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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 December 31, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-16673
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NAM TAI ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
British Virgin Islands
(Jurisdiction of incorporation or organization)
Suite 4, 9/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
Common Share Purchase Warrants
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act: NONE
As of December 31, 2000, there were 10,213,840 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 [ ]
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Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17. [ ] Item 18. X
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TABLE OF CONTENTS
PART I
Item 1. Identity of Directors, Senior Management and Advisors - Not applicable.......................3
Item 2. Offer Statistics and Expected Timetable - Not applicable.....................................3
Item 3. Key Information..............................................................................3
Item 4. Information on the Company...................................................................11
Item 5. Operating and Financial Review and Prospects.................................................25
Item 6. Directors, Senior Management and Employees...................................................33
Item 7. Major Shareholders and Related Party Transactions............................................37
Item 8. Financial Information........................................................................38
Item 9. The Listing..................................................................................39
Item 10. Additional Information.......................................................................39
Item 11. Quantitative and Qualitative Disclosure about Market Risk....................................42
Item 12. Description of Securities Other than Equity Securities - Not applicable......................42
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies - Not applicable.............................42
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds -
Not applicable.............................................................................42
PART III
Item 15. Financial Statements - Not applicable........................................................43
Item 16. Financial Statements.........................................................................43
Item 17. Exhibits.....................................................................................70
SIGNATURES .................................................................................................71
Consent of Independent Accountant (to incorporation of their report on Financial Statements
into the Company's Registration Statement on Forms F-3 and S-8)................................................72
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 3. - Key Information.
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
and publishes its financial statements in United States dollars.
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PART I
Unless the context otherwise requires, all references in this annual report
to "Nam Tai", "we", "our", "us" and the "Company" refer to Nam Tai Electronics,
Inc. and its consolidated subsidiaries and their respective predecessors.
References to "dollars" or $ are to United States dollars.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
Our historical Consolidated Financial Statements are prepared in accordance
with accounting principles generally accepted in the United States ("GAAP") and
presented in United States dollars. The following selected income statement data
for the three years in the period ended December 31, 2000 and the balance sheet
data as of December 31, 2000 and 1999 are derived from our audited consolidated
financial statements and notes thereto included later in this Report. The
selected income statement data for the two years in the period ended December
31, 1997 and the balance sheet data as of December 31, 1998, 1997 and 1996 were
derived from our audited financial statements, which are not included in this
Report.
The information presented below is qualified by the more detailed
consolidated financial statements including related notes contained in Item 18
and should be read in conjunction with, such Consolidated Financial Statements,
related notes, and the discussion under "Item 5. - Operating and Financial
Review and Prospects" included later in this report. These operating results are
not necessarily indicative of results for any future period and results may
fluctuate significantly from year to year in the future.
SELECTED FINANCIAL INFORMATION
(In thousands of U.S. dollars except per share data)
Year ended December 31,
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Income Statement Data (1) 2000 1999 1998 1997 1996
- ------------------------ ---- ---- ---- ---- ----
Net sales $ 213,688 $ 145,054 $ 101,649 $ 132,854 $ 108,234
Gross margin 31,592 24,980 24,710 34,724 22,185
Income from Operations 10,457 8,291 8,328 17,467 8,533
Net income 24,001 11,798 3,529 30,839 9,416
Per share amounts
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Basic earnings per share (2) $ 2.63 $ 1.26 $ 0.34 $ 3.70 $ 1.17
Diluted earnings per share (3) $ 2.56 $ 1.25 $ 0.34 $ 3.68 $ 1.16
Dividend declared $ 1.36 $ 0.32 $ 0.28 $ 0.10 $ 0.03
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Year ended December 31,
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Balance Sheet Data (1) 2000 1999 1998 1997 1996
- ------------------ ---- ---- ---- ---- ----
Current assets $ 135,352 $ 94,436 $ 97,015 $ 133,022 $ 46,609
Property, plant and equipment - net 44,599 44,717 32,445 32,442 36,487
Total assets 208,370 158,747 147,228 167,788 88,391
Current liabilities 45,784 33,171 19,476 19,552 21,401
Non-current liabilities 34 8 56 - -
Shareholders' equity 162,364 125,568 127,696 148,236 66,990
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(1) Assets and liabilities are translated into United States dollars using the
appropriate rates of exchange at the balance sheet date. Income and
expenses are translated at the average exchange rate in effect during the
year.
(2) For purposes of calculating basic earnings per share, the weighted average
number of common shares outstanding for the years ended December 31, 2000,
1999, 1998, 1997, and 1996 were 9,114,175, 9,328,213, 10,316,510,
8,324,320, and 8,040,497 respectively.
(3) For purposes of calculating fully diluted earnings per share, the weighted
average number of common shares outstanding for the years ended December
31, 2000, 1999, 1998, 1997, and 1996, were 9,375,116, 9,416,780,
10,351,100, 8,391,290, and 8,142,131 respectively.
RISK FACTORS
The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in this document and
other documents filed with the Securities and Exchange Commission, in press
releases, in reports to shareholders, on the Company's website, and other
documents. The Private Securities Reform Act of 1995 contains a safe harbor for
forward-looking statements on which the Company relies in making such
disclosures. In connection with this "safe harbor" the Company is 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:
CUSTOMER CONCENTRATION
Historically, a substantial percentage of our sales have been to a small
number of customers. During the years ended December 31, 2000, 1999, and 1998,
sales to the Company's four largest customers, i.e., customers which accounted
for 10% or more of the Company's total sales during the year ended December 31,
2000, aggregated approximately 72.4%, 77.9%, and 76.2% respectively, of the
Company's total sales. See "-- Customers and Marketing -- Customers." The
Company's sales transactions to all its OEM customers are based on purchase
orders received by the Company from time to time. Except for these purchase
orders, the terms of which in a few cases are supplemented by basic agreements
dependent upon the receipt of purchase orders, the Company has no written
agreements with its OEM customers. The loss of any of its largest customers or a
substantial reduction in orders from them would have a material adverse effect
on the Company's business. There can be no assurance that Nam Tai will be able
to quickly replace expired, canceled or reduced orders with new business. See
"-- Risk Factors -- Potential Fluctuations in Operating Results."
DEPENDENCE ON ELECTRONICS INDUSTRY
Most 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 or competitors in particular, could have a material adverse
effect on the Company's results of operations. Nam Tai's success will depend to
a significant extent on the success achieved by its customers in developing and
marketing their products, some of which may be new and untested. If customers'
products become obsolete or fail to gain widespread commercial acceptance, the
Company's business may be materially adversely affected.
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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, but not limited to, the cancellation or postponement of orders,
the timing and amount of significant orders from the Company's principal
customers, customers' announcement and introduction of new products or new
generations of products, evolutions in the life cycles of customers' products,
the Company's timing of expenditures in anticipation of future orders,
effectiveness in managing manufacturing processes including, interruptions or
slowdowns in production as a result of technical difficulties with equipment,
and changes in cost and availability of components, mix of orders filled,
adverse effects to the Company's financial statements resulting from
acquisitions, local factors and events that may affect production volumes such
as local holidays and seasonality of customers' production requirements, and
changes or anticipated changes in economic conditions. 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, cancel 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 often affected by seasonality
during the second and third quarters in anticipation of the start of the school
year and Christmas buying season and in the first quarter resulting from both
the closing of the Company's factories in China for two weeks for the Chinese
New Year holidays and the general reduction in sales following the holiday
season. See Item 5. Operating and Financial Review and Prospects. The market
segments served by the Company are also subject to economic cycles and have in
the past experienced, and are likely in the future to experience, recession
periods. A recession period affecting the industry segments served by the
Company could have a material adverse effect on the Company'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.
POLITICAL, LEGAL, ECONOMIC AND OTHER UNCERTAINTIES OF OPERATIONS IN CHINA
AND HONG KONG
Internal Political and Other Risks. The Company's manufacturing facilities
are located in China. As a result, the Company's operations and assets are
subject to significant political, economic, taxation, 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 and enforcement thereof, confiscatory or increased taxation,
restrictions on imports and sources of supply, import duties, corruption,
currency revaluations or the expropriation of private enterprise could
materially and adversely affect the Company. Over the past several years, the
Chinese government has pursued economic reform policies including the
encouragement of private economic activity and greater economic
decentralization. There can be no assurance that the Chinese government will
continue to pursue such policies, that such policies will be successful if
pursued, that such policies will not be significantly altered from time to time
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. Following the Chinese government's program of privatizing many state
owned enterprises, the Chinese government has attempted to augment its revenues
through increased tax collection. Continued efforts to increase tax revenues
could result in increased taxation expenses being incurred by the Company.
Economic development may be limited as well by the imposition of austerity
measures intended to reduce inflation, increase taxes, or reform money losing
state-owned enterprises, the inadequate development of infrastructure and the
potential unavailability of adequate power, water supplies, transportation,
communications, raw materials and parts or the deterioration of the general
political, economic or social environment in China, any of which could have a
material adverse effect on the Company's business. 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
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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. Most of the Company's
products are manufactured exclusively at its complex located in Baoan County,
Shenzhen, China. The Company does not own the land underlying its factory
complex. It occupies the site under agreements with the local Chinese
government. In the case of its original facility, the lease agreement covers an
aggregate of approximately 150,000 square feet of factory space and expires in
August 2007. In the case of the newer facility, including the current 138,000
square foot expansion, 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. Moreover, fire fighting and disaster relief or assistance in
China is primitive by Western standards. Material damage to, or the loss of, the
Company's factory complex due to fire, severe weather, flood, or other acts of
God or cause may not be adequately covered by proceeds of its insurance coverage
and could have a material adverse effect on the Company's financial condition,
business and prospects. In addition, any interruptions to the business caused by
such disasters would have a material adverse effect on the Company's financial
condition, business and prospects.
Possible Changes and Uncertainties in Economic Policies. As part of its
economic reform, China has designated certain areas, including Shenzhen where
the Nam Tai manufacturing complex is located, as Special Economic Zones. Foreign
enterprises in these areas benefit from greater economic autonomy and more
favorable tax treatment than enterprises in other parts of China. 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, like
most developing countries, is inherently risky. Corruption, extortion, bribery,
pay-offs, theft, and other fraudulent practices may be more common in developing
countries. The Company may suffer losses resulting from such practices.
Uncertainty and Possible Changes in China Tax Laws or their Interpretation.
As a result of locating in a Special Economic Zone of China, the Company enjoys
favorable tax treatment. See Note 8 of Notes to Consolidated Financial
Statements included elsewhere herein for information of income taxes applicable
to the Company and the effect of tax holidays and tax concessions that Company
has received for the years ended December 31, 2000, 1999 and 1998. Because of
this favorable tax treatment and pursuant to the provisions of applicable
Chinese law, the Company has received substantial refunds of income taxes paid
over the years on its operations in China and management believes that under
existing tax laws Nam Tai will continue to qualify for favorable tax treatment
in the future, particularly if Nam Tai reinvests profits attributable to its
Chinese operations in its Chinese subsidiaries. However, the Chinese tax system
is subject to substantial uncertainties including both the interpretation and
enforcement. Moreover, following the Chinese government's program of privatizing
many state owned enterprises, the Chinese government has attempted to augment
its revenues through heightened tax collection efforts. For the 1996, 1997, and
1998 tax years Nam Tai did not receive a 100% tax refund on taxes paid by its
principal Chinese subsidiary because the large intercompany receivable between
that subsidiary and a Hong Kong subsidiary was not considered by the tax
authorities to be a reinvestment of profits. Continued efforts by the Chinese
government to increase tax revenues could result in other decisions or
interpretations of the tax laws by the taxing authorities which are unfavorable
to Nam Tai and which increase its future tax liabilities, or deny expected
refunds. There can be no assurance that changes in Chinese tax laws or their
interpretation or application will not subject the Company to additional Chinese
taxation in the future.
MFN Status. China currently enjoys most favored nation ("MFN") trade
status, which provides China with the trading privileges generally available to
trading partners of the United States. In 2000, Congress voted to make China's
trade status permanent when it formally entered the World Trade Organization.
However, Congress may again consider China's trade status in 2001 and thereafter
as a result of the delay in China's entry into WTO. In the past, various
interest groups have urged that the United States not renew MFN for China and
may do so again before China's entry in the WTO. Even after China joins the WTO,
controversies between the United States and China may arise in the future that
threaten the status quo involving trade between the United States and China.
These controversies could adversely affect our business, by among other things,
causing our products in the United States to become more expensive, which could
result in a reduction in the demand for our products by customers in the United
States. Trade friction between the United
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States and China, whether or not actually affecting our business, could also
adversely affect the prevailing market price of our common shares and warrants.
Southeast Asia Economic Problems. As result of the Asian economic crisis a
few years ago, several countries in Southeast Asia have experienced a
significant devaluation of their currencies and decline in the value of their
capital markets. Some analysts have predicted growth declines in 2001 for
several Asian countries and currency declines have continued recently in
Thailand, Taiwan, South Korea and Singapore. The decline in the currencies in
these Southeast Asian countries could render our products less competitive if
competitors located in these countries are able to manufacture competitive
products at a lower effective cost.
Relations Between China and Taiwan. Relations between China and Taiwan have
been unresolved since Taiwan was established in 1949. Although not directly a
threat to Nam Tai, peaceful and normal relations between China and its neighbors
reduces the potential for events that could have an adverse impact on the
Company's business.
Operations in Hong Kong. The Company's executive and sales offices, and
several of its customers and suppliers are located in Hong Kong. The United
Kingdom transferred sovereignty over Hong Kong to China effective July 1, 1997.
There can be no assurance as to the continued stability of political, economic
or commercial conditions in Hong Kong, and any instability could have an adverse
impact on the Company's business.
The Hong Kong dollar and the United States dollar have been fixed at
approximately 7.80 Hong Kong dollars to U.S.$1.00 since 1983. Although the
Chinese government has expressed its intention to maintain the stability of the
Hong Kong currency, there can be no assurance that the system of a fixed
exchange rate will be maintained at this rate or at all. Any change, or even
expectations of a change, will increase the currency risks for the Company. See
"Exchange Rate Fluctuations."
EXCHANGE RATE FLUCTUATIONS
The Company sells most of its products in United States dollars and pays
expenses in United States dollars, Japanese yen, Hong Kong dollars, and Chinese
renminbi. The Company is subject to a variety of risks associated with changes
among the relative value of these currencies, but management believes the most
significant exchange risk results from material purchases made in Japanese yen.
Approximately 14%, 15%, and 18% of Nam Tai's material costs have been in yen
during the years ended December 31, 2000, 1999, and 1998. Sales made in yen
accounted for less than 4% of sales for each of the last three years. The net
currency exposure has decreased marginally in 2000 as a lower percentage of
material purchases were made in yen.
Based on oral agreements with its customers which are customary in the
industry, the Company believes its customers will accept an increase in the
selling price of manufactured products if the exchange 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.
The refusal of a large customer to honor these oral agreements in the event of a
severe adverse fluctuation of the Japanese yen would materially and adversely
affect the Company's operations. Additionally, there may be a considerable time
lag between the time of the fluctuation and the adjustment of product prices.
Approximately 12.9% of the Company's expenses were in Chinese renminbi in
2000. Approximately 3.7% and 21.5%, respectively, of the Company's revenues and
expenses were in Hong Kong dollars during 2000. An appreciation of the renminbi
or Hong Kong dollar against the U.S. dollar would increase the expenses of the
Company when translated into U.S. dollars and could adversely affect profit
margins. A devaluation in the renminbi or Hong Kong dollar would decrease
expenses. Although the Company expects that it may initially benefit from such
devaluations through their effect of reducing expenses when translated into U.S.
dollars, such benefits could be outweighed if it causes a destabilizing downturn
in economy of China or Hong Kong, creates serious domestic problems in China,
increases borrowing costs, or creates other problems adversely affecting the
Company's business.
The Company's financial results have been affected this year and in the
past by currency fluctuations, resulting in total foreign exchange
gains/(losses) of approximately $51,000 in 2000, ($413,000) in 1999, and
$394,000 in 1998.
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From time to time, the Company attempts to hedge its currency exchange
risk. During 2000, 1999 and 1998, the Company recorded charges of $304,000,
$566,000 and $840,000 on the write-off of option premiums purchased as a hedge
against the appreciation of the Japanese yen and the decline of the Hong Kong
dollar respectively. 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.
COMPETITION
General competition in the contract electronic manufacturing industry is
intense characterized by price erosion, rapid technological change, and
competition from major U.S. and international companies. This intense
competition could result in pricing pressures, lower sales, reduced margins, and
lower market share. Over the last several years our profit margins have declined
substantially, from 24.3% for 1998, to 17.2% for 1999 and to 14.8% for 2000. The
primary reasons for this decline has been our strategy to enter a less
competitive market place for more advanced subassemblies and components which is
more capital intensive and has a more complex manufacturing processes. This
strategy has reduced relative sales of higher margin finished goods such as
calculators, electronic organizers, and linguistic products. In addition, there
has been a lowering of unit prices for finished goods because of the
increasingly competitive environment. If we cannot increase sales of our lower
margin products, or if we are forced to continue to lower our prices, our net
sales and gross margins will decline. If we cannot stem the decline in our gross
margins, our financial position may be harmed and our stock price may decrease.
The Company has four competitors in the manufacture of its traditional
product lines of calculators, personal organizers and linguistic products -
Kinpo Electronics, Inc. (formerly Cal-Comp Electronics, Inc.), Inventec Co.
Ltd., Asustek and Compal. There are numerous competitors in the
telecommunication, subassemblies and components product lines. In addition, the
Company competes with the in-house manufacturing capabilities of current and
potential customers who evaluate Nam Tai's capabilities against the merit of
manufacturing products internally. Many of Nam Tai's competitors have greater
financial, technical, marketing, manufacturing, vertical integration, and
personnel resources and there can be no assurance that Nam Tai will continue to
compete successfully with these organizations.
SHORTAGES OF COMPONENTS
A substantial majority of our net sales are derived from turnkey
manufacturing in which we are responsible for purchasing components used in
manufacturing our customers products. We generally do not have long-term
agreements with suppliers of components. This typically results in our bearing
the risk of component price increases because we may be unable to procure the
required materials at a price level necessary to generate anticipated margins
from our agreements with our customers. Accordingly, component price changes
could seriously harm our operating results.
At various times, there have been shortages of some of the electronic
components that we use, and suppliers of some components have lacked sufficient
capacity to meet the demand for these components. In some cases, supply
shortages and delays in deliveries of particular components resulted in
curtailed production, or delays in production, of assemblies using that
component, which contributed to an increase in our inventory levels and
reduction in our sales margins. We expect that shortages and delays in
deliveries of some components will continue. If we are unable to obtain
sufficient components on a timely basis, we may experience manufacturing and
shipping delays, which could harm our relationships with current or prospective
customers and reduce our sales. There can be no assurance that any future
allocation or shortages would not have a material adverse effect on the
Company's results of operations.
ENVIRONMENTAL REGULATIONS
Nam Tai's operations create small amounts of environmentally sensitive
waste that may increase in the future depending on changes in our operations.
The general issue of the disposal of hazardous waste has received increasing
focus from national, state, local, and international governments and agencies
and has been subject to increasing regulation. The Company's results of
operations could be adversely affected if Nam Tai were required to increase
expenditures to comply with new environmental regulations affecting its
operations.
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DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES
Nam Tai operates in rapidly changing industries. Technological advances,
the introduction of new products, and new design and manufacturing techniques
could adversely affect our business unless we are able to adapt to the changing
conditions. As a result, we will be required to expend substantial funds for and
commit significant resources to engage additional engineering and other
technical personnel; and purchase advanced design, production, and test
equipment.
Our future operating results will depend to a significant extent on our
ability to continue to provide new product solutions that compare favorably on
the basis of time to introduction, cost, and performance with the design and
manufacturing capabilities of OEMs and competitive third-party suppliers. Our
success in attracting new customers and developing new business depends on
various factors, including the following:
o utilization of advances in technology;
o innovative development of new solutions for customer products;
o efficient and cost-effective services; and
o timely completion of the design and manufacture of new product
solutions.
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. 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 prove successful. There is a learning curve that must
be overcome when any new technologies are introduced. Failure to integrate the
new technology on a timely basis may occur resulting in reduced production, lost
sales, lower gross margins and losses.
RISKS ASSOCIATED WITH POTENTIAL FUTURE ACQUISITIONS
An important element of the Company's strategy is to acquire companies that
would complement the Company's existing products and services, augment its
market coverage and sales ability or enhance its technological capabilities.
Accordingly, the Company has acquired businesses in the past and may acquire
additional businesses, products or technologies in the future. Acquisitions by
the Company could result in charges similar to those incurred in connection with
the 1998 acquisition of Albatronics (Far East) Company Limited ("Albatronics"),
and the October 2000 acquisition of the JIC Group of Companies which are
discussed in Item 5 "Operating and Financial Review and Prospects" potentially
dilutive issuances of equity securities; the incurrence of debt and contingent
liabilities; and amortization expenses related to goodwill and other intangible
assets, any of which could materially adversely affect the Company's business,
financial condition and results of operations and/or the price of the Company's
Common Shares. Acquisitions entail numerous risks, including the assimilation of
the acquired operations, technologies and products, diversion of management's
attention to other business concerns, risks of entering markets in which the
Company has no or limited prior experience, the potential loss of key employees
of acquired organizations, increased debt loads, and an increased risk of
litigation. Management has limited experience in assimilating or managing
acquired organizations. There can be no assurance as to the ability of the
Company to successfully integrate the products, technologies or personnel of any
acquired business now or in the future, and the failure of the Company to do so
could have a material adverse affect on the Company's business, financial
condition and results of operations.
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. It may be difficult for investors
to enforce judgments against the Company obtained in the United States based on
actions predicated upon civil liability provisions of Federal securities laws.
In addition, all of the Company's officers and most 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
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has been advised by its Hong Kong counsel and its British Virgin Islands counsel
that there is substantial doubt as to the enforceability against the Company or
any of its directors 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.
Pursuant to the Company's Memorandum and Articles of Association and pursuant to
the laws of the British Virgin Islands, the Board of Directors may amend the
Company's Memorandum and Articles of Association without shareholder approval.
This includes, but is not limited to, amendments increasing or reducing the
authorized capital stock of the Company and increasing or reducing the par value
of its shares. In addition, the Board of Directors may approve certain
fundamental corporate transactions, including reorganizations, certain mergers
or consolidations and the sale or transfer of assets, without shareholder
approval. The ability of the Company to amend its Memorandum and Articles of
Association without shareholder approval could have the effect of delaying,
deterring or preventing a change in control of Nam Tai without any further
action by the shareholders including, but not limited to, a tender offer to
purchase the Common Shares at a premium above current market prices.
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.
VOLATILITY OF MARKET PRICE OF COMPANY'S SECURITIES
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, news issued from affiliated
companies, customers, suppliers or other publicly traded companies, general
market trends both domestically and internationally, currency movements and
interest rate fluctuations. These same factors can be expected to affect the
market price of the Company's Warrants that were publicly issued in late
November 1997. Certain events, such as the issuance of Common Shares upon the
exercise of the Warrants or other outstanding stock options or warrants of the
Company could also adversely affect the prevailing market prices of the
Company's securities.
