SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 20-F
[ ] Registration Statement Pursuant to Section 12(b) or (g) of the
Securities Exchange Act of 1934
OR
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
__________________________________
For the Fiscal Year Ended: Commission File Number:
December 31, 1996 0-16673
__________________________________
NAM TAI ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
British Virgin Islands
(Jurisdiction of incorporation or organization)
Unit 9, 15/F., Tower 1
China Hong Kong City, 33 Canton Road
TST, Kowloon, Hong Kong
(Address of principal executive offices)
__________________________________
Securities registered or to be registered pursuant to Section 12(b) of
the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common
Shares, $0.01 par value per share
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: NONE
As of December 31, 1996, there were 7,837,227 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 No
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17. Item 18. X
Exhibit Index on Page 52
TABLE OF CONTENTS
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION . . . . . . . . . . . . . .2
PART I . . . . . . . 3
Item 1. Description of Business. . . . . . . . . . . . . . . . . .3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 18
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 19
Item 4. Control of the Company . . . . . . . . . . . . . . . . . 20
Item 5. Nature of Trading Market . . . . . . . . . . . . . . . . 20
Item 6. Exchange Controls and Other Limitations Affecting
Security Holders 21
Item 7. Taxation . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 8. Selected Financial Data. . . . . . . . . . . . . . . . . 22
Item 9. Management's Discussion and Analysis of Results of
Operations and Financial Condition. . .. . . . . . . . . 23
Item 10. Directors and Executive Officers of the Company . . . . . 32
Item 11. Compensation of Directors and Officers. . . . . . . . . . 33
Item 12. Options to Purchase Securities from the Company or
its Subsidiaries . . . . . . . . . . . . . . . . . . . . 33
Item 13. Interest of Management in Certain Transactions. . . . . . 34
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Item 14. Description of Securities to be Registered. . . . . . . . 35
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Item 15. Defaults Upon Senior Securities . . . . . . . . . . . . . 35
Item 16. Changes in Securities and Changes in Security For the
Company's Securities . . . . . . . . . . . . . . . . . . 35
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Items 17.
and 18. Financial Statements . . . . . . . . . . . . . . . . . . 35
Item 19. Financial Statements and Exhibits . . . . . . . . . . . . 52
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Consent of Independent Accountants (to incorporation of their report on
Financial Statements
into the Company's Registration Statement on Forms F-3 and S-8). . . .54
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.
Readers should not place undue reliance on forward-looking statements,
which reflect management'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.
See "Report of Independent Accountants" included elsewhere herein. The Company
publishes its financial statements in United States dollars for the following
reasons: (i) the Company is incorporated in the British Virgin Islands where
the currency is the United States dollar; (ii) the Company conducts the
majority of its business transactions in United States dollars; and (iii) the
exchange rate between the Hong Kong dollar and the United States dollar has
been fixed at approximately 7.80 Hong Kong dollars to $1.00 since 1983. See
Note 1(g) of Notes to Consolidated Financial Statements appearing in Item 18.
of this Report.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Nam Tai Electronics, Inc. (which together with its subsidiaries is
hereafter referred to as the "Company" or "Nam Tai") was incorporated as a
limited liability International Business Company under the laws of the British
Virgin Islands in August 1987. The Company's 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. The Company's principal executive offices are located in Hong
Kong at Unit 9, 15/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 is an independent provider of high quality manufacturing
services to original equipment manufacturers ("OEMs") in the consumer
electronics industry. All of the Company's manufacturing operations are based
in China. 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 board ("COB"), multichip modulators
("MCM"), surface mount technology ("SMT"), tape automated bonding ("TAB") and
outer lead bonding ("OLB") 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 manufactures a broad line of finished products for its OEM customers,
including personal organizers, linguistic products, calculators, integrated
circuit ("IC") or smart card readers (referred to as "IC card readers"). It
also manufactures electronic components and subassemblies for printed circuit
boards ("PCBs"). These products include large scale integrated circuits
("LSI") bonded on PCBs that are used in the manufacture of products such as
electronic toys, and subassemblies for liquid crystal display ("LCD") modules
that are in turn used in the manufacture of communications, camera and
computer products. In addition, Nam Tai provides OEMs with silk screening
services for plastic parts, polyvinyl chloride ("PVC") products and metal
parts.
The Company moved its manufacturing facilities to Shenzhen, China in
1987 to take advantage of lower overhead costs and competitive labor rates and
to position itself to achieve low-cost, high volume manufacturing. The
location of Nam Tai's factory in Shenzhen is about 30 miles from Hong Kong,
providing the Company with close 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 9001/9002
Certification), competitive pricing, strong research 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 expanded
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 SUBSIDIARIES
The Company is a holding company for Nam Tai Electronic & Electrical
Products Limited and its subsidiaries, and Nam Tai Electronics (Canada) Ltd.
The chart below illustrates the organizational structure of the Company and
its principal operating subsidiaries.
Nam Tai
Electronics, Inc.
(A British Virgin
Islands International
Business Company)
/
/
--------------------------
/ /
100% 100%
Nam Tai Nam Tai
Electronics Electronic &
(Canada) Ltd. Electrical Products --------------75%
(A Canadian Federal Ltd. (A Hong /
Company) Kong Limited /
Liability Company) /
/ /
------------------------- /
/ / /
100% 100% /
Zastron Plastic & Namtai Electronic /
Metal Products (Shenzhen) Co. Ltd. /
(Shenzhen) Ltd. (A Limited Liability /
(A Limited Liability of China Foreign /
of China Foreign Operation) /
Operation) / /
/ /
--------------- 25% /
/
Shenzhen
Namtek Co., Ltd.
(A Limited
Liability of
China Foreign
Operation)
Nam Tai Electronic & Electrical Products Limited
Nam Tai Electronic & Electrical Products Limited ("NTE&E") was
incorporated in November 1983 and became the holding company for Namtai
Electronic (Shenzhen) Co. Ltd. and Zastron Plastic & Metal Products (Shenzhen)
Ltd. in 1992. Marketing and customer relations are handled from NTEE as well
as management operations.
Namtai Electronic (Shenzhen) Co. Ltd.
Namtai Electronic (Shenzhen) Co. Ltd. ("NTES") 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 NTES
was owned 70% by NTE&E and 30% by a Chinese Governmental agency. During 1992,
the joint venture was dissolved and the company changed its name to NTES. As
part of such termination, the company returned to the Chinese Governmental
agency its real property and investment, and NTES became a wholly owned
subsidiary of NTE&E.
NTES is the principal manufacturing arm of the Company and is engaged in
manufacturing and assembling 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.
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 20 software engineers and provides the facilities and
expertise to assist in new product development and research, enabling Nam Tai
to offer its customers enhanced software design and development services.
Nam Tai Electronics (Canada) Ltd.
Nam Tai Electronics (Canada) Ltd. ("NT Canada") was incorporated in
August 1989 under the Canada Business Corporations Act. NT Canada currently
provides finance, administrative and investor relations services to the
Company from its offices in Vancouver, British Columbia, Canada.
RISK FACTORS
The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to shareholders. 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 hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statements made by or
on behalf of the Company. Any such statement is qualified by reference to the
following cautionary statements:
POLITICAL, LEGAL, ECONOMIC AND OTHER UNCERTAINTIES OF OPERATIONS IN CHINA AND
HONG KONG
Internal Political and Other Risks. The Company's single manufacturing
complex is located in China. As a result, the Company's operations and assets
are subject to significant political, economic, legal and other uncertainties
associated with doing business in China. Changes in policies by the Chinese
government resulting in changes in laws, regulations, or the interpretation
thereof, confiscatory taxation, restrictions on imports and sources of supply,
import duties, corruption, currency revaluations or the expropriation of
private enterprise could materially and adversely affect the Company. Under
Deng Xiaoping's leadership, the Chinese government pursued economic reform
policies including the encouragement of private economic activity and greater
economic decentralization. With the recent death of Deng Xiaoping there can
be no assurance that the Chinese government will continue to pursue such
policies, that such policies will be successful if pursued, that such policies
will not be significantly altered from time to time or that business
operations in China would not become subject to the risk of nationalization,
which could result in the total loss of investment in that country. Economic
development may be limited as well by the imposition of austerity measures
intended to reduce inflation, the inadequate development of infrastructure and
the potential unavailability of adequate power, water supplies,
transportation, communications, raw materials and parts. The Company
maintains its own electrical generator, water treatment and water storage
facilities at the factory site 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 relating to foreign investments is both new and continually evolving,
and currently there can be no certainty as to the application of its laws and
regulations in particular instances. China does not have a comprehensive
system of laws. Enforcement of existing laws or agreements may be sporadic
and implementation and interpretation of laws inconsistent. The Chinese
judiciary is relatively inexperienced in enforcing the laws that exist,
leading to a higher than usual degree of uncertainty as to the outcome of any
litigation. Even where adequate law exists in China, it may not be possible
to obtain swift and equitable enforcement of that law.
Current Dependence on Single Factory Complex. The Company's products
are manufactured exclusively at its complex located in Baoan County, Shenzhen,
China. The Company does not own the land at its new facility nor the original
facility. It occupies the site under agreements with the local Chinese
government. In the case of the original facility, the lease agreement covers
an aggregate of approximately 150,000 square feet of factory space and expires
in August 2007. In the case of the new facility, the Company is entitled to
use the land upon which it is situated until 2044. These agreements and the
operations of the Company's Shenzhen factories are dependent on the Company's
relationship with the local government. The Company's operations and
prospects would be materially and adversely affected by the failure of the
local government to honor these agreements. In the event of a dispute,
enforcement of these agreements could be difficult in China.
Possible Changes and Uncertainties in Economic Policies. As part of its
economic reform, China has designated certain areas, including Shenzhen where
the Company's manufacturing complex is located, as Special Economic Zones.
Foreign enterprises in these areas benefit from greater economic autonomy and
more favorable tax treatment than enterprises in other parts of China. Changes
in the policies or laws governing special Economic Zones could have a material
adverse effect on the Company. Moreover, economic reforms and growth in China
have been more successful in certain provinces than others, and the
continuation or increase of such disparities could affect the political or
social stability of China.
Inherent Risks of Business in China. Conducting business in China is
inherently risky. Corruption, extortion, bribery, pay-offs, theft, and other
fraudulent practices are common in China. The Company has attempted to
implement safeguards 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.
Recent Relations with the U.S. In 1995, the United States considered
revocation of China's most favored nation ("MFN") trade status, which provides
China with the trading privileges generally available to trading partners of
the United States, and in 1996 the United States and China were involved in
controversy over the protection in China of intellectual property rights. In
1996, China and the United States reached an agreement on copyright protection
and extended China's MFN status to July 3, 1997. Various interest groups
continue to urge that the United States not renew China's trade status. There
can be no assurance that future 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 extend China's MFN status. In any
of such eventualities, the business of the Company could be adversely
affected.
Relations Between China and Taiwan. Relations between China and Taiwan
have been unresolved since Taiwan was established in 1949. The general
election in Taiwan in 1996 heightened tensions between them. Although not
directly a threat to Nam Tai, peaceful and normal relations between China and
its neighbors reduces the potential for events which could have an adverse
impact on the Company's business.
Operations in Hong Kong. The Company's executive and sales office, and
several of its customers and suppliers are located in Hong Kong, which is
currently a British Crown Colony. Sovereignty over Hong Kong will be
transferred effective July 1, 1997 to China. The Company is preparing for
this transition in Hong Kong by increasing the role and capability of its
personnel in China to manage a number of responsibilities previously managed
through the Hong Kong office. Certain other responsibilities are being
transferred to the Company's administration and finance office in Canada.
While the Company does not believe that the transfer of sovereignty over Hong
Kong to China will have a material adverse effect on the Company's business,
there can be no assurance as to the continued stability of political, economic
or commercial conditions in Hong Kong, and any instability could have an
adverse impact on the Company's business.
The Hong Kong dollar and the United States dollars have been fixed at
approximately 7.80 Hong Kong dollars to $1.00 since 1983. The Chinese
government has expressed its intention in the basic law to maintain the
stability of the Hong Kong currency after the sovereignty of Hong Kong is
transferred to China. There can be no assurance that this will occur and the
Company could face increased currency risks if the current exchange rate
mechanism is changed.
CUSTOMER CONCENTRATION; DEPENDENCE ON ELECTRONICS INDUSTRY
Sales to four major customers, Sharp Corporation, Texas Instruments
Incorporated, Nintendo, Inc. (which orders through Sharp Corporation) and
Seiko Instruments Inc. aggregated approximately 90.3%, 92.3% and 89.7% of the
Company's total net sales during the years ended December 31, 1996, 1995 and
1994. Sales to each of these customers as a percentage of the Company's total
net sales during the years ended December 31, 1996, 1995 and 1994 are set
forth in Item 1. Business --Customers and Marketing. 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. Although management believes that any one of its OEM customers
could be replaced eventually, the loss of any one of its major customers could
have a material adverse effect on the Company's business.
Virtually all of the Company's sales 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
any of the Company's major customers in particular, could have a material
adverse effect on the Company's results of operations.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly and annual operating results are affected by a
wide variety of factors that could materially and adversely affect net sales,
gross profit and profitability. This could result from any one or a
combination of factors such as the cancellation or postponement or orders, the
timing and amount of significant orders from the Company's largest 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, changes in cost and availability of
components, mix of orders filled, adverse effects to the Company's financial
statements resulting from, or necessitated by, possible future acquisitions,
and changes or anticipated changes in economic conditions. The volume and
timing of orders received during a quarter are difficult to forecast. The
Company's customers from time to time 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 or postpone shipments of orders.
The Company's expense levels during 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 affected by seasonality
during the third quarter in anticipation of the Christmas buying season and in
the first quarter resulting from both the closing of the Company's factory 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 Financial Condition and Results of
Operations. 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, recessionary periods. A recessionary period affecting the
industry segments served by the Company could have a material adverse effect
on the Company's 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 the Company's Common Shares.
