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, 2001
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)
15/F., China Merchants Tower
Shun Tak Centre
168-200 Connaught Road
Central, 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, 2001, there were 10,401,940 Common Shares
of the registrant outstanding.
Indicate by check mark whether the registrant: (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17. [ ] Item 18. [X]
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................................26
Item 6. Directors, Senior Management and Employees..................................34
Item 7. Major Shareholders and Related Party Transactions...........................39
Item 8. Financial Information.......................................................40
Item 9. The Listing.................................................................41
Item 10. Additional Information......................................................41
Item 11. Quantitative and Qualitative Disclosure about Market Risk...................49
Item 12. Description of Securities Other than Equity Securities -- Not applicable....50
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies -- Not applicable...........50
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds -- Not applicable..................................................50
PART III
Item 17. Financial Statements -- Not applicable......................................50
Item 18. Financial Statements........................................................50
Item 19. Exhibits....................................................................79
SIGNATURES ................................................................................80
Consent of Independent Accountant (to incorporation of their report on Financial Statements
into the Company's Registration Statements on Forms F-3 and S-8)...........................81
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.
2
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, 2001 and the
balance sheet data as of December 31, 2001 and 2000 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, 1998 and 1997 and the balance sheet data as of December 31, 1999,
1998 and 1997 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,
----------------------------------------------------
2001 2000 1999 1998 1997
--------- -------- --------- --------- ---------
Income Statement Data (1)
- ---------------------
Net sales $234,006 $213,688 $145,054 $101,649 $132,854
Gross margin 30,032 31,592 24,980 24,710 34,724
Income from Operations 5,104 10,457 8,291 8,328 17,467
Net income 9,045 24,001 11,798 3,529 30,839
Per share amounts
- -----------------
Basic earnings per share (2) $ 0.88 $ 2.63 $ 1.26 $ 0.34 $ 3.70
Diluted earnings per share (3) $ 0.87 $ 2.56 $ 1.25 $ 0.34 $ 3.68
Dividend declared $ 0.40 $ 1.36 $ 0.32 $ 0.28 $ 0.10
3
AS AT DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
--------- -------- --------- --------- ---------
Balance Sheet Data (1)
- ------------------
Current assets $ 125,771 $135,352 $ 94,436 $ 97,015 $ 133,022
Property, plant and equipment -
net 70,414 44,599 44,717 32,445 32,442
Total assets 224,573 208,370 158,747 147,228 167,788
Current liabilities 41,789 45,784 33,171 19,476 19,552
Non-current liabilities 13,011 34 8 56 -
Shareholders' equity 169,351 162,364 125,568 127,696 148,236
- ------------
(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, 2001, 2000, 1999, 1998, and 1997 were 10,274,377, 9,114,175,
9,328,213, 10,316,510, and 8,324,320, 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, 2001, 2000, 1999, 1998, and 1997 were 10,393,411,
9,375,116, 9,416,780, 10,351,100, and 8,391,290, 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:
WE ARE DEPENDENT ON A FEW LARGE CUSTOMERS AND HAVE NO LONG-TERM CONTRACTS WITH
THEM. OUR SALES WOULD SUBSTANTIALLY DECREASE AND WE WOULD SUFFER DECREASES IN
NET INCOME OR LOSSES IF WE LOSE ANY OF OUR LARGEST CUSTOMERS OR IF THEY
SUBSTANTIALLY REDUCE THEIR ORDERS.
Historically, a substantial percentage of our sales have been to a small
number of customers. During the years ended December 31, 2001, 2000, and 1999
sales to the Company's largest customers, i.e., customers which accounted for
10% or more of the Company's total sales during the year, aggregated
approximately 44.1%, 72.4% and, 77.9% respectively, of the Company's total
sales. See "-- Customers and Marketing -- Customers." The Company's sales
transactions to all its original equipment manufacturer, or 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 adversely impact
our sales and decrease our net income or cause us to incur losses unless and
until we were able to replace the customer or order with one or more of
comparable size.
WE ARE FACING INCREASING COMPETITION, WHICH HAS CAUSED US TO CHANGE OUR STRATEGY
AND HAS HAD AN ADVERSE EFFECT ON OUR GROSS PROFIT MARGINS.
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
17.2% for 1999, to 14.8% for 2000 and to 12.8% in 2001. The primary reasons for
this decline has been our strategy to enter a less competitive market place for
more advanced subassemblies
4
and components that 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.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OUR COMPETITORS, MANY OF WHOM
HAVE SUBSTANTIALLY GREATER RESOURCES THAN WE DO.
We believe we compete with five firms in the manufacture of our
traditional product lines of calculators, personal organizers and linguistic
products - Kinpo Electronics, Inc. (formerly Cal-Comp Electronics, Inc.),
Inventec Co. Ltd., Group Sense (International) Ltd., Asustek and Compal. We have
numerous competitors in our telecommunication, subassemblies and components
product lines. In addition, we compete with the in-house manufacturing
capabilities of current and potential customers who evaluate our capabilities
against the merit of manufacturing products internally. Many of our competitors
have greater financial, technical, marketing, manufacturing, vertical
integration, and personnel resources and there can be no assurance that we will
continue to compete successfully with these organizations.
WE MUST SPEND SUBSTANTIAL AMOUNTS TO MAINTAIN AND DEVELOP ADVANCED MANUFACTURING
EQUIPMENT AND ENGAGE ADDITIONAL ENGINEERING PERSONNEL IN ORDER TO ATTRACT NEW
CUSTOMERS AND BUSINESS.
We operate in rapidly changing industries. Technological advances, the
introduction of new products, and new design and manufacturing techniques could
adversely affect our business unless we are able to adapt to the changing
conditions. As a result, we continually are required to expend substantial funds
for, and commit significant resources to, engage additional engineering and
other technical personnel and to 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
- utilization of advances in technology;
- innovative development of new or improved manufacturing processes for
customer products;
- efficient and cost-effective services; and
- timely completion of the design and manufacture of new products.
OUR FAILURE TO IMPLEMENT NEW MANUFACTURING PROCESSES TIMELY COULD RESULT IN LOST
SALES, LOWER MARGINS OR EVEN LOSSES.
The market for our manufacturing services is characterized by rapidly
changing technology and continuing process development. We continually evaluate
the advantages and feasibility of new manufacturing processes. We believe that
our future success may depend upon our 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
is a learning curve that must be overcome when any new technologies are
introduced. Our failure to integrate the new technology timely may result in
reduced production, lost sales, lower gross margins and losses.
5
OUR QUARTERLY AND ANNUAL OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT
FLUCTUATIONS FROM A WIDE VARIETY OF FACTORS.
Our quarterly and annual operating results are affected by a wide
variety of factors that could materially and adversely affect our net sales,
gross profit and profitability during any period. This could result from any one
or a combination of factors such as
- the cancellation or postponement of orders,
- the timing and amount of significant orders from our largest
customers,
- our customers' announcement and introduction of new products or new
generations of products,
- evolutions in the life cycles of our customers' products,
- our timing of expenditures in anticipation of future orders,
- our effectiveness in managing manufacturing processes including,
interruptions or slowdowns in production as a result of technical
difficulties with equipment, and changes in cost and availability of
components,
- the mix of orders filled,
- adverse effects to our 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. Our 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.
CANCELLATIONS OR DELAYS IN ORDERS MAY ADVERSELY AFFECT OUR GROSS MARGINS AND
OPERATING INCOME.
Although it is our general practice to purchase raw materials only upon
receiving a purchase order, during times of potential component shortages or to
be able to fill custom orders timely, we have purchased, and may continue to
purchase raw materials and component parts in the expectation of receiving
purchase orders from customers or after receipt of order which is later
cancelled. In the event actual purchase orders are delayed, are not received or
are cancelled, we would experience increased inventory levels or possible
write-downs and or write offs of raw material inventory resulting in reduced
gross margins and operating profits. In 2001, $3.8 million in inventory
provisions were made for slow moving raw materials relating to cancelled,
reduced or delayed orders.
OUR OPERATING RESULTS COULD BE NEGATIVELY IMPACTED BY EXCESSIVE EXPENDITURES
RESULTING FROM OUR ERRORS IN FORECASTING SALES, SEASONALITY AND PERIODS OF
RECESSION, MAKING RESULTS IN ANY PERIOD NOT NECESSARILY RELIABLE TO PREDICT
RESULTS IN A FUTURE PERIOD.
Our 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 harmed. In addition, our 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 our factories in China
for about a half of a month for the Chinese New Year holidays and the general
reduction in sales following the holiday season. The market segments we serve
are also subject to economic cycles and have in the past experienced, are
currently experiencing and are likely in the future to experience, recessionary
periods. A recessionary period affecting the industry segments we serve has and
could in the future have a material adverse effect on our results of operations.
Results of operations in any period should not be considered indicative of
results to be expected in any future period, and fluctuations in operating
results may also result in fluctuations in the market price of our common
shares.
6
WE FACE NUMEROUS RISKS AS A RESULT OF OUR OPERATIONS IN CHINA AND HONG KONG.
Our manufacturing facilities are located in China. As a result, our
operations and assets are subject to significant political, economic, legal and
other uncertainties associated with doing business in China, which are discussed
in more detail below.
The Chinese government could change its policies toward or even
nationalize private enterprise, which could result in the total loss of our
investment in that country. Over the past several years, the Chinese government
has pursued economic reform policies including the encouragement of private
economic activity and greater economic decentralization. The Chinese government
may not continue to pursue these policies or may significantly alter them to our
detriment from time to time without notice. Changes in policies by the Chinese
government resulting in changes in laws, regulations, or their interpretation,
or the imposition of confiscatory taxation, restrictions on currency conversion
or imports and sources of supply could materially and adversely affect us. The
nationalization or other expropriation of private enterprises by the Chinese
government could result in the total loss of our investment in that country.
There may be a lack of remedies and impartiality under the Chinese legal
system that might adversely impact our ability to enforce the agreements
governing our factories and to do business. We do not own the land underlying
our factories. We occupy them under agreements with the local Chinese
government. These agreements and the operations of our factories are dependent
on our relationship with the local government. Our 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. Unlike the U.S., China has a civil
law system based on written statutes in which judicial decisions have little
precedential value. The Chinese government has enacted some laws and regulations
dealing with matters such as corporate organization and governance, foreign
investment, commerce, taxation and trade. However, their experience in
implementing, interpreting and enforcing these laws and regulations is limited,
and our ability to enforce commercial claims or to resolve commercial disputes
is unpredictable. These matters may be subject to the exercise of considerable
discretion by agencies of the Chinese government, and forces unrelated to the
legal merits of a particular matter or dispute may influence their
determination.
A fire, severe weather, flood, or other act of God could cause
significant damage to our properties in China and disrupt our business
operations. A substantial number of our products are manufactured exclusively at
our factory complex located in Baoan County, Shenzhen, China. Fire fighting and
disaster relief or assistance in China is primitive by Western standards.
Material damage to, or the loss of, our factory complex due to fire, severe
weather, flood, or other acts of God or cause may not be adequately covered by
proceeds of our insurance coverage and could have a material adverse effect on
our financial condition, business and prospects. In addition, any interruptions
to our business caused by such disasters would severely harm our financial
condition, business and prospects.
Possible changes and uncertainties in economic policies in the Special
Economic Zones of China in which we operate could harm our operations by
eliminating benefits we currently enjoy. As part of its economic reform, China
has designated certain areas, including Shenzhen where we have our principal
manufacturing facilities, 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 eliminate or substantially alter
these benefits. Moreover, economic reforms and growth in China have been more
successful in certain provinces than others, and the continuation or increase of
these disparities could affect the political or social stability of China.
We could suffer losses from corrupt or fraudulent business practices.
Conducting business in China is inherently risky. Corruption, extortion,
bribery, pay-offs, theft, and other fraudulent practices are common in China. We
could suffer losses from these practices if we are not successful in
implementing preventative measures.
Controversies affecting China's trade with the United States could harm
our operations or depress our stock price. While China has been granted
permanent most favored nation trade status in the United States, controversies
between the United States and China may arise that threaten the status quo
involving trade between the United States and China. These controversies could
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. Political or
trade friction between the United States and China, whether or not actually
affecting our business, could also adversely affect the prevailing market price
of our common shares.
7
Uncertain applications of Chinese tax laws and heightened efforts by the
Chinese taxing authorities to increase revenues could subject us to greater
taxes. Under applicable Chinese law, we have been afforded a number of tax
concessions by, and tax refunds from, the Chinese taxing authorities and have
avoided paying taxes on a substantial portion of our operations in China by
reinvesting all or part of the profits attributable to our Chinese manufacturing
operations. However, the Chinese tax system is subject to substantial
uncertainties including both their interpretation and enforcement. 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. Continued efforts by the Chinese government to increase tax
revenues could result in decisions or interpretations of the tax laws by the
taxing authorities that increase our future tax liabilities or deny us expected
refunds.
Our results have been affected by changes in currency exchange rates.
Changes in currency rates involving the Japanese yen, Hong Kong dollar or
Chinese renminbi could increase our expenses or cause economic or political
problems affecting our business. Our financial results have been affected by
currency fluctuations, resulting in total foreign exchange gains/(losses) of
approximately $530,000 in 2001, $51,000 in 2000 and ($413,000) in 1999. We sell
most of our products in United States dollars and pay our expenses in United
States dollars, Japanese yen, Hong Kong dollars, and Chinese renminbi. While we
face a variety of risks associated with changes among the relative value of
these currencies, we believe the most significant exchange risk results from
material purchases we make in Japanese yen. Approximately 16%, 14% and 15% of
our material costs have been in yen during the years ended December 31, 2001,
2000 and 1999, respectively, but sales made in yen accounted for less than 7% of
sales for each of the last three years. An appreciation of yen against the U.S.
dollar would increase our expenses when translated into U.S. dollars and would
adversely affect profit margins unless our customers permit us to increase our
selling prices to compensate for the appreciation of the yen. Even if our
customers do permit an increase, it may not be timely enough to overcome the
adverse affect we suffer in a particular period and could result in our
customers demanding a decrease in our selling prices in the event of a
depreciation of the yen.
Approximately 5% and 11% of our revenues and 15% and 19% of our expenses
were in Chinese renminbi and Hong Kong dollars, respectively in 2001. An
appreciation of the renminbi or Hong Kong dollar against the U.S. dollar would
increase our expenses when translated into U.S. dollars and could adversely
affect profit margins. Devaluation in the renminbi or Hong Kong dollar would
decrease expenses. Although we 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 the
economy of China or Hong Kong, creates serious domestic problems in China,
increases borrowing costs, or creates other problems adversely affecting our
business.
We have suffered losses from hedging against our currency exchange risk.
From time to time, we have attempted to hedge our currency exchange risk. While
we did not incur material charges during 2001 in our efforts to hedge against
the currency exchange risk, we recorded charges of $304,000 and $566,000 during
2000 and 1999, respectively, 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. We may suffer losses in the future as a result of
currency hedging.
We could be less competitive as a result of currency declines of other
countries in Southeast Asia. As a result of the Asian economic crisis in 1998,
several countries in Southeast Asia experienced a significant devaluation of
their currencies and decline in the value of their capital markets. Currency
declines continued in 2001 in Thailand, Taiwan, South Korea and Singapore.
Continued declines in the currencies in 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.
Political and economic instability of Hong Kong could harm our
operations. Our executive and sales office, and several of our customers and
suppliers are located in Hong Kong, formerly a British Crown Colony. Sovereignty
over Hong Kong was transferred effective July 1, 1997 to China. The continued
stability of political, economic or commercial conditions in Hong Kong remains
uncertain, and any instability could have an adverse impact on our business.
8
WE HAVE NO LONG-TERM CONTRACTS TO OBTAIN COMPONENTS AND OUR PROFIT MARGINS AND
NET INCOME COULD SUFFER FROM INCREASES IN COMPONENT PRICES.
A substantial amount of our net sales are derived from turnkey
manufacturing for which we are responsible for purchasing components used in
manufacturing products for our customers. 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 the orders of our customers. Accordingly, increases in component prices
could seriously harm our gross margins and operating results.
WE MAY LOSE SALES IF SUPPLIERS OF NEEDED COMPONENTS FAIL TO MEET OUR NEEDS.
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.
OUR RESULTS COULD BE HARMED IF WE HAVE TO COMPLY WITH NEW ENVIRONMENTAL
REGULATIONS.
Our operations create small amounts of environmentally sensitive waste
that may increase in the future depending on the nature of our manufacturing
operations. The general issue of the disposal of hazardous waste has received
increasing focus from national, state, local, and international governments and
agencies and has been subject to increasing regulation. Our results of
operations could be adversely affected if we were required to increase
expenditures to comply with new environmental regulations affecting our
operations.
FACTORS AFFECTING THE ELECTRONICS INDUSTRY IN GENERAL AND OUR CUSTOMERS IN
PARTICULAR COULD HARM OUR OPERATIONS.