EXEMPTIONS UNDER THE EXCHANGE ACT AS A FOREIGN PRIVATE ISSUER
The Company is a foreign private issuer within the meaning of rules
promulgated under the Exchange Act. As such, and though its Common Shares and
Warrants 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 with respect to a security registered under the
Exchange Act; and the sections of the Exchange Act requiring insiders to file
public reports of their stock ownership and trading activities and establishing
insider liability for profits realized from any "short-swing" trading
transaction (i.e., a purchase and sale, or sale and purchase, of the issuer's
equity securities within six months or less). Because of the exemptions under
the Exchange Act applicable to foreign private issuers, shareholders of the
Company are not afforded the same protections or information generally available
to investors in public companies organized in the United States.
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ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF NAM TAI
Nam Tai Electronics, Inc. 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 the Hong Kong Special
Administrative Region ("Hong Kong"), of the People's Republic of China
("China"). Its address is Suite 4, 9/F., Tower 1, China Hong Kong City, 33
Canton Road, TST, Kowloon, Hong Kong and its telephone number is (852)
2341-0273.
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 0.225% 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.
Nam Tai's predecessor company was founded in 1975 by M. K. Koo, Nam Tai's
Senior Executive Officer, Corporate Strategy Finance and Administration as an
electronics trading company. The company later shifted its focus to electronics
manufacturing. In order to capitalize on opportunities offered by the newly
opened "Special Economic Zones" in southern China Nam Tai moved its
manufacturing facilities to China in 1980 and in 1987 relocated to Shenzhen,
China to take advantage of lower overhead costs, lower material costs and
competitive labor rates, hence positioning itself as a low-cost, high-volume,
high-quality electronics manufacturer.
In 1978, Mr. Koo began recruiting operating executives from the Japanese
electronics industry, a move that laid the foundation for Nam Tai's future
success. These executives brought years of experience in Japanese manufacturing
methods, which emphasize quality, precision, and efficiency in manufacturing.
Senior management currently includes a team of Japanese professionals who
provide technical expertise and work closely with both the Company's Japanese
component suppliers and customers.
For a number of years, Nam Tai specialized in manufacturing large-volume,
hand-held digital consumer electronics and established a leading position in
electronic calculators and handheld organizers for OEMs such as Texas
Instruments Incorporated and Sharp Corporation. Over the years, Nam Tai has
developed into a turnkey electronic manufacturing services provider and
broadened its product mix to include a range of digital products for business
and personal use, as well as key components and subassemblies for advanced
telecommunications products. In August 1999, the Company established Nam Tai
Telecom (Hong Kong) Co. Ltd. to target the rapidly expanding market for
telecommunications end products including 900 MHz cordless phones and family
radio systems.
DEVELOPMENTS IN 2000
On January 13, 2000 Nam Tai and Toshiba Battery Co., Ltd. completed a joint
investment agreement for the establishment of BPC (Shenzhen) Co., Ltd., ("BPC")
a wholly foreign owned enterprise in Shenzhen, China. Nam Tai owns a 86.7%
interest in BPC, investing $1.3 million in cash for that interest. BPC was
established in March 2000 and Nam Tai has located BPC manufacturing operations
within Nam Tai's existing manufacturing complex and it is now manufacturing and,
through Toshiba, selling rechargeable lithium ion battery packs - a key
component required for cellular phones.
In February 2000, Nam Tai began selling its 20% interest in Group Sense
(International) Ltd. ("Group Sense"). For its interest, Nam Tai received an
aggregate of $28,089,000 in cash, resulting in a gain on the sale of
$10,781,000.
In September 2000 Nam Tai acquired a 5% indirect shareholding in both TCL
Mobile Communication (HK) Co., Ltd. and Huizhou TCL Mobile Communication Co.,
Ltd. through the acquisition of 25% of the outstanding shares of Mate Fair Group
Limited, an investment holding company owning a 20% shareholding interest in the
communications companies. These companies are engaged in manufacturing,
distributing and trading of digital mobile phones and accessories in China and
overseas markets and are licensed to manufacture cellular phones using the
Global System for Mobile Communications, or GSM, in China. GSM is an open,
non-proprietary system that permits wireless telephone users international
roaming capability and allows seamless and same standardized same number
contactability in more than 150 countries.
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In September 2000, Nam Tai purchased 500,000 common shares in Deswell
Industries Inc. ("Deswell") representing approximately 9% of the outstanding
shares of Deswell at the time of the purchase. Deswell is an independent
manufacturer of injection-molded plastic parts and components, electronic
products and subassemblies and metallic molds and accessory parts for original
equipment manufacturers, or OEMs, and contract manufacturers. Like Nam Tai,
Deswell's manufacturing facilities are located in China. Deswell's common shares
are traded on The Nasdaq National Market under the symbol "DSWL."
In October 2000, Nam Tai acquired all of the outstanding shares of the
J.I.C. Group of companies ("JIC"). JIC is engaged in the manufacture and
marketing of transformers and liquid crystal display ("LCD") panels, a key
component for a variety of consumer electronic products. Of the purchase price
of $32.8 million, Nam Tai paid $11.0 million in cash and issued 1.16 million of
its common shares. Nam Tai expects the acquisition of JIC to help alleviate Nam
Tai's LCD supply concerns and permit Nam Tai to expand its chip on glass LCD
module business in the future. The founders and senior management of JIC have
each signed a three-year service agreement with Nam Tai and have agreed to a
two-year lock up agreement on the shares issued by Nam Tai for this acquisition.
An important element of the Company's strategy is to acquire companies that
would complement the Company's existing products and services, augment its
market coverage and sales ability or enhance its technological capabilities.
Accordingly, the Company may acquire additional businesses, products or
technologies in the future.
CAPITAL EXPENDITURES
Principal capital expenditures and divestitures over the last three years
include the following:
2000 1999 1998
---- ---- ----
Property, plant and equipment (net) $ 3,579,000 $ 17,888,000 $ 4,699,000
Investment in subsidiaries and affiliated companies 36,319,000 951,000 26,259,000
Disposition of affiliated companies and investments (28,089,000) - (2,132,000)
Principal capital expenditures currently in progress consist of amounts
budgeted at approximately $25 million. This includes $10 million for the
purchase of new production equipment and $15 million for the construction of a
five-story factory building within the Company's existing manufacturing complex
to manufacture electronic products. The new building has been designed for
approximately 138,000 square feet, including an additional clean room to house
the Company's advanced chip on glass and chip on board equipment, room for
additional surface mount technology production lines, and office space for the
research and development department. Completion of construction is expected
before the end of 2001 with normal operations commencing from March 2002. The
$15 million budget for the new factory includes approximately $8 million for the
building and $7 million for the purchase and installation of associated
furniture, fixture and equipment.
BUSINESS OVERVIEW
Nam Tai provides design and manufacturing services OEMs of
telecommunication and consumer electronic products and components. Nam Tai's
largest customers include Texas Instruments Incorporated, Epson Precision (HK)
Ltd, Sharp Corporation and Seiko Instruments Inc. The Company's principal design
and manufacturing operations are based in Shenzhen, China, approximately 30
miles from Hong Kong. Products manufactured by Nam Tai include,
telecommunication products, palm-sized PC's, personal digital assistants,
electronic dictionaries, calculators and smart card readers. It also
manufactures electronic components and subassemblies including LCD panels,
transformers, and LCD modules used in the manufacture of cellular phones and
various other electronic products including, copiers, fax machines, electronic
toys, and microwave ovens. In 2000, Nam Tai began manufacturing lithium ion and
nickel metal hydride rechargeable battery packs that are used in cellular phones
as part of a joint venture investment with Toshiba.
Nam Tai assists OEMs in the design and development of products and
furnishes full turnkey manufacturing services to its OEM customers utilizing
advanced processes such as chip on glass ("COG"), chip on board ("COB"),
multichip modulators ("MCM"), surface mount technology ("SMT"), ball grid array
("BGA"), tape automated bonding ("TAB"), outer lead bonding ("OLB") and
anisotropic conductive film ("ACF") heat seal technologies. The Company provides
hardware and software design, plastic molding, component purchasing, assembly
into finished products or electronic subassemblies, post-assembly testing and
shipping. The Company uses radio frequency ("RF") and digitally
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enhanced cordless telephone ("DECT") technologies in the production of various
telecommunication products. The Company also provides original design
manufacturing ("ODM") whereby it develops and designs proprietary products,
which are sold by OEM customers. Nam Tai also provides OEMs with silk screening
services for plastic parts, polyvinyl chloride ("PVC") products and metal parts.
The location of Nam Tai's facilities in Shenzhen, about 30 miles from Hong
Kong, provides the Company with access to Hong Kong's infrastructure of
communication and banking. This also facilitates transportation of the Company's
products out of China through the port of Hong Kong. The Company emphasizes high
responsiveness to the needs of OEM customers through the development and volume
production of increasingly sophisticated and specialized products. The Company
seeks to build long-term relationships with its customers through high quality
standards (supported by ISO 9001 Certification), competitive pricing, strong
research and development support, advanced assembly processes and high volume
manufacturing, and with key suppliers through volume purchasing and reliable
forecasting of component purchases. The Company believes that the potential for
increased manufacturing outsourcing by Japanese and U.S. OEMs in China is
substantial and that it is in a position to take advantage of this because of
its available production capacity and experience. Management believes Nam Tai's
record of providing timely delivery in volume of high-quality, high technology,
low-cost products builds close customer relationships and positions the Company
to receive orders for more complex products. As the Company grows, management
will seek to maintain a low cost structure, reduce overhead where possible and
continuously strive to improve its manufacturing quality and processes.
ELECTRONIC MANUFACTURING SERVICES INDUSTRY OVERVIEW
During the 1970s and 1980s, global electronics OEMs used outsourcing
companies to provide low value-added electronic component assembly. Since then,
electronic manufacturing service, or EMS, companies have grown into turnkey
providers with a full spectrum of offerings including design and engineering
support, supply chain management, end-order fulfillment, and after-sales
services. According to Technology Forecasters, the global electronics
manufacturing and related services industry is expected to grow at a compounded
annual growth rate of 27%, from $78 billion in revenues in 1999, to $260 billion
in 2004.
GROWTH IN KEY END-MARKETS
EMS providers' growth is directly related to the growth rates of their
customers' end-markets. Nam Tai has targeted its products toward the cellular
phone handset and personal organizer end-markets. According to Ovum Ltd.
estimates, the worldwide cellular phone handset market is expected to grow at a
24% compound average growth rate from 330 million units in 2000 to 788 million
units in 2004, with handset revenues increasing from $50.2 billion to $122.0
billion in the same period. Growth in handset sales is driven by new subscriber
growth and increasingly by handset replacement. In mature markets such as Japan,
Italy, and Scandinavia, the average life of a handset has dropped to just over
one year. Worldwide, replacement handsets accounted for nearly 40% of handset
sales in 1999, and are nearing 50% in 2000.
According to International Data Corp., the worldwide handheld personal
organizer market is forecasted to grow from 7.1 million units in 2000 to 19.1
million units in 2004, with revenues increasing from $3.1 billion to $6.7
billion, respectively. Growth in handheld personal organizer sales will be
driven by the integration of various applications such as telephony, messaging,
browsers, and Personal Information Managers (PIMs) into handheld devices.
INCREASED UTILIZATION OF EMS COMPANIES
In recent years, OEMs have increasingly looked to outsource a higher
percentage of their manufacturing-related functions to third parties in order to
focus on their core competencies. This trend has been driven by competitive
pressures facing OEMs, which include shortened product life cycles, global
competition, high quality expectations combined with increasingly complex
technologies, and constant pressure on profits and pricing. These competitive
pressures have forced OEMs to maximize efficient asset utilization, cost
reduction, flexibility, rapid time-to-market and rapid time-to-volume, driving
the outsourcing trend. Established OEMs are increasingly outsourcing a
broadening array of complex design and manufacturing services to EMS providers.
In addition, emerging companies typically maintain little or no internal
manufacturing capability, relying instead on the manufacturing resources of
sophisticated EMS providers.
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Outsourcing has led to growth among EMS companies, which are increasing
their percentage of system built through stronger supplier relationships with
OEMs or by acquiring manufacturing assets divested by OEMs. According to
Technology Forecasters, the expansion of the market for EMS is evident in the
rise of outsourcing as a percentage of OEMs' cost of goods sold, which has
increased from approximately 9% in 1994 to 11% in 1999 and is projected to reach
26% by 2004.
Most EMS companies are just now beginning to gain business from top
international OEMs. However, the future potential here is significant; as
European, South American, and Asian companies move to outsourcing, growth could
be substantial. In particular, according to The Worldwide Electronics Assembly
Market, it is estimated that the electronics assembly market in Japan was worth
$124.9 billion in 2000, or 18% of the world market. The Japanese electronics
industry is at the very early stages of disintegrating their business models,
representing an enormous opportunity for the EMS industry.
PRODUCTS
The Company operates principally in the consumer electronic product segment
of the electronics manufacturing services industry. The following table sets
forth the percentage of net sales of each of the Company's product lines for the
years ended December 31, 2000, 1999, and 1998.
Year ended December 31,
---------------------------
Product Line 2000 1999 1998
- ------------------------------------------------- --------- -------- --------
Subassemblies and components 45% 34% 24%
Electronic calculators 29 35 60
Personal digital assistants and linguistic products 17 23 15
Telecommunications 7 6 -
Other products and services 2 2 1
--------- -------- --------
100% 100% 100%
========= ======== ========
Subassemblies and Components
- ----------------------------
Nam Tai manufactures and sells the following subassemblies and components:
o Liquid crystal display, or LCD, modules to display information as part
of such products as cellular telephones, telephone systems, copiers
and facsimile machines;
o Control panel modules for incorporation into microwave ovens and
copier machines;
o Large scale integrated circuits, or LSIs bonded on printed circuit
boards, or PCBs, which are incorporated into such products as
telecommunication products, electronic toys and games;
o Lithium ion and nickel metal hydride rechargeable battery packs for
use in cellular phones;
o LCD panels; and
o Transformers
Battery pack production and sales commenced in June of 2000 with the
majority of the sales occurring in the fourth quarter of 2000. Sales of LCD
panels and transformers are included from October 2000 with the acquisition of
the JIC Group of Companies. For 2000, sales of battery packs, LCD panels, and
transformers accounted for 3%, 3%, and 2% respectively of total sales. It is
expected that all three products will account for a larger percentage of total
sales in year 2001.
Electronic Calculators
- ----------------------
The Company manufactures a wide range of electronic calculators that
include basic function calculators, desktop display style, scientific, and
advanced graphic calculators.
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Personal Digital Assistants and Linguistic Products
- ---------------------------------------------------
The Company produces various types of digital management devices that
include pocket personal computer, or PPCs, personal digital assistants, or PDAs,
electronic organizers, and linguistic products. PPCs are pre-installed with a
Chinese version of Microsoft's windows CE software with pocket Inbox and pocket
Word for email and word processor functions and input by keyboard in display or
handwriting recognition. Electronic organizers provides practical features
particularly contact directories, scheduler, clock, memo pad, calculator, and in
PDA's more advance features like email, to do list, financial management, games,
sketches, and extension slots for other accessories. The linguistic products
manufactured by Nam Tai include dictionary, spell checkers, and language
translators, including some models with voice functions.
Telecommunication Products
- --------------------------
The Company produces 900 MHz cordless telephones and family radio systems
("FRS") from its existing manufacturing facility in Shenzhen, China. Future
products to be developed over the next two years may include digitally enhanced
cordless telephones, 2.4 GHz high frequency telecommunication products, and PDA
phones.
Other Products and Services
- ---------------------------
Other products and services provided by Nam Tai include:
Software Development Services. Through Namtek, the Company offers customers
software development services principally for the design of personal organizers
and electronic dictionary products.
Silk Screening. Through Zastron, the Company provides manufacturing and
silk screening to customers for plastic parts, PVC products and metal parts.
This service is also supplied to other firms for incorporation into their
finished products.
IC Card Balance Readers. IC card balance readers are hand-held devices used
to check information contained on the IC, or "Smart" cards. IC cards are being
developed by certain major banks in Europe and North America as an alternative
to the use of cash and mass production of the card readers has not started as
the "Smart Cards" are currently still undergoing market testing. Nam Tai has
developed and manufactured a number of prototype card reader models, which are
used for market testing purposes.
GEOGRAPHIC MARKETS
Approximate percentages of net sales to customers by geographic area based
upon location of product delivery are set forth below for the periods indicated:
Year ended December 31,
------------------------------------------
Geographic Areas 2000 1999 1998
- ------------------------ ------------ ------------ ------------
Hong Kong 46% 35% 9%
North America 24 30 47
Europe 9 18 18
Japan 9 12 22
Other 12 5 4
------------ ------------ ------------
100% 100% 100%
============ ============ ============
The Company's sales and operating results are often affected by seasonality
during the second and third quarters in anticipation of the start of the school
year and Christmas buying season and in the first quarter resulting from both
the closing of the Company's factories in China for one-half of a month for the
Chinese New Year holidays and the general reduction in sales following the
holiday season.
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CUSTOMERS
The Company's OEM customers include the following entities which 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
Customer Brand Name Product Since
-------- ---------- ------- -----
Asahi Corporation Casio Cordless telephones 1999
(subsidiary of Casio Computer Co., Ltd.)
Canon, Inc. Canon Personal organizers and calculators 1988
Casio Computer (Hong Kong) Limited Casio Aluminum panels and PVC wallets 1994
Epson Precision (HK) Ltd. ----- LCD Modules for cellular (mobile) 1997
phones
General Electric (China) Co., Ltd. and ----- Silk screening 1996
General Electric International Inc.
Headline Electronics Co., Ltd. Radio Shack Family radio systems 2000
Midland
Kanda Tsushin Kogyo Co., Ltd. ----- Caller ID function phones 2000
(affiliate of Fujitsu)
Legend (Beijing) Co. Ltd. Legend Palm-sized PC with Microsoft 1999
Wind-ows CE Chinese version software
Master S.P.A. ----- Cordless phones 2000
Matsushita Electronics Corporation ----- IC card readers 1994
(Matsushita Battery Industrial Co. Ltd)
Metro MGE Einkauf GmbH ----- Cordless phone 2000
Nitsuko (HK) Co. Ltd. ----- PCB modules for telecommunications 1995
systems
Optrex Corporation ----- Assemblies for LCD modules 1994
Premier Precision Ltd. Citizen Silk screening and aluminum panel 1993
Sanyo Electric (H. K.) Ltd. Sanyo Silk screening 1988
Seiko Instruments Inc. Seiko, SII Personal organizers and linguistic 1991
products
Sharp Corporation Sharp Personal organizers, calculators and 1989
control panel modules
Sony Corporation Sony Electronic dictionaries and 1999
rechargeable battery packs
Texas Instruments Incorporated Texas Personal organizers and calculators 1989
Instruments
Toshiba Battery Company Ltd. ----- Rechargeable battery packs for 2000
cellular phones
Shunde Whirlpool Electrical Appliance Whirlpool Silk screening/microwave oven 1998
Company Limited of China control panels
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At any given time, different customers account for a significant portion of
Nam Tai's business. Percentages of total sales to customer vary from year to
year and may fluctuate depending on the timing of production cycles for
particular products. Sales to Epson Precision (HK) Ltd., Seiko Instruments Inc.,
Sharp Corporation and Texas Instruments Incorporated, the only customers
accounting for 10% or more of sales in 2000 were as follows:
Year ended December 31,
--------------------------------------------
2000 1999 1998
-------- --------- ---------
Texas Instruments Incorporated 23.9% 26.2% 44.2%
Epson Precision (HK) Ltd. 23.8 21.5 N/A
Sharp Corporation 14.7 30.2 32.0
Seiko Instruments Inc. 10.0 N/A N/A
-------- --------- ---------
72.4% 77.9% 76.2%
======== ========= =========
A number of products are made for major customers so that the Company is
not necessarily dependent on a single product for one customer. Although
management believes any one of the Company's customers could be replaced with
time, the loss of any of its largest customers, especially its principal
customers, or a substantial reduction in orders from them would have a material
adverse effect on the Company's business. See "--Risk Factors - Customer
Concentration; Dependence on Electronics Industry." While each of the four
largest customers 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.
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. Often, 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. Some customers require COD
terms and request the Company to bear the cost of molds, tooling and development
charges.
Many of Nam Tai's customers have a relationship that 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 expertise 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
some of the OEM customers.
MANUFACTURING
Nam Tai utilizes the following production techniques:
o Chip On Glass ("COG"): A process that connects integrated circuits
directly to LCD panels without the need for wire bonding. This
technology is used to produce advanced LCD modules for high-end
electronic products, such as cellular phones and PDAs. At December 31,
2000, the Company employed five COG machines and plans to acquire four
additional systems in the first half of 2001.
o Chip On Board ("COB"): A technology that utilizes wire bonding to
connect large-scale integrated circuits directly to printed circuit
boards. COB is used in the assembly of consumer products such as
calculators, personal organizers and translators. At December 31,
2000, the Company employed 83 COB machines.
o Surface Mount Technology ("SMT"): A process by which electronic
components are mounted directly on both sides of a printed circuit
board, increasing board capacity, facilitating product miniaturization
and enabling advanced automation of production. SMT is used for
products such as electronic dictionaries and language translators. At
December 31, 2000, the Company employed 16 SMT lines.
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18
o Ball Grid Array ("BGA"): A method of mounting an integrated circuit or
other component to a printed circuit board. Rather than using pins,
the component is attached to the circuit board with small balls of
solder at each contact. This method allows for greater component
density and is used in printed circuit boards ("PCB") with higher
layer counts. At December 31, 2000, the Company employed 10 BGA
machines.
o Outer Lead Bonding ("OLB"): An advanced technology used to connect
PCBs and large-scale integrated circuits with a large number of
connectors. It is used in complex miniaturized products, such as
high-memory PDAs. At December 31, 2000, the Company employed three OLB
machines.
o Tape Automated Bonding ("TAB") with Anisotropic Conductive Film
("ACF"): A cutting-edge heat sealing technology that connects an LCD
with an integrated circuit in very small LCD modules, such as those in
cellular phones and pagers. At December 31, 2000, the Company employed
seven TAB with ACF machines.
In addition, at December 31, 2000, the Company employed six rechargeable battery
pack assembly lines.
The Company's manufacturing operations are based on shifts of eight or ten
hours, with the number of shifts depending on production volume. At full
capacity, manufacturing lines operate on two or three consecutive shifts.
QUALITY CONTROL
The Company maintains strict quality control programs for its products,
including the use of total quality management ("TQM") systems and advance
testing and calibration equipment. 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-progress 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 manufacturing facilities 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. The Company's main manufacturing facilities recently received the ISO
14001 certification, a standard published in 1996 by the International
Organization for Standardization that provides a structured basis for
environmental management control.
Management believes sophisticated customers are increasingly requiring
their manufacturers to be ISO 9000 certified, and 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.
For four consecutive years through 1999 the Company was awarded the
prestigious Texas Instruments Supplier Excellence Award. The award recognizes
suppliers who have achieved world class performance in the following categories:
product quality; quality management; continuous on-time delivery of products;
cycle times; leadership in product pricing and value; customer service;
technology; and environmental leadership. To qualify for the award the first
time requires very high scores in each of the categories. To receive the award
in subsequent years requires continuous improvement over the high scores
required for the first year.