TECHNOLOGICAL CHANGES AND PROCESS DEVELOPMENT
The market for the Company's 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, MCM, SMT, TAB and OLB. The Company believes that its
future success may depend upon its ability 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 continue to
prove successful.
EXCHANGE RATE FLUCTUATIONS
The Company sells most of its products in United States dollars and
Japanese yen and pays expenses in United States dollars, yen, Hong Kong
dollars, Canadian dollars and Chinese renminbi. The Company is subject to a
variety of risks associated with changes among the relative value of the
United States dollar, yen, Hong Kong dollar, Canadian dollar and Chinese
renminbi, but management believes that the most significant exchange risk
results from material purchases made in yen. Approximately 28%, 33% and 35% of
Nam Tai's material costs have been in yen during the years ended December 31,
1996, 1995 and 1994. Sales made in yen accounted for approximately 15% of
sales for the year ended December 31, 1996, 18% of sales for 1995 and 13% of
sales for 1994. The net exposure has been declining as material costs in
Japanese yen decrease and sales increase. 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 rate 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. Based on close
working relationships with its principal customers, and because management
believes that similar oral agreements exist between these OEMs and their other
suppliers, the Company believes that the oral nature of these agreements will
not prevent its OEMs from honoring them. However, there can be no assurance
that such agreements will be honored, and the refusal to honor such an
agreement in the event of a severe 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.
Although only 9.3% of the Company's expenses were in Chinese renminbi in
1996, the appreciation of the renminbi 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 not increase significantly in value relative
to the U.S. dollar in the future
The Company may elect to hedge its currency exchange risk when it judges
such action may be required. The Company's financial results have been
affected in the past due to hedging activities, resulting in foreign exchange
gains of approximately $52,000 in 1995 and $68,000 in 1994 and foreign
exchange losses of approximately $400,000 in 1993 and $350,000 in 1992. The
Company continually reviews its hedging strategy but there can be no assurance
that Nam Tai will not suffer losses in the future as a result of currency
hedging.
COMPETITION
Competition in the contract electronic manufacturing industry is
intense. The Company's primary competitors in the manufacture of its principal
product lines of calculators, personal organizers and linguistic products, are
Kinpo Electronics, Inc. (formerly Cal-Comp Electronics, Inc.) and Inventec Co.
Ltd., both of Taiwan. While an OEM may prefer its approved suppliers,
management believes that OEMs tend to order from several suppliers in order to
lessen dependence on any one of them. Certain competitors may have
substantially greater technical, financial and marketing resources than the
Company.
RISKS FROM POSSIBLE ACQUISITIONS
An important element of the Company's strategy is to review acquisition
prospects that would complement the Company's existing products and services,
augment its market coverage and sales ability or enhance its technological
capabilities. While the Company has no current agreements or negotiations
underway with respect to any acquisitions, the Company may acquire businesses,
products or technologies in the future. Future acquisitions by the Company
could result in accounting charges, potentially dilutive issuance 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 Stock.
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 and potential loss of key employees of acquired
organizations. Management has no experience in assimilating acquired
organizations. There can be no assurance as to the ability of the Company to
successfully integrate the products, technologies or personnel of any business
that might be acquired in the future, and the failure of the Company to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the abilities and continued
participation of Mr. M. K. Koo, its Chairman of the Board, and Mr. Tadao
Murakami, its Chief Executive Officer and President, who is in charge of the
Company's day-to-day manufacturing and marketing operations in China. The loss
of the services of Mr. Koo or Mr. Murakami could have a material adverse
effect on Company's business.
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is a holding corporation organized as an International
Business Company under the laws of the British Virgin Islands and its
principal operating subsidiary is organized under the laws of Hong Kong, where
the Company's principal executive offices are also located. The Company has
appointed Mr. Stephen Seung, an attorney engaged in the private practice of
law in New York and a director of Nam Tai since 1995, as its agent upon whom
process may be served in any action brought against the Company under the
securities laws of the United States. However, outside the United States, it
may be difficult for investors to enforce judgments against the Company
obtained in the United States in any such actions, including actions
predicated upon civil liability provisions of Federal securities laws. In
addition, all of the Company's officers and a majority of its directors reside
outside the United States and nearly all of the assets of these persons and of
the Company are located outside of the United States. As a result, it may not
be possible for investors to effect service of process within the United
States upon such persons, or to enforce against the Company or such persons
judgments predicated upon the liability provisions of U.S. securities laws.
The Company has been advised by its Hong Kong counsel and its British Virgin
Island counsel that there is substantial doubt as to the enforceability
against the Company or any of its directors and officers located outside the
United States in original actions or in actions for enforcement of judgments
of U.S. courts of liabilities predicated on the civil liability provisions of
Federal securities laws.
CERTAIN LEGAL CONSEQUENCES OF INCORPORATION IN THE BRITISH VIRGIN ISLANDS
The Company is organized under the laws of the British Virgin Islands.
Principles of law relating to matters affecting the validity of corporate
procedures, the fiduciary duties of the Company's management, directors and
controlling shareholders and the rights of Nam Tai's shareholders differ from,
and may not be as protective of shareholders as, those that would apply if the
Company were incorporated in a jurisdiction within the United States.
Directors of the Company have the power to take certain actions without
shareholder approval, including an amendment of the Company's Memorandum or
Articles of Association, a change in the Company's authorized capital, and
certain fundamental corporate transactions, including reorganizations, certain
mergers or consolidations, and the sale or transfer of assets. In addition,
there is doubt that the courts of the British Virgin Islands would enforce
liabilities predicated upon U.S. securities laws.
RISKS OF INTERNATIONAL SALES
The products of the Company are sold in the United States 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.
EXEMPTIONS UNDER THE EXCHANGE ACT AS A FOREIGN PRIVATE ISSUER
The Company is a foreign private issuer within the meaning of rules
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act").
As such, and though its Common Shares 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 or current reports on Form 8-K; the sections of the Exchange Act
regulating the solicitation of proxies, consents or authorizations in respect
to a security registered under the Exchange Act; and the sections of the
Exchange Act requiring insiders to file public reports of their stock
ownership and trading activities and establishing insider liability for
profits realized from any "short-swing" trading transaction (i.e., a purchase
and sale, or sale and purchase, of the issuer's equity securities within six
months or less). Because of the exemptions under the Exchange Act applicable
to foreign private issuers, shareholders of the Company are not afforded the
same protections or information generally available to investors in public
companies organized in the United States.
VOLATILITY OF SHARE PRICE
The markets for equity securities have been volatile and the price of
the Company's Common Shares has been and could continue to be subject to wide
fluctuations in response to quarter to quarter variations in operating
results, news announcements, trading volume, sales of Common Shares by
officers, directors and principal shareholders of the Company, general market
trends and other factors.
PRODUCTS
The following table sets forth the percentage of net sales of each of
the Company's product lines for the years ended December 31, 1996, 1995 and
1994.
YEAR ENDED DECEMBER 31,
PRODUCT LINE 1996 1995 1994
------------ ---- ---- ----
Personal organizers and linguistic
products 36% 47% 47%
Electronic calculators 35 30 34
Subassemblies, components and
other products 28 22 17
Silk screening 1 1 1
Discontinued products(1) 0 0 1
---- ---- ----
100% 100% 100%
(1) Includes health care products, such as electronic scales, thermometers
and blood pressure meters, which were discontinued in 1994.
Personal Organizers and Linguistic Products
The Company produces various types of electronic personal 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. These models generally
include a built-in calculator.
Electronic Calculators
The Company manufactures a wide range of electronic calculators with a
variety of features. These include calculators designed for different uses,
including mini card, scientific, desk top, hand held, graphical and printer
calculators.
Subassemblies, Components and Other Products
In 1994, the Company began manufacturing and delivering subassemblies
consisting of LSIs bonded on PCBs utilizing advanced technological processes.
These products are used to manufacture components which are incorporated into
such products as electronic toys and games.
In 1995, the Company expanded is subassembly manufacturing business into
liquid crystal display ("LCD") modules. These subassemblies display
information as part of such products as portable telephones, portable
computers and facsimile machines, and employ the same bonding technologies as
are used for the LSI bonded PCBs.
In 1995, the Company delivered a sample run of integrated circuit card
balance readers ("IC card readers") and in 1996 began volume shipments of
these products. These readers are hand-held devices used to check information
contained on the IC cards which are being developed for use by certain major
banks in Europe, Asia and North America as an alternative to the use of cash.
In 1996, the Company again expanded the component products it offers by
completing the development and shipping of control panel modules for microwave
ovens manufactured by a division of Sharp Corporation, which, management
believes, is the world's leading manufacturer of microwave ovens.
Silk Screening Services
Through Zastron, the Company provides manufacturing and silk screening
services to customers for plastic parts, PVC products and metal parts. This
service is also supplied to other firms for incorporation into their finished
products.
MANUFACTURING
Quality Control
The Company maintains strict quality control programs for its products,
including the use of total quality management ("TQM") systems. All incoming
raw materials and components are checked by the Company's quality control
personnel. During the production stage, Nam Tai's quality control personnel
check all work in process at several points in the production process.
Finally, after the assembly stage, the Company conducts random testing of
finished products. In addition, the Company provides office space at its
China manufacturing facility for representatives of its major customers to
permit them to monitor production of their products and to provide direct
access to the Company's manufacturing personnel. Manufactured products have a
low level of product defect, as required by the Company's OEM customers. When
requested, Nam Tai provides a limited warranty 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 China subsidiaries have maintained ISO 9002
Certification since December 1993 and ISO 9001 Certification since February
1996. The "ISO," or International Organization for Standardization, is a
Geneva-based organization dedicated to the development of worldwide standards
for quality management guidelines and quality assurance. ISO 9000, which was
the first quality system standard to gain worldwide recognition, requires a
company gather, analyze, document, monitor and make improvements where needed.
The Company's receipt of ISO 9001 Certification demonstrates that the
Company's manufacturing operations meet the most demanding of the established
world standards.
Management believes sophisticated customers are increasingly requiring
their manufacturers to be ISO 9000 certified, and that manufacturers that are
not so qualified are increasingly looking to certified manufacturers like Nam
Tai rather than undertaking the expensive and time-consuming process of
qualifying their own operations.
In 1996, the Company received notice that it had been awarded the Texas
Instruments Supplier Excellence Award for commitment to excellence and support
of Texas Instruments' quality leadership. In early 1997, the Company again
received notice that it received the award for a second year. Texas
Instruments, one of the Company's largest OEM customers, has advised the
Company that only a select group of its suppliers which have demonstrated an
unwavering commitment to the principle of total quality are recognized with
this award and that it was unusual for a company to be so honored in two
consecutive years.
Component Parts and Suppliers
The Company purchases over 100 different component parts from more than
30 major suppliers and is not dependent upon any single supplier for any key
component. The Company purchases components for its electronic products from
suppliers in Japan and elsewhere. Orders for components are based on
forecasts that Nam Tai receives from its OEM customers, which reflect
anticipated shipments during the production cycle for a particular model.
The major component parts purchased by the Company are ICs 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 and solar cells are purchased from Matsushita Battery Industrial
Company Ltd. Batteries are standard "off the shelf" items, generally
purchased in Hong Kong from agents of Japanese manufacturers. Certain
components may be subject to limited allocation by certain of Nam Tai's
suppliers. Although such shortages and allocations have not had a material
adverse effect on the Company's results of operations, there can be no
assurance that any future allocation or shortages would not have such an
effect.
In an effort to assure an adequate supply of competitively priced
plastic components, the Company maintains a minority interest in a Hong Kong
supplier of plastic parts, Deswell Industries, Inc. ("Deswell") (see
"Formation of Strategic Alliances").
CUSTOMERS AND MARKETING
General
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 1996 1995 1994
---------------- ---- ---- ----
Japan 28% 34% 24%
North America 34 30 33
Hong Kong 18 17 23
Europe 12 13 14
Other 8 6 6
---- ---- ----
100% 100% 100%
The Company's Hong Kong based management personnel and sales staff are
responsible for marketing products to existing customers as well as potential
new customers.
Five of the Company's major customers have done business with the
Company for over five years or more, and management believes that Nam Tai has
a stable relationship with all of its customers. The Company places great
emphasis on providing quality service to its customers and has, as a result,
limited the number of companies for which it manufactures in an effort to
ensure quality service.
Major Customers
The Company's OEM customers include the following entities. The OEM
customers either market Nam Tai's products under their own brand name or,
where no brand name is shown, incorporate the Company's products into their
products:
CUSTOMER BRAND NAME PRODUCT CUSTOMER
SINCE
- - -------- ---------- ------- -----
A&A International Radio Shack Calculators 1993
(Yichi-HK) Ltd.
Canon, Inc. Canon Personal organizers 1988
and calculators
Casio Computer (Hong Casio Aluminum panels and 1994
Kong) Limited PVC wallets
Matsushita Battery ----- IC card readers 1994
Industrial Co. Ltd.
Nintendo, Inc. ----- Bonding on PCBs 1994
(through Sharp Corp.)
Optrex Corporation ----- Assemblies for LCD 1994
modules
Premier Precision Ltd. Citizen Silk screening and 1993
aluminum panel
Sanyo Electric Sanyo Silk screening 1988
(H.K.) Ltd.
