1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F/A
(AMENDMENT NO. 1)
[ ] Registration Statement Pursuant to Section 12(b) or (g) of the Securities
Exchange Act of 1934
OR
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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For the Fiscal Year Ended: Commission File Number:
December 31, 1998 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)
Unit 9, 15/F., Tower 1
China Hong Kong City, 33 Canton Road
TST, Kowloon, Hong Kong
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $0.01 par value per share
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, 1998, there were 9,812,523 Common Shares of the
registrant outstanding.
Indicate by check mark whether the registrant: (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17.____ Item 18. [X]
Exhibit Index on Page 73
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TABLE OF CONTENTS
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION............................................................ 2
PART I
Item 1. Description of Business.................................................................... 3
Item 2. Properties.................................................................................21
Item 3. Legal Proceedings..........................................................................22
Item 4. Control of the Company.....................................................................23
Item 5. Nature of Trading Market...................................................................24
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.........................25
Item 7. Taxation .............................................................................25
Item 8. Selected Financial Data....................................................................26
Item 9. Management's Discussion and Analysis of Results of Operations and Financial Condition......27
Item 10. Directors and Executive Officers of the Company............................................46
Item 11. Compensation of Directors and Officers.....................................................47
Item 12. Options to Purchase Securities from the Company or its Subsidiaries........................47
Item 13. Interest of Management in Certain Transactions.............................................48
PART II
Item 14. Description of Securities to be Registered.................................................49
PART III
Item 15. Defaults Upon Senior Securities............................................................49
Item 16. Changes in Securities and Changes in Security For the Company's Securities.................49
PART IV
Items 17.
and 18. Financial Statements.......................................................................49
Item 19. Financial Statements and Exhibits..........................................................73
SIGNATURES................................................................................................74
Consent of Independent Accountants (to incorporation of their report on Financial Statements
into the Company's Registration Statement on Forms F-3 and S-8)...........................................75
This Annual Report on Form 20-F contains forward-looking statements. These
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled Risk Factors
under Item 1 - Description of Business.
Readers should not place undue reliance on forward-looking statements,
which reflect management's view only as of the date of this Report. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect subsequent events or circumstances. Readers should also carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission.
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
The Company prepares its consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
and publishes its financial statements in United States dollars.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Nam Tai Electronics, Inc. (which together with its wholly owned
subsidiaries is hereafter referred to as the "Company" or "Nam Tai") was
incorporated as a limited liability International Business Company under the
laws of the British Virgin Islands in August 1987. The Company's corporate
administrative matters are conducted in the British Virgin Islands through its
registered agent, McW. Todman & Co., McNamara Chambers, P.O. Box 3342, Road
Town, Tortola, British Virgin Islands. The Company's principal executive offices
are located in Hong Kong Special Administrative Region ("Hong Kong"), of the
People's Republic of China ("PRC"). Its address is Unit 9, 15/F., Tower 1, China
Hong Kong City, 33 Canton Road, TST, Kowloon, Hong Kong.
As an International Business Company, the Company is prohibited from doing
business with persons resident in the British Virgin Islands, owning real estate
in the British Virgin Islands, or acting as a bank or insurance company. The
Company does not believe these restrictions materially affect its operations.
Nam Tai was incorporated in the British Virgin Islands principally to
facilitate trading in its shares. The government of Hong Kong imposes stamp duty
on the transfer of shares equal to 0.3% of the value of the transaction. There
is no such stamp duty imposed by the British Virgin Islands. The Company was
organized in this manner to avoid any such requirements for the collection of
stamp duties for share transactions.
COMPANY OVERVIEW
Nam Tai provides design and manufacturing service to original equipment
manufacturers ("OEMs") of consumer electronic products. Nam Tai's two principal
customers include Texas Instruments Incorporated and Sharp Corporation. All of
the Company's design and manufacturing operations are based in Shenzhen, China,
approximately 30 miles from Hong Kong. Products manufactured by Nam Tai include
calculators, personal organizers, personal digital assistants, linguistic
products, integrated circuit ("IC") or smart card readers (referred to as "IC
card readers"), and various components including microwave oven control panel
modules.