Most of our sales are to customers in the electronics industry, which is
subject to rapid technological change and product obsolescence. The factors
affecting the electronics industry in general, or any of our major customers or
competitors in particular, could have a material adverse effect on our results
of operations. Our success will depend to a significant extent on the success
achieved by our customers in developing and marketing their products, some of
which may be new and untested. If our customers' products become obsolete or
fail to gain widespread commercial acceptance, our business may suffer.
WE ARE EXPOSED TO GENERAL ECONOMIC CONDITIONS. THE CURRENT SLOWDOWN IN THE
CONTRACT MANUFACTURING INDUSTRY HAS AFFECTED AND WE EXPECT IT TO CONTINUE TO
AFFECT OUR BUSINESS AND NET INCOME ADVERSELY.
As a result of recent unfavorable economic conditions and reduced
capital spending, sales to OEMs in the electronics industry were impacted during
2001. The contract manufacturing industry is currently in an economic slowdown
with an uncertain outlook. Some of the major contract manufacturers in the
United States have announced job reductions aimed at reducing costs and most
Wall Street analysts have reduced earnings and revenue estimates across the
entire contract-manufacturing sector. We have felt the slowdown in our business.
High customer inventory levels have resulted in the delay and cancellation of
orders for calculators, personal organizers, linguistic products and
rechargeable battery packs. As a result of order cancellations we were required
to write off inventory, which adversely impacted our net income in 2001. If the
economic conditions in the United States or Asia worsen generally or in the
electronics and contract manufacturing businesses particularly, or if a wider or
global economic slowdown occurs, we may experience a material adverse impact on
our business, operating results, and financial condition.
FUTURE HARM COULD RESULT FROM ADDITIONAL ACQUISITIONS.
An important element of our strategy is to review acquisition prospects
that would complement our existing companies and products, augment our market
coverage and distribution ability or enhance our technological capabilities.
9
Future acquisitions could have a material adverse effect on our
business, financial condition and results of operations because of the
- possible charges to operations for purchased technology restructuring,
- potentially dilutive issuances of equity securities,
- incurrence of debt and contingent liabilities,
- incurrence of impairment charges related to goodwill and amortization
expenses related to other intangible assets,
- difficulties assimilating the acquired operations, technologies and
products,
- diversion of management's attention to other business concerns,
- risks of entering markets in which we have no or limited prior
experience,
- potential loss of key employees of acquired organizations, and
- difficulties in honoring commitments made to customers by management
of the acquired entity prior to the acquisition.
We can give no assurance as to whether we can successfully integrate the
companies, products, technologies or personnel of any business that we might
acquire in the future.
POLITICAL INSTABILITY, AND CHANGES IN IMPORT/EXPORT REGULATIONS, TARIFFS AND
FREIGHT RATES IN COUNTRIES OTHER THAN CHINA WHERE WE DO BUSINESS COULD CAUSE OUR
PROFIT MARGINS TO DECLINE.
We sell our products to customers in Hong Kong, North America, Europe,
Japan and China. Because of the international nature of our operations and
customers, our business is subject to political and economic risks beyond those
involving China, including political instability, and changes in import/export
regulations, tariffs and freight rates. Changes in tariff structures or other
trade policies could adversely affect our suppliers or customers or decrease the
cost of supplies for our competitors.
THE MARKET PRICE OF OUR SHARES MAY BE HIGHLY VOLATILE.
The markets for equity securities have been volatile and the price of
our common shares has been and could continue to be subject to wide fluctuations
in response to quarter to quarter variations in operating results, news
announcements, trading volume, sales of common shares by officers, directors and
our principal shareholders, 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. Certain events, such as the issuance of common shares upon the
exercise of our publicly traded warrants or other outstanding stock options
could also adversely affect the prevailing market price of our common shares.
THE CONCENTRATION OF SHARE OWNERSHIP IN OUR SENIOR MANAGEMENT ALLOWS THEM TO
CONTROL OR SUBSTANTIALLY INFLUENCE THE OUTCOME OF MATTERS REQUIRING SHAREHOLDER
APPROVAL.
Members of our management and board as a group beneficially owned 53% of
our outstanding shares at February 28, 2002. As a result, acting together they
may be able to control, and they can substantially influence, the outcome of all
matters requiring approval by our shareholders, including the election of
directors and approval of significant corporate transactions. This ability may
have the effect of delaying or preventing a change in control of Nam Tai, or
causing a change in control of Nam Tai that may not be favored by our other
shareholders.
OUR EXEMPTIONS FROM CERTAIN OF THE REPORTING REQUIREMENTS UNDER THE EXCHANGE ACT
LIMITS THE PROTECTIONS AND INFORMATION AFFORDED TO INVESTORS.
We are a foreign private issuer within the meaning of rules promulgated
under the Securities Exchange Act of 1934. As such, we are exempt from certain
provisions 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;
10
- the sections of the Exchange Act regulating the solicitation of
proxies, consents or authorizations in respect to a security
registered under the Exchange Act;
- and the sections of the Exchange Act requiring insiders to file
public reports of their stock ownership and trading activities
and establishing insider liability for profits realized from any
"short-swing" trading transaction (i.e., a purchase and sale, or
sale and purchase, of the issuer's equity securities within less
than six months).
Because of these exemptions, investors are not afforded the same protections or
information generally available to investors in public companies organized in
the United States.
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 15/F., China Merchants Tower, Shun Tak Centre, 168-200
Connaught Road, Central, 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 Executive Director 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 products and established a
leading position in electronic calculators and handheld organizers for OEMs such
as Texas Instruments Incorporated and Sharp Corporation. Over the years, 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., which targets the rapidly expanding market for
telecommunications components including liquid crystal display, or LCD, modules
as well as end products including cordless phones and family radio systems.
In September 2000, 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") through the acquisition of 25% of the
outstanding shares of Mate Fair Group Limited, ("Mate Fair") an investment
holding company owning a 20% shareholding interest in the communications
companies. TCL Mobile is engaged in manufacturing, distributing and trading of
digital mobile phones and accessories in China and overseas markets and are
licensed to manufacture GSM and CDMA cellular phones.
11
In October 2000, Nam Tai completed the acquisition of the J.I.C. group
of companies ("JIC Group"). The JIC Group is engaged in the manufacture and
marketing of transformers and LCD panels, a key component for a variety of
consumer electronic products. Of the purchase price of $32.8 million, Nam Tai
paid $11.0 million in cash and issued 1.16 million of its common shares. Nam Tai
expects the acquisition of JIC Group 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.
In January 2002, Nam Tai entered into a transaction, which, if
consummated, will result in the listing of a company holding JIC Group's
business on the Hongkong Stock Exchange. To effect the transaction, Nam Tai
entered a restructuring agreement with the liquidators of Albatronics (Far East)
Company Limited ("Albatronics") a company whose shares had been listed on the
Hongkong Stock Exchange and which was placed into voluntary liquidation in
August 1999. Nam Tai owns slightly more than 50% of the outstanding capital
stock of Albatronics. Under the restructuring agreement Nam Tai has agreed to
transfer JIC Group into a new company for a controlling interest in the new
company. Albatronics' listing status on the Hongkong Stock Exchange will be
withdrawn and the new company will be listed on the Hongkong Stock Exchange free
from the liabilities of Albatronics. For its contribution to the new company,
Nam Tai will receive a combination of ordinary and preference shares, which are
analogous to common stock and convertible preferred stock of companies organized
under U.S. law. Immediately upon completion of the restructuring, Nam Tai, the
creditors of Albatronics and the Hong Kong public who hold shares of Albatronics
will receive ordinary shares of the new company equal to approximately 70.4%,
24.1% and 5.5%, respectively, of the outstanding ordinary shares of the new
company. Nam Tai will also receive preference shares of the new company, which
upon their full conversion, will result in Nam Tai, the creditors and the Hong
Kong public owning approximately 92.9%, 5.8% and 1.3%, respectively, of the
outstanding ordinary shares of the new company immediately upon consummation of
the restructuring. The preference shares are non-redeemable, non-voting shares
that rank pari passu with ordinary shares of the new Company on the payment of
dividends or other distribution other than on a winding-up. No holder of
preference shares (including Nam Tai) may convert them if such conversion would
result in the minimum public float of 75% that is required under the Hongkong
Stock Exchange Listing Rules not being met.
Consummation of the restructuring agreement is subject to the
fulfillment of a number of conditions including approval by Albatronics'
creditors and shareholders and the Listing Committee of the Stock Exchange of
Hong Kong and the receipt of other regulatory and court approvals. If such
conditions are satisfied, the restructuring is expected to be consummated before
the end of the second quarter of 2002.
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 or make investments in related businesses for
strategic business purposes.
CAPITAL EXPENDITURES
Nam Tai's principal capital expenditures and divestitures over the last
three years include the following:
2001 2000 1999
------------ ------------ ------------
Property, plant and equipment (net) $ 36,013,000 $ 3,579,000 $ 17,888,000
Investment in subsidiaries and affiliated
companies - 36,319,000 951,000
Disposition of affiliated companies and investments - (28,089,000) -
The major capital expenditures in 2001 included:
- $13.0 million for the purchase and interior improvements on
23,000 square feet of contiguous prime office space at Shun Tak
Centre in the Central district of Hong Kong,
- $6.4 million for the purchase of new staff residences in Hong
Kong,
- $5.5 million for the construction and machinery for a new 138,000
sqft. a five-story factory building within the Company's existing
manufacturing complex, o $5.5 million for the purchase of new
chip on glass production lines, o and $2.0 million for the
doubling of the front end process for LCD panels.
12
Principal capital expenditures currently in progress consist of amounts
budgeted at approximately $24 million. This includes $12 million for the
purchase of new production equipment for a Super Twisted Nematic ("STN") LCD
production line and $12 million for the completion of a five-story factory
building within the Company's existing manufacturing complex to manufacture
electronic products. The external structure of the new 138,000 square feet
building has been completed in 2001. Finalization of interior works, completion
of two floor of new clean rooms to house the Company's advanced chip on glass
and chip on board equipment, and installation of machinery and fixtures
equipment will occur in the first half of 2002.
An investment transaction that is expect to be completed in 2002 is the
acquisition of a 6% equity interest in TCL Holdings Corporation Ltd. ("TCL
Holdings") for a consideration of approximately $12 million. TCL Holdings is the
parent company for the TCL Group of Companies, a PRC state-owned enterprise that
has extensive sales and distribution channels in China. TCL Holdings' scope of
business includes the import and export of raw materials, the design
manufacturing and sales and marketing of telephones, VCD players, color
television sets, mobile phones and other consumer electronic products. Through
this transaction both Nam Tai and the TCL Group aim to create a strategic
relationship which will allow the parties to support and co-ordinate with each
other to expand and develop new business in the manufacturing and marketing of
consumer electronic products, including telecommunication products in the
growing domestic China market and globally.
BUSINESS OVERVIEW
Nam Tai provides design and manufacturing services to OEMs of
telecommunication and consumer electronic products and components. Nam Tai's
largest customers include Epson Precision (HK) Ltd., Texas Instruments
Incorporated, Toshiba Battery Co., Ltd., Seiko Instruments Inc., and Sharp
Corporation. 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 digital
cameras for use with mobile phones. 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. As part
of a joint venture investment with Toshiba, Nam Tai began manufacturing lithium
ion and nickel metal hydride rechargeable battery packs that are used in
cellular phones.
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, chip on film, chip on board, multichip
modulators, surface mount technology, ball grid array, tape automated bonding,
outer lead bonding and anisotropic conductive film 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 digitally enhanced cordless
telephone, or DECT, technologies in the production of various telecommunication
products. The Company also provides original design manufacturing 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 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 and
subassemblies. 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 to 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.
13
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 a International Data Corp., or IDC, report cited in the
July 2001 issue of Manufacturing Market Insider, the EMS market size will more
than double from $103 billion in 2000 to $231 billion by 2005.
GROWTH IN KEY END-MARKETS
The growth of electronic manufacturing service providers is directly
related to the growth rates of their customers' end-markets. Growth in handset
sales is driven by new subscriber growth and increasingly by handset
replacement. The potential for growth in handset sales is perhaps the greatest
in China. The penetration rate of China's cellular --phone market was 9.2% as of
August 31, 2001 compared to the average penetration rate of 40% to 50% in Europe
and the United States. (Source: South China Morning Post of Hong Kong, Oct. 4,
2001). Despite its low penetration rates China is already the world largest
mobile phone market with 125.7 million cellular phone users and expected to grow
at 40% annually for the next four years based on an IDC report sited in a
November 2001 Merrill Lynch analyst report.
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.
However, the future potential growth of international outsourcing is
significant. As an example, according to The Worldwide Electronics Assembly
Market, a strategic report on the worldwide market for printed circuit board and
box-level assembly published in November 2001 by Electronic Trend Publications,
a market researcher, it is estimated that the size of the electronics assembly
market in Japan was worth $124.9 billion in 2000, or 18% of the world market.
14
PRODUCTS
Prior to 2001, the Company operated in a single segment of the consumer
electronic products industry. As a result of the acquisition of JIC Group in
late 2000, the Company added a second segment, LCD panels and transformers,
principally relating to the operations of JIC Group. The following table sets
forth the percentage of net sales of each of the Company's product lines of each
segment for the years ended December 31, 2001, 2000, and 1999. The information
presented below for 2000 and 1999 has been restated to reflect this change. No
LCD panels and transformers segment information for the year ended December 31,
1999 is presented because the Company did not operate in the LCD panels and
transformer business in 1999.
YEAR ENDED DECEMBER 31,
-----------------------
PRODUCT LINE 2001 2000 1999
- ------------------------------------------- ------ ------ -------
Consumer Electronic Products Segment
Subassemblies and components 41% 38% 33%
Electronic calculators 17 29 35
Personal digital assistants and
linguistic products 13 16 23
Telecommunication Products 2 7 6
Battery Packs 9 3 -
Other products and services 3 2 3
----- ---- ----
85% 95% 100%
LCD Panels and Transformers Segment 15 5 -
----- ---- ----
100% 100% 100%
===== ==== ====
Subassemblies and Components
Nam Tai manufactures and sells the following subassemblies and
components:
- LCD modules to display information as part of telecommunication
products such as cellular telephones and telephone systems, and
office automation products such as copiers and facsimile
machines;
- Control panel modules for incorporation into microwave ovens and
copier machines; and
- Large scale integrated circuits assembled onto printed circuit
boards, flexible printed circuit boards, or LCDs which are
incorporated into telecommunication products, RF modules for
cordless phones, home appliance products, office automation
products, electronic dictionaries and personal digital
assistants.
Electronic Calculators
The Company manufactures a wide range of electronic calculators that
include basic function calculators, desktop display style, scientific, and
advanced graphic calculators.
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.
15
Telecommunication Products
The Company produces 1.9 GHz high frequency cordless telephones, home
feature phones, family radio systems, transceivers and a digital camera
accessory product for use with GSM and GPRS mobile phones.
Battery Packs
Nam Tai produces lithium ion and nickel metal hydride rechargeable
battery packs for use in cellular phones. Production commenced in June of 2000
as part of a joint venture with Toshiba Battery Company Limited.
Other Services and Products
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.
LCD Panels and Transformers
With the acquisition of JIC Group in October 2000 Nam Tai began
producing transformers and high quality LCD panels. An LCD panel is a key
component for a variety of consumer and telecommunication products. Nam Tai
expects in the future that JIC Group will produce LCD panels for LCD modules
that Nam Tai manufactures for cellular telephones and telephone systems using
advanced chip on glass mounting technology.
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 2001 2000 1999
- ---------------- ---- ---- ----
Hong Kong 27% 46% 35%
North America 24 24 30
China 11 5 -
Europe 10 9 18
Japan 10 9 12
Other 18 7 5
---- --- ---
100% 100% 100%
==== === ===
The Company's sales and operating results are often affected by
seasonality. Sales of calculators, personal organizers and linguistic products
are often higher during the second and third quarters in anticipation of the
start of the school year and Christmas buying season. All product categories
experience lower sales in the first quarter resulting from both the closing of
the Company's factories in China for about half of a month for the Chinese New
Year holidays and the general reduction in sales following the holiday season.
16
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 components and subassemblies into their products:
CUSTOMER BRAND PRODUCT CUSTOMER
NAME SINCE
Asahi Corporation Casio Cordless telephones 1999
(subsidiary of Casio
Computer Co., Ltd.)
Canon, Inc. Canon Personal organizers and 1988
calculators
Casio Computer (Hong Kong) Limited Casio Aluminum panels and PVC 1994
wallets
Epson Precision (HK) Ltd. ----- LCD Modules for cellular 1997
(mobile) phones
Headline Electronics Co., Ltd. Radio Shack Family radio systems 2000
Midland
Hitachi Ferrite Electronics Ltd. ----- Transformers 2000
and Hitachi Media Electronic
Co., Ltd.