Seiko Instruments Inc. Seiko, SII Personal organizers 1991
and linguistic products
Sharp Corporation Sharp Personal organizers, 1989
calculators and control
panel modules
Texas Instruments Texas Personal organizers 1989
Incorporated Instruments and calculators
At any given time, different customers account for a significant portion
of Nam Tai's business. Percentages of total sales by customer vary from year
to year and may fluctuate depending on the timing of production cycles for
particular products. Sales to four major customers, Sharp Corporation, Seiko
Instruments Inc., Nintendo, Inc. (which orders through Sharp Corporation) and
Texas Instruments Incorporated, aggregated approximately 90%, 92% and 90% of
the Company's total net sales during the years ended December 31, 1996, 1995
and 1994, respectively, as follows:
YEAR ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
CUSTOMER
- - --------
Sharp Corporation 38.4% 47.9% 47.7%
Texas Instruments Incorporated 22.3 13.2 9.8
Nintendo, Inc. (through Sharp Corporation) 16.1 18.0 13.0
Seiko Instruments Inc. 13.5 13.2 19.2
---- ---- ----
90.3% 92.3% 89.7%
A number of products are made for its major customers such that the
Company is not necessarily dependent on a single product by one customer.
Although management believes that any one of the Company's customers could be
replaced with time, the loss of any one of its major customers, particularly
one or more of its top four customers, could have a material adverse effect on
the Company's business. While each of the companies listed above is expected
to continue to be a significant customer, the Company continually tries to
lessen its dependence on large customers through efforts to diversify its
customer and product base. There can be no assurance, however, that such
efforts will prove successful.
The Company's sales to all of its OEM customers are based on purchase
orders. 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, Nam Tai has no written agreements with its OEM customers. The Company
receives letters of credit to cover the next three months of orders and all
the molds, tooling and development charges (including software design) are
charged to the account of OEM customers prior to production.
Many of Nam Tai's customers have a relationship which extends for a
number of years and consequently the Company believes its relations with these
customers are good. The Company encourages cooperation and communication with
its most important customers. In particular, senior management includes a
team of Japanese professionals who provide technical experience and work
closely with both the Company's Japanese component suppliers and its Japanese
customers. Management also believes the risk of a sudden withdrawal by any of
its major customers is diminished by: (i) the lengthy production cycle,
typically over three years for each model, which is required to produce the
products sold to customers; (ii) the fact that production cycles may begin
while other products for the same customers are in progress; and (iii) the
investment in molds, tooling and development charges (including software
design) which is borne by each OEM customer.
Sales are predominately based on standard letters of credit denominated
in either U.S. dollars or Japanese yen.
Production Scheduling and Backlog
The typical cycle for a product to be manufactured and sold to an OEM
customer is three to four years, including the development period and
production period. Initially an OEM customer gathers data from its sales
personnel as to products for which there is market interest, including
features and unit costs. The OEM then contacts the Company, and possibly
other prospective manufacturers, with forecasted total production quantities
and design specifications or renderings. From that information, the Company
in turn contacts its suppliers and determines estimated component costs. The
Company later advises the OEM of the development costs, charges (including
molds, tooling and development costs such as software design) and unit cost
based on the forecasted production quantities desired during the expected
production cycle. Once the Company and the OEM customer agree to the
Company's quotation for the development costs and the unit cost, the Company
begins the product development. This development period lasts approximately
nine to 15 months, or longer if software design is included. During this time
the Company completes all molds, tooling and software required to manufacture
the product with the development costs reimbursed by the customer. Upon
completion of the molds, tooling and software, the Company produces samples of
the product for the customer's quality testing, and, once approved, commences
mass production of the product.
The production period usually lasts approximately 18 to 30 months.
Typically, more advanced products have longer production runs. If total
production quantities change, the OEM customer often provides six months
notice before discontinuing orders for a product. At any point in time the
Company is in different stages of the development period and production period
for the various models it has under development or in production for OEM
customers.
The Company's production is based on forecasts received from OEM
customers covering the next six month period, the first three months of which
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. Confirmed orders are supported by letters of credit and
may not be canceled once confirmed without the customer becoming responsible
for all costs of the remaining components included in inventory for that
order. During the years ended December 31, 1995 and 1994, the Company did not
suffer a material loss resulting from the cancellation of an OEM customer
confirmed order. However, during the course of the audit of its financial
statements for the year ended December 31, 1996, the Company confirmed that
certain components included in its raw material inventory were not likely to
be used in connection with future production, and due to the passage of time,
could not be charged to customers who would have otherwise been responsible
for the reimbursement of cost. While the Company believes that it may in the
future be able to use some portion of the components in connection with future
production, the Company has elected to write-off the cost of such inventory in
the net amount of $415,000.
Backlog is defined by Nam Tai as the sales value of orders from OEM
customers for which shipments have been scheduled during the next three
months. Although orders are confirmed and covered by letters of credit, there
can be no assurance that the backlog can be produced, shipped and sales
recorded in its entirety during the following three month period. The
Company's backlog as at December 31, 1996 and 1995 was approximately
$28,500,000 and $24,800,000, respectively.
Marketing Plans for China
The Company has Chinese government approval to sell up to 20% of the
products manufactured and 10% of the parts manufactured by the Company in
China. The Company does not have any immediate plans to re-enter the China
market and make domestic sales, however, the Company would consider doing so
if economic and other factors in China appear favorable.
Formation of Strategic Alliance
The Company strives to maintain stable sources for quality components it
uses in its manufacturing operations. Suppliers of these components have from
time to time, in periods of short supply, limited allocation of their
production among their customers. The Company believes that the formation of
strategic alliances with certain of its suppliers assists the Company to
satisfy its OEM customers' needs for timely delivery of high-quality products
and permits Nam Tai to have greater control over the quality of its suppliers'
components.
Consistent with this strategy, in 1994 the Company purchased
approximately 10% of the outstanding common stock of Deswell Industries, Inc.
("Deswell"), the Nasdaq listed holding company of the Hong Kong-based suppler
of plastic parts used in many of the Company's products. Deswell has
manufacturing facilities in Shenzhen, China. In February 1997, the Company
reduced its holdings in Deswell to approximately 5.8% of the common shares of
Deswell reported outstanding as at December 31, 1996, realizing proceeds of
approximately $4.4 million. The Company plans to continue to maintain a close
working relationship with Deswell.
Transportation
Since the Company sells its products F.O.B. Hong Kong, its 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 has not been materially
affected by any transportation problems.
TECHNOLOGY DEVELOPMENT
Between 1984 and 1994, the Company spent an average of approximately
$360,000 per annum on research and development, chiefly to advance
manufacturing technology. During the later half of this period Nam Tai
concentrated on its OEM business and expenditures fell below the average by
the end of the period. At that time the major responsibility of the Company's
product design personnel was limited to the production to the satisfaction of
and in accordance with the specifications provided by OEM customers.
Since 1995, the Company has placed increased emphasis on research and
development which provides greater service to OEM customers and assists in
design and development of future products. Research and development expenses
increased marginally to $950,000 in 1996 from $945,000 in 1995. Namtek, the
Company's software development subsidiary which began operations in early 1996
accounted for approximately 40% of the research and development expenses in
1996 and these expenses were substantially recovered from fees paid by third
parties.
COMPETITION
The Company competes with numerous other companies in the contract
electronic manufacturing industry and competition is intense. Competition has
been limited by OEMs to a small number of companies who satisfy the
requirements to become approved suppliers. While individual OEM customers are
likely to prefer certain contract manufacturers, OEMs tend to order from
several different suppliers in order to reduce dependence on any one.
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 that it competes
favorably in each of these areas.
EMPLOYEES
At December 31, 1996, Nam Tai employed approximately 2,000 persons on a
full-time basis, of which approximately 1,960 were working in China, 30 in
Hong Kong, and 10 in Canada. Of these, approximately 1,750 were engaged in
manufacturing, 181 were engaged in clerical, research and development and
marketing positions and the balance in supporting jobs such as security,
janitorial, and food and medical services. The Company is not a party to any
material labor contract or collective bargaining agreement. The Company has
experienced no significant labor stoppages and believes that relations with
its employees are satisfactory. 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.
An employee incentive compensation program is in place 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
The Company has no patents, 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.
The Company has obtained trademark registrations in Hong Kong for the
mark "FORTEC" in connection with electronic calculators. Nam Tai has also
obtained a trademark registration in Hong Kong for the mark "SANTRON" in
connection with electronic calculators. The Company has registered the
trademark "NAMTAI" in connection with electronic calculators in Hong Kong, the
United States and Canada. The trademark "PEACOCK" is registered in China
although no products are currently being produced under this name.
ITEM 2. PROPERTIES
British Virgin Islands
As of January 17, 1997, the registered office of the Company was
transferred to McNamara Chambers, P.O. Box 3342, Road Town, Tortola, British
Virgin Islands. Only corporate administrative matters are conducted at such
office, through Nam Tai's registered agent, McW. Todman & Co. The Company
neither owns nor leases property in the British Virgin Islands.
Hong Kong
In February 1997 the Company leased new premises at Unit 9, 15/F., Tower
1, China Hong Kong City, 33 Canton Road, TST, Kowloon, Hong Kong for a term of
three years. Rental is approximately $17,900 per month for the first two
years, and will be renegotiated in the third year. The Company moved its
principle executive and marketing offices into these new premises in late
March 1997.
The Company owns a residential flat in Hong Kong which was purchased for
total consideration of $1,850,000. This property houses the Chief Executive
Officer of the Company and forms part of his overall compensation. See Item
11. Compensation of Directors and Officers.
The Company also owns approximately ten acres of land in Hong Kong which
the Company plans to sell. This land has been held since 1984 and is carried
on the books of the Company at its cost of approximately $523,000. In February
1997, the Company was notified that the Hong Kong government intends to
expropriate 0.55 acres of this land and has offered compensation of
approximately $240,000.
Shenzhen, China
Nam Tai's manufacturing complex is located in Baoan County, Shenzhen,
China. It includes the original facility and Phase I of the factory expansion
which was completed in May 1996. At December 31, 1996, the total combined
capacity utilization of the original factory and Phase I of the factory
expansion was 60%.
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 $32,000 per month due to increase by 20% in August 1997 and a
further 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 in 1994 and has a term of 50 years.
Construction of the approximately 437,000 square feet new facility
began in early 1995 and portions were completed in August 1995 to house new
factory employees needed to expand production at that time. Nam Tai's Phase
I complex expansion was completed on schedule in May 1996. The expanded new
facility is adjacent to the Company's original facility and 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 factory complex, excluding land, was approximately
$21,800,000. In addition, during 1996 Nam Tai purchased $1,100,000 of new
production equipment for the new factory. It has also transferred equipment
from the original factory to the new factory. In accordance with an expansion
schedule, Nam Tai intends to establish production lines and purchase
additional equipment as required by growth in the Company's business through
1997 and into early 1998.
The Company also has a 26,000 square feet facility in Shenzhen located
approximately one mile from its complex. This contains 28 apartment units
which the Company uses to house certain of its factory managers who are
married and have families. The Company purchased this building for
approximately $1,000,000, paying the final instalment in June 1993.
During 1992, the Company purchased the development rights to a further
parcel of leasehold land in Baoan County, Shenzhen, China. The purchase price
was approximately $343,000. The land area consists of approximately 70,000
square feet of land in a developed area of commercial buildings and
residences. The purchase of the leasehold land gives Nam Tai the right to use
the land for fifty years. The Company reviewed the construction of a high
rise office building to house its corporate headquarters and subsequently
decided to concentrate on its core contract manufacturing business. In
January 1997, Nam Tai entered into a Land Development Agreement with Shenzhen
Baoheng (Group) Co. Ltd. which is expected to result in the eventual sale of
the property and the recovery of the original purchase price. There can be no
assurance that the sale will occur.
Canada
On November 1, 1995, Nam Tai Canada moved its corporate office to new
leased premises in Vancouver, British Columbia. The Company entered into a
lease for 2,637 square feet of office space at an annual rental of $26,000.
The lease expires in August 1998.
In 1995, the Company completed construction of a building in Burnaby,
British Columbia in which it intended to house both manufacturing operations
and its Canadian administration and finance office. The two-story building
consists of approximately 7,000 square feet of office space and 8,000 square
feet of manufacturing space. Construction was completed in mid 1995 at a cost
of approximately $2,400,000, including the cost of land. The prospects for
manufacturing have been re-evaluated and the property is currently listed for
sale.
General
The Company believes that its existing 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 September 1993, Tele-Art, Inc., a shareholder of Nam Tai, commenced
an action against the Company seeking an injunction prohibiting the Company
from proceeding with a rights offering which was contemplated at that time.
Tele-Art's application was based on claims that Nam Tai may have violated
British Virgin Islands and United States law. Among other claims, Tele-Art
asserted that the Company's rights offering was part of a scheme to enrich
directors and management of Nam Tai and dilute the interest of minority
shareholders. After a hearing, a temporary injunction obtained by Tele-Art
was discharged, permitting the Company to proceed with, and complete, its
rights and standby offerings in October 1993. Tele-Art is pursuing claims in
the British Virgin Islands against Nam Tai for damages. In November 1993,
Tele-Art applied to the Court to include the Company's directors in the
proceedings, and in March 1994 the application was granted. In May 1996, the
Court ordered the parties to make discovery by exchanging lists of documents
and to-date this exchange has not occurred. The Company continues to believe
that Tele-Art's claims are without merit and plans to continue to vigorously
defend them as well as to seek from Tele-Art and its agents compensation for
the damage caused by the injunction and the proceedings that were brought to
obtain it.
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 December
31, 1996, 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.
NUMBER OF
IDENTITY OF COMMON SHARES PERCENT OF
PERSONS OR GROUPS BENEFICIALLY OWNED CLASS
----------------- ------------------ -------
M. K. Koo 2,553,656 (Note 1.) 32.5%
c/o Suite 530
999 West Hastings Street
Vancouver, B.C. V6C 2W2
Canada
Officers and directors as a 3,238,017 (Note 2.) 40.2%
group
(seven persons)
Notes
1. Includes outstanding shares which are personally owned by Mr. Koo
and 26,667 shares issuable to Mr. Koo upon exercise of options
exercisable within 60 days of December 31, 1996.