Nam Tai assists OEMs in the design and development of products and
furnishes full turnkey manufacturing services to its OEM customers utilizing
advanced processes such as chip on board ("COB"), multichip modulators ("MCM"),
surface mount technology ("SMT"), tape automated bonding ("TAB"), outer lead
bonding ("OLB") and anisotropic conductive film ("ACF") heat seal technologies.
The Company provides hardware and software design, plastic molding, component
purchasing, assembly into finished products or electronic subassemblies,
post-assembly testing and shipping. It also manufactures electronic components
and subassemblies for printed circuit boards ("PCBs"). This includes large scale
integrated circuits ("LSI") bonded on PCBs that are used in the manufacture of
products such as electronic toys and telecommunication systems, and
subassemblies for liquid crystal display ("LCD") modules that are in turn used
in the manufacture of communications, camera and computer products. In addition,
Nam Tai provides OEMs with silk screening services for plastic parts, polyvinyl
chloride ("PVC") products and metal parts, and is developing Original Design
Manufacturing ("ODM") capabilities.
The Company moved its manufacturing facilities to China in 1980 and later
located in Shenzhen, China in 1987 to take advantage of lower overhead costs,
lower material costs, and competitive labor rates and to position itself to
achieve low-cost, high volume, high quality manufacturing. The location of Nam
Tai's facility in Shenzhen, about 30 miles from Hong Kong, provides the Company
with access to Hong Kong's infrastructure of communication and banking. This
also facilitates transportation of the Company's products out of China through
the port of Hong Kong.
The Company emphasizes high responsiveness to the needs of OEM customers
through the development and volume production of increasingly sophisticated and
specialized products. The Company seeks to build long-term relationships with
its customers through high quality standards (supported by ISO 9001
Certification), competitive
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pricing, strong research and development support, advanced assembly processes
and high volume manufacturing, and with key suppliers through volume purchasing
and reliable forecasting of component purchases. The Company believes that the
potential for increased manufacturing outsourcing by Japanese and U.S. OEMs in
China is substantial and that it is in a position to take advantage of this
because of its expanded production capacity, and experience. Management believes
Nam Tai's record of providing timely delivery in volume of high-quality, high
technology, low-cost products builds close customer relationships and positions
the Company to receive orders for more complex products. As the Company grows,
management will seek to maintain a low cost structure, reduce overhead where
possible and continuously strive to improve its manufacturing quality and
processes.
THE COMPANY SUBSIDIARIES
The Company is a holding company for Nam Tai Electronic & Electrical Products
Limited and its subsidiaries, Nam Tai Electronics (Canada) Ltd. and Albatronics
(Far East) Company Limited ("Albatronics"). See Note 1 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 principal
operating subsidiaries.
_______________________
| Nam Tai |
| Electronics, Inc. |
| (A British Virgin |
| Island International |
| Business Company) |
|_______________________|
|
_____________________________|__________________________________
| 100% | 100% | 50%
______________________ ___________________________ ___________________________
| Nam Tai | | Nam Tai | | Albatronics |
| Electronics | | Electronic & | | (Far East) |
| (Canada) Ltd. | | Electrical Products Ltd. | | Company Limited |
| (A Canadian Federal | | (A Hong Kong Limited | | (A Hong Kong Limited |
| Company) | | Liability Company) | | Liability Company) |
| | | | | and its subsidiary |
| | | | | Company |
|______________________| |___________________________| |___________________________|
|
|
_____________________________________________________________
| | |
| | 100% | 100%
| | |
| ____________________________ _____________________________
| | Namtai Electronic | | Zastron Plastic & Metal |
| | (Shenzhen) Co. Ltd. | | Products (Shenzhen) Ltd. |
| | (A Limited Liability of | | (A Limited Liability |
| | China Foreign | | of China Foreign |
| | Operation) | | Operation) |
| |____________________________| |_____________________________|
| |
| |
| 75% |
_______________________ |
| Shenzhen | |
| Namtek Co., Ltd. | |
| (A Limited Liability | |
| of China Foreign | 25% |
| Operation) |_____________|
|_______________________|
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Nam Tai Electronic & Electrical Products Limited
Nam Tai Electronic & Electrical Products Limited ("NTEE") was incorporated
in November 1983 and became the holding company for Namtai Electronic (Shenzhen)
Co. Ltd. and Zastron Plastic & Metal Products (Shenzhen) Ltd. in 1992.