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
Optrex Corporation ----- Assemblies for LCD modules 1994
Seiko Instruments Inc. Seiko, SII Personal organizers and 1991
linguistic products
Sharp Corporation Sharp Personal organizers, 1989
calculators and control panel
modules
Sony Corporation Sony Electronic dictionaries and 1999
rechargeable battery packs
Sony Ericsson Mobile Ericsson Mobile phone digital camera 2001
Communication AB
Texas Instruments Incorporated Texas Personal organizers and 1989
Instruments calculators
Toshiba Battery Company Ltd. ----- Rechargeable battery packs 2000
for cellular phones
Shunde Whirlpool Electrical Whirlpool Silk screening/microwave oven 1998
Appliance Company Limited of China control panels
Vtech Communications Ltd. Vtech LCD Panels for phones 2000
17
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 customers accounting for 10% or more of sales in
years ended December 31, 2001, 2000 and 1999 were as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----
Epson Precision (HK) Ltd. 29.9% 23.8% 21.5%
Texas Instruments Incorporated 14.2 23.9 26.2
Sharp Corporation * 14.7 30.2
Seiko Instruments Inc. * 10.0 *
---- ---- ----
44.1% 72.4% 77.9%
==== ==== ====
*Less than 10% of Nam Tai's sales.
A number of product models are made for major customers so that the
Company is not necessarily dependent on a single product model for any 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, or a
substantial reduction in orders from them would have a material adverse effect
on the Company's business. While each of the two 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 product production
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:
- - 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, 2001, the Company employed nine
COG machines.
- - 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, 2001, the Company employed 78
COB machines.
- - 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, 2001, the Company
employed 16 SMT lines.
18
- - Ball Grid Array ("BGA"): A method of mounting an integrated circuit or other
component to a printed circuit board or PCB. 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 PCBs with higher layer counts. At December 31, 2001, the Company employed
10 BGA machines.
- - 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, 2001, the Company employed three OLB machines.
- - 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, 2001, the Company employed seven systems of TAB with
ACF machines.
At December 31, 2001, the Company employed six rechargeable battery pack
assembly lines and one double sided front end process LCD panel production line.
A new STN LCD front end process production line is currently being installed
with production commencing within the second quarter.
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.
19
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 products from
suppliers in Japan and elsewhere. In the past, orders for components were based
on forecasts that Nam Tai received from its OEM customers, which reflect
anticipated shipments during the production cycle for a particular model. The
Company now tries to base component orders on received purchase orders.
The major component parts purchased by the Company are integrated
circuits or "chips", LCDs, solar cells, printer heads, batteries, and battery
cells. 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. Battery cells are obtained from
Toshiba Battery Corporation Ltd. The Company also purchases various mechanical
components such as plastic parts, rubber keypads, PCBs ITO glass and packaging
materials locally in China. ITO stands for "indium tin oxide," an alloy that is
sputtered onto a transparent conductive film. The result is a conductive glass
product that can be used as the substrate for an LCD. Management is attempting
whenever possible to use domestic suppliers who are often able to provide items
at lower costs and with shorter lead times.
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 may occur again in the future. 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.
20
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 and 1999 the Company did
not suffer a material loss resulting from the cancellation of an OEM customer
confirmed order. In 2001, $3.8 million in inventory provisions for slow moving
raw materials were incurred relating to cancelled, reduced or delayed orders.
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 invest in research and development that
provides it with the potential to offer better and more technologically advanced
services to OEM customers or assists in the design and development of future
products. Research and development expenses were $2,954,000 in 2001, $3,489,000
in 2000, and $2,624,000 in 1999.
ODM DEVELOPMENT
Nam Tai believes it is important to foster the research and development
capabilities of its engineering division. Accordingly, it maintains two senior
executives to oversee the development of Nam Tai's product development
capabilities. The Company plans to continue acquiring advanced design equipment
and to enhance its technological expertise through continued training for all
engineers and further recruiting of system engineers.
The Company provides the facilities and experience 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's competitors in the manufacture of its
traditional product lines of calculators, personal organizers and linguistic
products include Kinpo Electronics, Inc. (formerly Cal-Comp Electronics, Inc.),
Inventec Co. Ltd., Group Sense (International) 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.
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.
21
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.
PATENTS, LICENSES AND TRADEMARKS
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., Nam Tai Group Management Ltd. and J.I.C. Group (B.V.I.) Ltd. and
their subsidiaries. See Note 14 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 at February 28, 2002.
[FLOW CHART GOES HERE]
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 and customer relations are the main functions handled by
NTEE.
Nam Tai Group Management Limited
Nam Tai Group Management Limited ("NTGM") was established on March 9,
2001 in Hong Kong and provides management services to other group companies.
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
and LCD modules.
BPC (Shenzhen) Co. Ltd.
In January 2000, Nam Tai, through NTEE, entered into a joint venture
agreement with Toshiba Battery Co., Ltd. for the establishment of BPC (Shenzhen)
Co., Ltd., ("BPC") a wholly foreign owned enterprise in Shenzhen, China. 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. Nam
Tai owns a 86.7% interest in BPC.
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.
23
J.I.C. Group (B.V.I.) Ltd. ("JIC")
Nam Tai completed its acquisition of JIC in October 2000 for
approximately $32.8 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, Nanox, Vtech,
Nishimura & Musen Denki, and Hitachi. JIC, incorporated in the British Virgin
Islands, is an investment holding company for the four subsidiaries described
below:
J.I.C. Enterprises (Hong Kong) Ltd. ("JIC Enterprises")
JIC Enterprises, incorporated in Hong Kong, was established in 1983 and
has been in the LCD business for almost 20 years. Originally a small trading
company for LCD panels and electronics products, JIC Enterprises is now
strategically focused on the sales and marketing of LCD panels and is
responsible for customer relationship development.
Jetup Electronic (Shenzhen) Co. Ltd. ("Jetup")
Jetup was incorporated in 1993 in the PRC and handles the manufacturing
and processing works of LCD panels through its factory plants in Baoan County,
Shenzhen.
J.I.C. Electronics Company 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 Group's transformer division due to the expansion of
the transformer business.
Mate Fair Group Ltd. - 25% equity interest
In September 2000, through the acquisition of a 25% interest in Mate
Fair, Nam Tai acquired a 5% indirect shareholding in TCL Mobile. TCL Mobile is
engaged in manufacturing, distributing, and trading of digital mobile phones and
accessories in China as well as overseas markets. It is one of 27 authorised GSM
handset manufacturers and one of 20 authorised CDMA handset manufacturers in the
PRC.
PROPERTY, PLANT 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
In 2001, the Company's principal executive office was relocated to
15/F., China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road, Central,
Hong Kong. The office is conveniently located above the ferry terminal and
beside the highway, permitting easy transportation by sea or by land to and from
the manufacturing facilities in Shenzhen. The purchase and renovation of the
23,000 square feet of contiguous prime office space, including transaction fees,
was $13.0 million.
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 was previously used by the JIC Group for administration and marketing and
is now being leased out.
24
The Company owns five residential flats in Hong Kong purchased for total
consideration of $8,312,000. These properties are occupied by senior management
and form part of their compensation. See item 6. directors, senior management
and employees .
Until 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.
Between 1997 and 2001 the Company sold approximately 7.7 acres of land for net
proceeds of $7,272,000, realizing a gain of $7,018,000. The Company plans to
sell the remaining land and pending the sale continues to carry the land at cost
of approximately $134,000.
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. As of December 31, 2001 the Company had spent $5.5 million to complete
the construction of the external structure. Installing of fixture and machinery
is scheduled to be completed in the first half of 2002. See discussion on
expansion in Item 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.
Nam Tai has three additional manufacturing facilities nearby.
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 Company is in the process of closing this factory and consolidating its
operations with the Baoan Transformer Factory.
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.
25
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 OEMs of consumer electronic products and components.
Products manufactured by Nam Tai include, telecommunication products, palm-sized
PC's, personal digital assistants, electronic dictionaries, and calculators. 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. It also manufactures lithium ion and nickel metal
hydride rechargeable battery packs that are used in cellular phones.
Management believes sales of personal digital assistants, linguistic
products, 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 15.
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 JIC Group. The JIC
Group is engaged in the manufacture and marketing of transformers and LCD
panels, a key component for a variety of consumer electronic products. 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
ended 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 Group under the purchase method and the results of JIC
Group'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 $22.9 million and has been recorded as
goodwill. 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 Group'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.
26
The following table presents selected consolidated financial information
stated as a percentage of net sales for the years ended December 31, 2001, 2000,
and 1999.
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
------- ------- ------
Net sales.................................. 100.0% 100.0% 100.0%
Cost of sales.............................. 87.2 85.2 82.8
------- ------- ------
Gross profit............................... 12.8 14.8 17.2
------- ------- ------
Costs and expenses:
Selling, general and administrative
expenses .................................. 9.3 8.3 10.3
Research and development expenses........ 1.3 1.6 1.8
Non-recurring income..................... - - (0.6)
------- ------- ------
10.6 9.9 11.5
------- ------- ------
Income from operations..................... 2.2 4.9 5.7
Gain on disposal of land................. 0.0 0.2 0.2
Other income -- net ..................... 1.1 6.3 1.5
Interest expense - net................... (0.0) (0.1) (0.1)
Equity in (loss) income of affiliated
companies.................................. 0.8 (0.1) 0.8
------- ------- ------
Income before income taxes and minority 4.1 11.2 8.1
interests .................................
------- ------- ------
Net income................................. 3.9% 11.2% 8.1%
======= ======= ======
The Company had certain transactions with related companies. The details are
disclosed in Item 7 "Major Shareholders and Related Party Transactions".
Year ended December 31, 2001 Compared to Year ended December 31, 2000
Nam Tai's sales increased by 9.5% to $234,006,000 for the year ended
December 31, 2001 compared to $213,688,000 for the year ended December 31, 2000.
The acquisition of JIC Group in October 2000 contributed $36.0 million in sales
for the year ended December 31, 2001 compared to $10.3 million for the fourth
quarter of 2000. The startup of the battery pack business contributed $21.1
million in sales for the year ended December 31, 2001 compared to only $6.2
million in sales in the prior year period. Sales of subassemblies and
components, particularly LCD modules for mobile phones increased by
approximately $14.7 million. Sales increases in these categories were partially
offset by decreased sales of calculators, personal digital assistants and
linguistic products, and telecommunication products of $23.4 million, $4.3
million and $9.3 million respectively compared to the prior year period.
Management attributes this growth in sales to a focus on key components for
telecommunication products and increased production capabilities resulting from
its investment in additional high-technology equipment, expansion into the
battery pack business, and the acquisition of JIC Group.
The Company's gross profit decreased 5% to $30,032,000 for the year
ended December 31, 2001 from $31,592,000 for the year ended December 31, 2000.
Nam Tai's gross profit declined as a result of a decrease in the gross profit
margin to 12.8% in 2001 from 14.8% in 2000. 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) $3.8 million in inventory provisions for slow moving raw
materials relating to cancelled, reduced or delayed orders; and (4) severance
payments of $300,000.
Selling, general and administrative expenses, or SG&A, for the year
ended December 31, 2001 increased to $21,974,000 or 9.3% from $17,646,000 or
8.3% of sales in the year ended December 31, 2000. The increase reflects,
increased amortization charges related to the acquisition of JIC Group and the
purchase of a new office, the addition of JIC
27
Group's expenses for an entire year compared to only the fourth quarter in 2000,
a stock option compensation expense of $0.8 million and various realignment
charges, including severance charges, of $0.7 million. Commencing January 1,
2002, under new account rule SFAS No. 142, goodwill and other intangible assets
with indefinite lives will not be amortized, but will be tested for impairment
on an annual basis. The amount of amortization of goodwill that was included in
SG&A for the year ended December 31, 2001 was approximately $1,979,000.
Management is reviewing SFAS No. 142 to determine what effect it will have on
its financial position and results of operations and a determination of the
extent of impairment of goodwill. See "Recent Changes in Accounting Rules" on
page 34.
Research and development expenses for the year ended December 31, 2001
decreased to $2,954,000 or 1.3% of sales from $3,489,000 or 1.6% of sales in the
year ended December 31, 2000. The decrease is related to a reduction of some
staff in 2001 as well as the closure of the Korean office in the later part of
2000.
Gain on disposal of land was $18,000 for the year ended December 31,
2001 compared to $355,000 for the year ended December 31, 2000. The gains in
both 2001 and 2000 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 $396,000 for the
year ended December 31, 2001 as compared to $111,000 for the year ended December
31, 2000.
Other income (excluding interest income) decreased to $1,496,000 for the
year ended December 31, 2001 compared to $10,198,000 (including a gain on the
sale of Nam Tai's interest in Group Sense (International) Limited of
$10,781,000) for the year ended December 31, 2000. Other income in 2001
included, unrealized gain on marketable securities of $1,568,000, $530,000
foreign exchange gains, and dividend income on marketable securities of
$525,000. Such gains were offset by a write-off of $500,000 of a non-trade
receivable, bank charges of $333,000, and miscellaneous expenses of $294,000.
Interest income decreased to $1,195,000 for the year ended December 31,
2001 compared to $3,300,000 for the year ended December 31, 2000. The decrease
is a result of lower cash balances and lower interest rates. Interest expenses
rose to $178,000 for the year ended December 31, 2001 compared to $165,000 for
the year ended December 31, 2000. The increase in interest charges is the result
of $15 million in long-term debt secured by the Company in the third quarter
offset by a reduction in interest rates.
Equity in income of affiliated companies, including amortization of
goodwill, was $1,867,000 for the year ended December 31, 2001, representing the
Company's 25% investment in Mate Fair, a company holding a 20% interest in TCL
Mobile. Equity in loss 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.
The income tax expense of $227,000 for the year ended December 31, 2001
compares to a benefit of $33,000 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 2001. As a result of locating in a Special Economic Zone of China, the
Company enjoys favorable tax treatment in China. See Note 7 of Notes to
Consolidated Financial Statements 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, 2001, 2000 and 1999. Efforts by the
Chinese government to increase tax revenues could result in 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.
Net income decreased by $14,956,000 or 62% to $9,045,000 (3.9% of sales)
for the year ended December 31, 2001 compared to $24,001,000 (11.2% of sales)
for the year ended December 31, 2000. This resulted in diluted earnings per
share for the year ended December 31, 2001 of $0.87 ($0.88 basic) compared to
$2.56 ($2.63 basic) for the year ended December 31, 2000. The decrease in net
income and earnings per share is the result of: (i) a lower gross profit margin
caused by $3.8 million in inventory provisions for slow moving raw materials
arising from cancellations, reductions, and delays of customer orders; (ii) $1.5
million in amortization of goodwill arising from the acquisition of JIC Group in
the fourth quarter of 2000; (iii) increased general and administrative expenses;
(iv) a gain of $10,781,000
28
from the sale of Nam Tai interest in Group Sense (International) Limited in
2000; and (v) an increase in the fully diluted weighted average number of shares
outstanding from 9,375,000 for the year ended December 31, 2000 to 10,393,000
for the current year.
The diluted weighted average number of common shares outstanding
increased to 10,393,000 (basic 10,274,000) for the year ended December 31, 2001
from 9,375,000 (basic 9,114,000) for the year ended December 31, 2000. During
2001 the Company issued 300,000 common shares upon the exercise of an advisors
warrant, and 116,000 shares upon the exercise of employee stock options. The
Company repurchased and cancelled 227,900 common shares pursuant to the
Company's repurchase program in 2001. The increase in the basic and diluted
weighted average number of common shares outstanding is also attributed to the
issuance of 1,161,087 shares at the end of October 2000 for the acquisition of
JIC Group.
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 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
Group, the addition of JIC Group'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 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, $51,000 foreign exchange gain and dividend income on
marketable securities of $188,000. Such gains were offset by miscellaneous
expenses of $623,000, bank charges of $328,000, and the $304,000 write-off of a
currency option premium.
29
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
for 2000.
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 2000.) 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 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 Group.
IMPACT OF INFLATION
Inflation/(deflation) in China and Hong Kong in 2001, estimated at 0.7%
and -1.6% 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.
30
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, and
Japanese yen. 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.
Management believes the Company's most significant foreign exchange risk
results from material purchases made in Japanese yen. Approximately 16%, 14% and
15% of Nam Tai's material costs have been in Japanese yen during the years ended
December 31, 2001, 2000, and 1999. Sales made in yen account for less than 7% of
sales for the years ended December 31, 2001, 2000 and 1999. 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 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.
At December 31, 2001 the Company held no option or future contracts and
during the year the company did not purchase or sell any commodity or currency
options. 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
hedging activities.
31
LIQUIDITY AND CAPITAL RESOURCES
Current assets decreased to $125,771,000 for the year ended December 31,
2001 from $135,352,000 for the year ended December 31, 2000. Cash and cash
equivalents, consisting of cash and short-term term deposits, decreased to
$58,676,000 for the year ended December 31, 2001 from $58,896,000 for the year
ended December 31, 2000. The principal uses of cash and cash equivalents were:
(i) $36,013,000 for the purchase of property, plant and equipment; (ii)
$3,947,000 used for the payment of dividends; and (iii). $3,353,000 for the
repurchase of 227,900 common shares under the Company's repurchase program.