COMPONENT PARTS AND SUPPLIERS
The Company purchases over 3,000 different component parts from more than
100 major suppliers and is not dependent upon any single supplier for any key
component. The Company purchases components for its electronic
-18-
19
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 integrated circuits
or "chips", LCDs, solar cells, printer heads and batteries. The Company
purchases both stock "off-the-shelf" chips and custom chips, the latter being
the most expensive component parts purchased by Nam Tai. At the present time,
the Company purchases most of its chips from Toshiba Corporation, Sharp
Corporation and certain of their affiliates, although there are many additional
suppliers from which the Company could purchase chips.
LCDs are readily available from many manufacturers and the Company in the
past used two major suppliers, Epson Hong Kong Ltd. and Sharp Corporation. In
the future, some LCD supplies may be produced internally. PCBs and other circuit
boards are purchased from circuit board manufacturers in Hong Kong, China and
solar cells are purchased from Matsushita Battery Industrial Company Ltd.
Batteries are standard "off-the-shelf" items, generally purchased in Hong Kong
from agents of Japanese manufacturers. The Company also purchases various
mechanical components such as plastic parts, rubber keypads, PCBs and packaging
materials locally in China. Management believes the low costs for locally
supplied parts adds to the Company's competitive advantage.
Certain components may be subject to limited allocation by certain of Nam
Tai's suppliers. During 2000 there was an industry-wide shortage of components
in the electronics industry as supply was unable to satisfy growing world
demand. In some cases, supply shortages and delays in deliveries of particular
components resulted in curtailed production, or delays in production of
assemblies using that component, which contributed to an increase in our
inventory levels and reduction in our sales margins. We expect that shortages
and delays in deliveries of some components will continue. If we are unable to
obtain sufficient components on a timely basis, we may experience manufacturing
and shipping delays, which could harm our relationships with current or
prospective customers and reduce our sales. There can be no assurance that any
future allocation or shortages would not have a material adverse effect on the
Company's results of operations.
PRODUCTION SCHEDULING
The typical cycle for a product to be manufactured and sold to an OEM
customer is three to four years including the production period, the development
period and the period for market research and data collection (which is
undertaken primarily by Nam Tai's OEM customers). Initially an OEM customer
gathers data from its sales personnel on products for which there is market
interest, including features and unit costs. The OEM customer then contacts the
Company, 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 customer 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 typically
lasts less than six months, 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.
Recently, some of the customers have started to request the Company to bear
responsibility for paying development charges. 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 and production periods for the various
models it has under development or in production for OEM customers.
The majority of 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. In many cases, 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, 2000, 1999, and 1998 the Company
did not suffer a material loss resulting from the cancellation of an OEM
customer confirmed order.
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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.
RESEARCH AND DEVELOPMENT
The Company continues to place an increased emphasis on research and
development that provides greater service to OEM customers and assists in design
and development of future products. Research and development expenses increased
to $3,489,000, or 1.6% of sales in 2000 up from $2,624,000 or 1.8% of sales in
1999. The increase is related to (1) the Company's customers requesting the
Company to bear increased responsibility for development charges; (2) the
establishment of telecommunication research and development in the Shenzhen
factory; and (3) requirement to devote a specified amount to research and
development in order to obtain the designation of a "High and New Technology
Enterprise" in China.
ODM DEVELOPMENT
Nam Tai has focused special attention on furthering the research and
development capabilities of its engineering division. This includes retaining
two senior executives to oversee the development of Nam Tai's product
development capabilities. The Company plans to continue acquiring
state-of-the-art design equipment and enhancing its technological expertise
through continued education for all engineers and further recruiting of system
engineers.
The Company provides the facilities and expertise to assist in new product
research and development, offering its customers program design for
microprocessors, enhanced software design and development services.
In the ODM business, Nam Tai is responsible for the design and development
of new products, the rights to which it owns. Nam Tai sells these products to
OEM customers to be marketed to end users under the customers' brand names. To
date the Company has successfully developed a number of electronic dictionaries,
cordless telephones, and calculator products. There can be no assurance that Nam
Tai's efforts to expand or maintain the ODM business will be successful or that
it will achieve material revenues or profits from its efforts.
COMPETITION
General competition in the contract electronics manufacturing industry is
intense characterized by price erosion, rapid technological change, and
competition from major U.S. and international companies. This intense
competition could result in pricing pressures, lower sales, reduced margins, and
lower market share. The Company has four competitors in the manufacture of its
traditional product lines of calculators, personal organizers and linguistic
products - Kinpo Electronics, Inc. (formerly Cal-Comp Electronics, Inc.),
Inventec Co. Ltd., Asustek and Compal. There are numerous competitors in the
telecommunication, sub-assemblies and components product lines. In addition, the
Company competes with the in-house manufacturing capabilities of current and
potential customers who evaluate Nam Tai's capabilities against the merit of
manufacturing products internally. Many of Nam Tai's competitors have greater
financial, technical, marketing, manufacturing, vertical integration, and
personnel resources and there can be no assurance that Nam Tai will continue to
compete successfully with these organizations.
While an OEM may prefer its approved suppliers, management believes OEMs
tend to order from several suppliers in order to lessen dependence on any one of
them. Competition for OEM sales is based primarily on unit price, product
quality and availability, promptness of service, reputation for reliability and
OEM confidence in the manufacturer. The Company believes it competes favorably
in each of these areas.
The Company's strategy is to produce more advanced and specialized products
as management believes that there is less competition in more advanced products
due to the complexity involved in manufacturing. There can be no assurance that
the Company will be successful in obtaining or developing the technology,
expertise, and business for such products and failure to move into more advanced
products may result in the Company facing increasing competition and reduced
profit margins.
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PATENTS, LICENSES AND TRADEMARKS
In 1999 the Company concluded a Technical Collaboration Agreement with
Toshiba Battery Co., Ltd. ("Toshiba Battery") in Japan regarding technology
introduction from Toshiba Battery for designing and manufacturing the battery
packs. It has also obtained licenses to use RF and DECT technologies. Otherwise,
the Company has no patents, trademarks, licenses, franchises, concessions or
royalty agreements that are material to its business as a whole. Due to rapid
technological change in the products manufactured, the Company does not believe
the absence of patents has had or will have a material impact on its business.
ORGANIZATIONAL STRUCTURE
The Company is a holding company for Nam Tai Electronic & Electrical
Products Ltd. and J.I.C. Group (B.V.I.) Ltd. and their subsidiaries. See Note 15
of Notes to Consolidated Financial Statements appearing in Item 18 of this
Report. The chart below illustrates the organizational structure of the Company
and its significant operating subsidiaries. J.I.C. Group (B.V.I.) Ltd. is
currently undergoing a corporate reorganization and the below chart depicts the
proposed new structure.
--------------------------------------
/ Nam Tai /
/ Electronics, Inc. / -----------------------------
/ (Incorporated in the British Virgin / /
/ Islands & listed on NASDAQ) / /
------------------------------------- /
/ /
/ /
/ /
--------------------------------------------------------- /
/ / /
/ 100% / 100% /
--------------------------- ------------------------------- /
/ Nam Tai Electronic & / / J.I.C. Group (B.V.I.) Ltd. / /
- ------------------------------------/ Electrical Products Ltd . / / (Incorporated in the / /
/ / (Incorporated in Hong Kong)/ / British Virgin Islands) / /
/ --------------------------- ------------------------------- /
/ / / /
/ / / /
/ ----------------------------------------------------------------- ------------------ /
/ / / / / / / /
/ / 100% / 100% / 86.67% / 100% / 100% / 100% /
/ --------------- ---------------- --------------- ----------------- -------------- -------------- /
/ / Namtai / / Nam Tai / / BPC / / Zastron Plastic / / J.I.C. / / J.I.C. / /
/ / Electronic / / Telecom / / (Shenzhen) / / & Metal Products/ / Enterprises / / Electronics / /
/ / (Shenzhen) / / (Hong Kong) / / Co. Ltd. / / (Shenzhen) Ltd. / /(Hong Kong) / / Co. Ltd. / /
/ / Co. Ltd. / / Co. Ltd. / / (Incorporated / / (Incorporated in/ / Ltd. / /(Incorporated / /
/ / (Incorporated / / (Incorporated / / in the PRC) / / the PRC) / /(Incorporated / / in Hong Kong)/ /
/ / in the PRC) / / in Hong Kong)/ -------------- ---------------- / in Kong Kong)/ -------------- /
/ 75% -------------- ---------------- -------------- / /
/ / / / /
/ / 25% / 100% / 100% /
/ -------------- --------------- -------------- /
/ / Shenzhen / / A new company / / Jieyao / /
/ / Namtek / / to be formed / / Electronics / /
/ --- / Co. Ltd. / / by the merger / / (Shenzhen) / /
/ (Incorporated/ / of Jetup / / Co. Ltd. / /
/ in the PRC) / / Electronic / / (Incorporated/ /
------------- / (Shenzhen) Co./ / in the PRC) / /
/ Ltd. and Jieda/ ------------ /
/ Electronics / /
/ (Shenzhen) / /
/ Co. Ltd. / /
-------------- -------------/
/ 25%
------------------
/ *Mate Fair /
/ Group Ltd. /
/ (Incorporated in /
/ the British /
/ Virgin Islands) /
------------------
*Nam Tai Electronics, Inc. acquired an indirect 5% interest in Huizhou TCL
Mobile Communication Co., Ltd. and TCL Mobile Communication (HK) Co., Ltd.
through its 25% interest in Mate Fair Group Ltd.
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22
The Company's significant operating entities are described below:
Nam Tai Electronic & Electrical Products Limited
------------------------------------------------
Nam Tai Electronic & Electrical Products Limited ("NTEE") 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, customer relations and management operations are the main functions
handled by NTEE.
Namtai Electronic (Shenzhen) Co. Ltd.
-------------------------------------
Namtai Electronic (Shenzhen) Co. Ltd. ("NTSZ") was established as Baoan
(Nam Tai) Electronic Co. Ltd. in May 1989 as a joint venture company with
limited liability pursuant to the relevant laws of China. The equity of NTSZ was
owned 70% by NTEE and 30% by a Chinese government agency. During 1992, the joint
venture was dissolved and the company changed its name to NTSZ. As part of such
termination, the company returned to the Chinese government agency its real
property and investment, and NTSZ became a wholly owned subsidiary of NTEE. NTSZ
is the principal manufacturing arm of the Company and is engaged in research and
development, manufacturing and assembling the Company's electronic products in
China.
Nam Tai Telecom (Hong Kong) Company Limited
-------------------------------------------
Nam Tai Telecom (Hong Kong) Company Limited ("NT Telecom") was established
in August 1999, emerging from a successful acquisition of a Korea based
telecommunication business. Located in the same office building as NTEE, NT
Telecom develops and sells high frequency wireless telecommunication products.
BPC (Shenzhen) Co. Ltd. ("BPC")
-------------------------------
In January 2000, Nam Tai, through NTEE, entered into a joint venture
agreement with Toshiba Battery Co., Ltd. to produce and sell high-end,
environmentally friendly, rechargeable lithium ion battery packs. Toshiba
handles BPC's sales and its products are marketed under the Toshiba brand name.
BPC is located in Nam Tai's existing manufacturing complex in Shenzhen. BPC
began operations in May 2000.
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 Company's customers and
for products manufactured or to be manufactured by Nam Tai. Namtek employs
approximately 30 software engineers and provides the facilities and expertise to
assist in new product development and research, enabling Nam Tai to offer its
customers program design for microprocessors, enhanced software design and
development services, and strengthening the Company's ODM capabilities.
J.I.C. Group (B.V.I.) Ltd. ("JIC")
----------------------------------
Nam Tai completed its acquisition of JIC in October 2000 for approximately
$32.7 million in cash and stock. JIC has been a participant in the LCD
marketplace since 1983, with almost 20 years of experience in manufacturing LCD
panels. The company has a strong customer base, including Hitachi, Nanox, Vtech,
Nishimura & Musen Denki, with revenues of $24.5 million and net income of $3.3
million for the fiscal year ended March 31, 2000. JIC's revenues are evenly
divided between sales of LCD panels and transformers. JIC is a holding company
for the four subsidiaries described below:
-22-
23
J.I.C. Enterprises (Hong Kong) Ltd. ("JIC Enterprises")
-------------------------------------------------------
JIC Enterprises was established in 1983 and has been in the LCD business
for almost 20 years. Originally a small trading company for LCD panels and
electronics products, JIC Enterprises is now strategically focused on the sales
and marketing of LCD panels and is responsible for customer relationship
development.
Jetup Electronic (Shenzhen) Co. Ltd. ("Jetup")
----------------------------------------------
Jetup was incorporated in 1993 and handles the manufacturing and processing
works of LCD panels through its factory plant in Baoan County, Shenzhen. Jetup
will be merged with Jieda Electronics (Shenzhen) Co. Ltd. to form a new
subsidiary of JIC.
J.I.C. Electronics Co. Ltd. ("JIC Electronics")
-----------------------------------------------
JIC Electronics was established in 1994 and is engaged in the manufacturing
and trading of transformers. JIC Electronics' transformer products are mainly
used in various home appliances, including rice cookers, washing machines,
lighting fixtures and video products. JIC Electronics is now commercializing its
products to Japanese consumers who are the major end users of its products.
Jieyao Electronics (Shenzhen) Co. Ltd. ("Jieyao")
-------------------------------------------------
Jieyao was incorporated in 1995 as a wholly foreign-owned enterprise with
its factory located in Baoan County, Shenzhen. The company acts as another
manufacturing arm of JIC's transformer division due to the expansion of the
transformer business.
Jieda Electronics (Shenzhen) Co. Ltd. ("Jieda")
-----------------------------------------------
Jieda was incorporated in 1992 as a wholly foreign-owned enterprise with
its factory located in Baoan County, Shenzhen. The company is engaged in the
manufacturing and processing of LCD panels.
Mate Fair Group Ltd - 25% equity interest
-----------------------------------------
In September 2000, through the acquisition of a 25% interest in Mate Fair
Group Ltd. Nam Tai acquired a 5% indirect shareholding in both TCL Mobile
Communication (HK) Co., Ltd. and Huizhou TCL Mobile Communication Co., Ltd.
(collectively "TCL Mobile"). TCL Mobile is engaged in manufacturing,
distributing, and trading of digital mobile phones and accessories in China as
well as overseas markets and is one of only 10 Chinese companies licensed to
manufacture GSM cellular phones in China.
PROPERTIES, PLANTS AND EQUIPMENT
British Virgin Islands
----------------------
The registered office of the Company is located at McNamara Chambers, P.O.
Box 3342, Road Town, Tortola, British Virgin Islands. Only corporate
administrative matters are conducted at this office, through Nam Tai's
registered agent, McW. Todman & Co. The Company neither owns nor leases property
in the British Virgin Islands.
Hong Kong
---------
The Company's principal executive office is located at Suite 4, 9th floor,
Tower 1, China Hong Kong City, 33 Canton Road, TST, Kowloon, Hong Kong with its
marketing office located in the same building on the 15th floor. The combined
rental rate is approximately $23,200 per month with the lease expiring on May
31, 2001. The Company owns 2,722 square feet of office space at Room 811, Tower
B, Hunghom Commercial Centre, 37 Ma Tau Wai Road, Hunghom, Kowloon, Hong Kong
which is used by the JIC Group of companies for administration and marketing.
The Company owns a residential flat in Hong Kong that was purchased for
total consideration of $1,850,000. This property was occupied by the previous
Chairman of the Company, Mr. Murakami until December 1998 and is now occupied by
Mr. Takizawa, Nam Tai's new Chairman, and forms part of his overall
compensation. In addition, the
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Company has purchased four additional residential flats in Hong Kong, two of
which are still under construction, for a total consideration of $6,304,000
which will be used by senior management and form part of their compensation. See
item 6. directors, senior management and employees .
From 1984 to 1996, the Company owned approximately ten acres of land in
Hong Kong carried on the books of the Company at its cost of approximately
$523,000. In 1997 the Company sold approximately six acres of its land holdings
for net proceeds of $5,750,000 realizing a gain of $5,548,000. In 1998 the
Company sold approximately 0.6 acres of its land holdings for net proceeds of
$815,000 realizing a gain of $795,000. In 1999 the Company sold 0.5 acres for
net proceeds of $316,000 realizing a gain of $302,000. In 2000, the Company sold
0.6 acres for net proceeds of $372,000 realizing a gain of $355,000. The Company
plans to sell the remaining land and pending the sale continues to carry the
land at cost of approximately $136,000.
Shenzhen, China
---------------
Nam Tai's principal manufacturing complex is located in Baoan County,
Shenzhen, China. It includes the original facility and Phase I of the factory
expansion completed in May 1996. The original facility consists of 150,000
square feet of manufacturing space under a 15 year lease expiring in 2007. The
rental rate is approximately $38,400 per month due to increase by 20% in August
2002. Phase I of the complex expansion is located on 286,600 square feet of
leasehold land adjacent to the original facility. The lease for this land was
purchased for approximately $2,450,000 in 1994 and has a term of 50 years. The
new facility consists of 160,000 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. The complex contains vacant land on which the Company in November
2000 commenced construction of another 138,000 square feet manufacturing
facility that is scheduled to be operational in March 2002. See discussion on
expansion in Items 4. Information on the Company - Capital Expenditures on page
12.
In July 1999 the Company purchased a 280,000 square feet (approximately 6.5
acres) vacant lot bordering its current manufacturing complex located in
Shenzhen, China at a cost of approximately $1.2 million. The lot is leasehold
land with a term of 50 years. It is zoned industrial and the Company plans to
use it to construct up to an additional 200,000 square feet of manufacturing,
office or dormitory facilities.
The Company also has a 26,000 square feet facility in Shenzhen, located
approximately one mile from the manufacturing complex. This contains 28
apartment units to house certain factory managers who are married and have
families.
Nam Tai has three additional manufacturing facilities nearby in Shenzhen:
two transformer factories and an LCD factory.
Shenzhen Transformer Factory
Nam Tai's transformer factory in Shenzhen was established in 1986 and has
seven floors of manufacturing space totaling over 46,700 square feet. The
facility produces hundreds of different models of transformers for use in
computers, consumer electronics, automobiles, and other electrical appliances.
The factory has an average monthly output of 1,200,000 units. Nam Tai is in the
process of negotiating an extension of the lease for this factory, which expires
in March 2001.
Baoan Transformer Factory
Nam Tai's transformer factory was built in 1999 and has two floors of
manufacturing space totaling over 27,000 square feet. The factory has an average
monthly output of 650,000 units. The facility is under a ten-year lease that
expires on October 31, 2009.
Baoan LCD Factory
Nam Tai's LCD factory was built in 1997 and has over 104,300 square feet of
manufacturing space. The facility produces LCD panels to the specifications of
Nam Tai's OEM customers and has an average monthly output of 9,200,000 pieces.
The facility is under a ten-year lease that expires on June 30, 2007.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Except for statements of historical facts, this section contains
forward-looking statements involving risks and uncertainties. You can identify
these statements by forward looking words including "expect", "anticipate",
"believe" "seek", "estimate". Forward looking statements are not guarantees of
Nam Tai's future performance or results and 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 3. Key Information - "Risk Factors". This section should be
read in conjunction with the Company's Consolidated Financial Statements
included as Item 18 of this report.
OPERATING RESULTS
General
- -------
The Company derives its revenues principally from the design and
manufacturing services to original equipment manufacturers ("OEMs") of consumer
electronic products and components. Products manufactured by Nam Tai include,
telecommunication products, palm-sized PC's, personal digital assistants,
electronic dictionaries, calculators and smart card readers. It also
manufactures electronic components and subassemblies including liquid crystal
display ("LCD") panels, transformers, and LCD modules used in the manufacture of
cellular phones and various other electronic products including, copiers, fax
machines, electronic toys, and microwave ovens. It also manufactures lithium ion
and nickel metal hydride rechargeable battery packs which are used in cellular
phones.
Management believes sales of personal organizers, electronic dictionaries
and calculators to its OEM customers will continue to be an important line of
business; however, telecommunication products and components, including LCD
modules and rechargeable battery packs for cellular phones, along with new
products will continue to be an increasing proportion of total revenue in the
future. See Item 4. Information on the Company - Products on page 14
The consumer electronics industry is very competitive and the Company is
continuously under pressure to lower the selling price of its existing product
lines. In response to these pressures, the Company seeks to reduce its material
costs by negotiating lower prices on components and upgrading its technology and
human resources in order to be capable of manufacturing more advanced and
specialized products with higher unit margins. It also strives to improve
customer and supplier relations and production quality. The Company desires to
produce more advanced and specialized products as management believes that there
is more growth potential in more advanced products due to the complexity
involved in manufacturing and the lower number of direct competitors. There can
be no assurance that the Company will be successful in obtaining business for
such products and failure to move into more advanced products may result in the
Company facing increasing competition and reduced profit margins.
In October 2000, Nam Tai completed the acquisition of the J.I.C. Group of
companies. The JIC group are engaged in the manufacture and marketing of liquid
crystal display ("LCD") panels, a key component for a variety of consumer
electronic products. As the purchase price, Nam Tai paid $32.8 million, which
was based on a guaranteed after tax net income of not less than $3.8 million for
the twelve-month period ending March 31, 2001 multiplied by 8.5. Nam Tai paid
two thirds of the purchase price by issuing approximately 1.16 million common
shares of Nam Tai and paid the $11.0 million balance in cash. The cash portion
of the purchase price was financed from internally generated funds. Nam Tai has
accounted for the acquisition of JIC under the purchase method and the results
of JIC's operations have been consolidated with Nam Tai's results from the date
of the acquisition. The excess of the purchase price over the fair value of the
net assets acquired was approximately $22.8 million and has been recorded as
goodwill, to be amortized on a straight-line basis over 15 years. The parties
have agreed that the purchase price will be reduced by the amount of shortfall,
if any, between the net income of the JIC group during the 12 months ending
March 31, 2001 and the guaranteed profit amount of $3,846,000 multiplied by 8.5.
This adjustment, if any, will be recorded as an adjustment to the purchase price
and goodwill. One third of the amount of the adjustment, if any, will be settled
in cash and the remaining balance will be satisfied by the cancellation of a
portion of the shares issued (based on price of $18.77 per share). The common
shares issued in the acquisition are subject to a two-year lock up, which
prevents their sale or transfer prior to October 27, 2002 without Nam Tai's
prior consent. Nam Tai retained JIC's management team and has entered into
three-year service agreements with Messrs. Joseph Li and Ivan Chui, the founders
and senior management of the JIC group.
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The following table presents selected consolidated financial information
stated as a percentage of net sales for the years ended December 31, 2000, 1999,
and 1998.