Marketing, customer relations and management operations are the main functions
handled by NTEE.
Namtai Electronic (Shenzhen) Co. Ltd.
Namtai Electronic (Shenzhen) Co. Ltd. ("NTSZ") was established as Baoan
(Nam Tai) Electronic Co. Ltd. in May 1989 as a joint venture company with
limited liability pursuant to the relevant laws of China. The equity of NTSZ was
owned 70% by NTEE and 30% by a Chinese Governmental 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 Governmental 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.
Zastron Plastic & Metal Products (Shenzhen) Ltd.
Zastron Plastic & Metal Products (Shenzhen) Ltd. ("Zastron") was organized
in March 1992 as a limited liability company pursuant to the relevant laws of
China. Zastron is principally engaged in silk screening metal and PVC products,
much of which are used in products manufactured by the Company's manufacturing
subsidiary. Zastron also provides silk screening of products for other unrelated
companies.
Shenzhen Namtek Co., Ltd.
Shenzhen Namtek Co., Ltd. ("Namtek") was organized in December 1995 as a
limited liability company pursuant to the relevant laws of China. Namtek
commenced operations in early 1996 developing and commercializing software for
the consumer electronics industry, particularly for the customers of the Company
and for products manufactured or to be manufactured by Nam Tai. Namtek employs
approximately 20 software engineers and provides the facilities and expertise to
assist in new product development and research, enabling Nam Tai to offer its
customers enhanced software design and development services, and strengthening
the Company's ODM capabilities.
Nam Tai Electronics (Canada) Ltd.
Nam Tai Electronics (Canada) Ltd. (`NT Canada") was incorporated in August
1989 under the Canada Business Corporations Act. NT Canada currently provides
finance, administrative and investor relations services to the Company from its
office in Vancouver, British Columbia, Canada.
Albatronics (Far East) Company Limited
Consistent with the Company's strategy to review acquisition prospects that
would complement the Company's existing products and services, augment market
coverage and sales ability, or enhance its technological capabilities the
Company signed an agreement to acquire just over 50% of Albatronics (Far East)
Company Limited ("Albatronics") by purchasing newly issued shares from
Albatronics. Albatronics is a publicly traded company listed on the Hong Kong
Stock Exchange (Hang Seng company # 987). The purchase price paid by Nam Tai on
November 30, 1998 was approximately $9,980,000 including transaction fees.
Albatronics is principally engaged in the trade and distribution of Sony
semiconductors and CD mechanisms, and the OEM and Original Design Manufacturing
("ODM") development, manufacture and trade of consumer electronic products. Its
existing manufactured products include CD players, digital cameras and audio
amplifiers, which are sold to major customers such as Sony, Aiwa, Panasonic and
Fuji Film. Additionally, Albatronics possesses advanced research
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and development capabilities in semiconductor system design, information
processing and data communications, which it carries out in Japan. Products
under development by Albatronics include telecommunication products, the AC-3
Music Centre, the Slim Discman, and minidisc ("MD"). Albatronics also owns a
material equity interest of approximately 21.72% in Shanghai Albatronics Co.,
Ltd., a publicly listed company in the PRC, which manufactures and distributes
consumer electronic products in the PRC. In addition, Albatronics has invested
in joint ventures in the PRC, which are engaged in plastic and metal
manufacturing, the manufacture and sale of telecommunication products, and the
implementation of wire bonding technologies.