Major sources of cash in 2001 were (i) $23,235,000 provided by operating
activities; (ii) $15,000,000 provided by a long-term bank loan; and (iii)
$4,307,000 from the issuance of shares on exercise of options and warrants. Nam
Tai does not use of off-balance sheet financing arrangements, such as
securitization of receivables or obtaining access to assets through special
purpose entities as a source of liquidity.
Marketable securities increased to $9,505,000 for the year ended
December 31, 2001 from $7,937,000 for the year ended December 31, 2000
consisting of 500,000 common shares of Deswell Industries, Inc. The increase is
attributable to the increase of $1,568,000 in unrealized gains on these shares
at December 31, 2001 from December 31, 2000. Through February 28, 2002, Nam Tai
sold 180,000 of its 500,000 Deswell shares, realizing cash in the amount of
$3,593,000 and a gain of $172,000.
Accounts receivable at December 31, 2001 increased to $41,968,000 from
$37,550,000 at December 31, 2000 primarily a result of the 9.5% increase in
sales.
Inventory levels were reduced to $11,892,000 at December 31, 2001 from
$27,172,000 at December 31, 2000 a decrease of 56%, reflecting an inventory
turnover period of 21 days versus 54 days in 2000. The decrease in inventory is
attributed to a shortening of inventory lead times as the Company attempts to
localize its supplier base, and $3.8 million in inventory provisions for slow
moving inventory due to cancelled, reduced or delayed orders. The December 31,
2000 inventory level included safety stock, components ordered in expectation of
future orders to accommodate the long lead times that were common in 2000 as a
result of industry wide component shortages. With the abatement of component
shortages in 2001 maintaining safety stock is not necessary.
Investments in affiliated companies at December 31, 2001 increased to
$3,921,000 from $2,054,000 at December 31, 2000 primarily as a result of the
Company's 5% indirect share the net income of TCL Mobile. (See Note 11 of the
Notes to the Consolidated Financial Statements.)
Property, plant and equipment - net of $70,414,000 as at December 31,
2001 is up from $44,599,000 as at December 31, 2000. Depreciation on fixed
assets for 2001 was $9,136,000 while additions to property, plant and equipment
during 2001 were approximately $36 million including $13.0 million for the
purchase and renovation of the new head office in Hong Kong, $5.5 million for
purchase of new chip on glass equipment, $2 million for the doubling of the
front end production capacity for LCD panels, $5.5 million for new factory
construction and machinery, and $6.4 million for staff quarters.
At December 31, 2001, 72.9% and 27.1% of the Company's identifiable
assets were located in Hong Kong and China, respectively, as compared to 65.8%
and 34.2% respectively, at December 31, 2000.
Short-term borrowing was nil and $24,000 at December 31, 2001 and 2000,
respectively.
At December 31, 2001, Nam Tai had in place general banking facilities
aggregating $76,494,000. The maturity of these facilities is generally up to 90
days. For the three years ended December 31, 2001, 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. Interest
rates are generally based on the bank's usual lending rates and 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, 2001, the Company had utilized
approximately $9,730,000 under such general credit facilities and had available
unused credit facilities of $66,764,000.
Accounts payable decreased by 14.8% to $34,258,000 for the year ended
December 31, 2001 from $40,224,000 for the year ended December 31, 2000,
principally as a result of the reduced lead times for purchases from suppliers
and the elimination of a safety stock.
32
As of December 31, 2001 the Company had $15 million of long-term debt
including the current portion of long term debt of $2,140,000. The seven year
loan amount was obtained in the fourth quarter of 2001 with a fixed rate of
interest of 5.05% for the first four years and 1% over the Singapore Interbank
Money Market Offer Rate, or SIBOR, for the following three years. Principal
repayments of $535,000 are to be made on a quarterly basis for the term of the
loan. The Company had no long-term debt at December 31, 2000.
A summary of contractual obligations and commercial commitments is as
follows:
Payments Due by Period
- ------------------------------------------------------------------------------------------------
Contractual Obligation Total 2002 2003-2005 2006 - 2007 2008 and beyond
- ---------------------- ----------- ----------- ------------ ------------ ---------------
Long-term Debt $15,000,000 $ 2,140,000 $ 6,420,000 $ 4,280,000 $ 2,160,000
Operating Leases $ 7,519,000 $ 1,335,000 $ 3,930,000 $ 1,860,000 $ 394,000
Capital Expenditures $15,397,000 $15,397,000 - - -
Total $37,916,000 $18,872,000 $ 10,350,000 $ 6,140,000 $ 2,554,000
Over the last few years the company's cash requirements have been
principally provided by internally generated funds. The Company had working
capital of $83,982,000 and $89,568,000 as of December 31, 2001 and 2000
respectively. In the opinion of the Company, the cash on hand of $58,676,000 as
at December 31, 2001 as well as cash flow from operations is sufficient to fund
its liquidity needs for the next twelve months. However, the company may require
or choose to obtain additional debt or equity financing in order to finance
acquisitions or other investments in its business. Nam Tai will continue to
devote resources for expansion and other business requirements. Its future
capital requirements will depend on many factors, including acquisitions, its
rate of revenue growth, the timing and extent of spending to support development
of new or enhanced products, expansion of sales and marketing, and market
acceptance of its products and those of its OEM customers.
During the year ended December 31, 2001, the Company paid a total of
$178,000 in interest on indebtedness.
Cash flow provided by (used in) operations for 2001 was $23,235,000 an
increase from ($1,135,000) for 2000. Cash provided by operating activities for
2001 included net income of $9,045,000, depreciation and amortization of
$12,273,000, non-working capital adjustments of ($2,710,000), and changes in
working capital (excluding cash and bank borrowings) of $4,627,000.
During 2001, the Company's net investment activities used $35,438,000
including $36,013,000 for the purchase of property, plant and equipment; less
(i) proceeds from the disposal of property, plant and equipment of $698,000.
Net cash provided by financing activities was $11,983,000 in 2001
including $15,000,000 from long-term debt financing, $4,307,000 from the
issuance of shares upon the exercise of options and warrants, less $3,947,000
for the payment of dividends, and $3,353,000 for share repurchases.
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 14 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.
For information concerning the Company's related party transaction with
Toshiba Battery Co., Ltd., or TBCL, see note 16 of the Notes to the Consolidated
Financial Statements. In the opinion of management existence of this
relationship has not materially affected the nature and amount of sales and
purchases between the Company and TBCL's related companies.
In 1994, the Company resumed declaring annual dividends and has increased
dividends for the last nine consecutive years. The Company declared shareholders
aggregate dividends of $12,190,000, or $1.36 per share (including a $1.00
special dividend) in 2000 and $4,134,000, or $0.40 per share in 2001. On
February 6, 2002 the
33
Company announced that it was increasing the annual dividend to $0.48 per share
to be paid on a quarterly basis commencing with the first quarter 2002 dividend
of $0.12 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 June 2001, the Financial Accounting Standard Board (the "FASB")
issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and
Other Intangible Assets". These statements, establish accounting and reporting
for business combinations. SFAS No. 141 requires that, among other things, all
business combinations entered into subsequent to 30 June 2001, be accounted for
using the purchase method of accounting. SFAS No. 142 provides that goodwill and
other intangible assets with indefinite lives not be amortized, but will be
tested for impairment on an annual basis. SFAS No. 142 is effective for fiscal
years beginning after 15 December 2001. The Company adopted SFAS No. 141 during
the year ended December 31, 2001 and it did not impact the Company's financial
statements. The Company adopted SFAS No. 142 on 1 January 2002. Management is
assessing, but has not yet determined, the impact that SFAS No. 142 will have on
its financial position and results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses the diverse accounting
practices for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company will be required
to adopt this standard on January 1, 2003. Management is assessing, but has not
yet determined, the impact that SFAS No. 143 will have, if any, on its financial
position and results of operations.
The FASB also recently issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The FASB's
new rules on asset impairment supersede SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
and portions of APB Option No. 30, "Reporting the Results for Operations". The
statement requires a single accounting model for long-lived assets to be
disposed of and significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. Classification as held-for-sale is an
important distinction since such assets are not depreciated and are stated at
the lower of fair value and carrying amount. The statements also requires
expected future operating losses from discontinued operations to be recorded in
the period(s) in which the losses are incurred, rather than as of the
measurement date as previously required. Management is assessing, but has not
yet determined, the impact that SFAS No. 144 will have, if any, on its financial
position and results of operations.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
The directors and senior management of the Company as of February 28,
2002 are as follows:
Name Position with Company
- ---- ---------------------
Tadao Murakami Chairman of the Board and member of the Board of
Directors
Joseph Li Chief Financial Officer and member of the Board
of Directors
M. K. Koo Executive Director and member of the Board of
Directors
Toshiaki Ogi Chief Executive Officer
Y.C. Chang Chief Operating Officer
Hidekazu Amishima Managing Director of NT Telecom
Karene Wong Managing Director of NTEE
Mamoru Koike Vice General Manager Research and Development
Charles Chu Member of the Board of Directors
Peter R. Kellogg Member of the Board of Directors
Stephen Seung Member of the Board of Directors
Lorne Waldman Secretary
34
TADAO MURAKAMI. Mr. Murakami, 58, 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 and again starting February 1, 2002. He
is in charge of the manufacturing and marketing operations of the Company. Mr.
Murakami graduated from Japan Electronic Technology College in 1964.
JOSEPH LI. Mr. Li, 50, co-founder, Chairman, and Managing Director of
JIC Group (acquired by Nam Tai in October 2000) was promoted to the position of
President of Nam Tai effective March 1, 2001 and promoted to Chief Financial
Officer on February 1, 2002. Mr. Li has directed JIC Group's business
development since founding JIC Group in 1980.
TOSHIAKI OGI. Mr. Ogi, 61, 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.
M. K. KOO. Mr. Koo, 58, had served as Chairman of the Board and a
Director of Nam Tai and its predecessor companies from inception until September
1998 and as Senior Executive Officer, Corporate Strategy, Finance and
Administration and Chief Financial Officer until retiring as Chief Financial
Officer on February 1, 2002. He remains an executive director responsible for
merger and acquisition, and administrative matters. Mr. Koo received his
Bachelor of Laws degree from National Taiwan University in 1970.
Y. C. CHANG. Mr. Y.C. Chang, 43, 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.
HIDEKAZU AMISHIMA. Mr. Amishima, 60, 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, 38, 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 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, 58, 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, 45, 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.
35
PETER R. KELLOGG. Mr. Kellogg, 59, 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 and a
specialist firm on the New York Stock Exchange. Mr. Kellogg serves on Nam Tai's
audit committee. Mr. Kellogg is also a member and Chairman of the Board of the
Ziegler Companies.
STEPHEN SEUNG. Mr. Seung, 55, 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.
LORNE WALDMAN. Mr. Waldman, 35, 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, 2001 to all directors and
officers as a group for services in all capacities was approximately $3,494,000
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.
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.
Prior to December 2000, the Company maintained staff contributory
retirement plans (defined contribution pension plans) which covered certain of
its employees. From December 2000 onwards, the Company terminated its existing
staff contributory retirement plans and enrolled all of its eligible employees
in Hong Kong into a Mandatory Provident Fund ("MPF") scheme. The MPF is a
defined contribution scheme and the assets of the scheme are managed by the
trustees independent to the Company. Contributions are made by the Company at 5%
based on the staff's relevant income with the maximum relevant income for
contribution purpose per employee of $3,000 per month. The cost of the Company's
contribution to the contributory retirement plans (including the MPF) amounted
to $151,000, $174,000 and $138,000 for the years ended December 31, 2001, 2000
and 1999, respectively.
36
OPTIONS OF DIRECTORS AND SENIOR MANAGEMENT.
The following table provides information concerning options owned by the
Directors and Senior Management at February 28, 2002. The table excludes the
Company's publicly traded warrants owned by the Directors and Senior Management,
information about which is disclosed in Item 7 of this Report together with
information concerning the beneficial ownership of the Company's common shares
by Directors and Senior Management and major shareholders.
Number of
common shares Exercise
subject to Price ($) Expiration
Name options per share Date
---- ------------- --------- ----------
Tadao Murakami 50,000 13.875 1/31/2003
40,000 (1) 13.940 3/16/2004
Joseph Li 25,000 (1) 7.00 6/22/2002
M. K. Koo 50,000 13.875 1/31/2003
40,000 (1) 14.50 6/22/2004
Toshiaki Ogi 0 - -
Y.C. Chang 30,000 13.875 1/31/2003
30,000 (1) 13.940 3/16/2004
Hidekazu Amishima 20,000 13.875 1/31/2003
10,000 (1) 13.940 3/16/2004
Karene Wong 20,000 13.875 1/31/2003
25,000 (1) 13.940 3/16/2004
Mamoru Koike 10,000 13.875 1/31/2003
8,000 (1) 13.940 3/16/2004
Charles Chu 5,000 16.375 6/8/2003
5,000 (1) 14.50 6/22/2004
Peter R. Kellogg 5,000 16.375 6/8/2003
5,000 (1) 14.50 6/22/2004
Stephen Seung 5,000 16.375 6/8/2003
5,000 (1) 14.50 6/22/2004
Lorne Waldman 5,000 13.875 1/31/2003
8,000 (1) 13.940 3/16/2004
(1) Indicates options granted during the year ended December 31, 2001.
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
consultants and administers various compensation, stock and benefit plans of Nam
Tai. The Compensation Committee consists of Messrs. Murakami, Li and Koo.
37
EMPLOYEES
At December 31, 2001, Nam Tai employed 3,947 persons on a full-time
basis, of which 3,866 were working in China and 81 in Hong Kong. Of these,
approximately 2,728 were engaged in manufacturing, approximately 1,096 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, 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.
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 and 2001 Stock Option Plans 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 normally 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.
38
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,
2002, 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 3,307,981 (2) 29.2%
Peter R. Kellogg 1,462,600 (3) 14.2%
I.A.T. Reinsurance Syndicate Ltd. 1,300,000 (3) 12.7%
Ivan Chui 1,086,087 (4) 10.6%
Joseph Li 1,086,087 (5) 10.6%
Tadao Murakami 932,249 (6) 8.9%
Y.C. Chang 60,000 (7) *
Hidekazu Amishima 30,000 (7) *
Karene Wong 45,000 (7) *
Stephen Seung 24,000 (8) *
Mamoru Koike 18,000 (7) *
Charles Chu 20,000 (7) *
Lorne Waldman 13,000 (7) *
- ---------
* Less than 1%.
(1) Pursuant to the rules of the Securities and Exchange Commission,
shares of common shares that an individual or group has a right to
acquire within 60 days pursuant to the exercise of options 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. Percent ownership
based on 10,259,940 common shares outstanding as of February 28, 2002.
(2) Includes publicly traded warrants to purchase 976,850 common shares
and options to purchase 90,000 common shares.
(3) Mr. Kellogg holds directly 152,600 common shares and options to
purchase 10,000 common shares. Indirectly, through I.A.T. Reinsurance
Syndicate Ltd., Mr. Kellogg holds 1,300,000 common shares. I.A.T.
Reinsurance Syndicate Ltd., is a Bermuda Corporation of which Mr.
Kellogg is the sole holder of voting stock. Mr. Kellogg disclaims
beneficial ownership of these shares.
(4) Consists of shares held of record by Li & Chui Holdings (B.V.I.)
Limited for which Mr. Chui shares investment and voting control. These
are the same shares shown in the table for Joseph Li. In addition Mr.
Chui holds options to purchase 25,000 common shares.
(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. In addition Mr.
Li holds 25,000 options to purchase common shares.
(6) Includes publicly traded warrants to purchase 175,094 common shares
and options to purchase 90,000 common shares.
(7) Consists of options to purchase common shares.
(8) Includes publicly traded warrants to purchase 4,000 common shares,
options to purchase 10,000 common shares, and 10,000 common shares
which are registered to Violet Seung, Mr. Seung's wife, as to which
Mr. Seung disclaims beneficial ownership.
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,
2001, approximately 913 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 6,131,858 of our outstanding common
shares.
39
RELATED PARTY TRANSACTIONS
Toshiba Battery Company Ltd. ("TBCL") owns a 13.3% interest in BPC 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, 2001, the Company owed $2,733,000 to Toshiba and its related companies for
raw materials and electronic components. During the year 2001 the Company
recognized net sales of $21,072,000, purchased raw materials of $23,065,000, and
acquired property, plant and equipment of $50,000 from TBCL and its related
companies.
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. On March 26, 2001, Nam Tai filed a summons seeking
to remove the liquidator for failing to act diligently in the performance of his
duties and for knowingly misleading the court. As of February 28, 2002, neither
summons has been listed for hearing. Meanwhile, the Company is prevented from
redeeming the remaining 169,727 Nam Tai shares beneficially owned by Tele-Art.