Year ended December 31,
----------------------------------
2000 1999 1998
--------- --------- -------
Net sales .......................................... 100.0% 100.0% 100.0%
Cost of sales ...................................... 85.2 82.8 75.7
----- ----- -----
Gross profit ....................................... 14.8 17.2 24.3
----- ----- -----
Costs and expenses:
Selling, general and administrative expenses .... 8.3 10.3 13.0
Research and development expenses .............. 1.6 1.8 1.6
Non-recurring (income) expense .................. -- (0.6) 1.4
----- ----- -----
9.9 11.5 16.0
----- ----- -----
Income from operations ............................. 4.9 5.7 8.3
Gain on disposal of land ......................... 0.2 0.2 0.7
Provision for impairment of value of investment
in an unconsolidated subsidiary............ -- -- (8.1)
Other income - net ............................... 6.3 1.5 4.8
Interest expense ................................. (0.1) (0.1) --
Equity in loss of an unconsolidated subsidiary.... -- -- (1.7)
Equity in (loss) income of affiliated companies... (0.1) 0.8 0.5
----- ----- -----
Income before income taxes and minority interests... 11.2 8.1 4.5
----- ----- -----
Net income ......................................... 11.2% 8.1% 3.5%
===== ===== =====
Year ended December 31, 2000 Compared to Year ended December 31, 1999
- ---------------------------------------------------------------------
Nam Tai's sales increased by 47% to $213,688,000 for the year ended
December 31, 2000 compared to $145,054,000 for the year ended December 31, 1999.
Sales increases were experienced in all product categories with the largest
increases arising from increased sales of LCD modules for cellular phones.
Management attributes this growth in sales to its focus on telecommunication
products and components, increased production capabilities resulting from its
investment in additional high-technology equipment, expansion into the battery
pack business, strong sales of graphic calculators, and the acquisition of the
JIC Group of companies which contributed $10.3 million to fourth quarter 2000
sales.
The Company's gross profit increased 26% to $31,592,000 for the year
ended December 31, 2000 from $24,980,000 for the year ended December 31, 1999.
Nam Tai's gross profit failed to increase correspondingly with sales because of
the decrease in the gross profit margin to 14.8% in 2000 from 17.2% in 1999. A
number of reasons combined to lower gross profit margins including (1) a
changing product mix towards more capital intensive subassemblies and components
with a reduction in sales of higher margin finished goods such as electronic
data banks and desktop calculators; (2) lowering unit prices caused by the
increasingly competitive environment; (3) startup learning costs associated with
entry into the telecommunication business and battery pack business; and (4)
increased material costs resulting from the component shortages.
Selling, general and administrative expenses for the year ended
December 31, 2000 increased to $17,646,000 or 8.3% of sales from $14,913,000 or
10.3% of sales in the year ended December 31, 1999. The increase in absolute
dollars reflects increased direct selling expenses incurred as a result of the
increase in sales, increased amortization charges related to the acquisition of
JIC, the addition of JIC's expenses in the fourth quarter, increased salary and
benefits as the Company increased its marketing, finance and administration
staff in Hong Kong, and compensation expenses related to the extension of
warrants and the granting of options to non-employees. The decrease in such
expenses as a
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percent of sales was the result of the Company maintaining tight control over
general and administrative expenses during a time of increasing sales.
Research and development expenses for the year ended December 31, 2000
increased to $3,489,000 or 1.6% of sales from $2,624,000 or 1.8% of sales in the
year ended December 31, 1999. The increase is related to (1) the Company's
customers requesting the Company to bear increased responsibility for
development charges; (2) the establishment of telecommunication research and
development in the Shenzhen factory; and (3) research and development expenses
for the newly established battery pack business.
Gain on disposal of land was $355,000 for the year ended December 31, 2000
as compared to $302,000 for the year ended December 31, 1999. The gains in both
2000 and 1999 were realized on the sale of a portion of the Company's land
holdings in Hong Kong. Loss on disposals of property, plant and equipment was
$111,000 for the year ended December 31, 2000 as compared to $143,000 for the
year ended December 31, 1999.
Other income increased to $13,498,000 for the year ended December 31, 2000
compared to $2,192,000 for the year ended December 31, 1999. Other income in
2000 consisted of a gain on the sale of Group Sense (International) Limited of
$10,781,000, $3,300,000 of interest income, unrealized gain on marketable
securities of $433,000, and $51,000 foreign exchange gain. Such gains were
offset by miscellaneous expenses of $435,000, bank charges of $328,000, and the
$304,000 write-off of a currency option premium.
Interest expense decreased to $165,000 for the year ended December 31, 2000
as compared to $192,000 for the year ended December 31, 1999.
Equity in (loss) income of affiliated companies, including amortization of
goodwill, was $(189,000) for the year ended December 31, 2000 with such amount
relating to the Company's investment in Mate Fair, and Shanghai Q&T Tech. Co.
Ltd.
Equity in (loss) income of affiliated companies, including amortization of
goodwill, was $1,146,000 for the year ended December 31, 1999 with such amount
relating to the Company's interest in Group Sense (International) Limited.
The income tax benefit of $33,000 for the year ended December 31, 2000
compares to a benefit of $60,000 for the prior year. 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
15%, and in Hong Kong, where the corporate tax rate on assessable profits was
16% in 2000. The Company receives tax credits in China related to its
reinvestment of profits on China operations into share capital and tax benefits
for being a "High and New Technology Enterprise". This reduces the overall tax
payable by the Company. See Note 8 of Notes to Consolidated Financial
Statements.
The income tax expense relates to income taxes on the Hong Kong and China
operations. (See note 8 of the Notes to the Consolidated Financial Statements.)
In the past, the Company received 100% tax credits in China related to its
reinvestment of profits into additional share capital of the China subsidiaries.
This reduced the overall tax payable by the Company in China. For the years 1993
through 1995, the Company received a full refund of China taxes paid as a result
of reinvesting its profits into share capital. As a result of its expectations
that it would receive a full refund of income taxes attributable to China
operations as it had in the past, the Company recorded tax payments in 1996 and
1997 as income tax recoverable. In early 1999, the Company learned that for the
1996 and 1997 tax years it would not receive a 100% tax refund on taxes already
paid, and was required to reduce the income tax recoverable by the amount of the
refund that was not obtained. For 1996, the Company received tax refunds of
$506,000 on taxes paid of $953,000. For 1997, the Company received a refund of
$1,322,000 on taxes paid of $1,891,000. A full refund was denied for 1997 and
1996 because the large intercompany receivable between the China subsidiary and
the Hong Kong subsidiary was not considered by the China Tax Authorities to be a
reinvestment of profits. For years 2000, 1999 and 1998, the Company paid taxes
of $504,000, $640,000 and $1,394,000, respectively. The Company has received a
refund of $463,000 for the taxes paid in 1998, and has been advised that $97,000
of the taxes paid is not refundable. The Company's application for a refund of
the balance of the taxes paid in 1998 is still in progress. To date, the Company
has not received a refund for the taxes paid for the years 1999 or 2000 as its
application for reinvestment of profits is still in progress.
Net income increased by $12,203,000 or 103% to $24,001,000 (11.2% of sales)
for the year ended December 31, 2000 compared to $11,798,000 (or 8.1% of sales)
for the year ended December 31, 1999. This resulted in diluted
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earnings per share for the year ended December 31, 2000 of $2.56 ($2.63 basic)
compared to diluted earnings per share of $1.25 ($1.26 basic) for the year ended
December 31, 1999. The increase in net income and earnings per share is the
result of: (i) an increase in gross profit; (ii) lower operating expenses as a
percentage of sales; and (iii) a gain of $10,781,000 from the sale of Nam Tai
interest in Group Sense (International) Limited. The increase in net income was
partially offset by loss of affiliated companies and the recovery of a portion
of the 1998 non-recurring customs assessment in 1999 of $848,000.
The diluted weighted average number of common shares outstanding decreased
to 9,375,000 (basic 9,114,000) for the year ended December 31, 2000 from
9,417,000 (basic 9,328,000) for the year ended December 31, 1999 reflecting the
repurchase of 5,600 and 879,700 common shares pursuant to the Company's
repurchase program in 2000 and 1999. During 2000, the Company issued 10,000
shares as compensation, 149,500 shares on the exercise of options, 58,030 shares
on the exercise of advisors' warrants, and 1,161,087 shares for the acquisition
of JIC.
Year ended December 31, 1999 Compared to Year ended December 31, 1998
- ---------------------------------------------------------------------
Nam Tai's sales increased by 43% to $145,054,000 for the year ended
December 31, 1999 compared to $101,649,000 for the year ended December 31, 1998.
Sales increases were experienced in all product categories and for all major
customers as a result of increased demand by end users. Management attributes
this growth in sales to the recovery of the Asian economy, increased production
capabilities resulting from its investment in additional high-technology
equipment, expansion of the Company's ODM business, and entry into the
telecommunication business.
The Company's gross profit increased marginally to $24,980,000 for the year
ended December 31, 1999 from $24,710,000 for the year ended December 31, 1998.
Nam Tai's gross profit failed to increase correspondingly with sales because of
the decrease in the gross profit margin to 17.2% in 1999 from 24.3% in 1998. A
number of reasons combined to lower gross profit margins including (1) lowering
unit prices caused by the increasingly competitive environment; (2) a changing
product mix towards more capital intensive products; (3) startup learning costs
associated with entry into the highly competitive telecommunication business;
(4) increased costs for material and costs denominated in yen; (5) increased
material costs resulting from increases in world-wide demand as well as a
reduction in supply from Taiwan after the earthquake of September 21, 1999; (6)
increased defect rates resulting from technical difficulties with the Company's
COG production; and (7) a write-off of some slow moving inventory.
Selling, general and administrative expenses for the year ended December
31, 1999 increased to $14,913,000 or 10.3% of sales from $13,246,000 or 13.0% of
sales in the year ended December 31, 1998. The increase in absolute dollars
reflects increased direct selling expenses incurred as a result of the increase
in sales, amortization charges related to goodwill, and increased salary
expenses incurred with the addition of the telecommunication business. The
decrease in such expenses as a percent of sales was the result of the Company
maintaining tight control over fixed general and administrative expenses during
a time of increasing sales.
Research and development expenses for the year ended December 31, 1999
increased to $2,624,000 or 1.8% of sales from $1,691,000 or 1.6% of sales in the
year ended December 31, 1998. Research and development expenses increased as a
result of increased customer orders that involved non-reimbursable expenses for
research and development work. The increase in research and development expenses
also reflects additional costs from the Company's newly established Korean
branch office.
Normally, the Company does not have to pay custom duties in China on
foreign purchases which are incorporated into manufactured goods that are
subsequently exported. The non-recurring income amount in 1999 of $848,000
represents the write-back of the remaining balance of the provision on the
settlement of a non-recurring customs assessment in China, which was recorded as
non-recurring expense of $1,445,000 in 1998.
Loss on disposal of property, plant and equipment was $143,000 for the year
ended December 31, 1999 as compared to $29,000 for the year ended December 31,
1998.
Gain on disposal of land was $302,000 for the year ended December 31, 1999
as compared to $795,000 for the year ended December 31, 1998. The gains in both
1999 and 1998 related primarily to the sale of portions of the Company's
landholdings in Hong Kong.
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For the year ended December 31, 1998 a provision for the impairment of
value of $8,271,000 was made to reduce to a nominal carrying value Nam Tai's
investment in Albatronics. This nominal amount was written off in 1999 as
Albatronics entered voluntary liquidation in August 1999.
Other income decreased to $2,192,000 for the year ended December 31, 1999
compared to $4,892,000 for the year ended December 31, 1998. Other income in
1999 consisted of interest income of $3,330,000, gains on marketable securities
of $144,000, and other miscellaneous income/expenses of $8,000. Such gains were
offset by the write-off of a $566,000 currency option premium, exchange
difference expenses of $413,000, and bank charges of $311,000.
The income tax benefit of $60,000 for the year ended December 31, 1999
compares to an expense of $1,040,000 for the prior year, with the change
resulting from the reversal of an over-provision of tax expense in 1998. The
income tax expense relates to income taxes on the Hong Kong and China
operations. See note 8 of the Notes to the Consolidated Financial Statements.
For years 1999 and 1998 the Company paid taxes of $606,000 and $1,391,000 and
has not received a refund to date as its application for reinvestment of profits
is still in progress.
Net income increased $8,269,000 or 234% to $11,798,000 (8.1% of sales) for
the year ended December 31, 1999 compared to $3,529,000 (or 3.5% of sales) for
the year ended December 31, 1998. This resulted in diluted earnings per share
for the year ended December 31, 1999 of $1.25 ($1.26 basic) compared to diluted
earnings per share of $0.34 ($0.34 basic) for the year ended December 31, 1998.
The increase in net income and earnings per share is the result of: (i) an
increase in sales sufficient to cover the lower profit margins; (ii) recovery of
a portion of the 1998 non-recurring customs assessment; (iii) the $8,271,000
provision for impairment of value for Albatronics in 1998; (iv) the $1,708,000
share of Albatronics losses in 1998; (v) reduced income tax expenses; and (vi)
an increase in Nam Tai's share of Group Sense (International) Limited's ("Group
Sense") net income for the first six months of fiscal 1999 (ending September 30,
1999) of $1,146,000. The increase in net income was partially offset by: (i)
increases in general, administration and selling expenses; (ii) increases in
research and development expenses; and (iii) reduced interest income.
The diluted weighted average number of common shares outstanding decreased
to 9,417,000 (basic 9,328,000) for the year ended December 31, 1999 from
10,351,000 (basic 10,317,000) for the year ended December 31, 1998 reflecting
the issuance of 36,500 common shares upon exercise of employee stock options,
the issuance of 10,000 common shares as employment compensation, the redemption
of 138,500 shares registered in the name of Tele-Art Inc. and the repurchase of
879,700 common shares pursuant to the Company's repurchase program.
IMPACT OF INFLATION
Inflation/(deflation) in China and Hong Kong in 2000, estimated at 1.5% and
- -3.7% respectively, has not had a material effect on Nam Tai's past business.
During times of inflation, the Company has generally been able to increase the
price of its products in order to keep pace with inflation. Furthermore,
increases in labor costs, which represent the most significant component of the
Company's production costs (other than material costs), would 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 11.2% of the Company's total expenses before
operating income during the year ended December 31, 2000 and 12.7% during the
year ended December 31, 1999.
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, Hong Kong dollars, and
Chinese renminbi. It pays labor costs and overhead expenses in renminbi, the
currency of China (the basic unit of which is the yuan), Hong Kong dollars,
Japanese yen, and Korean won. The exchange rate of the Hong Kong dollar to the
U.S. dollar has been fixed by the Hong Kong government since 1983 at
approximately HK$7.80 to US$1.00 through the currency issuing banks in Hong Kong
and accordingly has not in the past presented a currency exchange risk.
While the governments of Hong Kong and China have indicated they will
support their currencies, and have supported their currencies to date, possible
devaluations may occur. While the Company expects that it may initially benefit
from such devaluations through their effect of reducing expenses when translated
into U.S. dollars, such benefits could be outweighed if it causes a
destabilizing downturn in China's economy, creates serious domestic problems in
China or creates other problems adversely affecting the Company's business.
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Combined expenses in Canadian dollars and Korean won represented less than
1% of the total expenses respectively for the year ended December 31, 2000.
Management believes the Company's most significant foreign exchange risk
results from material purchases made in Japanese yen. Approximately 14%, 15%,
and 18% of Nam Tai's material costs have been in Japanese yen during the years
ended December 31, 2000, 1999, and 1998. Sales made in yen account for less than
4% of sales for the years ended December 31, 2000, 1999 and 1998. The net
currency exposure has decreased as a result a lower % of material being
purchased in yen. The Company believes its customers will accept an increase in
the selling price of manufactured products if the exchange rate of the yen
appreciates beyond a range of 5% to 10%, although such customers may also
request a decrease in selling price in the event of a depreciation of the
Japanese yen. There may also be a delay between the time of the exchange rate
fluctuation and the eventual adjustment in selling prices. The Company's belief
is based on oral agreements with its principal customers which management
believes are customary between OEMs and their suppliers. However, there can be
no assurance that such agreements will be honored, and the refusal to honor such
an 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 equaled the market rate. Since the market and
official renminbi rates were unified, the value of the renminbi against the
dollar has been stable. The Company believes that because its Chinese operations
are presently confined to manufacturing products for export, any devaluation of
the renminbi would benefit Nam Tai by reducing its costs in China, provided that
devaluation or other economic pressures do not lead to fundamental changes in
the present economic climate in China.
Foreign exchange transactions involving the renminbi take place through the
Bank of China or other institutions authorized to buy and sell foreign exchange
or at an approved foreign exchange adjustment center (known as a "swap center").
In the past, when exchanging Hong Kong dollars for Chinese 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 People's Bank of China. Since January 1, 1994, when China
adopted a floating currency system (whereby the official rate is equal to the
market rate), swap centers and banks in China offer essentially the same market
rates, facilitating the exchange of Hong Kong dollars for renminbi. The adoption
of a floating currency system has had no material impact on the Company.
Beginning on November 30, 1996, the Chinese renminbi became fully
convertible under the current accounts. There are no restrictions on
trade-related foreign exchange receipts and disbursements in China. Capital
account foreign exchange receipts and disbursements are subject to control, and
organizations in China are restricted in foreign currency transactions 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 or
option contracts to buy or sell foreign currency(ies) against the U.S. dollar
through one of its banks. As a result, the Company may suffer losses resulting
from the fluctuation between the buy forward exchange rate and the sell forward
exchange rate, or from the price of the option premium.
In 2000, Nam Tai recorded a $304,000 loss on the sale of an option that was
purchased as a hedge against the appreciation of the Japanese yen. At December
31, 2000 the Company held no option or future contracts. 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.
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LIQUIDITY AND CAPITAL RESOURCES
Current assets increased to $135,352,000 for the year ended December 31,
2000 compared to $94,436,000 for the year ended December 31, 1999. Cash and cash
equivalents, consisting of cash and short-term term deposits, increased to
$58,896,000 for the year ended December 31, 2000 versus $54,215,000 for the year
ended December 31, 1999. The principal reasons for the increase in cash and cash
equivalents were: (i) $28.1 million in proceeds from the disposal of holdings in
Group Sense (International) Ltd.; and (ii) proceeds of $2,753,000 from the
issuance of shares on exercise of options and warrants. Major uses of cash in
2000 were (i) $1,135,000 used in operating activities; (ii) $7,872,000 used for
the acquisition of JIC; (iii) $3,579,000 invested in property, plant and
equipment; (iv) $2,243,000 invested in Mate Fair and Shanghai Q&T; and, (v)
$11,973,000 used for the payment of dividends.
Marketable Securities increased to $7,937,000 for the year ended December
31, 2000 compared to $nil for the year ended December 31, 1999 consisting of
500,000 common shares of Deswell Industries Inc.
Accounts receivable at December 31, 2000 increased to $37,550,000 from
$24,283,000 at December 31, 1999 reflecting the 60% increase in sales in the
last quarter of 2000 compared to the fourth quarter of 1999. The acquisition of
JIC contributed $8,204,000 to the increase. Inventories at December 31, 2000
increased to $27,172,000 from $10,901,000 up 149% from levels at December 31,
1999, reflecting an inventory turnover period of 54 days in 2000 versus 33 days
in 1999. The increase is attributed to customer order commitments, the addition
of JIC's inventory ($3.2 million), an inventory build-up in preparation of two
week Chinese new year holiday in January and the continuing effects of component
shortages which have increased lead times, raw material costs, and our inventory
of safety stock.
Investments in Affiliated Companies at December 31, 2000 decreased to
$2,054,000 from $17,308,000 at December 31, 1999 primarily as a result of the
disposal of Group Sense and the investment in Mate Fair. Starting from February
2000, Nam Tai disposed of its 20% shareholding in Group Sense for cash of $28.1
million realizing a gain on the sale of $10.8 million. It also acquired a 25%
interest in Mate Fair Group Ltd for $2,036,000.
Property, plant and equipment - net of $44,599,000 as at December 31, 2000
is down from $44,717,000 as at December 31, 1999. Depreciation on fixed assets
for 2000 was $6,965,000 while additions to plant and equipment during 2000 were
$3,579,000 including $2,189,000 of machinery and equipment, $1,131,000 of
leasehold improvements, $133,000 for construction in progress, and other
additions of $126,000.
At December 31, 2000, 65.8% and 34.2% of the Company's identifiable assets
were located in Hong Kong and China, respectively, as compared to 64.7% and
35.3% respectively, at December 31, 1999.
Since 1998, the Company's working capital requirements have been financed
from internally generated funds, and short-term borrowing was $24,000 and nil at
December 31, 2000 and 1999 respectively. The Company had working capital of
$89,568,000 and $61,265,000 as of December 31, 2000 and 1999 respectively. In
the opinion of the Company the working capital is sufficient for the Company's
present requirements.
At December 31, 2000, Nam Tai had in place general banking facilities with
four financial institutions aggregating $75,442,000. For the three years ended
December 31, 2000, banking facilities bore Nam Tai's corporate guarantee and
there was an undertaking not to pledge any assets to any other banks without the
prior consent of the Company's bankers. 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, 2000, the Company had utilized approximately $5,399,000 under
such general credit facilities and had available unused credit facilities of
$70,043,000. Interest on notes payable averaged 8.3% per annum during the year
ended December 31, 2000. During the year ended December 31, 2000, the Company
paid a total of $165,000 in interest on indebtedness.
Accounts payable increased by 57.7% to $40,224,000 for the year ended
December 31, 2000 from $25,504,000 for the year ended December 31, 1999,
principally as a result of increased purchases from suppliers to support the
increase sales and $7,406,000 increase due to the acquisition of JIC.
The Company had no long-term debt during either 2000 or 1999.
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Cash flow from operations for 2000 was ($1,135,000), a decrease from
$8,953,000 for 1999. Cash used in operations for 2000 included net income of
$24,001,000, depreciation of $6,965,000 and non-working capital adjustments of
($10,099,000), and changes in working capital (excluding cash and bank
borrowings) of ($22,002,000).
During 2000, the Company's net investment activities generated $14,906,000
including proceeds from the disposal of Group Sense of $28,089,000 and proceeds
from the disposal of property, plant and equipment of $388,000; less (i)
$3,579,000 for the purchase of property, plant and equipment; (ii)$7,872,000 for
the acquisition of JIC; and (iii) $2,243,000 for the purchase of interests in
affiliated companies.
Net cash used by financing activities was approximately $9,094,000 in 2000
including the payment of dividend and special dividends of $11,973,000 and share
repurchases of $73,000. The Company received $2,753,000 from the issuance of
shares upon the exercise of options and warrants, and $200,000 being the
contribution from the minority interest holder in the battery pack business.
The Company believes 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 due to the Company's reinvestment program for tax purposes and the
10% reserve fund. (See note 15 of the Notes to the Consolidated Financial
Statements.) In the event that dividends are paid by the Company's China
subsidiaries, they would reduce the amount available for the reinvestment
program and accordingly taxes would be payable on the profits not reinvested.
The Company believes such restrictions will not have a material effect on the
Company's liquidity or cash flows.
In 1994, the Company resumed declaring annual dividends and have increased
dividend for the last eight consecutive years. The Company declared shareholders
aggregate dividends of $2,942,000, or $0.32 per share, in 1999 and $12,190,000,
or $1.36 per share (including a $1.00 special dividend) in 2000. On February 13,
2001 the Company announced that it was increasing the annual dividend to $0.40
per share to be paid on a quarterly basis commencing with the first quarter 2000
dividend of $0.10 per share. It is the general policy of Nam Tai to determine
the actual annual amount of future dividends based upon the Company's growth
during the preceding year. Future dividends will be in the form of cash or stock
or a combination of both. There can be no assurance that any dividend on the
Common Shares will be declared, or if declared, what the amounts of dividends
will be or whether such dividends, once declared, will continue for any future
period.