Albatronics is headquartered in Hong Kong and employs approximately 1600
people as of March 1, 1999. Its principal manufacturing facility, located in
Dongguan, Guangdong, PRC, is around 50 miles northwest of Nam Tai's
manufacturing facilities in Shenzhen, PRC. Albatronics' manufacturing facility
is situated on approximately 778,540 sq. ft. of land housing a factory,
administrative buildings and dormitories comprising approximately 312,740 sq.
ft. The manufacturing facility has been ISO 9002 certified since July 1996.
Albatronics' products are principally sold and delivered to customers in the
PRC, Hong Kong and Japan. See "Risk Factors - Risks Associated with Recent
Acquisitions and Potential Future Acquisitions".
RISK FACTORS
The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to shareholders, or on the Company's web site. The Private Securities Reform Act
of 1995 contains a safe harbor for forward-looking statements on which the
Company relies in making such disclosures. In connection with this "safe harbor"
the Company is hereby identifying important factors that could cause actual
results to differ materially from those contained in any forward-looking
statements made by or on behalf of the Company. Any such statement is qualified
by reference to the following cautionary statements:
CUSTOMER CONCENTRATION; DEPENDENCE ON ELECTRONICS INDUSTRY
During the years ended December 31, 1998, 1997 and 1996, sales to the
Company's four largest customers aggregated approximately 92.4%, 89.3%, and
90.3%, respectively, of the Company's total net sales. During the same periods,
sales to its principal customers, i.e., customers which accounted for more than
10% of the Company's total sales during 1998, aggregated approximately 76.2%,
73.3% and 90.3%, respectively, of the Company's total sales. See "-- Customers
and Marketing -- Customers." The Company's sales transactions to all its OEM
customers are based on purchase orders received by the Company from time to
time. Except for these purchase orders, the terms of which in a few cases are
supplemented by basic agreements dependent upon the receipt of purchase orders,
the Company has no written agreements with its OEM customers. The loss of any of
its largest customers, especially its principal customers, or a substantial
reduction in orders from them would have a material adverse effect on the
Company's business. There can be no assurance that Nam Tai will be able to
quickly replace expired, canceled or reduced orders with new business. See "--
Risk Factors -- Potential Fluctuations of Operating Results."
Most of the Company's sales are to customers in the electronics industry,
which is subject to rapid technological change and product obsolescence. The
factors affecting the electronics industry in general, or any of the Company's
major customers or competitors in particular, could have a material adverse
effect on the Company's results of operations. Nam Tai's success will depend to
a significant extent on the success achieved by its customers in developing and
marketing their products, some of which may be new and untested. If customers'
products become obsolete or fail to gain widespread commercial acceptance, the
Company's business may be materially adversely affected.
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POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially and adversely affect net sales, gross
profit and profitability. This could result from any one or a combination of
factors such as, but not limited to, the cancellation or postponement of orders,
the timing and amount of significant orders from the Company's largest
customers, customers' announcement and introduction of new products or new
generations of products, evolutions in the life cycles of customers' products,
the Company's timing of expenditures in anticipation of future orders,
effectiveness in managing manufacturing processes, changes in cost and
availability of components, mix of orders filled, adverse effects to the
Company's financial statements resulting from, or necessitated by the
Albatronics acquisition, possible future acquisitions, local factors and events
that may affect production volumes such as local holidays and seasonality of
customers' production requirements, and changes or anticipated changes in
economic conditions. The volume and timing of orders received during a quarter
are difficult to forecast. The Company's customers from time to time encounter
uncertain and changing demand for their products. Customers generally order
based on their forecasts. If demand falls below such forecasts or if customers
do not control inventories effectively, they may reduce or postpone shipments of
orders.