Inc. to satisfy the current unpaid judgment debt until a determination of the
liquidator's February 12, 1999 application.
Management believes that the claim mentioned above is without merit and
will vigorously defend it and believes that the outcome 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
In 1994, the Company resumed declaring annual dividends and has
increased dividends for the last nine consecutive years. The Company declared
shareholders aggregate dividends of $12,190,000, or $1.36 per share (including a
$1.00 special dividend) in 2000 and $4,134,000, or $0.40 per share in 2001. On
February 6, 2002 the Company announced that it was increasing the annual
dividend to $0.48 per share to be paid on a quarterly basis commencing with the
first quarter 2002 dividend of $0.12 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.
40
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, 2001 $19.125 $11.30
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
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, 2001.
QUARTER ENDED HIGH LOW
------------- ---- ---
December 31, 2001 $17.91 $12.50
September 30, 2001 15.31 11.30
June 30, 2001 15.01 12.25
March 31, 2001 19.125 12.125
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
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, 2002 $19.04 $16.40
January 31, 2002 16.70 15.45
December 31, 2001 17.91 15.40
November 30, 2001 15.51 13.30
October 31, 2001 13.30 12.50
September 30, 2001 14.60 11.30
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, 2002, there were 10,259,940 common
shares of the Company outstanding, all of which was fully paid.
At February 28, 2002, the Company had outstanding warrants to purchase
an aggregate of 3,065,159 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 and 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.
41
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.
42
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:
- 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 for
US$2,000,000.
- 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.
- 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 JIC Group 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 Group 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.
- Sale and Purchase Agreement dated March 27th 2001 between the Company
and Shun Tak Centre Limited for the 15th Floor of China Merchants
Tower, Shun Tak Centre, Nos. 168-200 Connaught Road Central, Hong Kong
for approximately US$11.3 million.
- On July 9, 2001 the Company entered into an indemnification agreement
with each of its directors providing for basic indemnification and
expense reimbursement.
- The Company signed a facility letter on September 24, 2001 with The
Hongkong and Shanghai Banking Corporation Limited for a $15,000,000
long-term loan the terms of which are described in Note 15 of the
Notes to the Consolidated Financial Statements.
- On January 14, 2002 Nam Tai entered into a restructuring agreement
with the joint liquidators of Albatronics. Under the restructuring
agreement Nam Tai will inject its wholly-owned subsidiary JIC Group
into a new company for 92.9% ownership in the new company on a fully
diluted basis after conversion of preference shares. Albatronics'
listing status on the Hongkong Stock Exchange will be withdrawn and
the new company will be listed on the Hongkong Stock Exchange by way
of introduction and free from the liabilities of Albatronics.
Immediately following completion of the restructuring, Nam Tai, the
Creditors and the public will be beneficially interested in
approximately 70.4 per cent., 24.1 per cent. and 5.5 per cent. of the
enlarged issued ordinary share capital of the new company
respectively, and Nam Tai will also hold preference shares. Upon full
conversion of the preference shares by Nam Tai, Nam Tai, the Creditors
and the public will be interested in approximately 92.9 per cent., 5.8
per cent. and 1.3 per cent. of the enlarged issued ordinary share
capital of the new company respectively. No holder of preference
shares shall be entitled to exercise its conversion right if such
conversion would result in the minimum public float of 75% as required
under the Hongkong Stock Exchange Listing Rules not being met.
Consummation of the restructuring agreement is subject to the
43
fulfillment of a number of conditions including approval by
Albatronics' creditors and shareholders and the Listing Committee of
the Stock Exchange of Hong Kong and the receipt of other regulatory
and court approvals. If such conditions are satisfied, the
restructuring is expected to be consummated before the end of the
second quarter of 2002.
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 in 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 14 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
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
THE DISCUSSION BELOW IS FOR GENERAL INFORMATION ONLY AND IS NOT, AND
SHOULD NOT BE INTERPRETED TO BE, TAX ADVICE TO ANY HOLDER OF OUR COMMON SHARES.
EACH HOLDER OR A PROSPECTIVE HOLDER OF OUR COMMON SHARES IS URGED TO CONSULT
HIS, HER OR ITS OWN TAX ADVISOR.
General
This section is a general summary of the material U.S. federal income
tax consequences of the ownership and disposition of our common shares as of the
date of this Report. The summary applies to you only if you hold our common
shares as a capital asset for tax purposes (that is, for investment purposes),
and it does not purport to be a comprehensive description of all the tax
considerations that may be relevant to the ownership of our common shares. The
summary is based on current law. Changes in the law may alter your tax treatment
of holding our common shares, possibly on a retroactive basis. There can be no
assurance that the U.S. Internal Revenue Service ("IRS") will not challenge the
tax consequences described below, and we have not requested, nor will we
request, a ruling from the IRS or an opinion of counsel with respect to the U.S.
federal income tax consequences of acquiring, holding or disposing of our common
shares. The discussion below does not cover tax consequences that depend upon
your particular tax circumstances, and it does not address any aspect of tax
laws other than U.S. federal income taxation. Specifically, it does not cover
any state, local or foreign law, or the possible application of U.S. federal
estate or gift tax. You are urged to consult your own tax advisors regarding the
application of the U.S. federal income tax laws to your particular situation as
well as any state, local, foreign and U.S. federal estate and gift tax
consequences of the ownership and disposition of the common shares. In addition,
this summary does not take into account any special U. S. federal income tax
rules that apply to a particular holder of our common shares, including, without
limitation, the following: qualified retirement plans, broker-dealers, financial
institutions, life insurance companies, tax-exempt organizations, persons that
hold our common shares in a hedging transaction or as part of a straddle or a
conversion transaction, persons whose functional currency for tax purposes is
not the U.S. dollar, real estate investment trusts and regulated investment
companies, or persons who receive our shares pursuant to the exercise of
employee stock options or otherwise as compensation.
Tax Consequences to U.S. Holders
For purposes of the discussion below, you are a "U.S. Holder" if you are
a beneficial owner of our common shares who or which is:
- an individual U.S. citizen or resident alien of the United States (as
specifically defined for tax purposes);
- a corporation created or organized in or under the laws of the United
States or any State or political subdivision thereof;
44
- any person or entity whose ownership of our common shares is
effectively connected with the conduct of trade or business in the
United States;
- an estate whose income is subject to U.S. federal income tax
regardless of its source;
- a trust (x) if a U.S. court can exercise primary supervision over the
trust's administration and one or more U.S. persons are authorized to
control all substantial decisions of the trust or (y) if it was in
existence on August 20, 1996, was treated as a U.S. person prior to
that date and has a valid election in effect under applicable treasury
regulations to be treated as a U.S. person;
- any other person or entity that would be subject to U.S. federal
income tax on a net income basis in respect of the common shares.
If a partnership holds our common shares, the tax treatment of a partner
will generally depend upon the status of the partner and upon the activities of
the partnership. If you are a partner of a partnership holding our common
shares, you should consult your tax advisor.
Distributions
Subject to the special tax regimes discussed below, for cash dividends,
the gross amount of any such distribution (other than in liquidation) that you
receive with respect to our common shares generally will be taxed to you as
dividend income to the extent such distribution does not exceed our current or
accumulated earnings and profits ("E&P"), as calculated for U.S. federal income
tax purposes. Such income will be includable in your gross income as ordinary
income on the date of receipt. To the extent any distribution exceeds our E&P,
the distribution will first be treated as a tax-free return of capital to the
extent of your adjusted tax basis in our common shares and will be applied
against and reduce such basis on a dollar-for-dollar basis (thereby increasing
the amount of gain and decreasing the amount of loss recognized on a subsequent
disposition of such shares). To the extent that such distribution exceeds your
adjusted tax basis, the distribution will be taxed as gain recognized on a sale
or exchange of our common shares. See "Sale or Other Disposition of Our Common
Shares," below. Because we are not a U.S. corporation, no dividends-received
deduction will generally be allowed to our shareholder-corporations with respect
to dividends paid by us.
Sale or Other Disposition of Our Common Shares
Subject to the special tax regimes discussed below, generally speaking,
in connection with the sale or other taxable disposition of our common shares:
- you will recognize gain or loss equal to the difference (if any)
between:
- the amount realized on such sale or other taxable disposition and
- your adjusted tax basis in such common shares (your adjusted tax
basis in the shares you hold generally will equal your U.S.
dollar cost of such shares);
- such gain or loss will be capital gain or loss and will be long-term
capital gain or loss if your holding period for our common shares is
more than one year at the time of such sale or other disposition;
- any gain or loss will generally be treated as having U. S. source for
U. S. foreign tax credit purposes; and
- your ability to deduct capital losses is subject to limitations.
For U.S. Holders who are individuals, estates or trusts, preferential
tax rates generally will apply for long-term capital gains.
U.S. Tax Regimes That May Apply to Our U.S. Holders
If any of the following four U.S. federal income tax regimes applies to
our U.S. Holders, the discussions above
45
on distributions and dispositions of our shares by U.S. Holders may not describe
the U.S. federal income tax consequences applicable to them. To the Company's
knowledge, as of the date of this Report, none of the four regimes applies to
the Company or its shareholders. However, the Company has not made a specific
determination as to whether any of such regimes does in fact so apply, and may
not be willing or able to make such a determination in the future.
Foreign Personal Holding Company ("FPHC")
If at any time during a taxable year more than 50 percent of the total
combined voting power or the total value of the Company's outstanding shares is
owned, actually or constructively, by five or fewer individuals who are citizens
or residents of the United States and 60 percent or more of the Company's gross
income for such year consisted of specified types of passive income (e.g.,
certain dividends, interest, royalties, gains from the sale of stock and
securities and other specified types of income), the Company would be treated as
a FPHC. If the Company is a FPHC, generally, its U.S. Holders would be required
to include in gross income for such year their portions of such passive income
to the extent the Company does not actually distribute such income.
You are urged to consult your own tax advisor concerning the potential
application of the FPHC rules to your ownership and disposition of our common
shares.
Foreign Investment Company ("FIC")
If we are or were to be classified as a FIC, generally, all or part of
gain realized by U.S. Holders on sale or other disposition of our shares could
be treated as ordinary income and not as capital gains. We will be an FIC if (x)
50 percent or more of the combined voting power or total value of the Company's
outstanding shares are held, directly or indirectly, by U.S. Holders who are
individuals, estates, trusts, corporations or U.S. partnerships, and (y) the
Company is engaged primarily in the business of investing, reinvesting, or
trading in securities, commodities, or any interest (including a futures or
forward contract or option) in securities or commodities.
You are urged to consult your own tax advisor concerning the potential
application of the FIC rules to your ownership and disposition of our common
shares.
Passive Foreign Investment Company ("PFIC")
U.S. Holders generally would be subject to a special, adverse tax regime
if we are or were to be classified as a PFIC. We will be a PFIC if either:
- 75 percent or more of our gross income in a taxable year is passive
income (including our pro-rata share of the gross income of any
company in which we own, or are treated as owning, 25 percent or
more of the shares by value), which includes dividends, interests,
royalties, rents, annuities, and some types of gains; or
- the average percentage by fair market value, or, if the Company is
a "controlled foreign corporation," by adjusted tax basis, of the
Company assets that produce or are held for the production of
passive income is at least 50 percent.
The application of the above tests could result in our classification as
a PFIC even in a year in which we have substantial gross revenues from product
sales. We intend to use reasonable efforts to avoid PFIC status, but can give no
assurance that we will be successful. If we determine that we are a PFIC, we
will endeavor to notify you.
If we are or were classified as a PFIC, unless you timely made one of
the specific elections, a special tax regime would apply to both:
- "excess distributions," which would be your share of distributions
in any year that are greater than 125 percent of the average annual
distributions received by you in the three preceding years before
the current taxable year (or during your holding period for the
shares, if shorter), and
- gains realized on the sale or other disposition of our common
shares.
Under this regime, any excess distribution and realized gain would be
treated as ordinary income and would
46
be subject to tax generally in the following manner:
- the excess distribution or gain would be allocated ratably to each
day that you have held our common shares,
- the amount allocated to the taxable year in which you realize the
excess distribution or gain would be taxed as ordinary income,
- the amount allocated to the taxable years prior to the first
taxable year in which we are a PFIC would be taxed as ordinary
income for the taxable year in which you realize the excess
distribution or gain, and
- the amounts allocated to each of the prior taxable years for which
we were a PFIC would be taxed as ordinary income at the highest
applicable tax rate in effect for that year, and, in addition, an
interest charge generally applicable to underpayments of tax would
be imposed on you for the tax deferred.
Subject to certain limitations, if you own common shares that are
treated as marketable stock, you may make a mark-to-market election. If you make
this election, for all taxable years during which you held common shares and we
were a PFIC, you would not be subject to the PFIC rules described above.
Instead, in general, you would include as ordinary income each year the excess,
if any, of the fair market value of your shares at the end of the taxable year
over the adjusted tax basis in your shares. You would also be allowed to take an
ordinary loss in respect of the excess, if any, of the adjusted basis of your
shares over their fair market value at the end of the taxable year, but only to
the extent of the net amount of income previously included as a result of the
mark-to-market election. Your basis in the shares would be adjusted to reflect
any such income or loss amounts. Any gain realized upon disposition would be
taxed as ordinary income. If we are or become a PFIC, we believe our shares
would be treated as marketable stock for purposes of the mark-to-market
election, but we can give you no assurance that they will be so treated.
In lieu of making a mark-to-market election, you may make a qualifying
electing fund election. In many situations it would be desirable to make this
election. However, even if your tax advisor determines that this election is
beneficial to you, if we are or were to become a PFIC, we may not be able or
willing to satisfy the record-keeping and other requirements that would enable
you to make a qualified electing fund election.
You are urged to consult your own tax advisor concerning the potential
application of the PFIC rules to your ownership and disposition of our common
shares.
Controlled Foreign Corporation ("CFC")
If more than 50 percent of the voting power of all classes of stock or
the total value of the stock of the Company is owned, directly or indirectly, by
individual U.S. Holders, U.S. partnerships and corporations, or U.S. Holders
which are estates or trusts, each of whom own 10 percent or more of the total
combined voting power of all classes of stock of the Company or the total value
of the stock of the Company (each, a "United States Shareholder"), the Company
will be a CFC. If we are a CFC for an uninterrupted period of 30 or more days,
the United States Shareholders generally would be required to include in their
income their pro rata shares of "Subpart F income", as defined by the U.S.
federal tax law, of the Company and certain of the Company's earnings invested
in U.S. property. This current income inclusion would be required even if the
Company makes no actual distributions to its shareholders. In addition, gain
from the sale or exchange of our common shares by a U.S. Holders who is or was a
United States Shareholder at any time during the five-year period ending with
the sale or exchange would be treated as ordinary dividend income to the extent
of earnings and profits of the Company attributable to the stock sold or
exchanged.
You are urged to consult your own tax advisor concerning the potential
application of the CFC rules to your ownership and disposition of our common
shares.
Tax Consequences to Non-U.S. Holders
If you are not a U.S. Holder, you are a "Non-U.S. Holder."
Distributions
You generally will not be subject to U.S. federal income tax, including
withholding tax, on distributions made
47
on our common shares unless:
- you conduct a trade or business in the United States and
- the distributions are effectively connected with the conduct of
that trade or business (and, if an applicable income tax treaty so
requires as a condition for you to be subject to U.S. federal
income tax on a net income basis in respect of income from our
common shares, such distributions are attributable to a permanent
establishment that you maintain in the United States).
If you fail the above test, you generally will be subject to tax in
respect of such dividends in the same manner as a U.S. Holder, as described
above. In addition, any effectively connected dividends received by a non-U.S.
corporation may also, under certain circumstances, be subject to an additional
"branch profits tax" at a 30 percent rate or such lower rate as may be specified
by an applicable income tax treaty.
Sale or Other Disposition of Our Common Shares
Generally, you will not be subject to U.S. federal income tax, including
withholding tax, in respect of gain recognized on a sale or other taxable
disposition of our common shares unless:
- your gain is effectively connected with a trade or business that
you conduct in the United States (and, if an applicable income tax
treaty so requires as a condition for you to be subject to U.S.
federal income tax on a net income basis in respect of gain from
the sale or other disposition of our common shares, such gain is
attributable to a permanent establishment maintained by you in the
United States), or
- you are an individual Non-U.S. Holder and are present in the United
States for at least 183 days in the taxable year of the sale or
other disposition, and certain other conditions exist.
You will be subject to tax in respect of any gain effectively connected
with your conduct of a trade or business in the United States generally in the
same manner as a U.S. Holder, as described above. Effectively connected gains
realized by a non-U.S. corporation may also, under certain circumstances, be
subject to an additional "branch profits tax" at a rate of 30 percent or such
lower rate as may be specified by an applicable income tax treaty.