RECENT CHANGES IN ACCOUNTING STANDARDS
In March 2000, the Financial Accounting Standards Board ("FASB") has issued
an interpretation ("FIN") No. 44 "Accounting for Certain Transactions involving
Stock Compensation, an interpretation of APB Opinion No. 25". FIN No. 44 is
effective on July 1, 2000 and there was no significant impact on the
consolidated financial statements of the Company on adoption of FIN No. 44.
In June 1998, the FASB has issued a new standard SFAS No.133 "Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. Management has completed the analysis of the
impact and concluded that there was no significant effect on the consolidated
financial statements of the Company on adoption of SFAS No.133 on January 1,
2001.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
The directors and senior management of the Company are as follows:
Name Position with Company
- ---- ---------------------
Shigeru Takizawa Chairman of the Board of Directors
Toshiaki Ogi Chief Executive Officer
Joseph Li President
Y.C. Chang Chief Operating Officer
Tadao Murakami Chief Marketing Officer and a Director
M. K. Koo Senior Executive Officer, Corporate Strategy,
Finance and Administration and a Director
Hidekazu Amishima Managing Director of NT Telecom
Karene Wong Managing Director of NTEE
Mamoru Koike Vice General Manager Research and Development
Charles Chu Director
Peter R. Kellogg Director
Stephen Seung Director
Lorne Waldman Secretary
SHIGERU TAKIZAWA. Mr. Takizawa joined the Company in September 1998 in the
positions of President and Chief Executive Officer of the Company. Prior to
joining Nam Tai, Mr. Takizawa had a forty-year career with Toshiba Corporation
holding various senior management and executive positions. Effective March 1,
2001 Mr. Takizawa assumed the position of Chairman of the Board of Directors. In
this position he will continue to be responsible for the management and
direction of all business operations and technological development of the Nam
Tai group of companies.
TOSHIAKI OGI. Mr. Ogi joined Nam Tai in February 2001, and assumed the
position of Chief Executive Officer on March 1, 2001. Prior to joining Nam Tai,
Mr. Ogi was a senior director for Toshiba Battery Co., Ltd., Nam Tai's joint
venture partner in its rechargeable battery pack business. Mr. Ogi has 35 years
of sales and marketing experience with Toshiba Corp. including 1.5 years with
Toshiba Battery with work experience in the U.S., Germany, Singapore and Hong
Kong. Mr. Ogi is a graduate of economics at Yokohama National University.
MR. JOSEPH LI. Mr. Li, co-founder, Chairman, and Managing Director of the
J.I.C. Group of companies (acquired by Nam Tai in October 2000) was promoted to
the position of President of Nam Tai effective March 1, 2001. Mr. Li has
directed JIC's business development since founding JIC in 1980.
MR. Y.C. CHANG. Mr. Y.C. Chang assumed the position of Chief Operating
Officer on March 1, 2000. Previously he was Managing Director of Nam Tai's
principal manufacturing subsidiary, Namtai Electronic (Shenzhen) Co. Ltd. Mr.
Chang joined the Company in 1991 and assumed the position of Assistant General
Manager of Production before being promoted to Vice General Manager of the
Company's principal manufacturing facility in Shenzhen China in late 1997, and
Managing Director in 1999. Prior to joining Nam Tai, he was Assistant Production
Manager for Inventec Co. Ltd. and Production and Quality Control Manager for
Supercom Co. Ltd. Mr. Chang is a graduate of Chin-I College in Taiwan.
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 Chairman
from September 1998 until March 1, 2001. In his current position as Chief
Marketing Officer, he remains in charge of the manufacturing and marketing
operations of the Company. Mr. Murakami graduated from Japan Electronic
Technology College in 1964.
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M. K. KOO. Mr. Koo had served as Chairman of the Board and a Director of
Nam Tai and its predecessor companies from inception until September 1998. Mr.
Koo assumed the newly created position of Senior Executive Officer, Corporate
Strategy, Finance and Administration in September 1998 and serves as the
Company's Chief Financial Officer. Mr. Koo received his Bachelor of Laws degree
from National Taiwan University in 1970.
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. On January 1, 2001 Mr. Amishima was promoted to
Managing Director of Nam Tai Telecom (Hong Kong) Co. Ltd. From 1964 until
joining the Company, Mr. Amishima was employed by Kanda Tsushin Industrial Co.
Ltd., a Japanese electronics manufacturer.
KARENE WONG. Ms. Wong joined the Company in March 1989 and was promoted to
Managing Director of Nam Tai Electronic & Electrical Products Ltd. on January 1,
2001. Before joining Nam Tai, Ms. Wong was Assistant to the Sales Manager at
Wright Joint & Co. Ltd. Ms. Wong is responsible for assisting Mr. Shigemori in
the Company's sales and marketing operations and supporting employee recruitment
and training. Ms. Wong holds a degree in marketing and international business
from the Chinese University of Hong Kong.
MAMORU KOIKE. Mr. Koike joined Nam Tai in April 1998 as Vice General
Manager of Nam Tai's Research and Development Department in charge of design and
development. Before joining Nam Tai, Mr. Koike served Sharp Corporation for
thirty-five years since his graduation from Osaka Electric Communication High
School in 1963.
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.
STEPHEN SEUNG. Mr. Seung was appointed a Director of Nam Tai in 1995. Mr.
Seung is an attorney and C.P.A. and has been engaged in the private practice of
law in New York since 1981. Mr. Seung received a B.S. degree in Engineering from
the University of Minnesota in 1969, an M.S. degree in Engineering from the
University of California at Berkeley in 1971, an MBA degree from New York
University in 1973 and a J.D. degree from New York Law School in 1979. Mr. Seung
serves on Nam Tai's audit committee and acts as Nam Tai's authorized agent in
the United States. Mr. Seung also serves on the Board of Directors and audit
committee of Deswell Industries, Inc.
PETER R. KELLOGG. Mr. Kellogg was elected to the Nam Tai Board of Directors
in June 2000. Mr. Kellogg is a Senior Managing Director of Spear, Leeds &
Kellogg, a registered broker-dealer in the United States. Mr. Kellogg serves on
Nam Tai's audit committee. Mr. Kellogg is also Chairman of the Ziegler
Companies.
LORNE WALDMAN. Mr. Waldman was appointed Secretary of Nam Tai Electronics,
Inc. in October 1997. Mr. Waldman received a Bachelor of Commerce Degree from
the University of Calgary in 1990. In 1994 he received his Law and MBA degrees
from the University of British Columbia.
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.
COMPENSATION OF DIRECTORS AND SENIOR MANAGERS
The aggregate amount of compensation paid by Nam Tai and its subsidiaries
during the year ended December 31, 2000 to all directors and officers as a group
for services in all capacities was approximately $2,294,000 including
compensation in the form of housing in Hong Kong for its Chairman and Chief
Executive Officer consistent with the practice of other companies in Hong Kong.
As of December 31, 2000, $451,000 has been accrued by the Company or its
subsidiaries to provide pension, retirement or similar benefits.
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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, and $500 per meeting attended by telephone. In addition they are
reimbursed for all reasonable expenses incurred in connection with services as a
director.
OPTIONS OF DIRECTORS AND SENIOR MANAGEMENT.
The following table provides information concerning options owned by the
Directors and Senior Management at February 28, 2001. The table excludes the
Company's publicly traded warrants owned by the Directors and Senior Management,
information about which is disclosed in Item 7 of this Report together with
information concerning the beneficial ownership of the Company's common shares
by Directors and Senior Management and major shareholders.
Number of
common shares Exercise
subject to Price ($) Expiration
Name options per share Date
- ------------------------ ----------------- ----------- ------------
Shigeru Takizawa 20,000(1) 13.875 1/31/2003
Toshiaki Ogi 0 - -
Joseph Li 0 - -
Y.C. Chang 11,000 10.500 3/16/2003
30,000(1) 13.875 1/31/2003
Tadao Murakami 21,000 10.500 3/16/2003
50,000(1) 13.875 1/31/2003
M. K. Koo 50,000(1) 13.875 1/31/2003
Hidekazu Amishima 20,000 10.500 3/16/2003
20,000(1) 13.875 1/31/2003
Karene Wong 5,500 10.500 3/16/2003
20,000(1) 13.875 1/31/2003
Mamoru Koike 10,000(1) 13.875 1/31/2003
Charles Chu 5,000(1) 16.375 6/8/2003
Peter R. Kellogg 5,000(1) 16.375 6/8/2003
300,000(2) 10.250 10/4/2001
Stephen Seung 5,000(1) 16.375 6/8/2003
Lorne Waldman 2,000 10.500 3/16/2003
10,000(1) 13.875 1/31/2003
- -----------
(1) Indicates options granted during the year ended December 31, 2000.
(2) Consists of warrants to purchase 300,000 common shares that Nam Tai issued
in October 1998 to a financial advisor. These warrants were purchased from
the financial advisor in 2001, at $7 3/8 per warrant by I.A.T. Reinsurance
Syndicate Ltd., a Bermuda Corporation of which Mr. Kellogg is the sole
holder of voting stock. Mr. Kellogg disclaims beneficial ownership of these
securities.
BOARD PRACTICES
All directors hold office until the next annual meeting of Nam Tai's
shareholders, which generally is in June of each calendar year, or until their
respective successors are duly elected and qualified or their positions are
earlier vacated by resignation or otherwise. All executive officers are
appointed by the board and serve at the pleasure of the Board. There are no
director service contracts providing for benefits upon termination of
employment.
The Audit Committee of the board of directors reviews, acts on and reports
to the board of directors with respect to various auditing and accounting
matters, including the selection of our auditors, the scope of the annual
audits, fees to be paid to the auditors, the performance of our independent
auditors and our accounting practices. Our Audit Committee consists of Messrs.
Seung, Chu, and Kellogg.
The Compensation Committee of the board of directors determines the
salaries and incentive compensation of the officers of Nam Tai and provides
recommendations for the salaries and incentive compensation of all employees and
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consultants and administers various compensation, stock and benefit plans of Nam
Tai. The Compensation Committee consists of Messrs. Murakami, Takizawa and Koo.
EMPLOYEES
At December 31, 2000, Nam Tai employed 4,954 persons on a full-time basis,
of which 4,873 were working in China and 81 in Hong Kong. Of these,
approximately 3,686 were engaged in manufacturing, approximately 875 were
engaged in administrative, research and development, quality control,
engineering and marketing positions, and the balance in supporting jobs such as
security, janitorial, food and medical services.
At December 31, 1999, Nam Tai employed approximately 2,600 persons on a
full-time basis, of which 2,550 were working in China, 42 in Hong Kong, and 8 in
Korea. Of these, approximately 2,000 were engaged in manufacturing, 500 were
engaged in administrative, research and development, quality control,
engineering and marketing positions, and the balance in supporting jobs such as
security, janitorial, food and medical services.
At December 31, 1998, Nam Tai employed approximately 1,755 persons on a
full-time basis, of which 1,719 were working in China, 21 in Hong Kong, and 15
in Canada. Of these, approximately 1,499 were engaged in manufacturing, 167 were
engaged in clerical, research and development and marketing positions, and the
balance in supporting jobs such as security, janitorial, food and medical
services.
The Company is not a party to any material labor contract or collective
bargaining agreement. The nature of its arrangement with its manufacturing
employees is such that it can increase or reduce staffing levels without
significant difficulty, cost or penalty. Although, the Company has experienced
no significant labor stoppages and believes relations with its employees are
satisfactory, there can be no assurances that this situation will continue in
the future, and any labor difficulties lead to increased costs and/or
interruptions in production.
The Company maintains an employee incentive compensation program in China
whereby a regular bonus is paid to employees on the employee's return to work
following the Chinese New Year holiday. Management believes this method has
contributed to low employee turnover in the factory.
SHARE OWNERSHIP OF DIRECTORS AND SENIOR MANAGEMENT
For information concerning the beneficial ownership of the Company's common
shares by Directors and Senior Management and major shareholders, see Item 7 of
this Report.
EMPLOYEE STOCK OPTION AND INCENTIVE PLAN
The Company's 1993 Stock Option Plan provides for the grant by Nam Tai of
stock options to directors, employees, (including officers) and consultants. The
purpose of the plan is to induce key employees to remain in the employ of Nam
Tai and to encourage such employees to secure or increase on reasonable terms
their stock ownership in the Company. The board of directors of the Company
believes the plan will promote continuity of management and increase incentive
and personal interest in the welfare of the Company.
The terms and conditions of individual grants may vary subject to the
following: (i) the exercise price of incentive stock options may not be less
than market value on the date of grant; (ii) the term of incentive stock options
may not exceed ten years from the date of grant; (iii) the exercise price of an
option can not be altered once granted; and (iv) every independent directors
shall, on an annual basis upon their election to the board of director at the
Annual General Meeting, be automatically granted 5,000 options, with an exercise
price equal to 100% of the fair market value of the common stock on the date of
grant.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The Company is not directly owned or controlled by another corporation or
by any foreign government. The following table sets forth, as of February 28,
2001, the beneficial ownership of the Company's common shares by each person
known by the Company to beneficially own 5% or more of the common shares of the
Company and by each of the Directors and Senior Management of the Company who
beneficially own common shares.
Beneficial (1) ownership
----------------------------
Name Number Percent
- ---------------------------------------------- ---------------- --------
M. K. Koo 3,187,481(2) 28.6%
Peter R. Kellogg 1,452,600(3) 13.8%
I.A.T. Reinsurance Syndicate Ltd. 1,300,000(3) 12.7%
Ivan Chui 1,061,087(4) 10.4%
Joseph Li 1,061,087(5) 10.4%
Tadao Murakami 842,249(6) 8.1%
Y.C. Chang 41,000(7) *
Hidekazu Amishima 40,000(7) *
Karene Wong 25,500(7) *
Stephen Seung 15,000(8) *
Mamoru Koike 10,000(7) *
Charles Chu 10,000 *
Lorne Waldman 3,500(9) *
- ---------
* Less than 1%.
(1) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock that an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person shown in the
table.
(2) Includes publicly traded warrants to purchase 926,850 common shares
exercisable within 60 days of February 28, 2001.
(3) Mr. Kellogg holds directly 152,600 common shares and indirectly, through
I.A.T. Reinsurance Syndicate Ltd, warrants to purchase 300,000 common
shares exercisable within 60 days of February 28, 2001 and 1,000,000 common
shares. I.A.T. Reinsurance Syndicate Ltd., is a Bermuda Corporation of
which Mr. Kellogg is the sole holder of voting stock. Mr. Kellogg disclaims
beneficial ownership of these shares.
(4) Consists of shares held of record by Li & Chui holdings (B.V.I.) Limited
for which Mr. Chui shares investment and voting control. These are the same
shares shown in the table for Joseph Li.
(5) Consists of shares held of record by Li & Chui holdings (B.V.I.) Limited
for which Mr. Li shares investment and voting control. These are the same
shares shown in the table for Ivan Chui.
(6) Includes publicly traded warrants to purchase 175,094 common shares and
options to purchase 21,000 common shares, each exercisable within 60 days
of February 28, 2001.
(7) Consists of options to purchase common shares exercisable within 60 days of
February 28, 2001.
(8) Includes publicly traded warrants to purchase 4,000 common shares
exercisable within 60 days of February 28, 2001 and 10,000 common shares
which are registered to Violet Seung, Mr. Seung's wife, as to which Mr.
Seung disclaims beneficial ownership.
(9) Includes options to purchase 2,000 common shares exercisable within 60 days
of February 28, 2001.
All of the holders of the Company's common shares have equal voting rights
with respect to the number of common shares held. As of December 31, 2000,
approximately 923 holders of record held our common shares. According to
information supplied to the Company by its transfer agent, holders of record
with addresses in the United States held approximately 6.0 million of our
outstanding common shares.
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RELATED PARTY TRANSACTIONS
Toshiba Battery Company Ltd. owns a 13.3% interest in BPC (Shenzhen) Co.,
Ltd. and the Company owns the balance. BPC manufactures rechargeable lithium
battery packs at the Company's manufacturing complex in Shenzhen, China. As of
December 31, 2000, the Company owed $2,691,000 to Toshiba for raw materials and
electronic components. Since the establishment of BPC in 2000, the Company
recognized net sales of $6,232, purchased raw materials of $22,370, acquired
property, plant and equipment of $814 from TBCL and its related companies. The
Company also acquired a license for $1,000 from TBCL.
ITEM 8. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
Our Consolidated Financial Statements are set forth under Item 18.
Financial Statements
LEGAL PROCEEDINGS
The Company is not party to any legal proceedings other than routine
litigation incidental to its business and there are no material legal
proceedings pending with respect to the property of the Company, other than as
described below.
In June 1997, the Company filed a petition in the British Virgin Islands
for the winding up of Tele-Art Inc. on account of an unpaid judgment debt owing
to the Company. The High Court of Justice granted an order to wind up Tele-Art
Inc. and the Caribbean Court of Appeal upheld the decision on January 25, 1999.
On January 22, 1999, pursuant to its Articles of Association, the Company
redeemed and cancelled 138,500 shares of the Company registered in the name of
Tele-Art, Inc. at a price of $11.19 per share to offset substantially all of the
judgment debt, interest and legal costs of $667,000 totaling $1,600,000. On
February 12, 1999, the liquidator of Tele-Art Inc. filed a summons in the
British Virgin Islands on its behalf seeking, among other things, a declaration
setting aside the redemption. The Courts of the British Virgin Islands have
delayed the fixing of a specific date for the hearing of the substantive
application, pending the outcome of an application by the Company to remove the
liquidator on the grounds of conflict of interest and bias. In the interim, the
Company is prevented from redeeming the remaining 169,727 shares to satisfy the
current unpaid judgment debt until a determination of the liquidator's February
12, 1999 application, which up to December 31, 2000, has not yet been finalized.
Management believes that the claim mentioned above is without merit and
will vigorously defend it and believes that the outcome will not have a
significant effect on the financial position, results of operation or cash
flows.
EXPORT SALES
Information regarding our export sales is provided in Item 4. "Information
on the Company - Geographic Markets."
DIVIDEND POLICY
It is the general policy of Nam Tai to determine the actual annual amount
of future dividends based upon the Company's growth during the preceding year.
Future dividends will be in the form of cash or stock or a combination of both.
There can be no assurance that any dividend on the Common Shares will be
declared, or if declared, what the amounts of dividends will be or whether such
dividends, once declared, will continue for any future period. In 1994, the
Company resumed paying annual dividends and has increased dividends for the last
eight consecutive years. The company paid shareholders aggregate dividends of
$2,942,000 or ($0.32 per share) in 1999 and $12,190,000 or ($0.36 per share plus
$1.00 special dividend) in 2000. On February 13, 2001, the Company announced
that it was increasing the annual dividend to $0.40 per share to be paid on a
quarterly basis commencing with the first quarter 2001 dividend of $0.10 per
share.
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ITEM 9. THE LISTING
The Company's Common Shares are traded exclusively on The Nasdaq National
Market under the symbol "NTAI". The Company's Warrants are traded exclusively on
The Nasdaq National Market under the symbol "NTAIW".
The following table sets forth the high and low closing sale prices as
reported by The Nasdaq National Market for year of the last five years ended
December 31:
YEAR ENDED HIGH LOW
---------- ---- ---
December 31, 2000 $20.625 $12.938
December 31, 1999 19.00 8.00
December 31, 1998 17.625 9.375
December 31, 1997 31.625 8.125
December 31, 1996 13.75 7.625
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, 2000.
QUARTER ENDED HIGH LOW
------------- ---- ---
December 31, 2000 $20.125 $14.688
September 30, 2000 20.625 14.813
June 30, 2000 17.563 15.188
March 31, 2000 17.625 12.938
December 31, 1999 19.00 12.13
September 30, 1999 15.50 12.00
June 30, 1999 12.63 8.00
March 31, 1999 12.56 8.88
The following table sets forth the high and low closing sale prices as
reported by The Nasdaq National Market during each of the most recent six
months.
MONTH ENDED HIGH LOW
----------- ---- ---
February 28, 2001 $19.125 $16.813
January 31, 2001 17.00 15.125
December 31, 2000 16.438 14.688
November 30, 2000 20.125 15.563
October 31, 2000 19.750 16.750
September 30, 2000 20.625 17.50
ITEM 10. ADDITIONAL INFORMATION
SHARE CAPITAL
The Company's authorized capital consists of 20,000,000 Common Shares,
$0.01 par value per share. At February 28, 2001, there were 10,218,340 common
shares of the Company outstanding, all of which was fully paid.
At February 28, 2001, the Company had outstanding warrants to purchase an
aggregate of 3,365,159 common shares. Of these warrants, 3,055,159 warrants were
publicly traded and are exercisable to purchase 3,055,159 Common Shares at
$20.40 per share until November 24, 2002; 10,000 warrants (which are not
publicly traded) are exercisable to purchase 10,000 units (consisting of one
common share and one warrant) at $20.40 per unit until November 24, 2002; and
300,000 warrants (which are not publicly traded) are exercisable to purchase
300,000 commons shares at $10.25 per share until October 4, 2001.
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MEMORANDUM AND ARTICLES OF ASSOCIATION
Nam Tai Electronics, Inc. is registered at McW. Todman & Co., McNamara
Chambers, P.O. Box 3342, Road Town, Tortola, British Virgin Islands and has been
assigned company number 3805. The object or purpose of the Company is to engage
in any act or activity that is not prohibited under British Virgin Islands law
as set forth in Clause 4 of the Memorandum of Association. 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.
Paragraph 60 of the Company's Amended Articles of Association (the
"Articles") provides that a director may be counted as one of a quorum in
respect of any contract or arrangement in which the director is materially
interested however, if the agreement or transaction cannot be approved by a
resolution of directors without counting the vote or consent of any interested
director the agreement or transaction may only be validated by approval or
ratification by a resolution of the members. Paragraph 53 of the Articles allows
the directors to vote compensation to themselves in respect of services rendered
to the Company. Paragraph 69 of the Articles provides that the directors may by
resolution exercise all the powers of the Company to borrow money and to
mortgage or charge its undertakings and property or any part thereof, to issue
debentures, debenture stock and other securities whenever money is borrowed or
as security for any debt, liability or obligation of the Company or of any third
party. Such borrowing powers can be altered by an amendment to the Articles.
There is no provision in the Articles for the mandatory retirement of directors
however, the Company has fixed 65 as the mandatory age of retirement for
Directors. Directors are not required to own shares of the Company in order to
serve as directors.
The authorized share capital of the Company is $200,000 divided into
20,000,000 common shares with par value of $0.01 each. Holders of our common
shares are entitled to one vote for each whole share on all matters to be voted
upon by shareholders, including the election of directors. Holders of our common
shares do not have cumulative voting rights in the election of directors. All of
our common shares are equal to each other with respect to liquidation and
dividend rights. Holders of our common shares are entitled to receive dividends
if and when declared by our Board of Directors out of funds legally available
under British Virgin Islands law. In the event of our liquidation, all assets
available for distribution to the holders of our common shares are distributable
among them according to their respective holdings. Holders of our common shares
have no preemptive rights to purchase any additional, unissued common shares.