The Company's expense levels during any particular period are based, in
part, on expectations of future sales. If sales in a particular quarter do not
meet expectations, operating results could be materially adversely affected. In
addition, the Company's operating results are often affected by seasonality
during the second and third quarters in anticipation of the start of the school
year and Christmas buying season and in the first quarter resulting from both
the closing of the Company's factories in China for one-half of a month for the
Chinese New Year holidays and the general reduction in sales following the
holiday season. See Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations. The market segments served by the Company
are also subject to economic cycles and have in the past experienced, and are
likely in the future to experience, recessionary periods. A recessionary period
affecting the industry segments served by the Company could have a material
adverse effect on the Company's results of operations. Results of operations in
any period should not be considered indicative of results to be expected in any
future period, and fluctuations in operating results may also result in
fluctuations in the market price of the Company's Common Shares.
POLITICAL, LEGAL, ECONOMIC AND OTHER UNCERTAINTIES OF OPERATIONS IN CHINA AND
HONG KONG
Internal Political and Other Risks. The Company's manufacturing facilities
are located in China. As a result, the Company's operations and assets are
subject to significant political, economic, taxation, legal and other
uncertainties associated with doing business in China. Changes in policies by
the Chinese government resulting in changes in laws, regulations, or the
interpretation and enforcement thereof, confiscatory or increased taxation,
restrictions on imports and sources of supply, import duties, corruption,
currency revaluations or the expropriation of private enterprise could
materially and adversely affect the Company. Over the past several years, the
Chinese government has pursued economic reform policies including the
encouragement of private economic activity and greater economic
decentralization. There can be no assurance that the Chinese government will
continue to pursue such policies, that such policies will be successful if
pursued, that such policies will not be significantly altered from time to time
or that business operations in China would not become subject to the risk of
nationalization, which could result in the total loss of investment in that
country. Following the Chinese government's program of privatizing many state
owned enterprises, the Chinese government has attempted to augment its revenues
through increased tax collection. Continued efforts to increase tax revenues
could result in increased taxation expenses being incurred by the Company.
Economic development may be limited as well by the imposition of austerity
measures intended to reduce inflation, increase taxes, or reform money losing
state-owned enterprises, the inadequate development of infrastructure and the
potential unavailability of adequate power, water supplies, transportation,
communications, raw materials and parts or the deterioration of the general
political, economic or social environment in China, any of which could have a
material adverse effect on the Company's business. The Company maintains its own
electrical generator, water treatment and water storage facilities at the
factory sites to address certain of these concerns. If for any reason the
Company were required to move its manufacturing operations outside of China, the
Company's profitability would be substantially impaired, its competitiveness and
market position would be materially jeopardized and there can be no assurance
that the Company could continue its operations.
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Uncertain Legal System and Application of Laws. The legal system of China
relating to foreign investments is both new and continually evolving, and
currently there can be no certainty as to the application of its laws and
regulations in particular instances. China does not have a comprehensive system
of laws. Enforcement of existing laws or agreements may be sporadic and
implementation and interpretation of laws inconsistent. The Chinese judiciary is
relatively inexperienced in enforcing the laws that exist, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation. Even where
adequate law exists in China, it may not be possible to obtain swift and
equitable enforcement of that law.
Current Dependence on Single Factory Complex. The Company's products are
manufactured exclusively at its complex located in Baoan County, Shenzhen,
China. The Company does not own the land underlying its factory complex. It
occupies the site under agreements with the local Chinese government. In the
case of its original facility, the lease agreement covers an aggregate of
approximately 150,000 square feet of factory space and expires in August 2007.
In the case of the newer facility, the Company is entitled to use the land upon
which it is situated until 2044. These agreements and the operations of the
Company's Shenzhen factories are dependent on the Company's relationship with
the local government. The Company's operations and prospects would be materially
and adversely affected by the failure of the local government to honor these
agreements. In the event of a dispute, enforcement of these agreements could be
difficult in China. Moreover, firefighting and disaster relief or assistance in
China is primitive by Western standards. Material damage to, or the loss of, the
Company's factory complex due to fire, severe weather, flood, or other act of
God or cause may not be adequately covered by proceeds of its insurance
coverage. In addition any interruptions to the business caused by such disasters
would have a material adverse effect on the Company's financial condition,
business and prospects.