Backup Withholding and Information Reporting
Payments (or other taxable distributions) in respect of our common
shares that are made in the United States or by a U.S. related financial
intermediary will be subject to U.S. information reporting rules. In addition,
such payments may be subject to U.S. federal backup withholding at the rate of
30 percent for payments made in 2002. You will not be subject to backup
withholding provided that:
- you are a corporation or other exempt recipient, or
- you provide your correct U.S. federal taxpayer identification
number and certify that no loss of exemption from backup
withholding has occurred.
If you are a Non-U.S. Holder, you generally are not subject to
information reporting and backup withholding, but you may be required to provide
a certification of your non-U.S. status in order to establish that you are
exempt.
Amounts withheld under the backup withholding rules may be credited
against your U.S. federal income tax liability, and you may obtain a refund of
any excess amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS.
THE DISCUSSION ABOVE IS FOR GENERAL INFORMATION ONLY. IT DOES NOT COVER TAX
CONSEQUENCES THAT DEPEND UPON YOUR PARTICULAR TAX CIRCUMSTANCES. YOU SHOULD
CONSULT YOUR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL
INCOME TAX LAWS TO YOUR PARTICULAR SITUATION AS WELL AS ANY STATE, LOCAL,
FOREIGN TAX AND THE U.S. FEDERAL ESTATE AND GIFT TAX CONSEQUENCES OF THE
OWNERSHIP AND DISPOSITION OF OUR COMMON SHARES.
48
BRITISH VIRGIN ISLANDS TAX CONSEQUENCES
Under the International Business Companies Act of the British Virgin Islands as
currently in effect, a holder of common equity, such as our common shares, who
is not a resident of the British Virgin Islands is exempt from British Virgin
Islands income tax on dividends paid with respect to the common equity and all
holders of common equity are not liable to the British Virgin Islands for income
tax on gains realized on sale or disposal of such shares. The British Virgin
Islands does not impose a withholding tax on dividends paid by a company
incorporated under the International Business Companies Act.
There are no capital gains, gift or inheritance taxes levied by the British
Virgin Islands on companies incorporated under the International Business
Companies Act. In addition, our common shares are not subject to transfer taxes,
stamp duties or similar charges. There is no income tax treaty or convention
currently in effect between the United States and the British Virgin Islands.
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 8 and 31 respectively.
FOREIGN CURRENCY RISK
As at December 31, 2001 the Company had no open forward contracts or option
contracts.
Cash on hand at December 31, 2001 of $58,676,000 was held in the following
currencies.
Equivalent U.S. Dollar Holdings
Japanese yen $33,501,000
United States dollars $20,850,000
Hong Kong dollar $1,812,000
Chinese renminbi $2,513,000
See Exchange Rate Fluctuation discussion on page 31.
INTEREST RATE RISK
Short-term interest rate risk
Our interest expenses and income are sensitive to changes in interest rates. All
of our cash reserves and any short term borrowings are subject to interest rate
changes. Cash on hand of $58,676,000 as at December 31, 2001 is invested in
short-term interest bearing investments having a maturity of three months of
less. As such interest income will fluctuate with changes in short term interest
rates. As of December 31, 2001 we had $9.7 million outstanding on our credit
facilities resulting in minimal interest rate risk.
Long-Term interest rate risk
As of December 31, 2001, the Company had $15 million of long-term debt including
the current portion of long term debt of $2,140,000. The seven-year $15 million
term loan was obtained in the fourth quarter of 2001 with a fixed rate of
interest of 5.05% for the first four years and 1% over the SIBOR rate for the
last three years. Accordingly interest expenses in years in 2006, 2007, and 2008
will fluctuate with changes in the SIBOR rate. The fair value of the long-term
loan determined based on quoted market rates is approximately $14,920,000 as of
December 31, 2001.
The potential effect of a hypothetical 0.5% increase in interest rate for 2001
indebtedness would be insignificant to the Company's cash flows and net income.
49
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS
Not applicable
ITEM 15.
Not applicable
ITEM 16.
Not applicable
PART III
ITEM 17. FINANCIAL STATEMENTS
Not Applicable
ITEM 18. FINANCIAL STATEMENTS
The following financial statements are filed as part of this report:
Page No.
Independent Auditors' Report................................................................51
Consolidated Statements of Income for the three years ended December 31, 2001,
December 31, 2000 and December 31, 1999...................................................52
Consolidated Balance Sheets as of December 31, 2001 and December 31, 2000...................53
Consolidated Statement of Shareholders' Equity for the three years
ended December 31, 2001, December 31, 2000 and December 31, 1999..........................54
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999.............................................................................55
Notes to Consolidated Financial Statements..................................................57
The information required within the schedules for which provisions are
made in the applicable accounting regulations of the Securities and Exchange
Commission is either not applicable or is included in the notes to the
Consolidated Financial Statements.
50
[DELOITTE TOUCHE TOHMATSU LETTERHEAD]
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, 2001 and 2000, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte Touche Tohmatsu
DELOITTE TOUCHE TOHMATSU
Hong Kong
March 15, 2002
51
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
-------- -------- --------
Net sales $234,006 $213,688 $145,054
Cost of sales 203,974 182,096 120,074
-------- -------- --------
Gross profit 30,032 31,592 24,980
-------- -------- --------
Selling, general and administrative expenses 21,974 17,646 14,913
Research and development expenses 2,954 3,489 2,624
Non-recurring income (Note 4) - - (848)
-------- -------- --------
Total operating expenses 24,928 21,135 16,689
-------- -------- --------
Income from operations 5,104 10,457 8,291
Gain on disposal of land 18 355 302
Other income - net (Note 5) 2,691 13,498 2,192
Interest expense (178) (165) (192)
Write off of investment in an unconsolidated subsidiary (Note 1e) - - (1)
Equity in income (loss) of affiliated companies, including
amortization of goodwill 1,867 (189) 1,146
-------- -------- --------
Income before income taxes and minority interest 9,502 23,956 11,738
Income taxes (expense) benefit (Note 7) (227) 33 60
-------- -------- --------
Income before minority interest 9,275 23,989 11,798
Minority interest (230) 12 -
-------- -------- --------
Net income $ 9,045 $ 24,001 $ 11,798
======== ========= =========
Basic earnings per share (Note 8) $ 0.88 $ 2.63 $ 1.26
======== ========= =========
Diluted earnings per share (Note 8) $ 0.87 $ 2.56 $ 1.25
======== ========= =========
See accompanying notes to consolidated financial statements.
52
NAM TAI ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
DECEMBER 31,
---------------------------
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 58,676 $ 58,896
Marketable securities (Note 9) 9,505 7,937
Accounts receivable, less allowance for doubtful accounts of $31
and $0 at December 31, 2001 and 2000, respectively 41,968 37,550
Inventories (Note 10) 11,892 27,172
Prepaid expenses and deposits 2,377 1,755
Income taxes recoverable (Note 7) 1,353 2,042
--------- ---------
Total current assets 125,771 135,352
Investment in affiliated companies (Note 11) 3,921 2,054
Property, plant and equipment - net (Note 12) 70,414 44,599
Intangible assets - net (Note 13) 23,060 24,996
Other assets 1,407 1,369
--------- ---------
Total assets $224,573 $ 208,370
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 15) $ 1,547 $ 1,499
Short term debt (Note 15) - 24
Long term bank loan - current portion (Note 15) 2,140 -
Accounts payable and accrued expenses 34,258 40,224
Amount due to a related party (Note 16) 2,733 2,691
Dividend payable 1,023 904
Income taxes payable 88 442
--------- ---------
Total current liabilities 41,789 45,784
Deferred income taxes (Note 7) 151 34
Long term bank loan - non-current portion (Note 15) 12,860 -
--------- ---------
Total liabilities 54,800 45,818
--------- ---------
Minority interest 422 188
Commitments and contingencies (Note 17) - -
Shareholders' equity:
Common shares ($0.01 par value - authorized 20,000,000 shares;
shares issued and outstanding at December 31, 2001 - 10,401,940,
December 31, 2000 - 10,213,840) 104 102
Additional paid-in capital 111,368 105,963
Retained earnings 57,864 56,304
Accumulated other comprehensive income (loss) 15 (5)
--------- ---------
Total shareholders' equity 169,351 162,364
--------- ---------
Total liabilities and shareholders' equity $ 224,573 $ 208,370
========= =========
See accompanying notes to consolidated financial statements.
53
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
ACCUMULATED TOTAL
COMMON COMMON ADDITIONAL OTHER SHARE -
SHARES SHARES PAID-IN RETAINED COMPREHENSIVE HOLDERS'
OUTSTANDING AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY
----------- ------ ---------- -------- ------------- ---------
Balance at January 1, 1999 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 17c) (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 1b) 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
Share buy-back program (227,900) (2) - (3,351) - (3,353)
Shares issued on exercise of advisors'
warrants 300,000 3 3,072 - - 3,075
Shares issued on exercise of options 116,000 1 1,231 - - 1,232
Advisors' warrants - - 263 - - 263
Issue of options (note 18a) - - 839 - - 839
Comprehensive income:
Net income - - - 9,045 - 9,045
Foreign currency translation - - - - 20 20
Dividends ($0.4 per share) - - - (4,134) - (4,134)
----------- ------ ---------- -------- ------------- ---------
Balance at December 31, 2001 10,401,940 $ 104 $ 111,368 $ 57,864 $ 15 $ 169,351
=========== ====== ========== ======== ============= =========
See accompanying notes to consolidated financial statements.
54
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF US DOLLARS)
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net income $ 9,045 $ 24,001 $ 11,798
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 9,136 6,965 5,288
Amortization of intangible assets 2,035 733 52
Amortization of advisors' warrants and options 263 423 329
Staff option costs 839 - -
Loss (gain) on disposal of property, plant and equipment 378 (244) (159)
Gain on disposal of investment - (9,435) -
Gain on disposal of investment in an affiliated company - (1,346) -
Loss on disposal of a subsidiary - - 290
Unrealized gain on marketable securities (1,568) (433) -
Equity in (income) loss of affiliated companies less
dividend received and amortization of goodwill (1,867) 189 (859)
Write off of investment in an unconsolidated subsidiary - - 1
Fair value of shares issued as compensation - 136 103
Deferred income taxes 117 (110) (48)
Minority interest 230 (12) -
Changes in current assets and liabilities (net of effects
of acquisitions and disposals):
(Increase) decrease in marketable securities - (7,504) 287
Increase in accounts receivable (4,378) (5,137) (8,147)
Decrease (increase) in inventories 15,302 (13,245) (6,546)
(Increase) decrease in prepaid expenses and deposits (620) 407 (896)
Decrease in income taxes recoverable 689 28 670
Increase (decrease) in notes payable 48 (6,331) (329)
(Decrease) increase in accounts payable and accrued
expenses (6,062) 7,203 7,224
Decrease in income taxes payable (354) (114) (105)
Increase in amount due to a related party 2 2,691 -
-------- -------- --------
Total adjustments 14,190 (25,136) (2,845)
-------- -------- --------
Net cash provided by (used in) operating activities 23,235 (1,135) 8,953
-------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (36,013) (3,579) (17,888)
Acquisition of subsidiaries, net of cash acquired (Note 1b) (85) (7,872) -
(Increase) decrease in other assets (38) 123 (53)
Proceeds from disposal of property, plant and equipment 698 388 322
Purchase of interest in affiliated companies (Note 1g, h) - (2,243) -
Proceeds from disposal of investment - 24,214 -
Proceeds from disposal of investment in an affiliated company - 3,875 -
Acquisition of business (Note 1d) - - (951)
Cash outflow on disposal of a subsidiary (Note 1f) - - (19)
-------- -------- --------
Net cash (used in) provided by investing activities (35,438) 14,906 (18,589)
-------- -------- --------
55
NAM TAI ELECTRONICS. INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF US DOLLARS)
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from financing activities:
Dividends paid (3,947) (11,973) (2,889)
Share buy-back program (3,353) (73) (10,260)
Repayment of short term debt (24) (1) -
Proceed from bank loan 15,000 - -
Proceeds from shares issued on exercise of options
and warrants 4,307 2,753 394
Contribution by minority interest - 200 -
Share redemption - - (1,549)
Notes payable - - 6,949
Net cash provided by (used in) financing activities 11,983 (9,094) (7,355)
-------- -------- --------
Effect of foreign currencies on cash flows - 4 (9)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (220) 4,681 (17,000)
Cash and cash equivalents at beginning of period 58,896 54,215 71,215
-------- -------- --------
Cash and cash equivalents at end of period $ 58,676 $ 58,896 $ 54,215
======== ======== ========
Supplemental schedule of cash flow information:
Interest paid $ 178 $ 165 $ 192
-------- -------- --------
Income taxes (received) paid $ (249) $ 129 $ -
-------- -------- --------
Non cash investing transactions:
Acquisition of subsidiaries by issue of shares (Note 1b) $ - $ 21,795 $ -
-------- -------- --------
See accompanying notes to consolidated financial statements.
56
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 On March 9, 2001, Nam Tai Electronics, Inc. (the "Company")
established Nam Tai Group Management Limited, a wholly-owned
subsidiary in the Hong Kong Special Administration Region ("Hong
Kong") of the People's Republic of China (the "PRC"), at an investment
cost of $1 contributed in cash. Its principal activity is to provide
management services to other group companies.
b In October 2000, the Company acquired all of the outstanding shares of
J.I.C. Group (B.V.I.) Limited ("JIC"), a company incorporated in the
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.
The earnings adjustment is the amount of shortfall, if any, between
the net income of JIC and its subsidiaries for the year ended March
31, 2001 and the guaranteed profit amount of $3,846, multiplied by
8.5. As the net income of JIC and its subsidiaries for the year ended
March 31, 2001 met this guaranteed profit requirement, no adjustment
to the purchase price was made.
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.
During 2001, the Company has incurred legal and professional fees of
$85 to complete the acquisition of JIC. Such amount has been adjusted
to goodwill.
The following unaudited pro forma consolidated results of operations
give effect to the acquisition of JIC as if it had occurred on January
1, 1999.
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 "LCD" 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 PRC.
c 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.
d 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.
57
1. ACQUISITIONS AND DISPOSITIONS - CONTINUED
e 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 made
provision against the remaining carrying value of this investment to a
nominal value of $1 at December 31, 1998.
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'
liquidators. In January 2002, the Company entered into a restructuring
agreement with the liquidators of Albatronics. Further information
about the restructuring of Albatronics is disclosed in note 20.
During 1999, the Company commenced legal proceedings against
Albatronics seeking compensation to recover its investment and seeking
damages for breach of representations, warranties and undertakings.
The case has been settled and the Company has withdrawn the legal
proceedings against Albatronics at December 31, 2001.
f In June 1999, the Company sold a 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, 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:
g 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.
h 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.
i 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.
58
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. As the
Company's investment in Albatronics has been written off and it has
ceased to provide additional financial support, the Company did not
account for any additional losses of Albatronics since January 1,
1999. Intercompany accounts and transactions have been eliminated on
consolidation. The details of the Company's subsidiaries are described
in Note 14.
The Company's investments in Group Sense, Mate Fair and Shanghai Q&T
were initially 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 shareholdings in Group Sense. Upon the reduction of
shareholdings 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 ranging from 4 years to 15 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. Provisions for
potentially obsolete or slow-moving inventory are recorded based on
management's analysis of inventory levels. In 2001, $3.8 million in
inventory provisions were made for cancelled, reduced or delayed
orders.
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.
59
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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, 2001, 2000 and 1999. 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 Hong Kong 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 of 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
Furniture and fixtures 4 to 7 years
Automobiles 4 to 6 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
Through December 31, 2001, 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. On January 1, 2002, the Company will be required to adopt
Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets", see Note 2s.
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.
60
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
k STAFF RETIREMENT PLAN COSTS
The Company's costs related to the staff retirement plans (see 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"),
Shenzhen Namtek Co., Ltd. ("Namtek") and Jetup 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. Monetary assets and liabilities existing
at the balance sheet date denominated in currencies other than
functional currencies are translated at the exchange rates existing on
that date. Exchange differences are recorded in the consolidated
statement of income.
The Company and its subsidiaries have adopted the U.S. dollar, Hong
Kong dollar or the Renminbi as their functional currencies. The
financial statements of all subsidiaries with functional currencies
other than the U.S. dollar are translated in accordance with SFAS No.
52, "Foreign Currency Translation". All assets and liabilities are
translated at the rates of exchange ruling at the balance sheet date
and all income and expense items are translated at the average rates
of exchange over the year. All exchange differences arising from the
translation of subsidiaries' financial statements are recorded as a
component of comprehensive income.
The exchange rate between the Hong Kong dollar and the U.S. dollar has
been pegged (HK$7.80 to US$1.00) since October 1983. The exchange rate
between Renminbi and the U.S. dollar is based on the prevailing market
rate.
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.
Premiums paid on purchased options are included in prepaid expenses
and deposits and are recognized in income over the life of the
options.
Starting from January 1, 2001, the Company has adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. Since there were no free standing
derivative instruments at December 31, 2001 or December 31, 2000,
there was no significant effect on the consolidated financial
statements of the Company upon the adoption of SFAS No. 133.