Paragraph 85 of the Articles allows the Company to deduct from any shareholder's
dividends amounts owing to the Company by such shareholder. Paragraph 13.1
provides that the Company can redeem shares at Fair Market Value from any
Shareholder against whom the Company has a judgment debt.
Paragraph 12 of the Articles provide that without prejudice to any special
rights previously conferred on the holders of any existing shares, any share in
the Company may be issued with such preferred, deferred or other special rights
or such restrictions, whether in regard to dividend, voting, return of capital
or otherwise as the directors may from time to time determine.
Paragraph 14 of the Articles provide that if at any time the authorized
share capital is divided into different classes or series of shares, the rights
attached to any class or series may be varied with the consent in writing of the
holders of not less than three fourths of the issued shares of any other class
or series of shares which may be affected by such variation.
Paragraph 14 of the Memorandum of Association provide that the Memorandum
and Articles of Association of the Company may be amended by a resolution of
members or a resolution of directors. Thus, our Board of Directors without
shareholder approval may amend our Memorandum and Articles of Association. This
includes amendments to increase or reduce our authorized capital stock. Our
ability to amend our Memorandum and Articles of Association without shareholder
approval could have the effect of delaying, deterring or preventing a change in
control of Nam Tai, including a tender offer to purchase our common shares at a
premium over the then current market price.
Provisions in respect of the holding of general meetings and extraordinary
general meetings are set out in Paragraphs 27 to 46 of the Articles and under
the International Business Companies Act. The directors may convene meetings of
the members of the Company at such times and in such manner and places as the
directors consider necessary or desirable, and they shall convene such a meeting
upon the written request of members holding more than 30 percent of the votes of
the outstanding voting shares in the Company.
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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.
There are no provisions in the Memorandum of Association or Articles of
Association governing the ownership threshold above which shareholder ownership
must be disclosed.
The full text of the Amended Articles and Memorandum of Nam Tai were filed
as Exhibit 2.1 in the Company's 1998 Annual Report on Form 20-F.
MATERIAL CONTRACTS
The following summarizes each material contract, other than contracts entered
into in the ordinary course of business, to which Nam Tai or any subsidiary of
Nam Tai is a party, for the two years immediately preceding the filing of this
report:
o Sale and Purchase Agreement between Spin King Limited as Seller and
Nam Tai Electronics, Inc. as Buyer dated September 6, 2000 under which
Buyer agrees to buy and Seller agrees to sell five fully paid bearer
shares of US$1 each in the share capital of Mate Fair Group Limited
for US$2,000,000.
o Common Share Purchase Agreement between Leesha Holdings Limited as
Seller and Nam Tai Electronics, Inc. as Buyer dated September 19, 2000
under which the Seller sells and the Buyer purchases 500,000 common
shares, $0.01 par value, of Deswell Industries, Inc., representing
approximately 9.0% of the outstanding common stock of Deswell at the
time of this transaction, for US$7,500,000.
o Sale and Purchase Agreement among J.I.C. Holdings (B.V.I) Ltd. as
Seller, Mr. Joseph Li Shi Yuen ("Mr. Li"), Mr. Chui Kam Wai ("Mr.
Chui") as Guarantors and Nam Tai Electronics, Inc. as Buyer dated
September 26, 2000 under which the Buyer agrees to purchase the entire
issued share capital of the J. I. C. Group of companies for
HK$255,000,000 (payable one-third in cash and two-thirds in Nam Tai
stock, not to exceed 19.9% of the total number of Nam Tai shares
outstanding at the time of the transaction) less any earnings
adjustment consisting of the amount of the shortfall (if any) between
the net income of the JIC companies and HK$30,000,000, multiplied by
8.5. As Guarantors, Messrs. Li and Chui have guaranteed the repayment
of such shortfall, if any. Messrs. Li and Chui also entered into
employment agreements with the Company.
EXCHANGE CONTROLS
There are no exchange control restrictions on payments of dividends,
interest, or other payments to nonresident holders of Nam Tai's securities or on
the conduct of the Company's operations in Hong Kong, where the Company's
principal executive offices are located or the British Virgin Islands, where Nam
Tai is incorporated. Other jurisdictions in which the Company conducts
operations may have various exchange controls. With respect to the Company's
China subsidiaries, there are restrictions on the payment of dividends and the
removal of dividends from China due to the Company's reinvestment program for
tax purposes and the 10% reserve fund. See note 15 of the Notes to the
Consolidated Financial Statements. In the event that dividends are paid by the
Company's China subsidiaries, they would reduce the amount available for the
reinvestment program and accordingly taxes would be payable on the profits not
reinvested. The Company believes such restrictions will not have a material
effect on the Company's liquidity or cash flow.
TAXATION
No reciprocal tax treaty regarding withholding tax exists between the
United States and the British Virgin Islands. Under current British Virgin
Islands law, dividends, interest or royalties paid by the Company to individuals
and gains realized on the sale or disposition of shares are not subject to tax
as long as the recipient is not a resident of the British Virgin Islands. The
Company is not obligated to withhold any tax for payments of dividends and
shareholders receive gross dividends irrespective of their residential or
national status.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
CURRENCY FLUCTUATIONS
See Exchange Rate Fluctuation discussion in risk factor section and MD&A on
pages 7 and 29 respectively.
FOREIGN CURRENCY RISK
As at December 31, 2000 the Company had no open forward contracts or option
contracts.
Cash on hand at December 31, 2000 of $58,896,000 was held in the following
currencies.
Equivalent U.S. Dollar Holdings
-------------------------------
United States dollars $48,361,000
Japanese yen $5,993,000
Hong Kong dollar $3,711,000
Chinese renminbi $549,000
Korean won $282,000
See Exchange Rate Fluctuation discussion on page 7
INTEREST RATE RISK
Our interest expenses and income are sensitive to changes in interest
rates, as all of our cash reserves and borrowings are subject to interest rate
changes. Cash on hand of $58,896,000 as at December 31, 2000 is invested in
short-term interest bearing investments. As such interest income will fluctuate
with changes in short term interest rates. As of December 31, 2000 we had no
long term debt and $5.4 million outstanding on our credit facilities resulting
in minimal interest rate risk.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable
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PART III
ITEM 15 FINANCIAL STATEMENTS
Not Applicable
ITEM 16. FINANCIAL STATEMENTS
The following financial statements are filed as part of this report:
Page No.
--------
Independent Auditors' Report.....................................................................................44
Consolidated Statements of Income for the three years ended December 31, 2000,
December 31, 1999 and December 31, 1998........................................................................45
Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999........................................46
Consolidated Statement of Shareholders' Equity for the three years
ended December 31, 2000, December 31, 1999 and December 31, 1998...............................................47
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998..................................................................................................48
Notes to Consolidated Financial Statements....................................................................50-69
All schedules for which provisions are 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.
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INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Directors of Nam Tai Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of Nam Tai
Electronics, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2000. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Nam Tai Electronics, Inc. and
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte Touche Tohmatsu
DELOITTE TOUCHE TOHMATSU
Hong Kong
March 15, 2001
-44-
45
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Net sales $ 213,688 $ 145,054 $ 101,649
Cost of sales 182,096 120,074 76,939
-----------------------------------------
Gross profit 31,592 24,980 24,710
-----------------------------------------
Selling, general and administrative expenses 17,646 14,913 13,246
Research and development expenses 3,489 2,624 1,691
Non-recurring (income) expense (Note 4) -- (848) 1,445
-----------------------------------------
Total operating expenses 21,135 16,689 16,382
-----------------------------------------
Income from operations 10,457 8,291 8,328
Gain on disposal of land 355 302 795
Other income - net (Note 5) 13,498 2,192 4,892
Interest expense (165) (192) (1)
Write off / Provision for impairment of investment in an
unconsolidated subsidiary (Note 1d) -- (1) (8,271)
Equity in loss of an unconsolidated subsidiary (Note 1d) -- -- (1,708)
Equity in (loss) income of affiliated companies, including
amortization of goodwill (189) 1,146 534
-----------------------------------------
Income before income taxes and minority interest 23,956 11,738 4,569
Income taxes benefit (expense) (Note 8) 33 60 (1,040)
-----------------------------------------
Income before minority interest 23,989 11,798 3,529
Minority interest 12 -- --
-----------------------------------------
Net income $ 24,001 $ 11,798 $ 3,529
=========================================
Basic earnings per share (Note 9) $ 2.63 $ 1.26 $ 0.34
=========================================
Diluted earnings per share (Note 9) $ 2.56 $ 1.25 $ 0.34
=========================================
See accompanying notes to consolidated financial statements.
-45-
46
NAM TAI ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
DECEMBER 31,
2000 1999
- -------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 58,896 $ 54,215
Marketable securities (Note 10) 7,937 --
Accounts receivable, net 37,550 24,283
Inventories (Note 11) 27,172 10,901
Prepaid expenses and deposits 1,755 2,967
Income taxes recoverable (Note 8) 2,042 2,070
-------------------------
Total current assets 135,352 94,436
Investments in affiliated companies (Note 12) 2,054 17,308
Property, plant and equipment - net (Note 13) 44,599 44,717
Intangible assets - net (Note 14) 24,996 839
Other assets 1,369 1,447
-------------------------
Total assets $ 208,370 $ 158,747
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 16) $ 1,499 $ 6,949
Short term debt (Note 16) 24 --
Accounts payable and accrued expenses 40,224 25,504
Amount due to a related party (Note 17) 2,691 --
Dividend payable 904 718
Income taxes payable 442 --
-------------------------
Total current liabilities 45,784 33,171
Deferred income taxes (Note 8) 34 8
-------------------------
Total liabilities 45,818 33,179
-------------------------
Minority interest 188 --
Commitments and contingencies (Note 18)
Shareholders' equity:
Common shares ($0.01 par value - authorized 20,000,000 shares; shares issued
and outstanding at December 31, 2000 - 10,213,840,
December 31, 1999 - 8,840,823) 102 88
Additional paid-in capital 105,963 80,870
Retained earnings 56,304 44,566
Accumulated other comprehensive income (5) 44
-------------------------
Total shareholders' equity 162,364 125,568
-------------------------
Total liabilities and shareholders' equity $ 208,370 $ 158,747
=========================
See accompanying notes to consolidated financial statements.
-46-
47
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
ACCUMULATED TOTAL
COMMON COMMON ADDITIONAL STOCK OTHER SHARE-
SHARES SHARES PAID-IN OPTIONS RETAINED COMPREHENSIVE HOLDERS'
OUTSTANDING AMOUNT CAPITAL GRANTED EARNINGS INCOME EQUITY
----------- ------ ------- ------- -------- ------------ ------
Balance at January 1, 1998 11,220,023 $ 112 $ 80,044 $ -- $ 68,050 $ 30 $ 148,236
Share buy-back program (1,407,500) (14) -- -- (21,241) -- (21,255)
Issue of options -- -- -- 75 -- -- 75
Options cancelled -- -- -- (75) -- -- (75)
Comprehensive income:
Net income -- -- -- -- 3,529 -- 3,529
Foreign currency translation -- -- -- -- -- 15 15
Dividends ($0.28 per share) -- -- -- -- (2,829) -- (2,829)
----------------------------------------------------------------------------------------------
Balance at December 31, 1998 9,812,523 98 80,044 -- 47,509 45 127,696
Share buy-back program (879,700) (9) -- -- (10,251) -- (10,260)
Share redemption (Note 18c) (138,500) (1) -- -- (1,548) -- (1,549)
Shares issued as compensation 10,000 -- 103 -- -- -- 103
Shares issued on exercise of
options 36,500 -- 394 -- -- -- 394
Advisors' warrants -- -- 329 -- -- -- 329
Comprehensive income:
Net income -- -- -- -- 11,798 -- 11,798
Foreign currency translation -- -- -- -- -- (1) (1)
Dividends ($0.32 per share) -- -- -- -- (2,942) -- (2,942)
----------------------------------------------------------------------------------------------
Balance at December 31, 1999 8,840,823 $ 88 $ 80,870 $ -- $ 44,566 $ 44 $ 125,568
Share buy-back program (5,600) -- -- -- (73) -- (73)
Shares issued as compensation 10,000 -- 136 -- -- -- 136
Shares issued on exercise of
advisors' warrants 58,030 1 1,183 -- -- -- 1,184
Shares issued on exercise of
options 149,500 1 1,568 -- -- -- 1,569
Shares issued for acquisition of
subsidiaries (Note 1a) 1,161,087 12 21,783 -- -- -- 21,795
Advisors' warrants -- -- 306 -- -- -- 306
Advisors' options -- -- 117 -- -- -- 117
Comprehensive income:
Net income -- -- -- -- 24,001 -- 24,001
Foreign currency translation -- -- -- -- -- (49) (49)
Dividends ($1.36 per share,
including special dividend
of $1 per share) -- -- -- -- (12,190) -- (12,190)
----------------------------------------------------------------------------------------------
Balance at December 31, 2000 10,213,840 $ 102 $ 105,963 $ -- $ 56,304 $ (5) $ 162,364
==============================================================================================
See accompanying notes to consolidated financial statements.
-47-
48
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF US DOLLARS)
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 24,001 $ 11,798 $ 3,529
--------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 6,965 5,288 4,258
Amortization of intangible assets 733 52 --
Amortization of advisors' warrants and options 423 329 --
Gain on disposal of property, plant and equipment (244) (159) (766)
Gain on disposal of investment (9,435) -- --
Gain on disposal of investment in an affiliated company (1,346) -- --
Gain on disposal of long-term investments -- -- (1,299)
Loss on disposal of a subsidiary -- 290 --
Unrealized (gain) loss on marketable securities (433) -- 468
Equity in loss (income) of affiliated companies less dividend
received and amortization of goodwill 189 (859) (404)
Equity in loss of an unconsolidated subsidiary -- -- 1,708
Write off/provision for impairment of investment in an
unconsolidated subsidiary -- 1 8,271
Fair value of shares issued as compensation 136 103 --
Deferred income taxes (110) (48) 56
Minority interest (12) -- --
Changes in current assets and liabilities (net of effects of acquisitions
and disposals):
Decrease (increase) in marketable securities (7,504) 287 (981)
(Increase) decrease in accounts receivable (5,137) (8,147) 824
(Increase) decrease in inventories (13,245) (6,546) 5,483
Decrease (increase) in prepaid expenses and deposits 407 (896) (832)
Decrease (increase) in income taxes recoverable 28 670 (174)
Decrease in notes payable (6,331) (329) (1,485)
Increase in accounts payable and accrued expenses 7,203 7,224 826
Decrease in income taxes payable (114) (105) (82)
Increase in amount due to a related party 2,691 -- --
--------------------------------------
Total adjustments (25,136) (2,845) 15,871
--------------------------------------
Net cash (used in) provided by operating activities (1,135) 8,953 19,400
--------------------------------------
Cash flows from investing activities:
Acquisition of subsidiaries, net of cash acquired (Note 1a) (7,872) -- --
Purchase of property, plant and equipment (3,579) (17,888) (4,699)
Purchase of interest in affiliated companies (Note 1f,g,h) (2,243) -- (15,819)
Proceeds from disposal of investment 24,214 -- --
Proceeds from disposal of investment in an affiliated company 3,875 -- --
Proceeds from disposal of property, plant and equipment 388 322 1,197
Decrease (increase) in other assets 123 (53) (53)
Acquisition of business (Note 1c) -- (951) --
Cash outflow on disposal of a subsidiary (Note 1e) -- (19) --
Purchase of interest in unconsolidated subsidiary (Note 1d) -- -- (9,980)
Proceeds from disposal of long-term investments -- -- 2,132
--------------------------------------
Net cash provided by (used in) investing activities 14,906 (18,589) (27,222)
--------------------------------------
-48-
49
NAM TAI ELECTRONICS. INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF US DOLLARS)
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends paid (11,973) (2,889) (2,141)
Share buy-back program (73) (10,260) (21,255)
Repayment of short term debt (1) -- --
Proceeds from shares issued on exercise of options and warrants 2,753 394 --
Contribution by minority interest 200 -- --
Share redemption -- (1,549) --
Notes payable -- 6,949 --
---------------------------------------
Net cash used in financing activities (9,094) (7,355) (23,396)
---------------------------------------
Effect of foreign currencies on cash flows 4 (9) 22
---------------------------------------
Net increase (decrease) in cash and cash equivalents 4,681 (17,000) (31,196)
Cash and cash equivalents at beginning of period 54,215 71,215 102,411
---------------------------------------
Cash and cash equivalents at end of period $58,896 $ 54,215 $ 71,215
=======================================
Supplemental schedule of cash flow information:
Interest paid $ 165 $ 192 $ 1
---------------------------------------
Income taxes paid $ 129 $ -- $ 161
---------------------------------------
Non cash investing transactions:
Acquisition of subsidiaries by issue of shares (Note 1a) $21,795 $ -- $ --
---------------------------------------
See accompanying notes to consolidated financial statements.
-49-
50
NAM TAI ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
1. ACQUISITIONS AND DISPOSITIONS
Subsidiaries:
A In October 2000, Nam Tai Electronics, Inc. (the "Company")
acquired all of the outstanding shares of J.I.C. Group (B.V.I.)
Limited ("JIC"), a company incorporated in the British Virgin
Islands. The purchase price was the initial consideration of
$32,776, less an "earnings adjustment". The initial consideration
was satisfied by a cash consideration of $10,981 and the issuance
of 1,161,087 shares in the Company at $18.77 each, being the
average market closing price as reported on The Nasdaq Stock
Market ("Nasdaq") for each day during the period from September
26, 2000 to October 24, 2000 (inclusive) on which Nasdaq is open
for trading and on which at least 10,000 shares were traded.
One third of the amount of the earning adjustment, if any, shall
be settled in cash and the remaining balance shall be satisfied by
the immediate cancellation of those shares which were issued as
part of the initial consideration. The earnings adjustment is the
amount of shortfall, if any, between the net income of JIC and its
subsidiaries for the financial year ending March 31, 2001 and the
guaranteed profit amount of $3,846, multiplied by 8.5. This
adjustment, if any, will be recorded as an adjustment to the
purchase price and goodwill.
The acquisition was accounted for as a purchase and the results of
JIC and its subsidiaries have been included in the accompanying
consolidated financial statements since the date of acquisition.
The excess of the purchase consideration over the fair value of
the net assets acquired of $10,002 was $22,774 and has been
recorded as goodwill which is being amortized on a straight-line
basis over 15 years.
The following unaudited pro forma consolidated results of
operations give effect to the acquisition of JIC as if it occurred
as of the beginning of the period:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
-----------------------------
Net sales $ 239,327 $ 167,834
Net income $ 25,492 $ 13,070
Basic earnings per share $ 2.53 $ 1.25
Diluted earnings per share $ 2.47 $ 1.24
JIC and its subsidiaries are principally engaged in the
manufacture and trading of liquid crystal display panels and
transformers. Their production base is located at Shenzhen and Bao
An, which are used by three subsidiaries of JIC namely, Jieda
Electronics (Shenzhen) Co. Ltd. ("Jieda"), Jetup Electronic
(Shenzhen) Co., Ltd. ("Jetup") and Jieyao Electronics (Shenzhen)
Co., Ltd. ("Jieyao"), being wholly foreign owned enterprises in
the People's Republic of China (the "PRC").
B In March 2000, Nam Tai Electronic & Electrical Products Limited
("NTEE"), a wholly-owned subsidiary of the Company, together with
Toshiba Battery Co., Ltd. ("TBCL"), established BPC (Shenzhen)
Co., Ltd. ("BPC"), a wholly foreign owned enterprise in Shenzhen,
PRC. NTEE has a 86.67% interest in BPC and the investment cost of
$1,300 was contributed in cash. BPC is located within the
Company's existing manufacturing complex where it produces and
sells high-end, environmentally friendly, rechargeable lithium ion
battery packs.
C On May 28, 1999, the Company acquired from Micro Business Systems
Industries Company Limited a telecommunication business including
the design, research and development, and marketing of
telecommunication products for a consideration of $951 including
acquisition costs. The acquisition was accounted for as a purchase
and the results of operations of the acquired business have been
included in the accompanying consolidated financial statements
since the date of acquisition. The excess of the purchase
consideration over the fair value of the assets acquired of $175
was $776 and has been recorded as goodwill which is being
amortized on a straight-line basis over 4 years. The results of
operations of the business acquired were not material in relation
to the consolidated results of operations of the Company.
-50-
51
1. ACQUISITIONS AND DISPOSITIONS - CONTINUED
D On December 2, 1998, the Company acquired 50.00025% of the
outstanding shares of Albatronics (Far East) Company Limited
("Albatronics"), a Hong Kong public listed company, for cash of
$9,980 including transaction fees. Albatronics and its
subsidiaries were engaged in the trading of electronic components
and manufacturing of consumer electronics products.
On the completion of the Albatronics acquisition on December 2,
1998, the Company indicated that it would take steps to support
Albatronics depending on the results of a comprehensive study
investigating opportunities for corporate restructuring and
streamlining of overhead expenses in Albatronics. Despite the
Company's cash investment, Albatronics' financial position
weakened dramatically since the agreement to invest in Albatronics
was signed in September 1998. As Albatronics became unable to pay
its liabilities as they came due, management of the Company and
Albatronics undertook negotiations with Albatronics' major trade
creditors for forbearance on demands for repayment and concessions
as to amounts payable.
Due to the troubled financial condition of Albatronics at December
31, 1998, it was probable that the Company would never be in a
position to exercise control over Albatronics as such control
would rest with the creditors of Albatronics. Accordingly, the
Company did not consolidate Albatronics' financial statements at
December 31, 1998, for the year then ended or for any subsequent
period. Instead, the Company recorded as separate line items on
its consolidated statements of income Albatronics' loss for the
month of December 1998 of $1,708 as "equity in loss of an
unconsolidated subsidiary" and a "provision for impairment of
investment in an unconsolidated subsidiary" of $8,271 against the
remaining carrying value of this investment. As a result, the
carrying value of the Company's investment in Albatronics was
recorded on the consolidated balance sheet at December 31, 1998 as
"investment in an unconsolidated subsidiary" at a nominal value of
$1.
At the extraordinary general meeting held on August 20, 1999, a
special resolution for the voluntary winding up of Albatronics was
approved by the shareholders of Albatronics. As a result, the
remaining nominal investment value was written off in 1999. On
February 1, 2000, the Company received an invitation soliciting
offers for the rescue or restructuring of Albatronics from
Albatronics' liquidator. According to the invitation, such offers
will likely be subject to the consent and approval of the
creditors, the Stock Exchange of Hong Kong Limited and
shareholders of Albatronics. The success of any rescue or
restructuring proposal is dependent upon acceptance from the
Company which is the majority shareholder of Albatronics. The
Company will carefully consider the terms of the solicitation and
any proposals, coordinating with other creditors and the
liquidator, with the objective of maximizing its return.
During 1999, the Company commenced legal proceedings against
Albatronics seeking compensation to recover its investment seeking
damages for breach of representations, warranties and
undertakings.