Possible Changes and Uncertainties in Economic Policies. As part of its
economic reform, China has designated certain areas, including Shenzhen where
the Nam Tai manufacturing complex is located, as Special Economic Zones. Foreign
enterprises in these areas benefit from greater economic autonomy and more
favorable tax treatment than enterprises in other parts of China. Changes in the
policies or laws governing Special Economic Zones could have a material adverse
effect on the Company. Moreover, economic reforms and growth in China have been
more successful in certain provinces than others, and the continuation or
increase of such disparities could affect the political or social stability of
China.
Inherent Risks of Business in China. Conducting business in China, like
most developing countries, is inherently risky. Corruption, extortion, bribery,
pay-offs, theft, and other fraudulent practices may be more common in developing
countries. The Company has attempted to implement safeguards to prevent losses
from such practices, but there can be no assurance that despite these safeguards
the Company will not suffer losses relating to such practices.
Uncertainty and Possible Changes in China Tax Laws. The basic corporate tax
rate for Foreign Investment Enterprises ("FIEs") such as Nam Tai's China
subsidiaries is currently 33% (30% state tax and 3% local tax). However, because
Nam Tai's China 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 Nam Tai's
subsidiaries have agreed to operate for a minimum of 10 years in China, 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 Nam Tai's China subsidiaries 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%. On January 8, 1999, Nam
Tai's principal China subsidiary received the recognition of "High and New
Technology Enterprise" which entitles it to various tax benefits including a
lower income tax rate of 7.5% until January 7, 2004. For a full discussion of
the Company's income taxes, see Note 8 of Notes to Consolidated Financial
Statements included elsewhere herein.
Because of this favorable tax treatment and pursuant to the provisions of
applicable Chinese law, the Company has received substantial refunds income
taxes paid over the years on its operations in China and management believes
that under existing tax laws Nam Tai will continue to qualify for favorable tax
treatment in the future, particularly if Nam Tai reinvests profits attributable
to its Chinese operations in its Chinese subsidiaries. However, the Chinese tax
system
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is subject to substantial uncertainties and was subject to significant changes
enacted on January 1, 1994, the interpretation and enforcement of which are
still uncertain. Moreover, following the Chinese government's program of
privatizing many state owned enterprises, the Chinese government has attempted
to augment its revenues through heightened tax collection efforts. In early 1999
the Company learned that for the 1996 and 1997 tax years it would not receive a
100% tax refund on taxes paid by its principal Chinese subsidiary because the
large intercompany receivable between that subsidiary and a Hong Kong subsidiary
was not considered by the tax authorities to be a reinvestment of profits.
Continued efforts by the Chinese government to increase tax revenues could
result in other decisions by the taxing authorities which are unfavorable to Nam
Tai and which increase its future tax liabilities. There can be no assurance
that changes in Chinese tax laws or their interpretation or application will not
subject the Company to additional Chinese taxation in the future.
MFN Status. China currently enjoys most favored nation ("MFN") trade
status, which provides China with the trading privileges generally available to
trading partners of the United States. The United States annually reconsiders
the renewal of China's MFN status. Various interest groups continue to urge that
the United States not renew MFN for China and there can no assurance that
controversies will not arise that threaten the status quo involving trade
between the United States and China or that the United States will not revoke or
refuse to renew China's MFN status. In any of such eventualities, the business
of the Company could be adversely affected, by among other things, causing the
Company's products in the United States to become more expensive, which could
result in a reduction in the demand for the Company's products by customers in
the United States. Trade friction between the United States and China, whether
or not actually affecting Nam Tai's business, could also adversely affect the
prevailing market price of the Company's Common Shares and Warrants.