2. Includes outstanding shares and a total of up to 216,667 shares
issuable to officers upon exercise of employee options exercisable
within 60 days of December 31, 1996.
ITEM 5. NATURE OF TRADING MARKET
COMMON SHARES
The Company's Common Shares are traded on The Nasdaq National Market
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, 1996.
QUARTER ENDED HIGH LOW
------------- ---- ----
December 31, 1996 10.63 7.25
September 30, 1996 11.50 8.63
June 30, 1996 13.88 10.50
March 31, 1996 13.13 9.25
December 31, 1995 13.88 10.75
September 30, 1995 17.25 9.00
June 30, 1995 10.50 9.00
March 31, 1995 9.75 7.94
On December 12, 1996, the Company listed its shares on The Toronto Stock
Exchange under the symbol "NMT." The high and low closing sales prices of the
Company's Common Shares on the Toronto Stock Exchange during the period from
December 12, 1996 to December 31, 1996 were Canadian $12.25 and Canadian
$10.85, respectively.
Of the 7,837,227 Common Shares of the Company outstanding as of December
31, 1996, approximately 4,200,000 are beneficially held by approximately 1,250
holders of record in the United States.
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
either 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 the 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
British Virgin Islands Tax Considerations
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.
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 Financial Condition and Results of Operations"
included elsewhere in this report.
SELECTED FINANCIAL INFORMATION
(In thousands of U.S. dollars except per share data)
YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Income Statement Data
Net sales $108,234 $121,240 $ 96,564 $ 70,844 $ 57,955
Gross margin 22,185 23,152 17,223 14,098 10,940
Net income 9,416 11,419 8,099 5,197 2,503
Dividends paid 243 120 65 - 853
Per share amounts (Note 2.)
Net income $ 1.16 $ 1.40 $ 1.09 $ 0.87 $ 0.47
Dividend paid 0.03 0.015 0.01 - 0.20
Balance Sheet Data
Current assets $ 46,609 $ 47,011 $ 45,520 $ 31,247 $ 23,071
Property, plant and equipment - net 36,487 27,635 14,624 7,396 6,337
Total assets 88,391 79,281 66,287 39,530 29,474
Current liabilities 21,401 19,108 17,838 10,644 12,475
Non current liabilities - - - 609 631
Shareholders' equity 66,990 60,173 48,449 28,162 16,368
Notes
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. The weighted average number of shares outstanding and common stock
equivalents for the years ended December 31, 1996, 1995, 1994, 1993 and
1992 were 8,142,131, 8,171,750, 7,459,570, 5,976,136 and 5,301,996,
respectively.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This section contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under the section of this Report entitled Item 1.
Business -- Risk Factors. This section should be read in conjunction with the
Company's Consolidated Financial Statements included elsewhere herein.
RESULTS OF OPERATIONS
General
The Company derives its revenues principally from manufacturing consumer
electronic products and subassemblies for OEM customers in the electronics
industry. The Company manufactures a broad line of finished products for its
OEM customers, including personal organizers, linguistic products, calculators
and IC card readers. In addition, it manufactures electronic components and
subassemblies. In 1994, the Company discontinued sales of its proprietary
products, sales of which had not been material to the Company prior to the sale
of the product lines.
During the years ended December 31, 1996, 1995 and 1994, sales to OEM
customers accounted for 99% of total net sales in each year. Management
believes that sales of personal organizers, linguistic products and calculators
will continue to be an important line of business for the Company for the next
several years. The importance of sales of subassemblies and components and
other products to total revenues has been rising, and management expects these
products, particularly LCD modules and IC card readers, to contribute an
increasing proportion of total revenue. See Item 1. Description of Business --
Customers and Marketing.
The consumer electronics industry is very competitive and the Company is
continuously under pressure to lower the selling price and therefore reduce the
gross profit margin of its existing product lines. In response to these
pressures, the Company seeks to upgrade its technology in order to be capable of
manufacturing more advanced and specialized products with higher unit margins.
It also strives to improve customer relations and quality. The Company believes
there is less competition in more advanced and specialized products due to the
complexity involved in manufacturing and the lower numbers of direct
competitors.
Since 1987, when the Company moved its manufacturing operations to China,
Nam Tai has derived substantially all of its operating income from its China
operations. The Company 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 16.5%. The Company receives tax credits in
China related to its investment there which reduces the overall tax payable by
the Company. See Note 9 of Notes to Consolidated Financial Statements.
The Company uses a standard cost system to value its inventory, which is
purchased in U.S. dollars, Japanese yen and Hong Kong dollars. At the end of
each quarter, the Company revalues its inventory based upon actual costs and the
resulting standard cost revaluation flows through cost of sales when the
inventory is sold.
The first quarter is typically the Company's slowest sales period because,
as is customary in China, the Company's factories in China are closed for two
weeks for the Chinese New Year holidays. The following table sets forth certain
unaudited quarterly financial information for the four quarters of 1996, 1995
and 1994.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(In thousands of U.S. dollars except per share data)
1996
- - ----
Summary of operations
Net sales $ 25,357 $ 24,885 $ 28,005 $ 29,987
Gross profit 5,036 4,907 6,344 5,898
Income from operations 2,007 1,201 2,893 2,432
Net income 2,333 1,409 3,318 2,356
Net income per share $ 0.29 $ 0.17 $ 0.40 $ 0.30
1995
- - ----
Summary of operations
Net sales $ 22,443 $ 30,065 $ 35,514 $ 33,218
Gross profit 4,256 5,987 6,967 5,942
Income from operations 1,609 2,880 3,736 2,541
Net income 1,556 3,210 4,637 2,016
Net income per share $ 0.19 $ 0.39 $ 0.57 $ 0.25
1994
- - ----
Summary of operations
Net sales $ 14,888 $ 24,625 $ 32,127 $ 24,924
Gross profit 2,602 4,681 5,702 4,238
Income from operations 672 2,111 3,137 1,694
Net income 655 2,003 3,494 1,947
Net income per share $ 0.09 $ 0.28 $ 0.48 $ 0.24
The following table presents selected consolidated financial information
stated as a percentage of net sales for the years ended December 31, 1996,
1995 and 1994:
Year ended December 31,
1996 1995 1994
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 79.5 80.9 82.2
---- ---- ----
Gross profit 20.5 19.1 17.8
---- ---- ----
Costs and expenses:
Selling, general and administrative expenses 11.7 9.4 9.7
Research and development expenses 0.9 0.8 0.2
---- ---- ----
12.6 10.2 9.9
---- ---- ----
Income from operations 7.9 8.9 7.9
(Loss) on disposal of fixed assets (0.1) 0 0
Other income - net 1.1 0.2 0.8
Interest expense (0.1) (0.2) (0.2)
---- ---- ----
Income from consolidated companies
before income taxes and minority interests 8.8 8.9 8.5
---- ---- ----
Net income 8.7% 9.4% 8.4%
---- ---- ----
Year ended December 31, 1996 Compared to Year Ended December 31, 1995
Nam Tai's sales declined by 11% to $108,234,000 for the year ended
December 31, 1996 compared to $121,240,000 for the year ended December 31,
1995. A reduction in orders from certain OEM customers, particularly Sharp
Corporation, caused the decline in sales. Management believes the reduction
in orders was the result of forecasts of year-end sales levels by certain of
the Company's OEM customers which had caused them to place extensive orders
with the Company for production during the third and fourth quarters of 1995.
Lower than expected year-end 1995 sales by these OEM customers caused them to
curtail orders for production in 1996. The decline in orders from Sharp
Corporation during 1996 did not offset a substantial increase in sales to
certain other OEM customers, particularly Texas Instruments Incorporated.
The Company's gross profit decreased to $22,185,000 for the year ended
December 31, 1996 from $23,152,000 for 1995. The principal reason for the
decrease in gross profit was the decrease in sales. Also contributing to the
decrease in gross profit was an increase in the cost of sales resulting from a
net write-off of $415,000 of inventory. During the course of the audit of
its financial statements for the year ended December 31, 1996, the Company
confirmed that certain components included in its raw material inventory were
not likely to be used in connection with future production, and due to the
passage of time, could not be charged to customers who would have otherwise
been responsible for the reimbursement of cost. After consulting with its
auditors, the Company elected to write-off the cost of such inventory.
Despite the reduction in sales and additions to costs of sales,
Nam Tai's gross profit margin improved to 20.5% in 1996 from 19.1% in 1995.
This was principally because of lower component costs and efficiencies
implemented to reduce manufacturing costs. Lower component costs were
attributable to the general decline in the cost of certain components as well
as the decline in the value of the yen relative to the U.S. dollar. The
latter benefited the Company as it purchases a substantial volume of components
from Japanese companies which are paid in yen.
Selling, general and administrative expenses increased by 11.0% to
$12,702,000 or 11.7% of sales in the year ended December 31, 1996 from
$11,441,000 or 9.4% of sales for the year ended December 31, 1995. The
increase in absolute dollars was principally the result of costs associated
with the addition of management personnel to the Company's operations in
China, Hong Kong and Canada, plus certain one-time expenses relating to the
opening of Phase I of the Company's the new factory.
Research and development expenses increased marginally to $950,000 in
1996 from $945,000 in 1995. Namtek, the Company's software-development
subsidiary which began operations in early 1996, accounted for approximately
40% of the research and development expenses in 1996. These expenses were
substantially recovered from fees paid by third parties.
Loss on disposal of fixed assets was $123,000 in the year ended December
31, 1996 as compared to zero for the year ended December 31, 1995. The loss in
1996 principally related to $120,000 of leasehold improvements Nam Tai had
made to its former principal executive offices in Hong Kong under a lease
which was prematurely terminated as of the end of 1996. See the discussion
regarding this lease, its termination and Nam Tai's relocation of its
principal executive offices in Hong Kong to new premises under Item 9.
Liquidity and Capital Resources below.
Other income (net) increased to $1,253,000 for the year ended December 31,
1996 from $225,000 for the year ended December 31, 1995. This income
consisted chiefly of interest income of $1,092,000 on the Company's cash
balances and $294,000 of income from dividends paid by Deswell to the Company
as a shareholder. In 1995, other income was reduced as a result of fourth
quarter charges totaling $936,000 in regard to a provision for the Company's
compensation for loss of office arrangement and a one-time bonus to workers.
Interest expense decreased to $89,000 for the year ended December 31,
1996 from $161,000 for the year ended December 31, 1995 as a result of the
reduction in the Company's borrowings under its banking facilities.
Income from continuing operations before income tax was $9,574,000 for
the year ended December 31, 1996 as compared to $10,830,000 for the year ended
December 31, 1995. The decrease of 11.6% was primarily due to decreased 1996
sales.
The income tax expense of $158,000 for the year ended December 31, 1996
compares to a recovery of $589,000 for the prior year. The income tax expense
in 1996 relates to income taxes on Hong Kong operations and is comparable to
1995 income taxes paid with respect to Hong Kong operations. In 1995, the
Company reversed a provision of $705,000 against income taxes owing from China
operations following receipt of a refund of 1994 income taxes on China
operations. The refund in 1995 of 1994 China income taxes resulted in an
overall recovery of total income taxes paid for 1995. As a result of expected
refunds of income taxes attributable to China operations, the Company made no
provision for such income taxes in either 1995 or 1996. The refund of 1995
income taxes on China operations was received in 1996 and the refund of 1996
income taxes from such operations is expected in 1997.
Net income decreased by 17.5% to $9,416,000 (or 8.7% of sales) for the
year ended December 31, 1996 compared to $11,419,000 (or 9.4% of sales) for
the year ended December 31, 1995. This resulted in earnings per share for the
year ended December 31, 1996 of $1.16 compared to earnings per share of $1.40
for the year ended December 31, 1995. The decrease in net income and earnings
per share was in line with the decrease in sales taking into consideration the
higher operating margins.
The weighted average number of Common Shares outstanding and common
stock equivalents decreased to 8,142,131 for the year ended December 31, 1996
from 8,171,750 for the year ended December 31, 1995, reflecting the repurchase
by the Company of 273,500 shares through its share repurchase program in
effect from September 11, 1996 to December 4, 1996.
Year ended December 31, 1995 Compared to Year Ended December 31, 1994
Nam Tai's sales increased by 26% to $121,240,000 in the year ended
December 31, 1995 compared to $96,564,000 for the year ended December 31,
1994, primarily due to increases in sales to Sharp Corporation, Nintendo, Inc.
(which orders through Sharp Corporation) and Texas Instruments Incorporated.
The Company also received additional orders from Optrex Corporation.
The Company's gross profit margin increased to $23,152,000 or 19.1% of
sales for the year ended December 31, 1995 from $17,223,000 or 17.8% of sales.
The principal reasons for the increase in profit margins were (i) low cost of
raw materials, in part the result of the weakness of the Japanese yen in
relation to the US dollar, and (ii) improvements to quality control which
resulted in a reduction of the scrap rate.
Selling, general and administrative expenses increased by 22.1% to
$11,441,000 or 9.4% of sales in the year ended December 31, 1995 from
$9,370,000 or 9.7% of sales for the year ended December 31, 1994. The
increase in absolute dollars mainly reflected additional staff and costs
required to provide services to the Company in line with growth in sales. The
decrease in such expenses as a percent of sales was the result of efficiencies
obtained in general administrative expense as the Company handled a greater
level of activity with existing resources. Other expenses included the
initial start up expenses associated with the formation of the new subsidiary
operation, Namtek.
No gain or loss on disposal of fixed assets was incurred in the year
ended December 31, 1995 compared to a net loss on disposal of fixed assets of
$48,000 in the year ended December 31, 1994. Other income - net declined to
$225,000 for the year ended December 31, 1995 from $761,000 for the year ended
December 31, 1994. This income mainly consists of $1,548,000 of interest
income less a $560,000 charge relating to undepreciated cost of the
compensation for loss of office arrangement and $376,000 associated with a
one-time bonus to staff in Hong Kong, China and Canada to recognize
exceptional work in the fourth quarter of 1995 (a period of high activity).