E In June 1999, the Company sold its subsidiary, Nam Tai Electronics
(Canada) Ltd. ("NT Canada"), to its management at a nominal value
which the board of directors believed represented the fair market
value and realized a loss on disposition of $290. NT Canada
provided investor relations, regulatory compliance and other
services to the Company. NT Canada, now no longer a subsidiary of
the Company, was renamed Pan Pacific I.R. Ltd. by its new owners
and continues to provide similar services to the Company.
Affiliated companies:
F In September 2000, the Company acquired a 5% indirect shareholding
in both TCL Mobile Communication (HK) Co., Ltd. and Huizhou TCL
Mobile Communication Co., Ltd. (collectively "TCL Mobile") through
the acquisition of 25% outstanding shares of Mate Fair Group
Limited ("Mate Fair"), an investment holding company incorporated
in the British Virgin Islands with a 20% shareholding interest in
TCL Mobile. The acquisition was satisfied by a cash consideration
of $2,036.
TCL Mobile is engaged in manufacturing, distributing and trading
of digital mobile phones and accessories in the PRC as well as
overseas markets.
Mate Fair has been accounted for as an affiliated company and the
results of Mate Fair has been equity accounted for in the
consolidated financial statements from the date of acquisition.
G In March 2000, Nam Tai Electronic (Shenzhen) Co., Ltd. ("NTES"), a
wholly-owned subsidiary of the Company, acquired 42.5% of the
equity interest in Shanghai Q&T Tech. Co., Ltd. ("Shanghai Q&T")
(formerly known as Red Net Technology Co., Ltd.), a company
registered in the PRC for $207. Shanghai Q&T has been accounted
for as an affiliated company and the results of Shanghai Q&T has
been equity accounted for in the consolidated financial statements
from the date of acquisition.
-51-
52
1. ACQUISITIONS AND DISPOSITIONS - CONTINUED
H On May 27, 1998, the Company acquired 20% of the outstanding
shares of Group Sense (International) Limited ("Group Sense"), a
Hong Kong public listed company, for cash of $16,279 which was
reduced by a pre-acquisition dividend of $460. Group Sense and its
subsidiaries manufacture consumer electronics products. Starting
from February 2000, the Company began to dispose of its
shareholding in Group Sense and up to November 2000, the Company
had disposed of its entire interest in Group Sense for cash of
$28,089 in total.
Group Sense had been accounted for as an affiliated company in
1999 and the results of Group Sense had been included in the
consolidated financial statements from the date of acquisition to
September 30, 1999 (interim announcement date of Group Sense, the
date of latest available results in that year) as permitted by
Accounting Principles Board ("APB") Opinion No. 18 "The equity
method of accounting for investments in common stock". Upon the
reduction of shareholding in Group Sense below the 20% level in
2000, the equity method was discontinued and the carrying amount
at the date of discontinuance became the cost of investment, which
was subsequently included in the calculation of the gain on
disposal of investment in 2000 upon sale of the Company's
remaining ownership interest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial
statements of the Company and all its subsidiaries, excluding
Albatronics. In 1998, the Company equity accounted for its share
of the loss of Albatronics. As all investment in Albatronics has
been written off and the Company has ceased to provide additional
financial support, in 1999 the Company ceased to account for any
additional losses of Albatronics. Intercompany accounts and
transactions have been eliminated on consolidation. The details of
the Company's subsidiaries are described in Note 15.
The Company's investment in Group Sense, Mate Fair and Shanghai
Q&T are accounted for by the equity method. Accordingly, the
Company's share of the earnings of these companies are included in
consolidated net income. In February 2000, the Company began to
dispose of its shareholding in Group Sense. Upon the reduction of
shareholding in Group Sense below the 20% level, the equity method
was then discontinued.
B GOODWILL AND LICENSE
The excess of the purchase price over the fair value of net assets
acquired is recorded on the consolidated balance sheet as
goodwill. Goodwill is amortized to expense on a straight-line
basis over various periods not exceeding 40 years. Costs incurred
in the acquisition of licenses are capitalized and amortized to
expense on a straight-line basis over the shorter of license
period or 5 to 7 years.
C USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
D CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash balances and
certificates of deposit having a maturity date of three months or
less upon acquisition.
E INVENTORIES
Inventories are stated at the lower of cost or market value. Cost
is determined on the first-in, first-out basis.
-52-
53
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
F MARKETABLE SECURITIES
All marketable securities are classified as trading securities and
are stated at fair market value. Market value is determined by the
most recently traded price of the security at the balance sheet
date. Net realized and unrealized gains and losses on trading
securities are included in other income. The cost of securities
sold is based on the average cost method and income earned is
included in other income.
G PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and include
interest on funds borrowed to finance construction. No interest
was capitalized for the years ended December 31, 2000, 1999 and
1998. The cost of major improvements and betterments is
capitalized whereas the cost of maintenance and repairs is
expensed in the year incurred. Gains and losses from the disposal
of property, plant and equipment are included in income from
operations, and gains and losses from the disposal of unused land
are separately reported in the consolidated statements of income.
The majority of the land in the Hong Kong Special Administration
Region ("Hong Kong") of the PRC is owned by the government of Hong
Kong which leases the land at public auction to nongovernmental
entities. With the exception of those leases which expire after
June 30, 1997 and before June 30, 2047 with no right of renewal,
the Sino-British Joint Declaration extends the terms of all
currently existing land leases for another 50 years beyond June
30, 1997. Thus, all of the Company's leasehold land in Hong Kong
are considered to be medium-term assets. The cost of such
leasehold land is amortized on the straight-line basis over the
respective terms of the leases.
All land in other regions in the PRC is owned by the PRC
government. The government in the PRC, according to PRC law, may
sell the right to use the land for a specified period of time.
Thus all of the Company's land purchases in the PRC are considered
to be leasehold land and are amortized on the straight-line basis
over the respective term of the right to use the land.
Depreciation rates computed using the straight-line method are as
follows:
CLASSIFICATION YEARS
-------------- -----
Buildings 20 to 50 years
Machinery and equipment 4 to 12 years
Leasehold improvements 3 to 7 years
Automobiles 4 to 6 years
Furniture and fixtures 4 to 7 years
Tools and molds 4 to 6 years
Assets under construction are not depreciated until construction
is completed and the assets are ready for their intended use.
H IMPAIRMENT
The Company reviews its long-lived assets, including goodwill and
license costs, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may no
longer be recoverable. An impairment loss, measured based on the
fair value of the assets, is recognized if expected future
non-discounted cash flows are less than the carrying amount of the
assets.
I REVENUE RECOGNITION
Revenue from sales of products is generally recognized when the
title is passed to customers upon shipment and when collectibility
is reasonably assured. Provision for discounts and rebates to
customers, and returns and other adjustments are provided for in
the same period the related sales are recorded.
J RESEARCH AND DEVELOPMENT COSTS
Research and development costs relating to the development of new
products and processes, including significant improvements and
refinements to existing products, are expensed as incurred.
-53-
54
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
K STAFF RETIREMENT PLAN COSTS
The Company's costs related to the staff retirement plans (Note 6)
are charged to the consolidated statement of income as incurred.
L INCOME TAXES
The Company provides for all taxes based on income whether due at
year end or estimated to become due in future periods but based on
profits earned to date. However, under the current tax legislation
in the PRC, the Company has reasonable grounds to believe that
income taxes paid by NTES, Zastron Plastic & Metal Products
(Shenzhen) Ltd. ("Zastron") and Shenzhen Namtek Co., Ltd.
("Namtek") in respect of any year would be refunded after the
profits earned in that year are reinvested in the business by way
of subscription for new shares. Accordingly, any PRC tax paid by
these subsidiaries during the year is recorded as an amount
receivable at year end when an application for reinvestment of
profits has been filed and a refund is expected unless there is an
indication from the PRC tax authority that the refund will be
refused. Deferred income taxes are provided to recognize the
effect of the difference between the financial statement and
income tax bases of measuring assets and liabilities.
M FOREIGN CURRENCY TRANSACTIONS AND TRANSLATIONS
All transactions in currencies other than functional currencies
during the year are translated at the exchange rates prevailing on
the respective transaction dates. 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 are
recorded in the consolidated statement of income.
The Company's subsidiaries adopt the U.S. dollar, Hong Kong dollar
or the Renminbi as their functional currencies. The financial
statements of all subsidiaries with functional currencies other
than the U.S. dollar are translated in accordance with Statement
of Financial Accounting Standard ("SFAS") No. 52, "Foreign
Currency Translation". All assets and liabilities are translated
at the rates of exchange ruling at the balance sheet date and all
income and expense items are translated at the average rates of
exchange over the year. All exchange differences arising from the
translation of subsidiaries' financial statements are recorded as
a component of comprehensive income.
The exchange rate between the Hong Kong dollar and the U.S. dollar
has been pegged (HK$7.80 to US$1.00) since October 1983.
N EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the
period.
Diluted earnings per share gives effect to all dilutive potential
common shares outstanding during the period. The weighted average
number of common shares outstanding is adjusted to include the
number of additional common shares that would have been
outstanding if the dilutive potential common shares had been
issued.
O CURRENCY CONTRACTS
The Company enters into forward currency contracts in its
management of foreign currency exposures. Firmly committed
transactions are hedged with forward exchange contracts.
Anticipated, but not yet firmly committed transactions are hedged
through the use of purchased options. Gains and losses related to
hedges of firmly committed transactions are deferred and are
recognized in income or as adjustments of carrying amounts when
the hedged transaction occurs. Other foreign exchange contracts
are marked to market with the net realized or unrealized gains or
losses recognized in other income - net (Note 5). Premiums paid on
purchased options are included in prepaid expenses and deposits
and are recognized in income over the life of the options.
P STOCK OPTIONS
SFAS No. 123 "Accounting for Stock-Based Compensation" allows
companies which have stock-based compensation arrangements with
employees to adopt a new fair value basis of accounting for stock
options and other equity instruments or to continue to apply the
existing accounting rules under APB Opinion No. 25, "Accounting
for Stock Issued to Employees," but with additional financial
statement disclosure. The Company continues to account for
stock-based compensation arrangements under APB Opinion No. 25 and
provides additional disclosures required by SFAS No. 123 in Note
19a.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Q COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with SFAS
No. 130, "Reporting Comprehensive Income". Accumulated other
comprehensive income represents foreign currency translation
adjustments and is included in the shareholders' equity section of
the balance sheet. The comprehensive income of the Company was
$23,952, $11,797 and $3,544 for the years ended December 31, 2000,
1999 and 1998, respectively.
R RECENT CHANGES IN ACCOUNTING STANDARDS
In March 2000, the Financial Accounting Standards Board ("FASB")
has issued an interpretation ("FIN") No. 44 "Accounting for
Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25". FIN No. 44 is effective on
July 1, 2000 and there was no significant impact on the
consolidated financial statements of the Company on adoption of
FIN No. 44.
In June 1998, the FASB has issued a new standard SFAS No.133
"Derivative Instruments and Hedging Activities". SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000.
Management has completed the analysis of the impact and concluded
that there was no significant effect on the consolidated financial
statements of the Company on adoption of SFAS No.133 on January 1,
2001.
S RECLASSIFICATION
Certain prior year amounts in the accompanying consolidated
financial statements have been reclassified to conform to the
current years' presentation. These reclassifications had no effect
on the net income or financial position for any year presented.
3. FINANCIAL INSTRUMENTS
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of its cash equivalents and trade
receivables.
The Company's cash and cash equivalents are high-quality deposits placed
with banking institutions with high credit ratings. This investment
policy limits the Company's exposure to concentrations of credit risk.
The trade receivable balances largely represent amounts due from the
Company's principal customers who are generally international
organizations with high credit ratings. Letters of credit are the
principal security obtained to support lines of credit or negotiated
contracts from a customer. As a consequence, concentrations of credit
risk are limited. During the years ended December 31 2000, 1999 and 1998
the Company has not incurred any bad debt expense and does not maintain
any allowances for doubtful accounts.
All of the Company's significant financial instruments at December 31,
2000 and 1999 are reported in current assets or current liabilities in
the consolidated balance sheet at carrying amounts which approximate
their fair value due to the short maturity of these instruments.
From time to time, the Company hedges its currency exchange risk, which
primarily arises from materials purchased in currencies other than U.S.
dollars, through the purchase and sale of currency forward contracts and
options. Such contracts typically allow the Company to buy or sell
currencies at a fixed price with maturities that do not exceed one year.
The Company's forward contracts do not subject the Company to risk from
exchange rate movements because gains and losses from such contracts
offset losses and gains, respectively, of the assets or liabilities being
hedged. At December 31, 2000, there were no open currency forward
contracts and options. As at December 31, 1999, the Company had
outstanding forward contracts and options to purchase Japanese Yen of
approximately $1,755 and $20,000, respectively with maturities that did
not exceed six months.
There was no carrying value for foreign currency forward contracts at
December 31, 1999. The estimated fair values represents the amount
required to enter into offsetting contracts with similar remaining
maturities based on quoted market prices. At December 31, 1999, the
difference between the contract amounts and fair values was immaterial.
The carrying value and fair value of foreign currency options were $554
and $1,058, respectively, as of December 31, 1999. Fair value relating to
foreign currency options at December 31, 1999 was based on the amount the
Company would receive or pay to terminate the contracts based on quoted
market prices as at December 31, 1999.
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4. NON-RECURRING (INCOME) EXPENSE
The amount in 1999 represented the write-back of the remaining balance of
the provision on the settlement of a non-recurring customs assessment in
the PRC which was recorded as non-recurring expense in 1998.
5. OTHER INCOME - NET
Other income - net consists of:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---------------------------------------------
Interest income $ 3,300 $3,330 $5,047
Miscellaneous (expense) income (435) 8 (196)
Gain on disposal of investment in an affiliated company 1,346 - -
Realized gain on disposal of investments, net 9,435 144 1,207
Currency option premium written off (304) (566) (840)
Foreign exchange gain (loss) 51 (413) 394
Bank charges (328) (311) (252)
Unrealized gain (loss) on marketable securities 433 - (468)
--------------------------------------------
$ 13,498 $2,192 $4,892
============================================
In February 2000, the Company sold a portion of its shareholding in Group
Sense, resulting in a gain on disposal of investment in an affiliated
company of $1,346 and the reduction of shareholding in Group Sense below
the 20% level. The Company then continued to dispose of all of its
remaining shareholding in Group Sense, resulting in a gain of $9,435 in
2000. Total gain on disposal of the entire shareholdings in Group Sense
during 2000 amounted to $10,781.
6. STAFF RETIREMENT PLANS
The Company maintains staff contributory retirement plans (defined
contribution pension plans) which cover certain of its employees. The
cost of the Company's contributions amounted to $174, $138 and $79 for
the years ended December 31, 2000, 1999 and 1998, respectively.
7. DEFERRED COMPENSATION ARRANGEMENT
In August 1990, the Company agreed to provide compensation in the event
of loss of office, for whatever reason, for two officers. The amount of
compensation to be ultimately provided is $500 for Mr. M. K. Koo, the
senior executive officer of the Company and $300 for Mr. T. Murakami, the
Chairman of the Company and was fully expensed by December 31, 1995. At
December 31, 2000, the amounts payable to Mr. M. K. Koo and Mr. T.
Murakami are still included in accounts payable and accrued expenses.
8. INCOME TAXES BENEFIT (EXPENSE)
The components of income before income taxes and minority interest are as
follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
-------------------------------------------
PRC, excluding Hong Kong $ 6,384 $ 7,355 $8,207
Hong Kong 17,572 4,387 (4,017)
Other - (4) 379
--------------------------------------------
$23,956 $11,738 $4,569
============================================
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8. INCOME TAXES - CONTINUED
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 taxes as described below.
The provision for current income taxes of the subsidiaries operating in
Hong Kong has been calculated by applying the current rate of taxation of
16% to the estimated taxable income earned in or derived from Hong Kong
during the period.
Deferred tax, where applicable, is provided under the liability method at
the rate of 16%, being the effective Hong Kong statutory income tax rate
applicable to the ensuing financial year, on the difference between the
financial statement and income tax bases of measuring assets and
liabilities.
The basic corporate tax rate for Foreign Investment Enterprises ("FIEs")
in the PRC, such as NTES, Zastron, Namtek, BPC, Jieda, Jetup, and Jieyao
(the "PRC Subsidiaries") is currently 33% (30% state tax and 3% local
tax). However, because all the PRC subsidiaries are located in 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, the PRC subsidiaries have agreed to operate for a minimum of 10
years in the PRC, a two-year tax holiday from the first profit making
year is available, following which in the third through fifth years there
is a 50% reduction to 7.5%. In any event, for FIEs such as 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 the years in which a tax holiday is available, there is an overall
minimum tax rate of 10%. For the years ended December 31, 1990 and 1991,
NTES qualified for a tax holiday; tax was payable at the rate of 7.5% on
the assessable profits of NTES for the years ended December 31, 1992,
1993 and 1994, and 10% in 1995, 1996, 1997 and 1998. On January 8, 1999,
NTES received the recognition of "High and New Technology Enterprise"
which entitles it to various tax benefits including a lower income tax
rate of 7.5% until January 7, 2004. For the years ended December 31, 1992
and 1993, Zastron qualified for a tax holiday; tax was payable at the
rate of 7.5% on the assessable profits of Zastron for the years ended
December 31, 1994, 1995 and 1996 and 10% for the years ended December 31,
1997, 1998, 1999 and 2000. In 1996 and 1997, Jieda and Namtek qualified
for a tax holiday. For the years ended December 31, 1998, 1999 and 2000,
tax was payable at the rate of 7.5% on the assessable profit. Jetup
enjoyed its tax holiday since 1997 and tax was payable at the rate of
7.5% on its assessable profit for the years ended December 31, 1999 and
2000. For the years ended December 31, 1999 and 2000, Jieyao qualified
for a tax holiday. For BPC, the tax holiday has not yet commenced due to
continuous loss accumulated since the date of establishment.
Notwithstanding the foregoing, an FIE whose foreign investor directly
reinvests by way of subscription for new shares its share of profits
obtained from that FIE or another FIE owned by the same foreign investor
in establishing or expanding an export-oriented or technologically
advanced enterprise in the PRC for a minimum period of five years may
obtain a refund of the taxes already paid on those profits.
NTES, Zastron and Namtek qualified for such refunds of taxes as a result
of reinvesting their profit earned in previous years. As a result, the
Company recorded tax expense net of the benefit related to the refunds.
At December 31, 2000 and 1999, taxes recoverable under such refund
arrangements were $2,042 and $2,028, respectively, which are included in
income taxes recoverable.
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8. INCOME TAXES - CONTINUED
The current and deferred components of the income tax benefit (expense)
appearing in the consolidated statements of income are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----------------------------------------------
Current tax $ (77) $12 $ (984)
Deferred tax 110 48 (56)
----------------------------------------------
$ 33 $60 $(1,040)
==============================================
The components of deferred tax assets and liabilities are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---------------------------------------
Deferred tax asset:
Net operating loss carryforwards $ 17 $ 83 -
Deferred tax liability:
Excess of tax allowances over depreciation (51) (91) (56)
-----------------------------------------
Net deferred tax liability $ (34) $ (8) $(56)
========================================
At December 31, 2000 and 1999, a subsidiary of the Company had tax losses
carryforward for Hong Kong tax purposes, subject to the agreement of the
Hong Kong Inland Revenue Department, amounting to approximately $104 and
$521 respectively which have no expiration date.
A reconciliation of the income tax benefit (expense) to the amount
computed by applying the current tax rate to the income before income
taxes in the consolidated statements of income is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
------------------------------------------
Income before income taxes and minority interest $23,956 $11,738 $ 4,569
PRC tax rate 15% 15% 15%
Income tax expense at PRC tax rate on
income before income tax $(3,593) $(1,761) $ (685)
Effect of difference between Hong Kong and PRC tax (7) (37) (54)
rates applied to Hong Kong income
Effect of income for which no income tax expense is payable 2,527 675 586
Tax holidays and tax incentives 491 543 412
Effect of PRC tax concessions, giving rise to no PRC tax
liability 508 538 714
Tax benefit (expense) arising from items which are not
assessable (deductible) for tax purposes:
Gain on disposal of unused land in Hong Kong 53 47 125
Offshore interest income 76 143 -
Non-deductible items (252) (122) -
Provision for impairment of investment in an
unconsolidated subsidiary - - (1,241)
Other 230 34 (897)
------------------------------------------
$ 33 $ 60 $(1,040)
==========================================
No income tax arose in the United States of America in any of the periods
presented.
Tax that would otherwise have been payable without tax holidays and tax
concessions amounts to approximately $999, $1,081 and $1,126 in the years
ended December 31, 2000, 1999 and 1998, respectively (representing a
decrease in the basic earnings per share of $0.11, $0.11 and $0.11, and a
decrease in the diluted earnings per share of $0.11, $0.11 and $0.11 in
the years ended December 31, 2000, 1999 and 1998, respectively).
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9. EARNINGS PER SHARE
The calculations of basic earnings per share and diluted earnings per
share are computed as follows:
Per share
YEAR ENDED DECEMBER 31, 2000 Income Shares amount
---------------------------- ---------------------------------------
Basic earnings per share $ 24,001 9,114,175 $2.63
Effect of dilutive securities
- Stock options - 140,676
- Warrants - 120,265
------------------------------------------
Diluted earnings per share $ 24,001 9,375,116 $2.56
==========================================
Warrants to purchase 3,055,159 shares of common shares at $20.40 were
outstanding at December 31, 2000 but were not included in the computation
of diluted earnings per share because the exercise price of the warrants
was greater than the average market price of the common shares during the
relevant period.
Per share
YEAR ENDED DECEMBER 31, 1999 Income Shares amount
---------------------------- ---------------------------------------------
Basic earnings per share $11,798 9,328,213 $1.26
Effect of dilutive securities
- Stock options - 40,997
- Warrants - 47,570
--------------------------------------------
Diluted earnings per share $11,798 9,416,780 $1.25
============================================
Stock options to purchase 1,500 shares of common shares at $15.75 and
warrants to purchase 2,997,129 shares of common shares at $20.40 and
130,000 shares of common shares plus 130,000 warrants at $20.40 were
outstanding at December 31, 1999 but were not included in the computation
of diluted earnings per share because the exercise price of the share
options and warrants was greater than the average market price of the
common shares during the relevant period.
Per share
YEAR ENDED DECEMBER 31, 1998 Income Shares amount
---------------------------- -----------------------------------------------------
Basic earnings per share $3,529 10,316,510 $0.34
Effect of dilutive securities
- Stock options - 23,162
- Warrants - 11,428
-----------------------------------------------------
Diluted earnings per share $3,529 10,351,100 $0.34
=====================================================
Stock options to purchase 3,500 common shares at $15.75 and warrants to
purchase 2,997,129 common shares at $20.40 and 130,000 common shares plus
130,000 warrants at $20.40 were outstanding at December 31, 1998 but were
not included in the computation of diluted earnings per share because the
exercise price of the share options and warrants was greater than the
average market price of the common shares during the relevant period.
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10. MARKETABLE SECURITIES
During 2000, the Company acquired equity securities listed in the Nasdaq
and all of them were classified as trading securities and included in
current assets at December 31, 2000.