Southeast Asia Economic Problems. Several countries in Southeast Asia,
including Korea, Thailand and Indonesia, have experienced a significant
devaluation of their currencies and decline in the value of their capital
markets in 1997 and 1998. In addition, these countries have experienced a number
of bank failures and consolidations. Most of the Company's products are paid for
in U.S. dollars; therefore, the Company believes that it is less susceptible to
the direct effects of a devaluation in the Hong Kong dollar or Chinese renminbi
if either or both were to occur despite assurances to the contrary by the
Chinese government. The decline in the currencies of other Southeast Asian
countries could render the Company's products less competitive if competitors
located in these countries are able to manufacture competitive products at a
lower effective cost. Management believes that the currency declines in other
countries have resulted in increased pressure from customers for the Company to
reduce its prices. While the Company's two principal competitors in the
manufacture of its principal product lines of calculator, personal organizers
and linguistic products also manufacture from China and therefore, the Company
believes, are in the same position as Nam Tai vis-a-vis Southeast Asia's
economic problems, there can be no assurance as to the ability of the Company's
products to continue to compete with products of other competitors from other
Southeast Asian countries suffering devaluations of their currencies or that
currency or other effects of the decline in Southeast Asia will not have a
material adverse effect on the Company's business, financial condition, results
of operations or market price of its securities.
Relations Between China and Taiwan. Relations between China and Taiwan have
been unresolved since Taiwan was established in 1949. Although not directly a
threat to Nam Tai, peaceful and normal relations between China and its neighbors
reduces the potential for events that could have an adverse impact on the
Company's business.
Operations in Hong Kong. The Company's executive and sales offices, and
several of its customers and suppliers are located in Hong Kong, formerly a
British Crown Colony. Sovereignty over Hong Kong was transferred effective July
1, 1997 to China. The Company prepared for this transition in Hong Kong by
increasing the role and capability of its personnel in China to manage a number
of responsibilities previously managed through the Hong Kong office. Certain
other responsibilities have been transferred to the Company's office in
Vancouver, British Columbia, Canada. While the Company does not believe that the
transfer of sovereignty over Hong Kong to China will have a material adverse
effect on the Company's business, there can be no assurance as to the continued
stability of political, economic or commercial conditions in Hong Kong, and any
instability could have an adverse impact on the Company's business.
The Hong Kong dollar and the United States dollars have been fixed at
approximately 7.80 Hong Kong dollars to $1.00 since 1983. Although the Chinese
government has expressed its intention to maintain the stability of the Hong
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Kong currency there can be no assurance that the system of a fixed exchange rate
will be maintained at this rate or at all. Any change, or even expectations of a
change, will increase the currency risks for the Company. See "Exchange Rate
Fluctuations."
RISKS ASSOCIATED WITH RECENT ACQUISITIONS AND POTENTIAL FUTURE ACQUISITIONS
The Company completed the Albatronics' acquisition in November 1998 At
December 31, 1998, Albatronics' liabilities exceeded its assets by $43.9 million
and in January 1999 it started receiving demands from creditors for repayment of
past due obligations. As Albatronics was unable to pay its liabilities as they
came due, management of Nam Tai and Albatronics undertook negotiations with
Albatronics' major trade creditor and bankers for forbearance on demands for
repayment and concessions as to amounts payable. Such discussions were
ultimately unsuccessful. Albatronics ceased its operations and, after the
creditors threatened to take legal action to force Albatronics into involuntary
liquidation, the Directors voted on June 30, 1999 to submit to the shareholders
a proposal to liquidate Albatronics. Due to the troubled financial condition of
Albatronics at December 31, 1998, it was probable that Nam Tai would never be in
a position to exercise control over Albatronics, such control would rest with
the creditors. Accordingly, Nam Tai did not consolidate Albatronics' financial
statements as of and for the one month ended December 31, 1998. Instead, Nam Tai
recorded the Albatronics losses in December 1998 on the equity method and wrote
down its remaining investment in Albatronics at December 31, 1998 to a nominal
value. See "The Company's Subsidiaries - Albatronics" Note 1 of Notes to
Consolidated Financial Statements.