61
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 18a.
q COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with SFAS No.
130, "Reporting Comprehensive Income". Accumulated other comprehensive
income (loss) represents foreign currency translation adjustments and
is included in the shareholders' equity section of the balance sheet.
The comprehensive income of the Company was $9,065, $23,952 and
$11,797 for the years ended December 31, 2001, 2000 and 1999,
respectively.
r FAIR VALUE DISCLOSURES
The carrying amounts of cash and cash equivalents, marketable
securities, accounts receivable, notes payable, short term debt,
accounts payable and amount due to a related party approximate fair
value due to the short term maturity of these instruments. The fair
value of long term bank loan is determined based on quoted market
rates and is approximately $14,920 as of December 31, 2001.
s RECENT CHANGES IN ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standard Board (the "FASB")
issued SFAS No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets". These statements, establish
accounting and reporting for business combinations. SFAS No. 141
requires that, among other things, all business combinations entered
into subsequent to 30 June 2001, be accounted for using the purchase
method of accounting. SFAS No. 142 provides that goodwill and other
intangible assets with indefinite lives not be amortized, but will be
tested for impairment on an annual basis. SFAS No. 142 is effective
for fiscal years beginning after 15 December 2001. The Company adopted
SFAS No. 141 during the year ended December 31, 2001 and it did not
impact the Company's financial statements. The Company has adopted
SFAS No. 142 on 1 January 2002. Management is assessing, but has not
yet determined, the impact that SFAS No. 142 will have on its
financial position and results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses the diverse
accounting practices for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
The Company will be required to adopt this standard on January 1,
2003. Management is assessing, but has not yet determined, the impact
that SFAS No 143 will have, if any, on its financial position and
results of operations.
The FASB also recently issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", that is applicable to
financial statements issued for fiscal years beginning after December
15, 2001. The FASB's new rules on asset impairment supersede SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and portions of APB Opinion No.
30, "Reporting the Results for Operations". The statement requires a
single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. Classification as held-for-sale is
an important distinction since such assets are not depreciated and are
stated at the lower of fair value and carrying amount. The statements
also requires expected future operating losses from discontinued
operations to be recorded in the period(s) in which the losses are
incurred, rather than as of the measurement date as previously
required. Management is assessing, but has not yet determined the
impact that SFAS No. 144 will have, if any, on its financial position
and results of operations.
t RECLASSIFICATION
Certain prior year amounts in the accompanying consolidated financial
statements have been reclassified to conform to the current year's
presentation. These reclassifications had no effect on the net income
or financial position for any year presented.
62
3. FINANCIAL INSTRUMENTS
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of its cash equivalents, trade receivables
and marketable securities.
The Company's cash and cash equivalents are high-quality deposits placed
with banking institutions with high credit ratings. This investment policy
limits the Company's exposure to 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.
Allowance for doubtful debts was $31 in 2001. No allowance for doubtful
accounts has been provided for the year ended December 31, 2000 and 1999.
There were no other movements in the provision for doubtful accounts.
The Company's sales to the customers which accounted for 10% or more of its
sales are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
--------- -------- --------
Customer
A $ 69,996 $ 50,767 $ 31,176
B 33,143 51,124 38,071
C N/A 31,442 43,737
D N/A 21,448 N/A
-------- -------- --------
$103,139 $154,781 $112,984
======== ======== ========
The Company's marketable securities are equity securities listed on the
Nasdaq.
All of the Company's significant financial instruments at December 31, 2001
and 2000 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, 2001 and December 31, 2000, there were no open currency
forward contracts and options.
4. NON-RECURRING INCOME
The amount in 1999 represented the reversal 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.
63
5. OTHER INCOME - NET
Other income - net consists of:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
------- -------- --------
Interest income $ 1,195 $ 3,300 $3,330
Miscellaneous (expense) income (294) (623) 8
Gain on disposal of investment in an affiliated
company - 1,346 -
Realized gain on disposal of investments, net - 9,435 144
Non-trade receivable write-off (500) - -
Currency option premium written off - (304) (566)
Foreign exchange gain (loss) 530 51 (413)
Bank charges (333) (328) (311)
Unrealized gain on marketable securities 1,568 433 -
Dividend income received from marketable securities 525 188 -
------- ------- ------
$ 2,691 $13,498 $2,192
======= ======= ======
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
Prior to December 2000, the Company maintained staff contributory
retirement plans (defined contribution pension plans) which covered certain
of its employees. From December 2000 onwards, the Company terminated its
existing staff contributory retirement plans and enrolled all of its
eligible employees in Hong Kong into a Mandatory Provident Fund ("MPF")
scheme. The MPF is a defined contribution scheme and the assets of the
scheme are managed by the trustees independent to the Company.
The MPF is available to all employees aged 18 to 64 and with at least 60
days of service under the employment of the Company in Hong Kong.
Contributions are made by the Company at 5% based on the staff's relevant
income. The maximum relevant income for contribution purpose per employee
is $3 per month. Staff members are entitled to 100% of the Company's
contributions together with accrued returns irrespective of their length of
service with the Company, but the benefits are required by law to be
preserved until the retirement age of 65.
The cost of the Company's contribution to the contributory retirement plans
(including the MPF) amounted to $151, $174 and $138 for the years ended
December 31, 2001, 2000 and 1999, respectively.
64
7. INCOME TAXES (EXPENSE) BENEFIT
The components of income before income taxes and minority interest are as
follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
-------- -------- -------
PRC, excluding Hong Kong $ 9,002 $ 6,384 $ 7,355
Hong Kong 500 17,572 4,387
Other - - (4)
-------- ------- -------
$ 9,502 $23,956 $11,738
======== ======= =======
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 to 1994, and 10% in
1995 to 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 2003. For the years ended
December 31, 1992 and 1993, Zastron qualified for a tax holiday; tax was
payable at the rate of 7.5% on the assessable profits of Zastron for the
years ended December 31, 1994 to 1996 and 10% for the years ended December
31, 1997 to 2001. In 1996 and 1997, Jieda and Namtek qualified for a tax
holiday. For the years ended December 31, 1998 to 2000, tax was payable at
the rate of 7.5% on the assessable profit. In February 2001, Namtek
received the recognition of "Advanced Technology Enterprise" which entities
it to various tax benefits including a lower income tax rate of 7.5% until
2003. For the year ended December 31, 2001, the income tax of Jieda was
payable at the rate of 15% 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 to 2001. For the
years ended December 31, 1999 and 2000, Jieyao qualified for a tax holiday;
tax was payable at the rate of 7.5% on the assessable profit of Jieyao for
the year ended December 31, 2001. For the year ended December 31, 2001, BPC
qualified for its first year tax holiday.
Notwithstanding the foregoing, an FIE whose foreign investor directly
reinvests by way of capital injection its share of profits obtained from
that FIE or another FIE owned by the same foreign investor in establishing
or expanding an export-oriented or technologically advanced enterprise in
the PRC for a minimum period of five years may obtain a refund of the taxes
already paid on those profits. NTES, Zastron, Namtek and Jetup qualified
for such refunds of taxes as a result of reinvesting their profit earned in
previous years. As a result, the Company recorded tax expense net of the
benefit related to the refunds. At December 31, 2001 and 2000, taxes
recoverable under such refund arrangements were $1,271 and $2,042,
respectively, which are included in income taxes recoverable.
65
7. INCOME TAXES - CONTINUED
The current and deferred components of the income tax (expense) benefit
appearing in the consolidated statements of income are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
------------------------------
Current tax $(110) $(77) $ 12
Deferred tax (117) 110 48
----- ----- -----
$(227) $ 33 $ 60
===== ===== =====
The components of deferred tax assets and liabilities are as follows:
AT DECEMBER 31,
-------------------
2001 2000
-------------------
Deferred tax asset:
Net operating loss carryforwards $ - $ 17
Deferred tax liability:
Excess of tax allowances over depreciation (151) (51)
------ ------
Net deferred tax liability $ (151) $ (34)
====== ======
At December 31, 2000, 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.
A reconciliation of the income tax (expense) benefit 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,
------------------------------
2001 2000 1999
--------- --------- ---------
Income before income taxes and minority interest $ 9,502 $23,956 $11,738
PRC tax rate 15% 15% 15%
Income tax expense at PRC tax rate on
income before income tax $(1,425) $(3,593) $(1,761)
Effect of difference between Hong Kong and PRC tax (7) (7) (37)
rates applied to Hong Kong income
Effect of (loss) income for which no income tax benefit/
expense is receivable/payable (35) 2,527 675
Tax holidays and tax incentives 786 491 543
Effect of PRC tax concessions, giving rise to no PRC tax
liability 564 508 538
Tax benefit (expense) arising from items which are not
assessable (deductible) for tax purposes:
Gain on disposal of land in Hong Kong 6 53 47
Offshore interest income 21 76 143
Non-deductible items (159) (252) (122)
Other 22 230 34
------- ------ ------
$ (227) $ 33 $ 60
======= ====== ======
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 $1,350, $999 and $1,081 in the years
ended December 31, 2001, 2000 and 1999, respectively (representing a
decrease in the basic earnings per share of $0.13, $0.11 and $0.11, and a
decrease in the diluted earnings per share of $0.13, $0.11 and $0.11 in the
years ended December 31, 2001, 2000 and 1999, respectively).
66
8. 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, 2001 Income Shares amount
---------------------------- ------- ---------- ---------
Basic earnings per share 9,045 10,274,377 $0.88
Effect of dilutive securities
- Stock options - 56,660
- Warrants - 62,374
------- ---------- ---------
Diluted earnings per share $ 9,045 10,393,411 $0.87
======= ========== =========
Stock options to purchase 15,000 shares of common shares at $16.375,
warrants to purchase 3,055,159 shares of common shares at $20.40, and the
10,000 advisors' warrants were outstanding at December 31, 2001 but were
not included in the computation of diluted earnings per share because the
exercise price of the stock options and warrants was greater than the
average market price of the common shares during the relevant period. The
holder of each advisors' warrant is entitled to purchase from the Company
at the purchase price of $20.40 per unit one common share and one warrant
exercisable to purchase one common share at $20.40 per share.
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.
67
9. MARKETABLE SECURITIES
During 2000, the Company acquired equity securities listed on the Nasdaq
and all of them were classified as trading securities and included in
current assets at December 31, 2001 and 2000.
AT DECEMBER 31,
------------------
2001 2000
------- --------
Cost $ 7,504 $ 7,504
Unrealized gain on marketable securities 2,001 433
------- -------
Market value $ 9,505 $ 7,937
======= =======
10. INVENTORIES
Inventories consist of:
AT DECEMBER 31,
------------------
2001 2000
------- --------
Raw materials $ 9,144 $ 21,232
Work-in-progress 1,823 3,126
Finished goods 925 2,814
------- --------
$11,892 $ 27,172
======= ========
11. INVESTMENT IN AFFILIATED COMPANIES
Investment in affiliated company represents 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, 2001 and December 31, 2000 was $153
and $51, respectively. The share of results of Mate Fair in 2001 and 2000
is based on its unaudited management accounts for the year ended December
31, 2001 and 2000, respectively.
The Company's interest in Shanghai Q&T was reduced to zero since December
31, 2000 as Shanghai Q&T incurred losses during the year ended December 31,
2000. The Company does not have any further financial commitment in this
company.
The following table presents summarized financial information for Mate
Fair:
2001 2000
------- --------
Operating income 8,077 246
Net income 8,077 246
Non-current assets 10,452 2,375
Shareholders' equity 10,452 2,375
The Company's retained earnings included the undistributed earnings
(accumulated losses) of affiliates, including related amortization of
goodwill, of $1,678 and $(189) as of December 31, 2001 and December 31,
2000, respectively.
68
12. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
AT DECEMBER 31,
-------------------
2001 2000
------- ---------
At cost
Land use right, land and buildings $ 38,592 $ 25,485
Machinery and equipment 41,974 32,876
Leasehold improvements 11,862 9,872
Furniture and fixtures 1,930 1,519
Automobiles 1,631 1,652
Tools and molds 127 87
-------- --------
Total 96,116 71,491
Less: accumulated depreciation and amortization (35,122) (27,025)
Construction in progress 5,321 133
Deposit paid for the acquisition of leasehold land and
buildings 4,099 -
------- -------
Net book value $70,414 $44,599
======= =======
13. INTANGIBLE ASSETS
Intangible assets consist of the following:
AT DECEMBER 31,
------------------
2001 2000
------- --------
Goodwill $ 24,563 $ 24,478
License 1,335 1,321
-------- ---------
Total 25,898 25,799
Less: accumulated amortization (2,838) (803)
-------- ---------
$ 23,060 $ 24,996
======== =========
Amortization expense charged to income from operations for the year ended
December 31, 2001, 2000 and 1999 was $2,035, $733 and $52, respectively.
69
14. INVESTMENT IN SUBSIDIARIES
Percentage of ownership
Place of Principal as of December 31
incorporation activity 2001 2000
-----------------------------------------------------------------------------------------------------
Consolidated principal subsidiaries:
BPC (Shenzhen) Co., Ltd. PRC Manufacturing 86.67% 86.67%
J.I.C. Electronics Company Hong Kong Manufacturing and 100% 100%
Limited trading
J.I.C Enterprises (Hong Kong) Hong Kong Trading 100% 100%
Limited
J.I.C. Group (B.V.I.) Limited British
Virgin Islands Investment holding 100% 100%
Jetup Electronic (Shenzhen) Co., PRC Manufacturing 100% 100%
Limited
Jieda Electronics (Shenzhen) PRC Manufacturing 100% 100%
Co., Ltd.
Jieyao Electronics (Shenzhen) PRC Manufacturing 100% 100%
Co., Ltd.
Nam Tai Electronic & Hong Kong Trading 100% 100%
Electrical Products Limited
Nam Tai Group Management Hong Kong Provision of management 100% -
Limited services
Nam Tai Telecom (Hong Kong) Hong Kong Trading 100% 100%
Company Limited
Namtai Electronic (Shenzhen) PRC Manufacturing 100% 100%
Co., Ltd.
Shenzhen Namtek Co., Ltd. PRC Software development 100% 100%
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 7) 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.
70
15. BANK LOANS AND BANKING FACILITIES
The Company has credit facilities with various banks representing trade
acceptances and overdrafts. At December 31, 2001 and 2000, these facilities
totaled $76,494 and $75,442, of which $9,730 and $5,399 were utilized at
December 31, 2001 and 2000, 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 will net book values
of $230, and these securities have been released as a result of the
settlement of these credit lines during the year ended December 31, 2001.
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,
------------------
2001 2000
------- --------
Outstanding letters of credit $ 8,183 $ 3,900
Trust receipts 994 389
Usance bills pending maturity 553 1,110
------- --------
Total banking facilities utilized 9,730 5,399
Less: Outstanding letters of credit (8,183) (3,900)
------- --------
Notes payable $ 1,547 $ 1,499
======= ========
As of December 31, 2000, the Company also had short term debt of $24, which
was bearing interest at 5.445% per annum and was secured by an automobile
with a net book value of $37. The amount has been fully repaid during the
year ended December 31, 2001.
As of December 31, 2001, the long term bank loan represents a seven-year
term loan totaling $15,000 at a fixed interest rate of 5.05% in the first
four years and at a rate of 1% over Singapore Interbank Money Market Offer
Rate for the following three years. The loan is secured by land and
buildings with net book value of $18,010, and is repayable as follows:
Year ending December 31,
- 2002 $ 2,140
- 2003 2,140
- 2004 2,140
- 2005 2,140
- 2006 2,140
- 2007 and thereafter 4,300
-------
$15,000
=======
71
16. RELATED PARTY BALANCE AND TRANSACTIONS
As of December 31, 2001 and December 31, 2000, the balance due to a related
party represents the balance due to TBCL, a minority shareholder of BPC,
and its related companies.
Since the establishment of BPC in 2000, the Company recognized net sales of
$21,072 and $6,232, purchased raw materials of $23,065 and $22,370,
acquired property, plant and equipment of $50 and $814, from TBCL and its
related companies for the years ended December 31, 2001 and 2000,
respectively. In addition, the Company also acquired a license for $1,000
from TBCL during the year ended December 31, 2000.
17. COMMITMENTS AND CONTINGENCIES
a As at December 31, 2001, the Company has entered into commitments for
capital expenditure of approximately $15,397 for property, plant and
equipment which are expected to be disbursed during the year ending
December 31, 2002.
b Lease commitments
The Company leases premises under various operating leases, certain of
which contain escalation clauses. Rental expense under operating
leases was $1,501 in 2001, $812 in 2000 and $528 in 1999.