The provision taken to expense the compensation for loss of office arrangement
applied to certain senior management who were the beneficiaries of such
arrangement but did not involve the payment of any funds and will eliminate
the need to accrue for this expense in the future.
Interest expense increased to $161,000 for the year ended December 31,
1995 from $129,000 for the year ended December 31, 1994.
Income from continuing operations before income taxes increased to
$10,830,000 for the year ended December 31, 1995 from $8,198,000 for the year
ended December 31, 1994. The improvement of 32.1% was primarily attributable
to higher operating income reflecting increased sales volume and higher gross
profit margins associated with 1995 sales.
The income tax benefit of $589,000 for the year ended December 31, 1995
compared to a provision for income tax expense of $173,000 for the year ended
December 31, 1994. The tax recovery resulted from the refund of $782,000
China tax paid for the year ended December 31, 1994 which was received during
the second quarter of 1995. Hong Kong tax payable was $106,000 for the year
ended December 31, 1995.
Minority interest in subsidiaries declined to nil for the year ended
December 31, 1995 from $74,000 for the year ended December 31, 1994 following
the repurchase of shares of NT Canada from a minority shareholder during 1994.
Net income increased by 41% to $11,419,000 (or 9.4% of sales) for the
year ended December 31, 1995 compared to $8,099,000 (or 8.4% of sales) for
the year ended December 31, 1994. This resulted in earnings per share for the
year ended December 31, 1995 of $1.40 compared to earnings per share of $1.09
for the year ended December 31, 1994. The increase in net income and earnings
per share was in line with the increase in sales taking into consideration the
higher operating margins. The weighted average number of common shares
outstanding and common stock equivalents increased to 8,171,750 for the year
ended December 31, 1995 from 7,459,570 for the year ended December 31, 1994,
reflecting the exercise of warrants issued according to the 1993 Rights
Offering which occurred in September 1994.
LIQUIDITY AND CAPITAL RESOURCES
Current assets remained relatively stationary at $46,609,000 for the
year ended December 31, 1996 compared to $47,011,000 for the year ended
December 31, 1995. Cash, cash equivalents and term deposits were also
relatively stationary at $17,741,000 for the year ended December 31, 1996
versus $17,362,000 for the year ended December 31, 1995. Accounts receivable
at December 31, 1996 decreased by 6.3% from the level at December 31, 1995,
essentially corresponding to the decrease in sales during 1996. Inventories at
December 31, 1996 increased by 0.8% from levels at December 31, 1995,
reflecting an inventory turnover period of 45 days in 1996 versus 37 days for
1995. The increase in the inventory turnover was principally the result of
Nam Tai's transfer of responsibility for accounts payable on China deliveries
from the Hong Kong office to personnel at the Company's China factory complex.
Total current assets also remained relatively stationary at $47,011,000
for the year ended December 31, 1995 compared to $45,520,000 for the year
ended December 31, 1994. Cash, cash equivalents and term deposits declined to
$17,362,000 for the year ended December 31, 1995 from $23,681,000 for the year
ended December 31, 1994. This decline of $6,319,000 resulted from
expenditures on new plant construction. The increase in accounts receivable
and inventories for the year ended December 31, 1995 compared to 1994 was in
line with the increase in sales during 1995 over 1994 plus additional
receivables at December 31, 1995 in the amount of $2,620,000 which related to
the residential property in West Vancouver, British Columbia, Canada. The
sale of this property was concluded as at December 31, 1995.
In December 1994, the Company invested $3,931,000 for approximately 14%
of Deswell's then outstanding capital stock. In July 1995, Deswell completed
an initial public offering of its securities in the United States and the
Company's investment was diluted to approximately 10.5% of Deswell's
outstanding shares as at December 31, 1995. In July 1996, the Company
exercised warrants to purchase an additional 12,000 shares of Deswell for
$119,000. As at December 31, 1996, this investment was shown at cost and was
approximately 87% of the market value of Deswell common shares as reported on
The National Market at December 31, 1996. Subsequent to the end of the year,
the market price of the Deswell shares rose substantially on The Nasdaq
National Market System and the Company elected to sell a portion of its
investment in Deswell, reducing its stake in Deswell to approximately 5.8% of
its reported shares outstanding at December 31, 1996. The Company realized a
gain of $2,564,500 on sales of 225,000 shares for total gross proceeds of
$4,428,000.
The increase in property, plant and equipment - net to $36,487,000 for
the year ended December 31, 1996 from $27,635,000 for the year ended December
31, 1995 principally reflects the expenditure of capital on new plant
facilities. A total of $9,904,000 was expended finalizing the construction of
the new facility resulting in a total expenditure, excluding land and
production equipment, of $21,812,000. In addition, $1,100,000 of new
production equipment costs were incurred during 1996. The increase in
property, plant and equipment - net to $27,635,000 for the year ended December
31, 1995 from $14,624,000 for the year ended December 31, 1994 reflects the
expenditure of capital on new plant facilities, net of depreciation.
At December 31, 1996, 28% and 51% of the Company's identifiable assets
were located in Hong Kong and China, respectively, as compared to 32% and 54%,
respectively, at December 31, 1995. In 1996, the Company implemented a new
policy of holding surplus funds in Canada. Consequently, cash and term
deposits representing 53% of the total cash and term deposits of $17,741,000
were held by the Company in Canada at December 31, 1996 versus nil as at
December 31, 1995. As a result, identifiable assets in Canada represented 21%
of total assets at December 31, 1996 as compared to 14% of total assets at
December 31, 1995.
In the past, the Company used short-term bank borrowings to assist it to
meet its working capital requirements and to provide funds for investment in
property, plant and equipment. Short-term bank borrowings totaled $273,000 as
at December 31, 1995. During 1996, the Company's capital requirements were
financed from internally generated funds and short-term borrowings were
reduced to nil at December 31, 1996. The Company plans to finance its 1997
capital requirements from internally generated funds and working capital of
which there was approximately $25,208,000 as at December 31, 1996.
At December 31, 1996, Nam Tai had in place general banking facilities
with six financial institutions aggregating $49,200,000. Such facilities,
which are subject to annual review, permit the Company 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. As at December 31, 1996, the Company had utilized
approximately $7,629,000 under such general credit facilities and had
available unused credit facilities of $41,571,000. Interest on notes payable
averaged 5.1% per annum during the year ended December 31, 1996. During the
year ended December 31, 1996, the Company paid a total of $89,000 in interest
on indebtedness.
Accounts payable increased by 20.7% to $16,184,000 for the year ended
December 31, 1996 from $13,408,000 for the year ended December 31, 1995,
principally as a result of changes to policy regarding the payment of vendors
associated with the transfer, during 1996, of responsibility for accounts
payable on China deliveries from the Hong Kong office to personnel at the
Company's China factory complex. The Company had no long term debt during
either 1995 or 1996.
Cash flow from operations for 1996 included net income of $9,416,000
and depreciation of $2,676,000. The net cash addition due to changes in
working capital (excluding cash and bank borrowings) was $3,347,000. During
1996, the Company's investment activities utilized $11,650,000 in additions to
property, plant and equipment, mainly consisting of capitalized construction
costs for the Company's new factory and additional equipment costing
$1,100,000.
During 1995, the Company commenced the expansion of its complex in
China, including the construction of Phase I of its new manufacturing facility
adjacent to the Company's original factory. The Company used existing cash
balances to finance the construction. Construction was substantially
completed in May 1996 and the Company began to utilize portions of the
facility during the period from June 1 through December 31, 1996. As a result
of the partial use of the new facility during the last seven months of 1996,
the Company recorded a depreciation expense of $346,000 for the year ended
December 31, 1996.
In September 1994, the Company agreed to a three-year lease for office
space in Hong Kong and effective March 1, 1995 moved its principal executive
and marketing offices there. The rent for the first two years was
approximately $17,800 per month. As a result of zoning regulations which
limited the use that the Company could make of the space comprising its Hong
Kong headquarters, Nam Tai was required to terminate its existing lease and
relocate its principal executive and Hong Kong marketing offices prior to the
expiration of the lease term. Accordingly, in February 1997, the Company
leased new premises for its principal executive offices in Hong Kong. The
rent for the new space is approximately $17,900 per month for the first two
years and is to be renegotiated for the third year. The Company moved into
the new premises in late March 1997. The Company recorded a charge of
$120,000 for the year ended December 31, 1996 in regard to leasehold
improvements Nam Tai had made in the terminated leasehold.
Net cash utilized by financing activities was $290,000 in 1996. No major
financing was undertaken during the year.
The Company believes that there are no material restrictions (including
foreign exchange controls) on the ability of Nam Tai's non-China subsidiaries
to transfer funds to the Company in the form of cash dividends, loans,
advances, or product/material purchases. With respect to the Company's China
subsidiaries, there are restrictions on the payment of dividends and the
removal of dividends from China, however, the Company believes that such
restrictions will not have a material effect on the Company's liquidity or
cash flow.
In the past Nam Tai paid quarterly dividends on its Common Shares, but
such dividends were discontinued in January 1993. In 1994, the Company began
paying annual dividends, paying shareholders aggregate dividends of $65,000
($0.01 per share) in 1994, $120,000 (0.015 per share) in 1995 and $243,000
($0.03 per share) in 1996. It is the current policy of Nam Tai to determine
the actual amount of future dividends based upon the Company's growth during
the preceding year and to limit cash dividends to less than 20% of net cash
flow in order to have sufficient cash to finance growth. 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.
IMPACT OF INFLATION
The Company believes that inflation has not had a material effect on its
past business. The Company has generally been able to increase the price of
its products in order to keep pace with inflation. The Company believes that
increases in labor costs, which represent the most significant component of
the Company's production costs (other than material costs), will not
materially affect its business because of the Company's utilization of less
expensive labor through its operations in China. Labor and overhead expenses
related to Nam Tai's Chinese factory amounted to 8.7% of the Company's total
expenses before operating income during the year ended December 31, 1996 and
6.2% during the year ended December 31, 1995, the increase principally
resulting from the expansion of the facility.
EXCHANGE RATES
The Company sells a majority of its products in U.S. dollars and pays
for its material components in Japanese yen, U.S. dollars and Hong Kong
dollars. It pays labor costs and overhead expenses in renminbi, the currency
of China (the basic unit of which is the yuan), Hong Kong dollars and Canadian
dollars. The exchange rate of the Hong Kong dollar to the United States
dollar has been fixed by the Hong Kong government since 1983 at approximately
HK$7.80 to $1.00 through the currency issuing banks in Hong Kong and
accordingly has not presented a currency exchange risk. Canadian operations
are relatively small with the percentage of expense in Canadian dollars
representing 2% of the total expenses for the year ended December 31, 1996.
Management believes that the Company's most significant foreign exchange
risk results from material purchases made in Japanese yen. Approximately 28%,
33% and 35% of Nam Tai's material costs have been in yen during the years
ended December 31, 1996, 1995 and 1994, respectively. Sales made in yen
account for approximately 15% of sales for the year ended December 31, 1996,
18% of sales for 1995 and 13% of sales for 1994. The net currency exposure
has been declining as material costs in yen decrease and sales in yen
increase. The Company also 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. This 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 agreement in the event of a
severe fluctuation of the 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.
Effective January 1, 1994, China adopted a floating currency system
whereby the official exchange rate equalled 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 which 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 United States dollar. This stability
was maintained through 1996. The Company believes that because its Chinese
operations presently are confined to manufacturing products for export, any
devaluation of the renminbi would benefit Nam Tai by reducing its costs in
China provided that action 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 center"). In the past, when exchanging Hong Kong dollars for renminbi,
the Company used a swap center to obtain the best possible rate. When
translating the Chinese company account into U.S. dollars, the Company uses
the same exchange rate as quoted by the 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.
On April 1, 1996, new regulations on foreign exchange were implemented
by the China government. Trade-related foreign exchange receipts and
disbursements are generally not subject to restriction in accordance with the
provisions on settling, selling or buying foreign exchange. Capital account
foreign exchange receipts and disbursements are subject to control and
organizations in China are restricted in foreign currency transactions which
must take place through designated banks.
The Company may elect to hedge its currency exchange risk when it judges
such action may be required. In an attempt to lower the costs of expenditures
in foreign currencies, management will periodically enter into forward
contracts to buy or sell foreign currency(ies) against the U.S. dollar through
one of its banks. A buy contract allows Nam Tai to buy a targeted currency at
a fixed price for up to one year, but which the Company normally books forward
six months. Conversely, a sale contract allows the Company to sell the
currency at a fixed price during the contract period. The type of contract
and currency that the Company enters into depends on whether management
believes the currency will rise or fall against the dollar in the succeeding
period. Nam Tai will enter into buy forward contracts if it appears the
currency will rise and sell forward contracts if it appears the currency will
fall against the dollar. If there is a fluctuation in the two currencies a
gain or loss occurs between the buy forward exchange rate and the sell forward
exchange rate. The Company enters into foreign currency contracts in order to
manage foreign exchange exposures. However, since the foreign currency
contracts are not intended to hedge identifiable foreign currency commitments,
as required by generally accepted accounting principles, the contracts are
marked to the market with any realized and unrealized gains or losses recorded
as other income (loss) - net.
As at December 31, 1996, the Company had no open forward contracts while
at December 31, 1995 there were open forward contracts amounting to $60,000.
