.
NAM TAI ELECTRONICS, INC.
Date: March 29, 2000 By: /S/Tadao Murakami
-----------------
Tadao Murakami
Chairman of the Board
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[Deloitte Touch Tohmatsu Letterhead]
INDEPENDENT AUDITORS' CONSENTS
We hereby consent to the incorporation by reference of our report dated March
27, 2000 relating to the consolidated financial statements of Nam Tai
Electronics, Inc. (the "Company") for the years ended December 31, 1999 and 1998
appearing insign this annual report on Form 20-F in (1) the Registration Statement
on Form S-8 of the Company (file no. 33-73954); (2) the Registration Statement
on Form S-8 of the Company (file no. 333-27761; and (3) the Registration
Statement on Form F-3 of the Company (file no. 333-36135).
/S/ Deloitte Touche Tohmatsu
DELOITTE TOUCHE TOHMATSU
Hong Kong
March 27, 2000
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