At December 31, 2001, the Company was obligated under operating
leases, which relate to land and buildings, requiring minimum rentals
as follows:
Year ending December 31,
- 2002 $ 1,335
- 2003 1,284
- 2004 1,320
- 2005 1,326
- 2006 1,168
- 2007 and thereafter 1,086
--------
$ 7,519
========
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 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. On March 26, 2001, Nam Tai
filed a summons seeking to remove the liquidator for failing to act
diligently in the performance of his duties and for knowingly
misleading the court. As of February 28, 2002, neither summons has
been listed for hearing. Meanwhile, the Company is prevented from
redeeming the remaining 169,727 Nam Tai shares beneficially owned by
Tele-Art. Inc. to satisfy the current unpaid judgment debt until a
determination of the liquidator's February 12, 1999 application.
Management believes that the claim mentioned above is without merit
and will vigorously defend it and believes that the outcome will not
have a significant effect on the financial position, results of
operation or cash flows.
72
18. COMMON SHARES
a STOCK OPTIONS
In August 1993, the Board of Directors approved a stock option plan
which authorized the issuance of 300,000 vested options to key
employees, consultants or advisors of the Company or any of its
subsidiaries. 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.
In May 2001, the Board of Directors approved another stock option plan
which would grant 5,000 options to each independent directors of the
Company elected at each annual general meeting of shareholders, and
might grant options to key employees, consultants or advisors of the
Company or any of its subsidiaries to subscribe for its shares in
accordance with the terms of this stock option plan. The maximum
number of shares to be issued pursuant to the exercise of options
granted was 1,000,000 shares.
A summary of stock option activity during the three years ended
December 31, 2001 is as follows:
Number of Option price per share with the weighted
options average option price in parenthesis
---------------------------------------------------------------------------------------------------------
Outstanding at January 1, 1999 353,333 $10.50 & $15.75 ($10.55)
Exercised (36,500) $10.50 & $15.75 ($10.79)
Cancelled (53,333) $10.50
--------
Outstanding at December 31, 1999 263,500 $10.50 & $15.75 ($10.53)
Granted 350,220 $13.875, $14.81, $16.125 & $16.375 ($14.18)
Exercised (149,500) $10.50
Cancelled (28,220) $16.125
---------
Outstanding at December 31, 2000 436,000 $10.50, $13.875, $14.81, $15.75 & $16.375 ($13.11)
Granted 438,253 $13.94, $14.50 & $7.0 ($12.34)
Exercised (116,000) $10.50, $13.875 & $15.75 ($10.63)
Cancelled (50,853) $13.875, $13.94, $14.81 ($14.02)
--------
Outstanding at December 31, 2001 707,400 $7.00, $13.875, $13.94, $14.50 & $16.375 ($12.97)
========
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. No advisors' options were granted during 2001 or 1999.
Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant dates for awards under
those plans consistent with the method of 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,
-----------------------------------
2001 2000 1999
------ -------- -------
Net income As reported $9,045 $ 24,001 $11,798
Pro forma 6,714 21,785 11,582
Diluted earnings per share As reported $0.87 $2.56 $1.25
Pro forma $0.65 2.32 1.23
73
18. COMMON SHARES - CONTINUED
a STOCK OPTIONS - CONTINUED
There were no stock options granted during the year ended December 31,
1999. Details of the options granted by the Company in 2000 and 2001
are as follows:
Number of Exercise
options granted price Exercisable period
--------------- -------- ------------------
In 2001
_______
277,853 $13.94 March 16, 2001 to March 16, 2004
55,000 $14.50 June 22, 2001 to June 22, 2004
105,400 $7.00 June 27, 2001 to June 22, 2002
In 2000
_______
172,000 $13.875 January 1, 2001 to January 31, 2003
130,000 $13.875 May 31, 2001 to January 31, 2003
5,000 $14.81 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
Stock option costs of $839 charged to the selling, general and
administrative expenses in 2001 represented the difference between the
market price and exercisable price of $7 for the 105,400 options
granted during 2001.
The weighted average fair value of options granted during 2001 and
2000 was $5.14 and $5.67, respectively, using the Black-Scholes
option-pricing model based on the following assumptions:
2001 2000
----------------------------- ---------------------------------------
$13.94 $14.50 $7.0 $16.375 $16.125 $14.81 $13.875
Options Options Options Options Options Options Options
----------------------------- ---------------------------------------
Risk-free interest rate 5% 5% 5% 6.41% 6.23% 6.13% 6.67%
Expected life 3/16/04 6/22/04 6/22/02 6/8/03 4/5/03 7/31/03 1/31/03
Expected volatility 45% 45% 45% 54.1% 51.2% 47.3% 65.0%
Expected dividends $0.10 $0.10 $0.10 $0.09 $0.09 $0.09 $0.09
per quarter
The weighted average remaining contractual life of the stock options
outstanding at December 31, 2001 and 2000 was 18 months and 19 months,
respectively.
b SHARE BUY - BACK PROGRAM
The Company repurchased shares under its buy-back program as follows:
Year Shares repurchased Average purchase price
---- ------------------ ----------------------
2001 227,900 $14.71
2000 5,600 13.00
1999 879,700 11.66
74
18. 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
extension of the expiry date of the 10,000 advisors' warrants, using
the Black-Scholes option-pricing model, was $43 and has been charged
to the consolidated statement of income in 2000.
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, 1999 to October 4, 2001. These warrants have been
accounted for using variable accounting and the related compensation
expense of $263, $263 and $329, has been charged to the consolidated
statement of income for the year ended December 31, 2001, 2000 and
1999, respectively. In 2001, 300,000 advisor's warrants were
exercised.
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% 50%
Expected dividend per quarter $0.09 $0.09
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 extending of the expiry date of the warrants
created a new measurement date for the warrants, however, the
resulting amount was deemed immaterial.
The 58,030 warrants issued pursuant to the exercise of advisors'
warrants mentioned in note 18c above bear the same rights as other
warrants.
75
19. SEGMENT INFORMATION
Prior to 2001, the Company operated in a single segment of the consumer
electronic products ("CEP") industry. As a result of the acquisition of JIC
in late 2000, the Company added a second segment, LCD panels and
transformers ("LPT"), principally relating to the operation of JIC. The
Company operates and manages these segments as strategic business units.
The chief operating decision maker evaluates the net income of each segment
in assessing performance and allocating resources between segments.
The following table provides operating financial information for the two
reportable segments. The information presented below for 2000 and 1999 has
been restated to reflect this change. No LPT segment information for the
year ended December 31, 1999 is presented because the Company did not
operate LPT business in 1999.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------ ----------------------------------- ----------
CEP LPT TOTAL CEP LPT TOTAL CEP
Net sales $ 198,048 $ 35,958 $ 234,006 $ 203,404 $ 10,284 $ 213,688 $ 145,054
Cost of sales (174,863) (29,111) (203,974) (173,878) (8,218) (182,096) (120,074)
--------- --------- --------- --------- --------- --------- ---------
Gross profit 23,185 6,847 30,032 29,526 2,066 31,592 24,980
Selling, general and
administrative
expenses (16,521) (5,453) (21,974) (15,196) (2,450) (17,646) (14,913)
Research and
development
expenses (2,746) (208) (2,954) (3,489) -- (3,489) (2,624)
Non-recurring income -- -- -- -- -- -- 848
Gain on disposal of
land 18 -- 18 355 -- 355 302
Interest income 1,127 68 1,195 3,256 44 3,300 3,330
Interest expense (170) (8) (178) (149) (16) (165) (192)
Write off of investment
in an unconsolidated
subsidiary -- -- -- -- -- -- (1)
Equity in income (loss)
of affiliated
companies, including
amortisation of goodwill 1,867 -- 1,867 (189) -- (189) 1,146
Other (expense) income (260) 1,756 1,496 10,161 37 10,198 (1,138)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
income taxes and minority
interest 6,500 3,002 9,502 24,275 (319) 23,956 11,738
Income taxes (expense)
benefit (137) (90) (227) (144) 177 33 60
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
minority interest 6,363 2,912 9,275 24,131 (142) 23,989 11,798
Minority interest (230) -- (230) 12 -- 12 --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 6,133 $ 2,912 $ 9,045 $ 24,143 $ (142) $ 24,001 $ 11,798
========= ========= ========= ========= ========= ========= =========
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
2001 2000 1999
------------------------------ ------------------------------- ---------
CEP LPT TOTAL CEP LPT TOTAL CEP
Depreciation and
amortisation $ 8,454 $ 2,717 $ 11,171 $ 7,059 $ 639 $ 7,698 $ 5,340
Stock option costs -- 839 839 117 -- 117 --
Capital expenditures 34,060 1,953 36,013 3,141 438 3,579 17,888
Identifiable assets $188,262 $ 36,311 $224,573 $164,963 $ 43,407 $208,370 $158,747
There are no inter-segment sales for the years ended December 31, 2001,
2000 and 1999.
76
19. SEGMENT INFORMATION - CONTINUED
A summary sets forth the percentage of net sales of each of the Company's
product lines of each segment for the years ended December 31, 2001, 2000
and 1999, is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
PRODUCT LINE 2001 2000 1999
------------ --------------------------------
CEP:
- subassemblies and components 41% 38% 33%
- electronic calculators 17 29 35
- personal digital assistants and linguistic products 13 16 23
- telecommunication products 2 7 6
- battery packs 9 3 -
- other products and services 3 2 3
--- --- ---
85% 95% 100%
LPT:
- LCD panels and transformers 15 5 -
--- --- ---
100% 100% 100%
=== ==== ===
A summary of net sales, income from operations and identifiable assets by
geographic areas and net sales to major customers is as follows:
By geographical area:
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
--------------------------------------
Net sales from operations within:
- Hong Kong:
Unaffiliated customers $206,902 $202,364 $142,347
-------- -------- --------
- PRC, excluding Hong Kong:
Affiliated customers (note 16) 21,072 6,232 -
Unaffiliated customers 6,032 5,092 2,707
Intersegment sales 160,503 180,065 136,648
-------- -------- --------
187,607 191,389 139,355
-------- -------- --------
- Intersegment eliminations (160,503) (180,065) (136,648)
-------- -------- --------
Total net sales $234,006 $213,688 $145,054
======== ======== ========
Net income within:
- PRC, excluding Hong Kong $ 4,848 $ 6,549 $ 7,341
- Hong Kong 4,197 17,452 4,462
- Canada - - (5)
-------- -------- --------
$ 9,045 $ 24,001 $ 11,798
======== ======== ========
AS AT DECEMBER 31,
--------------------------------------
2001 2000 1999
--------- --------- ---------
Identifiable assets by geographic area:
- PRC, excluding Hong Kong $ 60,866 $ 71,242 $ 55,962
- Hong Kong 163,707 137,128 102,785
--------- -------- ---------
Total assets $ 224,573 $208,370 $ 158,747
========= ======== =========
Intersegment sales arise from the transfer of finished goods between
subsidiaries operating in different areas. These sales are generally at
estimated market price.
77
19. SEGMENT INFORMATION - CONTINUED
At December 31, 2001, 2000 and 1999, the identifiable assets in Hong Kong
included the investment in affiliated companies of $3,921, $2,054 and
$17,308, respectively.
AS AT DECEMBER 31,
--------------------------------------
2001 2000 1999
--------- --------- ---------
Net sales to customers by geographic area:
- Hong Kong $ 64,391 $ 97,685 $ 51,856
- North America 54,994 52,244 43,181
- PRC 25,378 11,056 -
- Japan 22,767 19,388 17,597
- Europe 22,437 20,032 25,520
- Other 44,039 13,283 6,900
--------- --------- ---------
Total net sales $ 234,006 $ 213,688 $ 145,054
========= ========= =========
20. SUBSEQUENT EVENTS
(i) In January 2002, the Company entered into a transaction, which, if
consummated, will result in the listing of a company holding JIC's
business on the Hong Kong Stock Exchange. To effect the transaction,
the Company entered a restructuring agreement with the liquidators of
Albatronics, a company whose shares had been listed on the Hong Kong
Stock Exchange and which was placed into voluntary liquidation in
August 1999. The Company owns slightly more than 50% of the
outstanding capital stock of Albatronics. Under the restructuring
agreement the Company has agreed to transfer JIC into a new company
for a controlling interest in the new company. Albatronics' listing
status on the Hong Kong Stock Exchange will be withdrawn and the new
company will be listed on the Hong Kong Stock Exchange free from the
liabilities of Albatronics. For its contribution to the new company,
the Company will receive a combination of ordinary and preference
shares, which are analogous to common stock and convertible preferred
stock of companies organized under U.S. law. Immediately upon
completion of the restructuring, the Company, the creditors of
Albatronics and the Hong Kong public who hold shares of Albatronics
will receive ordinary shares of the new company equal to approximately
70.4%, 24.1% and 5.5% respectively, of the outstanding ordinary shares
of the new company. The Company will also receive preference shares of
the new company, which upon their full conversion, will result in the
Company, the creditors and the Hong Kong public owning approximately
92.9%, 5.8% and 1.3%, respectively, of the outstanding ordinary shares
of the new company immediately upon consummation of the restructuring.
The preference shares are non-redeemable, non-voting shares that rank
pari passu with ordinary shares of the new Company on the payment of
dividends or other distribution other than on a winding-up. No holder
of preference shares (including the Company) may convert them if such
conversion would result in the minimum public float of 75% that is
required under the Hong Kong Stock Exchange Listing Rules not being
met.
Consummation of the restructuring agreement is subject to the
fulfillment of a number of conditions including approval by
Albatronics' creditors and shareholders and the Listing Committee of
the Stock Exchange of Hong Kong and the receipt of other regulatory
and court approvals. If such conditions are satisfied, the
restructuring is expected to be consummated before the end of the
second quarter of 2002.
(ii) The Company expects to complete an investment transaction in 2002 for
the acquisition of a 6% equity interest in TCL Holdings Corporation
Ltd. ("TCL Holdings") for a consideration of approximately US$12
million. TCL Holdings is the parent company for the TCL Group of
Companies, a PRC state-owned enterprise that has extensive sales and
distribution channels in PRC. TCL Holdings' scope of business includes
the import and export of raw materials, the design manufacturing and
sales and marketing of telephones, VCD players, color television sets,
mobile phones and other consumer electronic products. Through this
transaction both the Company and the TCL Group aim to create a
strategic relationship which will allow the parties to support and
coordinate with each other to expand and develop new business in the
manufacturing and marketing of consumer electronic products, including
telecommunication products in the growing domestic China market and
globally.
78
ITEM 19 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 Sale and Purchase Agreement of 5 bearer shares in Mate Fair Group
Limited between Spin King Limited and Nam Tai Electronics, Inc. dated
September 6, 2000. (5% Indirect Ownership in TCL Mobile). (incorporated
by reference to Exhibit 4.5 of registrant's Form 20-F for the year ended
December 31, 2000 filed with the SEC on March 21, 2001.)
4.2 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).
4.3 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).
4.4 Nam Tai's Amended and Restated 1993 Stock Option Plan (incorporated by
reference to the Amended and Restated 1993 Stock Option Plan of Nam Tai
Electronics, Inc. as adopted August 18, 1993, amended December 15, 1993,
January 12, 1996, and amended and restated April 26, 1999) included as
part of Nam Tai's definite Proxy Statement for its 1999 Annual Meeting
of Shareholders filed with the SEC as part of Nam Tai's Form 6-K on June
24, 1999).
4.5 Nam Tai's 2001 Stock Option Plan (incorporated by reference to the 2001
Stock Option Plan included as part of Nam Tai's Proxy Statement for its
2001 Annual Meeting of Shareholders filed with the SEC as part of Nam
Tai's Form 6-K on June 27, 2001)
4.6 Sale and Purchase Agreement for the 15th Floor of China Merchants Tower,
Shun Tak Centre, Nos.168-200 Connaught Road Central, Hong Kong between
Shun Tak Centre Limited and Nam Tai Group Management Limited dated March
27th 2001.
4.7 Agreement on Proposal for the listing of JIC Group common shares on the
Hongkong Stock Exchange dated January 14, 2002 between Nam Tai
Electronics, Inc., J.I.C. Technology Company Limited, Albatronics (Far
East) Company Limited (in liquidation) and Messrs. Toohey and Chung, the
Joint Liquidators.
4.8 Letter dated September 24, 2001 between The Hongkong and Shanghai
Banking Corporation Limited and the Company for a seven-year term-loan
of $15,000,000.
4.9 Form of Indemnification Agreement entered into between the Company and
each of its Director's as of the 9th day of July 2001.
8.1 Diagram of Company's subsidiaries.
23.1 Auditor's Consent. See page 81 of this report.
79
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 15, 2002
By: /s/ Joseph Li
-----------------------------
Joseph Li
Chief Financial Officer
80
[DELOITTE TOUCHE TOHMATSU LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
333-73954, 333-27761, 333-58466, and 333-76940 of Nam Tai Electronics, Inc. on
Form S-8 and Registration Statements Nos. 333-36135 and 333-58468 of Nam Tai
Electronics, Inc. on Form F-3 of our report dated March 15, 2002, appearing in
this Annual Report on Form 20-F of Nam Tai Electronics, Inc. for the year ended
December 31, 2001.
/s/ Deloitte Touche Tohmatsu
Hong Kong
March 15, 2002
81