During 1996, Nam Tai recorded no gain from hedging transactions. The
Company's financial results have been affected in the past due to hedging
activities, resulting in foreign exchange gains of approximately $52,000 in
1995 and $68,000 in 1994 and foreign exchange losses of approximately $400,000
in 1993 and $350,000 in 1992. These exchange gains and losses were caused by
the difference between the buy forward rate and sell forward rate for exchange
contracts between the foreign currencies (Japanese yen in 1992 and 1993,
Canadian dollars in 1994 and 1995) entered into by the Company. The Company
is continuing to review its hedging strategy and there can be no assurance
that Nam Tai will not suffer losses in the future as a result of currency
hedging.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Management
The directors and executive officers of the Company are as follows:
NAME POSITION WITH COMPANY
- - ---- ---------------------
M. K. Koo Chairman of the Board
and Director
Tadao Murakami Chief Executive Officer, Vice-Chairman
and Director
Ronald Erdman Chief Financial Officer, Secretary
and Director
Hidekazu Amishima General Manager of NTES
Jerry Chang Vice General Manager of NTES
Charles Chu Director
Robert McNamara Director
Stephen Seung Director
M. K. KOO. Mr. Koo has served as Chairman of the Board and a Director
of Nam Tai and its predecessor companies since inception. Mr. Koo serves on
the Company's audit committee. Mr. Koo received his Bachelor of Laws degree
from National Taiwan University in 1970.
TADAO MURAKAMI. Mr. Murakami has served the Company in various
executive capacities since 1984. He became Secretary and a Director of the
Company in December 1989. From June 1989, he has been employed as the
President of the Company's Hong Kong subsidiary. In July 1994, Mr. Murakami
succeeded Mr. Koo as President and in June 1995 became the Company's Chief
Executive Officer. Mr. Murakami assumed the position of Vice-Chairman in
January 1996 and is in charge of the manufacturing and marketing
operations of the Company. Mr. Murakami graduated from Japan Electronic
Technology College in 1964.
RONALD ERDMAN. Mr. Erdman joined Nam Tai as Chief Financial Officer,
Secretary and Director in January 1996 based in Vancouver, Canada. He also
serves as President of Nam Tai Electronics (Canada) Ltd. Mr. Erdman was
employed by HSBC Capital Canada Inc. (formerly Wardley Canada Inc.), acting as
Chief Executive Officer since 1992. Mr. Erdman obtained a BSc. (Eng.) from
Queen's University, Kingston, Ontario, Canada in 1973 and M.B.A. from
Cranfield School of Management, Cranfield, United Kingdom in 1979.
HIDEKAZU AMISHIMA. Mr. Amishima joined the Company in August 1996 as
Vice General Manager and assumed the responsibility for overseeing day-to-day
factory operations of the Company's Shenzhen, China manufacturing complex as
General Manager in November 1996. From 1964 until joining the Company, Mr.
Amishima was employed by Kanda Tsushin Industrial Co. Ltd., a Japanese
electronics manufacturer.
JERRY CHANG. Mr. Chang joined the Company in 1995 and assumed the
position of Vice General Manager of NTES in late 1996. Mr. Chang is in charge
of production at the Company's Shenzhen, China manufacturing facility. Prior
to joining Nam Tai he was General Manager of R.C. Centronix Electronics (M)
SDN BHD, a Malaysian electronics manufacturer.
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's 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.
ROBERT MCNAMARA. Mr. McNamara served as a consultant to Nam Tai during
1995 and joined the Board of Directors of the Company effective May 18, 1996.
He is currently Managing Director of Broadview Associates, L.P. of Fort Lee,
New Jersey. Prior to joining Broadview Associates, L.P. in 1995, Mr. McNamara
spent fifteen years in the investment banking business with Smith Barney Inc.
and Salomon Brothers Inc., most recently as head of Salomon Brothers'
Technology Group in New York.
STEPHEN SEUNG. Mr. Seung was appointed a Director of Nam Tai in 1995.
Mr. Seung is an attorney and Certified Accountant 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's audit committee and acts as Nam
Tai's authorized agent in the United States.
No family relationship exists among any of the named directors,
executive officers or key employees. No arrangement or understanding exists
between any such director or officer and any other persons pursuant to which
any director or executive officer was elected as a director or executive
officer of the Company. Directors of the Company are elected each year at its
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 of the Company.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
The aggregate amount of compensation paid by Nam Tai and its
subsidiaries during the year ended December 31, 1996 to all directors and the
five highest paid officers as a group for services in all capacities was
approximately $1,574,000, including the benefit provided in lieu of
compensation for loss of office described below. The Company also provides
additional compensation in the form of housing for its Chief Executive Officer
in Hong Kong.
In August 1990, the Company fixed compensation for loss of office at
$500,000 for Mr. M. K. Koo and $300,000 for Mr. Tadao Murakami. The Company
also fixed the age of retirement for directors at age 65 years. At December
31, 1995, the Company had accrued the entire $800,000. In March 1996, Mr. Koo
agreed to release the Company from its obligation to pay compensation for loss
of office in exchange for the Company's agreement to reduce the final purchase
price of the property purchased by Mr. Koo from the Company by $450,000. See
Item 13. Interest of Management in Certain Transactions.
Directors who are not employees of the Company nor any of its
subsidiaries are paid $1,000 per month for services as a director, $750 per
meeting attended in person, $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.
As at December 31, 1996, the Company had outstanding options to purchase
an aggregate of 537,300 Common Shares. Of these options, all of which were
granted under the Company's 1993 stock option plan, options to purchase
131,550, 225,750 and 10,000 Common Shares were exercisable at $5.35, $11.00
and $11.375 per share, respectively, and expire on September 9, 1998, and July
15, 1999 and July 15, 1999, respectively. Options to purchase an aggregate of
330,000 Common Shares were held by the Company's officers and directors as a
group at December 31, 1996.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
In January 1995, Nam Tai entered into an arrangement with Mr. M. K. Koo,
Chairman of the Company, requiring him to purchase a residential property in
West Vancouver, British Columbia, Canada no later than December 31, 1995 at
the higher of book value or market value. At December 29, 1995, Mr. Koo
purchased the property for book value in the amount of $2,620,445. In 1996,
the Company agreed to reduce the final purchase price of the property by
$450,000 in exchange for Mr. Koo's agreement to release the Company from its
obligation to pay him $500,000 as compensation for loss of office upon Mr.
Koo's retirement. The balance outstanding at December 31, 1996 amounting to
$2,120,000 is repayable by Mr. M.K. Koo on or before December 31, 1997. See
Item 11. Compensation of Directors and Officers.
It is the Company's policy that all future transactions between the
Company and any interested director or executive officer be approved by a
majority of the disinterested directors and on terms no more favorable than
would be available from an independent third party.
PART II
ITEM 14. DESCRIPTION OF SECURITIES 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. FINANCIAL STATEMENTS
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements are filed as part of this Report:
Page No.
-------
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . .36
Consolidated Statements of Income for the years ended December 31, 1996,
December 31, 1995 and December 31, 1994. . . . . . . . . . . . . . . . . . .37
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995. . . 38
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1996, December 31, 1995 and December 31, 1994 . . . . . .39
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
December 31, 1995 and December 31, 1994. . . . . . . . . . . . . . . . . . .40
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . .41
All other schedules for which provisions made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
NAM TAI ELECTRONICS, INC.
We have audited the accompanying consolidated balance sheets of Nam Tai
Electronics, Inc and its subsidiaries as of December 31, 1996 and 1995, and
the related statements of income, shareholders' equity, and cash flows for
each of the three years ended December 31, 1996, 1995 and 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Nam Tai Electronics, Inc. and
its subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years ended December 31,
1996, 1995 and 1994 in conformity with accounting principles generally
accepted in the United States of America.
Price Waterhouse
Certified Public Accountants
Hong Kong, March 31, 1997
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of U.S. Dollars except share data)
Year ended December 31,
1996 1995 1994
---- ---- ----
Net sales $108,234 $ 121,240 $ 96,564
Cost of sales 86,049 98,088 79,341
------ ------ ------
Gross profit 22,185 23,152 17,223
------ ------ ------
Costs and expenses
Selling, general and
administrative expenses 12,702 11,441 9,370
Research and development expenses 950 945 239
------ ------ ------
13,652 12,386 9,609
------ ------ ------
Income from operations 8,533 10,766 7,614
(Loss) on disposal of fixed assets (123) 0 (48)
Other income - net (Note 5) 1253 225 761
Interest expense (89) (161) (129)
------ ------ ------
Income from consolidated companies
before income taxes and minority
interests 9,574 10,830 8,198
Income tax (expense) benefit (Note 8) (158) 589 (173)
------ ------ ------
9,416 11,419 8,025
Minority interests in subsidiaries 0 0 74
------ ------ ------
Net income $ 9,416 $ 11,419 $ 8,099
------ ------ ------
Earnings per share $ 1.16 $ 1.40 $ 1.09
------ ------ ------
Weighted average Common Shares
outstanding and common stock
equivalents (Note 1(f)) 8,142,131 8,171,750 7,459,570
See accompanying notes to consolidated financial statements.
NAM TAI ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. Dollars)
As at December 31,
1996 1995
---- ----
ASSETS
Current assets:
Cash and cash equivalents (Note 12) $ 1,761 $ 10,927
Term deposits 15,980 6,435
Accounts receivable, net 16,589 17,699
Inventories (Note 3) 10,511 10,425
Prepaid expenses and deposits 1,768 1,525
------ ------
Total current assets 46,609 47,011
Long term investment (Note 4) 4,050 3,931
Property, plant and equipment, at cost 46,751 35,365
Less: Accumulated depreciation and
amortization (10,264) (7,730)
------- ------
36,487 27,635
Other assets 1,245 704
------ ------
Total assets $ 88,391 $ 79,281
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ 0 $ 273
Notes payable 5,186 5,320
Accounts payable and accrued expenses 16,184 13,408
Income taxes payable 31 107
------ ------
Total current liabilities 21,401 19,108
Shareholders' equity:
Common stock (Note 13) 78 80
Additional paid-in capital 28,572 28,182
Stock option grants (Note 13(b)) 305 467
Retained earnings 38,007 31,417
Foreign currency translation adjustment 28 27
------ ------
Total shareholders' equity 66,990 60,173
------ ------
Total liabilities and shareholders' equity $ 88,391 $ 79,281
Commitments and contingencies (Note 11)
See accompanying notes to consolidated financial statements.
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of U.S. Dollars except shares outstanding)
Foreign Total
Common Shares Additional Stock Currency Share-
Shares Paid-in Option Retained Translation holders'
Outstanding Amount Capital Grants Earnings Adjustment Equity
----------- ------ --------- ------ -------- ---------- -------
Balance at December 31, 1993 6,498,825 $65 $15,355 $690 $12,084 $(32) $28,162
Shares issued on exercise of options 9,000 - 69 (21) - - 48
Options cancelled - - - (38) - - (38)
Warrants cancelled - - (657) - - - (657)
Shares issued on exercise of warrants 1,485,202 15 12,878 - - - 12,893
Net income - - - - 8,099 - 8,099
Dividends paid - - - - (65) - (65)
Foreign currency translation adjustments - - - - - 7 7
-------- --- ------- ----- ------- ---- ------
Balance at December 31, 1994 7,993,027 $80 $27,645 $631 $20,118 $(25) $48,449
Shares issued on exercise of options 70,150 - 537 (161) - - 376
Options cancelled - - - (3) - - (3)
Net income - - - - 11,419 - 11,419
Dividends paid - - - - (120) - (120)
Foreign currency translation adjustments - - - - - 52 52
-------- --- ------- ----- ------ ---- -------
Balance at December 31, 1995 8,063,177 $80 $28,182 $467 $31,417 $27 $60,173
Share buy-back program (273,500) (3) - - (2,583) - (2,586)
Shares issued on exercise of options 47,550 1 390 (91) - - 300
Options cancelled - - - (71) - - (71)
Net income - - - - 9,416 - 9,416
Dividends paid - - - - (243) - (243)
Foreign currency translation adjustments - - - - - 1 1
--------- --- ------- ----- ------ ---- ------
Balance at December 31, 1996 7,837,227 $78 $28,572 $305 $38,007 $28 $66,990
See accompanying notes to consolidated financial statements.
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. Dollars)
Year ended December 31,
1996 1995 1994
Cash flows from operating activities:
Net income $ 9,416 $ 11,419 $ 8,099
------ ------ ------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,676 2,612 2,063
Gain on release of deferred credit
to income - - (594)
Loss on disposal of property,
plant and equipment 123 - 48
Gain on disposal of product lines - - (129)
Minority interests in subsidiaries - - (74)
Other items - - 9
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable 1,110 (5,955) (1,857)
(Increase) in inventories (86) (1,338) (2,414)
(Increase) in prepayments and deposits (243) (517) (337)
Increase (decrease) in notes payable (134) (797) 4,244
Increase in accounts payable and
accrued expenses 2,776 2,876 2,917
(Decrease) in income taxes payable (76) (519) (140)
------ ------ ------
Total adjustments 6,146 (3,638) 3,736
------ ------ ------
Net cash provided by operating activities 15,562 7,781 11,835
------ ------ ------
Cash flows from investing activities:
Proceeds from disposal of property,
plant and equipment - 12 12
Proceeds from disposal of product lines - - 270
Additions to property, plant and equipment (11,650) (13,696) (10,673)
Additions to other assets (541) (379) (199)
Term deposits (9,545) (6,035) -
Purchase of long term investment (119) - (3,931)
------ ------ ------
Net cash used in investing activities (21,855) (20,098) (14,521)
------- ------- -------
Cash flows from financing activities:
Share buy-back program (2,583) - -
Increase (decrease) in short-term bank
loans and overdraft (273) (290) 173
(Distributed to) received from minority
interests - - (41)
Additional shares issued (net) 226 373 12,284
Dividends paid (243) (120) (65)
Net cash (used in) provided by financing activities (2,873) (37) 12,351
------ ------- ------
Net increase (decrease) in cash and cash equivalents (9,166) (12,354) 9,665
Cash and cash equivalents at beginning of period 10,927 23,281 13,616
Cash and cash equivalents at end of period $ 1,761 $ 10,927 $ 23,281
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 89 $ 186 $ 131
Income taxes paid $ 234 $ 47 $ 313
See accompanying notes to consolidated financial statements.