AT DECEMBER 31,
---------------
2000 1999
---------------------------------
Cost $ 7,504 -
Unrealized gain on marketable securities 433 -
---------------------------------
Market value $ 7,937 $ -
================================
11. INVENTORIES
Inventories consist of:
AT DECEMBER 31,
---------------
2000 1999
--------------------------------
Raw materials $ 21,232 $ 7,416
Work-in-progress 3,126 1,380
Finished goods 2,814 2,105
--------------------------------
$ 27,172 $10,901
===============================
12. INVESTMENTS IN AFFILIATED COMPANIES
As of December 31, 1999, investments in affiliated companies represented
the Company's investment in Group Sense which included the unamortized
excess of the Company's investment over its equity in Group Sense's
assets. The excess was approximately $2,090 at December 31, 1999, and was
being amortized on a straight-line basis over the estimated economic
useful life of 10 years. The amortization charge for the year ended
December 31, 1999 and 1998 was $241 and $80, respectively. At December
31, 1999, the aggregate market value of the Company's investment in Group
Sense as quoted on The Stock Exchange of Hong Kong Limited was $16,902
and in 1999, the Company received dividend payments from Group Sense of
$263. During 2000, the Company disposed of its entire interest in Group
Sense for cash of $28,089.
As of December 31, 2000, investments in affiliated companies of $2,054
represent the Company's interest in Mate Fair. The Company's investment
in Mate Fair includes the unamortized excess of the Company's investment
over its equity in Mate Fair's assets. The excess was approximately
$1,525 and is being amortized on a straight-line basis over the estimated
economic useful life of 10 years. The amortization charge for the year
ended December 31, 2000 was $51.
The Company's interest in Shanghai Q&T was reduced to zero as Shanghai
Q&T incurred losses during the year ended December 31, 2000. The Company
does not have any further financial commitment in Shanghai Q&T.
The Company's retained earnings included the (accumulated losses)
undistributed earning of affiliates, including related amortization of
goodwill, of $(189) and $1,680 as of December 31, 2000 and December 31,
1999, respectively.
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13. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
AT DECEMBER 31,
---------------
2000 1999
------------------------------
At cost
Land use right, land and buildings $ 25,485 $ 24,893
Machinery and equipment 32,876 29,478
Leasehold improvements 9,872 8,234
Automobiles 1,652 1,259
Furniture and fixtures 1,519 1,134
Tools and molds 87 78
--------------------------------
Total 71,491 65,076
Less: accumulated depreciation and amortization (27,025) (20,359)
Construction in progress 133 -
--------------------------------
Net book value $ 44,599 $ 44,717
===============================
14. INTANGIBLE ASSETS
Intangible assets consist of the following:
AT DECEMBER 31,
---------------
2000 1999
-------------------------------
Goodwill $ 24,478 $776
License 1,321 115
-------------------------------
Total 25,799 891
Less: accumulated amortization (803) (52)
--------------------------------
$ 24,996 $839
===============================
Amortization expense charged to income from operations for the year ended
December 31, 2000, 1999 and 1998 was $733, $52 and nil, respectively.
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15. INVESTMENT IN SUBSIDIARIES
Percentage of ownership
Place of Principal as at December 31
incorporation activity 2000 1999
------------------------------------------------------------------------------------------------------------------
Consolidated principal subsidiaries:
BPC (Shenzhen) Co., Ltd. PRC Manufacturing 86.67% -
J.I.C. Electronics Company Hong Kong Manufacturing and 100% -
Limited trading
J.I.C Enterprises (Hong Kong) Hong Kong Trading 100% -
Limited
J.I.C. Group (B.V.I.) Limited British Virgin Islands Investment holding 100% -
Jetup Electronic (Shenzhen) Co., PRC Manufacturing 100% -
Limited
Jieda Electronics (Shenzhen) PRC Manufacturing 100% -
Co., Ltd.
Jieyao Electronics (Shenzhen) PRC Manufacturing 100% -
Co., Ltd.
Nam Tai Electronic & Hong Kong Trading 100% 100%
Electrical Products Limited
Nam Tai Telecom Hong Kong Trading 100% 100%
(Hong Kong) Company
Limited
Namtai Electronic (Shenzhen) PRC Manufacturing 100% 100%
Co., Ltd.
Shenzhen Namtek Co., Ltd. PRC Software 100% 100%
development
Zastron Plastic & Metal PRC Manufacturing 100% 100%
Products (Shenzhen) Ltd.
Unconsolidated subsidiary:
Albatronics (Far East) Hong Kong Ceased business in 50.00025% 50.00025%
Company Limited August 1999
(in liquidation)
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. In
the event that dividends are paid by the Company's PRC subsidiaries, such
dividends will reduce the amount of reinvested profits (Note 8) and
accordingly, the refund of taxes paid will be reduced to the extent of
tax applicable to profits not reinvested. However, the Company believes
that such restrictions will not have a material effect on the Company's
liquidity or cash flows.
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16. SHORT TERM DEBT AND BANKING FACILITIES
The Company has credit facilities with various banks representing trade
acceptances and overdrafts. At December 31, 2000 and 1999, these
facilities totaled $75,442 and $38,020, of which $5,399 and $10,711 were
utilized at December 31, 2000 and 1999, respectively. The maturity of
these facilities is generally up to 90 days. Interest rates are generally
based on the banks' usual lending rates in Hong Kong and the credit lines
are normally subject to annual review. The banking facilities restrict
the pledge of assets to any other banks without the prior consent of the
Company's bankers. At December 31, 2000, credit lines with certain banks
were secured by post dated cheques of $105 and land and buildings with
net book values of $230.
The notes payable, which include trust receipts and shipping guarantees,
may not agree to utilized banking facilities due to a timing difference
between the Company receiving the goods and the bank issuing the trust
receipt to cover financing of the purchase. The Company recognizes the
outstanding letter of credit as a note payable when the goods are
received, even though the bank may not have issued the trust receipt.
However, this will not affect the total bank facility utilization, as an
addition to trust receipts will be offset by a reduction in the same
amount of outstanding letters of credit.
AT DECEMBER 31,
---------------
2000 1999
------------------------------
Outstanding letters of credit $ 3,900 $2,718
Trust receipts 389 6,949
Usance bills pending maturity 1,110 -
-------------------------------
Total banking facilities utilized 5,399 9,667
Less: Outstanding letters of credit (3,900) (2,718)
--------------------------------
Notes payable per balance sheets $ 1,499 $6,949
==============================
In addition, the Company has bank borrowings of $24, which is bearing
interest at 5.445% per annum and is secured by an automobile with a net
book value of $37 as of December 31,2000.
17. RELATED PARTY BALANCE AND TRANSACTIONS
As of December 31, 2000, the balance due to a related party represents
the balance due to TBCL, a minority shareholder of BPC.
Since the establishment of BPC in 2000, the Company recognized net sales
of $6,232, purchased raw materials of $22,370, acquired property, plant
and equipment of $814 from TBCL and its related companies. The Company
also acquired a license for $1,000 from TBCL.
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64
18. COMMITMENTS AND CONTINGENCIES
A As at December 31, 2000, the Company has entered into commitments
for capital expenditures of approximately $19,078 for property,
plant and equipment which are expected to be disbursed during the
year ending December 31, 2001.
B Lease commitments
The Company leases premises under various operating leases which
do not contain any escalation clauses. Rental expense under
operating leases was $812 in 2000, $528 in 1999 and $337 in 1998.
At December 31, 2000, the Company was obligated under operating
leases, which relate to land and buildings, requiring minimum
rentals as follows:
Year ending December 31,
- 2001 1,452
- 2002 1,195
- 2003 1,188
- 2004 1,188
- 2005 1,188
- 2006 and thereafter 1,880
--------
$ 8,091
========
C Significant legal proceedings
In June 1997, the Company filed a petition in the British Virgin
Islands for the winding up of Tele-Art Inc. on account of an
unpaid judgement debt owing to the Company. The High Court of
Justice granted an order to wind up Tele-Art Inc. and the
Caribbean Court of Appeal upheld the decision on January 25, 1999.
On January 22, 1999, pursuant to its Articles of Association, the
Company redeemed and cancelled 138,500 shares of the Company
registered in the name of Tele-Art, Inc. at a price of $11.19 per
share to offset substantially all of the judgement debt, interest
and legal costs of $667 totaling $1,600. On February 12, 1999, the
liquidator of Tele-Art Inc. filed a summons in the British Virgin
Islands on its behalf seeking, among other things, a declaration
setting aside the redemption. The Courts of the British Virgin
Islands have delayed the fixing of a specific date for the hearing
of the substantive application, pending the outcome of an
application by the Company to remove the liquidator on the grounds
of conflict of interest and bias. In the interim, the Company is
prevented from redeeming the remaining 169,727 shares to satisfy
the current unpaid judgement debt until a determination of the
liquidator's February 12, 1999 application, which up to December
31, 2000, has not yet been finalized.
Management believes that the claim mentioned above is without
merit and will vigorously defend it and believes that the outcome
of the case will not have a significant effect on the Company's
financial position, results of operation or cash flows.
D Acquisition of JIC
As indicated in Note 1a, the purchase price of JIC was the initial
consideration of $32,776, less an "earnings adjustment". The
earnings adjustment is the amount of shortfall, if any, between
the net income of JIC and its subsidiaries for the financial year
ending March 31, 2001 and the guaranteed profit amount of $3,846,
multiplied by 8.5. The management estimated that the guaranteed
profit amount can be met by JIC and its subsidiaries. Accordingly,
no adjustment has been made to the purchase price and the related
goodwill amount as of December 31, 2000.
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19. COMMON SHARES
A STOCK OPTIONS
In August 1993, the Board of Directors approved a stock option
plan which authorized the issuance of 300,000 vested options to
key employees of the Company. In December 1993, January 1996 and
April 1999, 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 and 1,425,000,
respectively. A summary of stock option activity during the three
years ended December 31, 2000 is as follows:
Number of Option price per share with the weighted
options average option price in parenthesis
---------------------------------------------------------------------------------------------------------
Outstanding at January 1, 1998 53,333 $10.50
Granted 596,500 $10.50 & $15.75 ($13.14)
Cancelled (296,500) $15.75
---------
Outstanding at December 31, 1998 353,333 $10.50 & $15.75 ($10.55)
Exercised (36,500) $10.50 & $15.75 ($10.79)
Cancelled (53,333) $10.5
----------
Outstanding at December 31, 1999 263,500 $10.50 & $15.75 ($10.53)
Granted 350,220 $13.875, $14.81, $16.125 & $16.375 ($14.18)
Exercised (149,500) $10.5
Cancelled (28,220) $16.125
----------
Outstanding at December 31, 2000 436,000 $10.5, $13,875, $14.81, $15.75 & $16.375 ($13.11)
=======
Of the 350,220 options granted by the Company in 2000, 5,000 and
10,000 options with exercise price of $13.875, expiring on January
31, 2003, and exercisable from January 1, 2001 and May 31, 2001,
respectively, were granted to its advisors. The compensation
expense for these advisors' options, using the Black-Scholes
option-pricing model, was $117 and has been charged to the
consolidated statement of income in 2000.
Had compensation cost for the Company's stock option plan, other
than the 15,000 options mentioned above, been determined based on
the fair value at the grant dates for awards under those plans
consistent with the method of SFAS No. 123, the Company's net
income and diluted earnings per share would have been reduced to
the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
-------------------------------------------
Net income As reported $ 24,001 $11,798 $3,529
Pro forma 21,785 11,582 3,273
Diluted earnings per share As reported $2.56 $1.25 $0.34
Pro forma 2.32 1.23 0.32
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19. COMMON SHARES - CONTINUED
A STOCK OPTIONS - CONTINUED
There were no stock options granted during the year ended December
31, 1999. In 1998, the Company granted 300,000 and 296,500 options
with exercise price of $15.75 and $10.50, respectively,
exercisable from August 27, 1999 and expiring on March 15, 2001.
The details of the options granted by the Company in 2000 are as
follows:
Number of Exercise
options granted price Exercisable period
-------------------------------------------------------------------------------------------------
172,000 $13.875 January 1, 2001 to January 31, 2003
130,000 $13.875 May 31, 2001 to January 31, 2003
5,000 $14.81 January 1, 2001 to July 31, 2003
28,220 $16.125 January 1, 2001 to April 5, 2003
15,000 $16.375 June 9, 2001 to June 8, 2003
The weighted average fair value of options granted during 2000 and
1998 was $5.67 and $3.24 respectively, using the Black-Scholes
option-pricing model based on the following assumptions:
2000 1998
----------------------------------------------------- -----------------------
$16.375 $16.125 $14.81 $13.875 $15.75 $10.50
Options Options Options Options Options Options
---------------------------------------------------------------------------------------------------------
Risk-free interest rate 6.41% 6.23% 6.13% 6.67% 5.5% 5.0%
Expected life 6/8/03 4/5/03 7/31/03 1/31/03 3/15/01 3/15/01
Expected volatility 54.1% 51.2% 47.3% 65.0% 61.1% 60.9%
Expected dividends $ .090 $ .090 $ .090 $ .090 $ .070 $ .070
per quarter
The weighted average remaining contractual life of the stock
options outstanding at December 31, 2000 and 1999 was 19 months
and 15 months, respectively.
B SHARE BUY-BACK PROGRAM
The Company repurchased shares under its buy-back program as
follows:
Year Shares repurchased Average purchase price
---- ------------------ ----------------------
2000 5,600 $12.94
1999 879,700 11.86
1998 1,407,500 15.10
In April 2000, the Company terminated its share buy-back program.
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19. COMMON SHARES - CONTINUED
C ADVISORS' WARRANTS
On December 2, 1997, the Company issued 130,000 units to its
advisors. The holder of each unit is entitled to purchase from the
Company at the purchase price of $20.40 per unit one common share
and one warrant exercisable to purchase one common share at $20.40
per share for the period from November 30, 1998 to November 24,
2000. In 2000, 58,030 advisors' warrants were exercised, 61,970
advisors' warrants were expired and the expiry date of exercisable
period for the remaining 10,000 advisors' warrants was extended to
November 24, 2002. As a result, 58,030 common shares and 58,030
warrants were issued during the year ended December 31, 2000. The
compensation expense for the extention of the expiry date of the
10,000 advisors' warrants, using the Black-Scholes option-pricing
model, was $43 and has been charged to the consolidated statement
of income in 2000.
On October 5, 1998, the Company issued 300,000 warrants to an
advisor as consideration of advisory services under a service
contract for a period of 3 years. The holder of each warrant is
entitled to purchase from the Company one common share at $10.25
per share for the period from October 5, 1998 to October 4, 2001.
These warrants have been accounted for using variable accounting
and the related compensation expense of $263, using the
Black-Scholes option-pricing model, has been charged to the
consolidated statement of income in 2000.
The fair values of the advisors' warrants were calculated using
the Black-Scholes option-pricing model based on the following
assumptions:
$20.4 advisors' $10.25 advisors'
warrants warrants
-------- --------
Risk-free interest rate 6.50% 6.50%
Expected life 11/24/02 10/4/01
Expected volatility 50.0% 50%
Expected dividend per quarter $0.090 $0.090
D OTHER WARRANTS
On October 10, 1997, the Company distributed to each holder of its
common shares nontransferable rights (the "Rights") to subscribe
for one unit for every three common shares owned at that date
(referred to as the "Rights Offering"). The subscription price was
$17.00 per unit. Each unit consisted of one common share and one
redeemable common share purchase warrant. Each warrant is
exercisable to purchase one common share at a price of $20.40 per
share at any time from the date of their issuance until November
24, 2000. The common shares and the warrants included in the units
will be separately transferable immediately on issuance of the
common shares. The warrants are redeemable by the Company at any
time at $0.05 per warrant if the average closing sale price of the
common shares for 20 consecutive trading days within the 30-day
period preceding the date the notice is given equals or exceeds
$25.50 per share. The terms of the Rights Offering include an over
subscription privilege available to shareholders subject to
certain conditions and a Standby Purchase Commitment made by the
Standby Underwriters to the Rights Offering, subject to the terms
and conditions of a Standby Underwriting Agreement made between
the Company and the Standby Underwriters, and which includes
purchase by the Standby Underwriters of units not subscribed for
by shareholders of the Company. Pursuant to the Rights Offering,
3,000,000 units were offered, with a subscription expiry date of
November 24, 1997.
During the period of the Rights Offering, shareholders of the
Company exercised Rights to purchase a total of 2,267,917 units at
$17.00 per unit and the Standby Underwriters purchased a total of
729,212 units at a price of $16.75, being the lower of the
subscription price per unit and the closing bid price per common
share as reported on the Nasdaq on the subscription expiry date,
as provided for under the Standby Underwriting Agreement. The
gross proceeds raised amounted to $50,769 and the net proceeds
raised after deduction of expenses associated with the Rights
Offering amounted to $47,700.
On April 1, 2000, the Company amended the terms of the warrant by
extending the expiry date of the warrants from November 24, 2000
to November 24, 2002.
The 58,030 warrants issued pursuant to the exercise of advisors'
warrants mentioned in note 19c above bear the same rights as other
warrants.
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20. BUSINESS SEGMENT INFORMATION
The Company operates principally in the consumer electronic product
segment of the electronics manufacturing services industry. A summary of
net sales, income (loss) from operations and identifiable assets by
geographic areas and net sales to major customers is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
-------------------------------------------
Net sales from operations within:
- Hong Kong:
Unaffiliated customers $202,364 $142,347 $100,081
-------------------------------------------
- PRC, excluding Hong Kong:
Unaffiliated customers 11,324 2,707 1,568
Intersegment sales 180,065 136,648 93,556
-------------------------------------------
191,389 139,355 95,124
-------------------------------------------
- Intersegment eliminations (180,065) (136,648) (93,556)
-------------------------------------------
Total net sales $213,688 $145,054 $101,649
===========================================
Net income within:
- PRC, excluding Hong Kong $ 6,549 $ 7,341 $ 7,272
- Hong Kong 17,452 4,462 (4,122)
- Canada - (5) 379
-------------------------------------------
$ 24,001 $ 11,798 $ 3,529
===========================================
AS AT DECEMBER 31,
------------------
2000 1999 1998
-------------------------------------------
Identifiable assets by geographic area:
- PRC, excluding Hong Kong $ 71,242 $ 55,962 $ 42,690
- Hong Kong 137,128 102,785 85,419
- Canada - - 19,119
-------------------------------------------
Total assets $208,370 $ 158,747 $ 147,228
===========================================
Intersegment sales arise from the transfer of finished goods between
subsidiaries operating in different areas. These sales are generally at
estimated market price.
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20. BUSINESS SEGMENT INFORMATION - CONTINUED
At December 31, 2000, 1999 and 1998, the identifiable assets in Hong Kong
included the investment in affiliated companies of $2,054, $17,308 and
$16,223, respectively.
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
--------------------------------------------
Net sales to customers by geographic area:
- Hong Kong $ 97,685 $ 51,856 $ 8,731
- North America 52,244 43,181 48,204
- Europe 20,032 25,520 18,770
- Japan 19,388 17,597 21,839
- Other 24,339 6,900 4,105
-------------------------------------------
Total net sales $213,688 $145,054 $101,649
===========================================
The Company's sales to the customers which accounted for 10% or more of
its sales are as follows:
Customer
--------
A $ 51,124 $ 38,071 $44,975
B 50,767 31,176 -
C 31,442 43,737 32,478
D 21,448 - -
-------------------------------------------
$154,781 $112,984 $77,453
===========================================
21. SUBSEQUENT EVENT
On February 13, 2001 and March 2, 2001, NTEE, a wholly-owned subsidiary
of the Company, entered into provisional agreement to acquire two
properties at a total consideration of $2,205.
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ITEM 17 EXHIBITS.
The following exhibits are filed as part of this annual report:
Exhibit Number Description
- -------------- -----------
1.1 Memorandum and Articles of Association, as amended (incorporated
by reference to Exhibit 2.1 of registrant's Form 20-F for the
year ended December 31, 1998 filed with the SEC on March 31,
1999.)
4.1 Employment contract between Nam Tai Electronics (Canada) Ltd.
and Edward K. W. Chan dated April 26, 1998 (incorporated by
reference to Exhibit 2.3 of registrant's Form 20-F for the year
ended December 31, 1998 filed with the SEC on March 31, 1999.)
4.2 Termination Agreement between Nam Tai Electronics (Canada) Ltd.
and Edward K. W. Chan dated January 11, 1999 (incorporated by
reference to Exhibit 2.4 of registrant's Form 20-F for the year
ended December 31, 1998 filed with the SEC on March 31, 1999.)
4.3 Agreement dated January 11, 1999 between Nam Tai Electronics,
Inc. and Edward K. W. Chan to negotiate settlement of dispute
(incorporated by reference to Exhibit 2.5of registrant's Form
20-F for the year ended December 31, 1998 filed with the SEC on
March 31, 1999.)
4.4 Warrant for the Purchase of 300,000 Shares of Common Stock
issued to National Securities Corporation dated October 5, 1998
(incorporated by reference to Exhibit 2.7 of registrant's Form
20-F for the year ended December 31, 1998 filed with the SEC on
March 31, 1999.)
4.5 Sale and Purchase Agreement of 5 bearer shares in Mate Fair
Group Limited between Spin King Limited and Nam Tai Electronics,
Inc. dated September 6, 2000. (5% Indirect Ownership in TCL
Mobile)
4.6 Common Share Purchase Agreement between Leesha Holdings Limited
and Nam Tai Electronics, Inc. dated September 19, 2000 for
purchase of 500,000 Deswell Industries Inc. common shares
(incorporated by reference to Exhibit A of the Schedule 13D of
registrant in relation to Deswell Industries, Inc. filed with
the SEC on October 6, 2000).
4.6 Sale and Purchase Agreement of entire issued share capital of
J.I.C. Group between J.I.C. Holdings (B.V.I.) Ltd., Mr. Joseph
Li Shi Yuen, Mr. Chui Kam Wai and Nam Tai Electronics, Inc.
dated September 26, 2000, including service agreements with
Messrs. Li and Chui (incorporated by reference to Exhibit A of
the Schedule 13D of Joseph Li Shi Yuen, Chui Kam Wai and J.I.C.
Holdings (B.V.I) Limited filed with the SEC on November 7,
2000).
4.8 Nam Tai's Amended and Restated 1993 Stock Option Plan
(incorporated by reference to the Amended and Restated 1993
Stock Option Plan of Nam Tai Electronics, Inc. as adopted August
18, 1993, amended December 15, 1993, January 12, 1996, and
amended and restated April 26, 1999) included as part of Nam
Tai's definite Proxy Statement for its 1999 Annual Meeting of
Shareholders filed with the SEC as part of Nam Tai's Form 6-K on
June 24, 1999).
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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 16, 2001 By: /s/ Ming Kown Koo
---------------------------
Ming Kown Koo
Chief Financial Officer
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[DELOITTE TOUCHE TOHMATSU LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-73954 and 333-27761 of Nam Tai Electronic, Inc. on Form S-8 and Registration
Statement No. 333-36135 of Nam Tai Electronic, Inc. on Form F-3 of our report
dated March 15, 2001, appearing in this Annual Report on Form 20-F of Nam Tai
Electronic, Inc. for the year ended December 31, 2000.
/s/ Deloitte Touche Tohmatsu
DELOITTE TOUCHE TOHMATSU
Hong Kong
March 19, 2001
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