NAM TAI ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)
1 Summary of Significant Accounting Policies
a Basis of presentation
The preparation of 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
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
b Principles of consolidation
The consolidated financial statements include the financial
statements of Nam Tai Electronics, Inc. ("the Company") and all
its subsidiaries. Intercompany accounts and transactions have been
eliminated on consolidation. Minority interest is recognized in
respect of earnings of less than wholly-owned subsidiaries. The
details of the Company's subsidiaries are described in Note 9.
c Deferred credit
When a subsidiary is purchased, the excess of the fair value of
the net assets acquired over the purchase price is recorded as a
reduction to non-current assets with any remainder being recorded
as a deferred credit. If the purchase price exceeds the fair
value of net assets acquired, the excess cost is recorded as
goodwill. Any goodwill or deferred credit which may result is
amortized over its estimated useful life, not to exceed forty
years. The remaining deferred credit of $594,000 at September
30,1994 was credited to income in 1994 as the subsidiary to which
the deferred credit related commenced liquidation procedures and
was insolvent.
d Inventories
Inventories are stated at the lower of cost and market value. Cost
is determined on the first-in, first-out basis.
e Property, plant and equipment
Property, plant and equipment are recorded at cost and include
interest on funds borrowed to finance construction in Canada.
Capitalized interest was $12,650, $12,650 and nil for the years
ended December 31, 1996, 1995 and 1994 respectively. The cost of
major improvements and betterments is capitalized whereas the cost
of maintenance and repairs is expensed in the year incurred.
All land in Hong Kong is owned by the government 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
purchased long-term assets. The cost of such land leaseholds is
amortized on the straight-line basis over the respective terms of
the leases.
All land in the People's Republic of China ("PRC") is owned by the
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.
1 Summary of Significant Accounting Policies (cont'd)
e Property, plant and equipment (cont'd)
Depreciation and amortization rates computed using the straight-line
method are as follows:
Classification Rate
Long-term leasehold buildings . . . . . . . . . 2%-4.5%
Freehold buildings. . . . . . . . . . . . . . . 3.3%-4%
Furniture and fixtures. . . . . . . . . . . . . 18%-25%
Machinery and equipment . . . . . . . . . . . . 9%-25%
Molds and tools . . . . . . . . . . . . . . . . 18%-25%
Motor vehicles. . . . . . . . . . . . . . . . . 18%-25%
Leasehold improvements. . . . . . . . . . . . . 18%-33%
During 1996, management reassessed the useful life of certain
plant and equipment assets and changed their estimated useful life
from four to five years effective January 1, 1996. As a result of
this change, the 1996 depreciation expense was $860,000 less than
it would have been had an estimated life of four years been used.
f Per share amounts
The per share amounts in the consolidated statements of income
have been computed based on the weighted average number of Common
Shares and common stock equivalents outstanding during each
period. Common stock equivalents include the number of shares that
would be issued from the exercise of in- the-money stock options
reduced by the assumed number of shares that could be purchased
from the proceeds based on the average market price of the
Company's Common Stock.
The weighted average number of shares outstanding for the years
ended December 31, 1996, 1995 and 1994 were 8,040,497, 8,018,252,
and 6,934,098, respectively. Common stock equivalents for the
years ended December 31, 1996, 1995 and 1994 were 101,634,
153,498, and 525,472 respectively. Fully diluted earnings per
share do not differ materially from the undiluted figures.
g Foreign currency translations
The financial statements have been stated in United States
dollars, the official currency 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 United States
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 United States
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 existing 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 in these cases are dealt with in the statement of income.
The financial statements of all subsidiaries with functional currencies
other than the United States dollar are translated in accordance with
Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation". With the exception of Namtai Electronic (Shenzhen)
Co. Ltd. ("NTES"), Zastron Plastic & Metal Products (Shenzhen) Ltd.
("Zastron") and Shenzhen Namtek Co. Ltd. ("Namtek"), which are
companies incorporated in the PRC, 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. Also with the exception of the PRC
companies, all exchange differences arising from translation of
subsidiaries' financial statements are dealt with as a separate
component of equity.
1 Summary of Significant Accounting Policies (cont'd)
g Foreign currency translations (cont'd)
As NTES, Zastron and Namtek act as production centers for the Company,
the Company controls their operations and the majority of their
transactions are made in Hong Kong dollars. Therefore, the Hong Kong
dollar has been determined to be the functional currency of NTES,
Zastron and Namtek. Accordingly, all monetary assets and liabilities
are translated at the rates of exchange ruling at the balance sheet
date, non-monetary assets and liabilities are translated at the
historical rate and all income and expense items are translated at the
average rates of exchange over the year and all translation
adjustments resulting from the conversion of NTES, Zastron and
Namtek's financial statements to Hong Kong dollars are taken to the
income statements. Exchange rates used to translate and remeasure
transactions and balances of NTES, Zastron and Namtek are the rates
quoted by the Bank of China.
h 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
People's Republic of China ("PRC"), the Company has reasonable grounds
to believe that income taxes paid in respect of any year would be
refunded after the profits earned in that year are reinvested in the
business. Accordingly, any PRC tax paid during the year is recorded as
an amount receivable at year end. Deferred income taxes are provided to
recognize the effect on the difference between the financial statement
and income tax bases of assets and liabilities.
i Staff retirement plan costs
The Company's contributions to the staff retirement plan (Note 6) are
charged to the income statements as incurred.
j Deferred Compensation Arrangement costs
For the years 1990 to 1995, the liability relating to the Deferred
Compensation Arrangement (Note 7) was provided ratably over the future
employment periods of the beneficiaries of the plan until their dates
of retirement or earlier departure from the Company. At December 31,
1995,the remaining balance was fully provided for. Consequently, at
December 31, 1996, no provision was taken.
k Cash and cash equivalents
Cash equivalents include certificates of deposit having a maturity date
of three months or less upon acquisition.
l Currency contracts
The Company enters into forward currency contracts in its management of
foreign currency exposures. Since the forward currency contracts are
not intended to hedge an identifiable foreign currency commitment,
generally accepted accounting principles require that the contracts are
marked to market with the net realized or unrealized gains or losses
recognized in other income. (Note 5).
m Long term investment
Long term investment is stated at the lower of cost and market value.
n 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. The amounts
charged against income were $949,941, $945,333 and $239,139 for the
years ended December 31, 1996, 1995 and 1994 respectively.
1 Summary of Significant Accounting Policies (cont'd)
o Stock options
Financial Accounting Standards Board ("FASB") Statement 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 Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", but with
additional financial statement disclosure. The Company plans to
continue to account for stock-based compensation arrangements under
APB Opinion No. 25 and provides additional disclosure to that effect
in Note 13 (b).
2 Financial Instruments
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of its cash equivalents, term deposits and trade
receivables.
The Company's 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 concentration 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. As a consequence, concentrations of credit risk are
limited. Letters of credit are the principal security obtained to support
lines of credit or negotiated contracts when the financial strength of a
customer is not considered sufficient.
All of the Company's significant financial instruments at December 31, 1996
are reported in current assets or current liabilities in the consolidated
balance sheet at carrying amounts which approximate their fair value.
From time to time, the Company hedges its currency exchange risk, which
primarily arises from materials purchased in currencies other than the United
States dollar, through the purchase and sale of forward exchange contracts.
Such contracts typically allow the Company to buy or sell currency at a fixed
price for up to one year, but the Company normally books forward six months.
At December 31, 1996, there was no open forward currency contract and at
December 31, 1995, the open forward contracts amounted to $60,000 at face
value.
3 Inventories
Inventories consist of (in thousands):
As at December 31,
1996 1995
---- ----
Finished goods . . . . . . . . . . . . . . . . . . $ 576 $ 1,927
Work-in-progress . . . . . . . . . . . . . . . . . 2,548 1,690
Raw materials. . . . . . . . . . . . . . . . . . . 7,387 6,808
------ ------
$10,511 $10,425
4 Long Term Investment
In December 1994, the Company purchased 14.04% or 477,370 of the outstanding
common shares of Deswell Investment Holdings Limited ("Deswell"), a supplier
of plastic parts to the Company, for a total consideration of $3,931,284. In
1995, Deswell changed its name to Deswell Industries, Inc. and completed its
initial public offering which reduced the Company's ownership to approximately
10.5% at December 31, 1995. In July 1996, the Company elected to exercise
warrants which increased its holdings by 12,000 shares to 489,370 or 10.6% of
the outstanding common shares of Deswell Industries, Inc.
In February 1997, the Company sold 225,000 shares of Deswell Industries Inc.
realizing a net gain of $2,564,500.
5 Other Income - Net
Other income - net consists of (in thousands):
As at December 31,
1996 1995 1994
---- ---- ----
Foreign exchange gains $ 20 $ 52 $ 68
Interest income 1,092 1,548 591
Bank charges (406) (490) (364)
Release of deferred credit (Note 1(c)) - - 594
Offering costs written off - (334) -
Full provision for Deferred Compensation
Arrangement (Note 7) - (560) -
Special bonus - (376) -
Miscellaneous income (expenses) 547 385 (128)
------ ------ ------
$1,253 $ 225 $ 761
6 Staff Retirement Plan
The Company maintains staff retirement plans (defined contribution pension
plans) which cover certain of its employees. The cost of the Company's
contributions amounted to $92,399, $80,545 and $67,034 for the years ended
December 31, 1996, 1995 and 1994 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 $500,000 for Mr. Koo and $300,000
for Mr. Murakami. A provision of $40,000 was made in each of the years ended
December 31, 1995 and 1994. At December 31, 1995, the balance of the deferred
compensation arrangement, which amounted to $560,000, was provided for. For
the year ended December 31, 1996, pursuant to an agreement between Mr. Koo
and the Company, an amount of $450,000 payable to Mr M.K. Koo was
transferred from the provision for compensation for loss of office and
applied against an amount receivable from him. (Note 10).
8 Income Taxes
Under the current British Virgin Islands law, the Company's income is not
subject to taxation. Subsidiaries, primarily operating in Hong Kong and the
PRC, are subject to income tax 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 16.5%
(1995: 16.5% and 1994: 16.5%) 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 16.5% (1995: 16.5%, 1994: 16.5%), 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 assets and
liabilities.
The basic corporate tax rate for Foreign Investment Enterprises ("FIE's") in
the PRC, such as NTES, Zastron and Namtek, is currently 33% (30% state tax and
3% local tax). However, because NTES, Zastron and Namtek are located in the
designated Special Economic Zone ("SEZ") of 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 Shenzhen SEZ are not
currently assessing any local tax. Since NTES, Zastron, and Namtek have
agreed to operate for a minimum of ten 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
FIE's such as NTES, 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 years in which a tax holiday is available, there is an
overall minimum tax rate of 10%. In 1990 and 1991, NTES qualified for a tax
holiday; tax was payable at the rate of 7.5% on the assessable profits of NTES
in 1992, 1993 and 1994, and 10% in 1995 and 1996. In 1992 and 1993, Zastron
qualified for a tax holiday; tax was payable at the rate of 7.5% on the
assessable profits of Zastron in 1994, 1995 and 1996. Namtek in 1996 was
in its first year of operation and qualified for a two year tax holiday.
8 Income Taxes (cont'd)
An FIE whose foreign investor directly reinvests its share of profits obtained
from that FIE 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. The
Company has gained reasonable assurance through previous experience that when
profits are reinvested, PRC taxes paid are refunded in full in the ensuing
year.
NTES qualified for such refunds of its 1993, 1994 and 1995 taxes as a result
of reinvesting its profits in those years. Zastron qualified for such refund
of its 1994 taxes as a result of reinvesting its profits in that year.
The tax refunds received were as follows:
Taxation Date
Company Year Paid Refunded Received
------- ---- ---- -------- --------
NTES 1993 $212,000 $212,000 Nov 1994
1994 $714,000 $714,000 Aug 1995
1995 $918,727 $918,727 Dec 1996
Zastron 1994 $ 68,000 $ 68,000 Aug 1995
1995 $ 30,967 - Refund awaited
The Company intends to reinvest profits earned in 1996 by NTES and Zastron
and accordingly no provision for PRC taxes was made in 1996.
The current and deferred components of the income tax (expense) benefit
appearing in the income statement are as follows (in thousands):
Year ended December 31,
1996 1995 1994
---- ---- ----
Current tax . . . . . $(158) $ 589 $(173)
Deferred tax .. . . . - - -
----- ----- -----
$(158) $ 589 $(173)
A reconciliation of the tax (expense) benefit to the amount computed by
applying the current tax rate to the income from continuing operations before
taxes in the consolidated statements of income is as follows (in thousands
except tax rate):
Year ended December 31,
1996 1995 1994
---- ---- ----
Hong Kong statutory tax rate 16.5% 16.5% 16.5%
Income tax expense at current
tax rate on income from
consolidated companies before
income taxes and minority interests $(1,580) $(1,787) $(1,353)
Tax (expense) benefit arising from
items which are not (allowable)
assessable for tax purposes:
Gain on write-off of deferred credit
which is not taxable under Hong Kong
tax law 0 0 98
Effect of difference between PRC and
Hong Kong tax applied to PRC
taxable income 1,449 1,659 873
Reversal of subsidiary's tax provision 0 314 0
Income tax refund 0 391 270
Other (27) 12 (61)
-------- ------- -------
$ (158) $ 589 $ (173)
8 Income Taxes (cont'd)
No income tax arose in the United States of America in any of the periods
presented.
In prior years, the purchase cost of patents and trademarks and certain
expenses incurred by a subsidiary, Nam Tai Supplies Ltd., were claimed as tax
deductible expenses. The Hong Kong Inland Revenue Department ("IRD") has
taken issue on the deductibility of these expenses and issued revised
assessments to recover taxes of $995,000. In January 1994, the IRD petitioned
the Hong Kong court to wind up the subsidiary for non-payment of assessed
taxes. A winding up order was made on March 9, 1994, and the Official
Receiver was appointed as liquidator. In 1995, the tax provision of $314,000
for this subsidiary was reversed as the subsidiary is in the process of
liquidation and is insolvent.
9 Investment in Subsidiaries
Percentage of
Ownership
Consolidated Country of Principal December 31,
Subsidiaries Incorporation Activity 1996 1995
------------ ------------- -------- ---- ----
Nam Tai Electronic &
Electrical Products Ltd. Hong Kong Trading 100% 100%
Nam Tai Electronics
(Canada) Ltd. Canada Services 100% 100%
Namtai Electronic (Shenzhen)
Co. Ltd. PRC Manufacturing 100% 100%
Zastron Plastic & Metal
Products (Shenzhen) Ltd. PRC Manufacturing 100% 100%
Shenzhen Namtek
Co. Ltd. PRC Software Development 100% -
In February 1995, NTEE invested $9,546,000 in NTES by reinvesting NTES's
1994 net income. This increased NTEE's total investment in NTES to
$24,490,000. In April 1996, NTEE invested a further $9,165,000 in NTES by
reinvesting NTES's 1995 net income. This increased NTEE's total investment
in NTES to $33,655,000.
At December 31, 1995, NTEE's investment in Zastron was $3,100,000 and Nam Tai
Electronics, Inc's investment in Nam Tai Electronics (Canada) was $256,000. At
December 31, 1996, NTEE's investment in Zastron and Namtek were $3,512,000 and
$225,000, respectively. Nam Tai Electronics, Inc.'s investment in Nam Tai
Electronics (Canada) Ltd. was $256,000.
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'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. However, the Company believes that such
restrictions will not have a material effect on the group's liquidity or cash
flows.
10 Related Party Transactions
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 Chairman of the Company, purchased the property for book
value of $2,620,000 being the higher of the market value and book value
of the property as required by the contract. At December 31, 1995
this amount was included in accounts receivable. In March 1996, Mr M.K.
Koo elected to apply $450,000 available from his compensation for loss
of office against the account receivable. The balance outstanding at
December 31, 1996 amounting to $2,120,000 is repayable by Mr. M.K. Koo
on or before December 31, 1997.
11 Commitments and Contingencies
a Pursuant to the August 17, 1992 land purchase and development agreement
between NTES and Baoan County City Development Foundation, NTES is
required to construct a multi-purpose business building of seven floors
or more in Baoan City, Shenzhen, PRC. The Company is looking for a
partner to develop, manage and finance the entire project. To date,
the Company has invested $488,000 to purchase the land and in
capitalized design fees. Subsequent to December 31, 1996, the
Company signed an agreement with Shenzhen Baoheng (Group) Co. Ltd.,
a Chinese company, which will be responsible for the design,
construction and marketing of this project.
b Lease commitments
At December 31, 1996, there were annual commitments under operating
leases which relate to land and buildings as follows (in thousands):
- 1997 . . . . . . . . . . . . . . . . . . . . .$ 891
- 1998 . . . . . . . . . . . . . . . . . . . . . 698
- 1999 . . . . . . . . . . . . . . . . . . . . . 469
- 2000 . . . . . . . . . . . . . . . . . . . . . 443
- 2001 and thereafter. . . . . . . . . . . . . . 3,174
-----
$ 5,675
c The Company has been advised that Tele-Art, Inc., a shareholder of the
Company, intends to pursue claims in a court in the British Virgin
Islands for damages allegedly suffered as a result of the rights
offering completed in 1993. Management believes that the claim 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
statements.
12 Banking Facilities
General banking facilities amounted to $49,200,000 at December 31, 1996,
(December 31, 1995 - $38,202,000), with interest charged based on the Hong
Kong prime rate for Hong Kong dollar transactions and banks' cost of funds
rate for transactions in other currencies (effectively 8.50% and 0.50%,
respectively at December 31, 1996).
The total amount of banking facilities utilized as at December 31, 1996 was
$7,629,000 (December 31, 1995 - $10,216,000).
The notes payable, which include trust receipts, shipping guarantees and
discounted bills, may not agree to utilized banking facilities due to a timing
difference between the Company receiving the goods and the bank issuing the
trust receipt to cover financing of the purchase. The Company recognizes the
outstanding letter of credit as a note payable when the goods are received,
even though the bank may not have issued the trust receipt. However, this
will not affect the total bank facility utilization, as an addition to trust
receipts will be offset by a reduction in the same amount of outstanding
letters of credit.
December 31,
1996 1995
---- ----
Outstanding letters of credit. . . . . . . . . . . . .$ 3,688 $ 7,724
Usance bills pending maturity. . . . . . . . . . . . . 619 2,159
Discounted bills . . . . . . . . . . . . . . . . . . . - -
Trust receipts and shipping guarantees . . . . . . . . 3,322 -
Short-term bank borrowings . . . . . . . . . . . . . . - 273
Forward exchange contracts . . . . . . . . . . . . . . - 60
----- ------
Total banking facilities utilized . . . . . . . . . . 7,629 10,216
Less:
Outstanding letters of credit. . . . . . . . . . . . (3,688) (7,724)
Short-term bank borrowings . . . . . . . . . . . . . - (273)
Forward Contracts. . . . . . . . . . . . . . . . . . - (60)
Plus:
Goods received but trust receipts not issued
by the bank. . . . . . . . . . . . . . . . . . . . 1,245 3,161
----- -----
Notes payable per balance sheets . . . . . . . . . . .$ 5,186 $ 5,320
Discounted bills normally have a term to maturity of 30 days. Trust receipts
normally have terms from 90 to 100 days. The interest rate for the above
facilities is normally prime plus 3/4% for all currencies.
In the third quarter of 1995, the Company's bankers agreed to release the
charges on the pledged assets and to provide the banking facilities with only
the corporate guarantee from Nam Tai Electronics, Inc., the parent company,
and its undertaking not to pledge any assets to any banks without the prior
consent of the Company's bankers. Throughout 1996, banking facilities bore
the corporate guarantee of Nam Tai Electronics, Inc.
13 Common Shares
a Authorized shares
In July 1994, the Board of Directors increased the number of authorized
Common Shares to 20,000,000. The par value of each Common Share is
$0.01.
b 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
of the Company at an exercise price of $5.35. The options expire in
September 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 $690,000 reflecting the excess
of the fair value of the underlying stock over the exercise price. In
December 1993 and January 1996, the option plan was amended and the
maximum number of shares to be issued pursuant to the exercise of
options granted was increased to 650,000 and 1,000,000 respectively.
A summary of stock option activity is as follows:
Number of Option Price
Options Per Share
------- ---------
Outstanding at December 31, 1993 300,000 $5.35
Exercised (9,000) $5.35
Granted 365,000 $11.00
Cancelled (40,750) $5.35 & $11.00
------
Outstanding at December 31, 1994 615,250 $5.35 & $11.00
Reissued 40,750 $11.00
Exercised (70,150) $5.35
Cancelled (25,000) $11.00
Reissued 10,000 $11.375
------
Outstanding at December 31, 1995 570,850 $5.35, $11.00
& 11.375
Exercised (47,550) $5.35 & $11.00
Granted 170,000 $10.50
Cancelled (156,000) $5.35 & $11.00
-------
Outstanding at December 31, 1996 537,300 $5.35, $10.50,
$11.00 & $11.375
Had compensation cost for 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 FASB No. 123, the Company's
net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
1995 1996
---- ----
Net Income As Reported 11,419 9,416
Pro forma 11,340 9,081
Earnings per share As Reported 1.40 1.16
Pro forma 1.39 1.12
The weighted-average fair value of options granted during the year was
$4.52 (1995 - $4.03), using the Black-Scholes option-pricing model based
on the following assumptions:
$11.00 $11.375 $10.50
Options Options Options
------- ------- -------
Risk-free interest rate 6.0% 5.4% 5.3%
Expected life 8/01/98 12/01/98 1/12/00
Expected volatility 44.0% 49.0% 48.0%
Expected dividends .030 .030 .030
c Share buy-back program
During 1996, the Company bought back 273,500 Common Shares of its
outstanding capital stock at an average price of $9.46 per share.
14 Business Segment Information
The Company operates principally in the consumer electronic products
industry. The following is a summary of sales, income from continuing
operations and assets by geographic area (in thousands):
Year ended December 31,
1996 1995 1994
---- ---- ----
Net sales from operations within
Hong Kong:
Unaffiliated customers $105,170 $ 119,417 $ 95,470
Related parties - - -
Intersegment sales - 353 -
------- ------- ------
105,170 119,770 95,470
People's Republic of China:
Unaffiliated customers 3,064 1,445 810
Intersegment sales 95,669 112,804 92,612
------- ------- ------
98,733 114,249 93,422
Canada:
Unaffiliated customers - 378 284
Intersegment eliminations (95,669) (113,157) (92,612)
------- -------- -------
Total net sales $108,234 $121,240 $ 96,564
Income (loss) from continuing operations
within:
- People's Republic of China 10,339 10,448 7,491
- Hong Kong 2,921 4,196 2,020
- Canada (3,844) (3,225) (1,412)
------- ------- ------
Net income $ 9,416 $ 11,419 $ 8,099
Identifiable assets by geographic
area:
- People's Republic of China 44,975 42,416 19,116
- Hong Kong 24,564 25,505 23,463
- Canada 18,852 11,360 23,708
------- ------- ------
Total assets $ 88,391 $ 79,281 $ 66,287
Intersegment sales arise from the transfer of finished goods between
subsidiaries operating in different areas. These sales are generally at
estimated market prices.
<CAPTION
Year ended December 31,
1996 1995 1994
---- ---- ----
Net sales to customers by geographic
area:
- North America $ 36,595 $ 36,730 $ 31,686
- Japan 30,483 41,532 23,547
- Hong Kong 19,404 20,544 21,855
- Europe 13,187 16,003 13,831
- Other 8,565 6,431 5,645
-------- -------- --------
Total net sales $108,234 $121,240 $ 96,564
The Company had sales to four major customers, each individually exceeding 10%
of total sales in 1996 as follows:
Customer
--------
A $ 41,569 $ 58,124 $ 46,032
B (through customer A) 17,395 21,805 12,600
C 24,138 16,022 9,421
D 14,642 15,962 18,573
-------- -------- --------
$ 97,744 $111,913 $ 86,626
Item 19. Financial Statements and Exhibits
(a) Financial Statements. See list under Item 18. of this Report.
(b) Exhibits. The following documents are filed as exhibits herewith,
unless, otherwise specified and are incorporated herein by this
reference:
Exhibit
Number Exhibit
2.1 Letter of Agreement dated May 15, 1996 making available credit
facilities with Kredietbank N.V. Hong Kong Branch.
2.2 Letter of Agreement dated June 5, 1996 offering credit facility
with Argentaria Banco Exterior De Espana.
2.3 Letter of Agreement dated June 11, 1996 revising existing
facilities with Credit Commercial De France.
2.4 Letter of Agreement dated August 5, 1996 renewing banking
facilities with The Hongkong and Shanghai Banking Corporation
Limited.
2.5 Letter of Agreement dated August 29, 1996 revising banking facilities
with The Sanwa Bank Limited.
2.6 Letter of Agreement dated September 18, 1996 making available
credit facilities with Banque Worms Hong Kong Branch.
2.7 Contract for Use of Land dated March 25, 1996 between NTSZ and
Shenzhen City Xinan Gu Su Estate Residents Committee extending the
lease on land situated at Zhuao, Gu Su Industrial Estate, Xinan,
Baoan from 30 years to 50 years.
2.8 Tenancy Agreement dated February 24th 1997 between NTE&E and Wide
Harvest Investment Limited for Suite Nos. 6B-9 on 15/F., Tower 1,
China Hong Kong City.
2.9 Contract of Purchase and Sale dated December 29, 1995 with Mr. Koo
regarding residential property in West Vancouver - Filed as Exhibit
2.8 to the Company's Form 20-F for the fiscal year ended December
31, 1995 and hereby incorporated by reference.
3.1 Diagram of the Company's operating subsidiaries. See page 4 of this
Report.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements
for filing on Form 20-F and has duly caused this annual report to be signed on
its behalf by the undersigned thereunto duly authorized.
NAM TAI ELECTRONICS, INC.
Date: March 31, 1997 By: /s/ M.K. Koo
____________________________________
M. K. Koo
Chairman of the Board
[PRICE WATERHOUSE LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the Registration
Statement on Form F-3 (the "Registration Statement") of Nam Tai Electronics,
Inc. (File No. 33-91553) of our report dated March 31, 1997 appearing in this
Annual Report on Form 20-F. We hereby further consent to the reference to us
under the heading "Experts" in the Prospectus included as part of the
Registration Statement.
Price Waterhouse
Certified Public Accountants
Hong Kong
March 31, 1997
[PRICE WATERHOUSE LETTERHEAD]
CONSENT OF PRICE WATERHOUSE
We hereby consent to the incorporation into the Registration Statement on Form
S-8 of Nam Tai Electronics, Inc. (File No. 33-73954) relating to 650,000 Common
Shares issuable upon exercise of options granted under the Nam Tai Electronics,
Inc. 1993 Stock Option Plan of our report dated March 31, 1997 relating to the
financial statements of Nam Tai Electronics, Inc. appearing in this Annual
Report on Form 20-F.
Price Waterhouse
Certified Public Accountants
Hong Kong
March 31, 1997