An important element of the Company's strategy is to review acquisition
prospects that would complement the Company's existing products and services,
augment its market coverage and sales ability or enhance its technological
capabilities. Accordingly, the Company may acquire additional businesses,
products or technologies in the future. Future acquisitions by the Company could
result in charges similar to those incurred in connection with the Albatronics
acquisition, potentially dilutive issuances of equity securities, the incurrence
of debt and contingent liabilities and amortization expenses related to goodwill
and other intangible assets, any of which could materially adversely affect the
Company's business, financial condition and results of operations and/or the
price of the Company's Common Shares. Acquisitions entail numerous risks,
including the assimilation of the acquired operations, technologies and
products, diversion of management's attention to other business concerns, risks
of entering markets in which the Company has no or limited prior experience, the
potential loss of key employees of acquired organizations, increased debt loads,
and an increased risk of litigation. Management has limited experience in
assimilating or managing acquired organizations. There can be no assurance as to
the ability of the Company to successfully integrate the products, technologies
or personnel of any acquired business now or in the future, and the failure of
the Company to do so could have a material adverse affect on the Company's
business, financial condition and results of operations.
EXCHANGE RATE FLUCTUATIONS
The Company sells most of its products in United States dollars and pays
expenses in United States dollars, Japanese yen, Hong Kong dollars, Canadian
dollars and Chinese renminbi. The Company is subject to a variety of risks
associated with changes among the relative value of the United States dollar,
Japanese yen, Hong Kong dollar, Canadian dollar and Chinese renminbi, but
management believes the most significant exchange risk results from material
purchases made in Japanese yen. Approximately 18%, 23%, and 28% of Nam Tai's
material costs have been in yen during the years ended December 31, 1998, 1997
and 1996. Sales made in yen accounted for approximately 0.3% of sales for the
year ended December 31, 1998, 6.3% of sales for the year ended December 31,
1997, and 15% of sales for 1996. The net currency exposure has increased as a
result of decreased sales in yen not being fully offset by the decrease in
material purchases in yen.
Based on oral agreements with its customers which are customary in the
industry, the Company believes its customers will accept an increase in the
selling price of manufactured products if the exchange rate of the Japanese yen
appreciates beyond a range of 5% to 10% although such customers may also request
a decrease in selling price in the event of a depreciation of the Japanese yen.
Based on close working relationships with its principal customers, and because
management believes similar oral agreements exist between these OEMs and their
other suppliers, the Company believes the oral nature of these agreements will
not prevent its OEMs from honoring them. However, there can be no
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assurance that such agreements will be honored, and the refusal to honor such an
agreement in the event of a severe adverse fluctuation of the Japanese yen at a
time when sales made in yen are insufficient to cover material purchases in yen
would materially and adversely affect the Company's operations.
Although only 14.2% of the Company's expenses were in Chinese renminbi in
1998, an appreciation of the renminbi against the U.S. dollar increases the
expenses of the Company when translated into U.S. dollars. While there has been
recent pressure on the Chinese government to devalue the renminbi against the
U.S. dollar, there can be no assurances that the renminbi will not increase
significantly in value relative to the U.S. dollar in the future.
Approximately 0.9% and 38.3%, respectively, of the Company's revenues and
expenses are in Hong Kong dollars. The Hong Kong dollar is currently pegged to
the U.S. dollar. At the end of 1997 and for most of 1998, in light of the
currency turmoil experienced by many other Southeast Asian countries, there has
been increasing pressure for a devaluation of the currencies of Hong Kong and
China. While the Governments of Hong Kong and China have indicated they will
support their currencies, possible devaluations may occur. Although the Company
expects that it may initially benefit from such devaluations through their
effect of 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, increases in borrowing costs, or
creates other problems adversely affecting the Company's business.
The Company's financial results have been affected this year and in the
past by currency fluctuations, resulting in total foreign exchange gains of
approximately $394,000 in 1998, $500,000 in 1997, and $20,000 in 1996.
From time to time, the Company attempts to hedge its currency exchange
risk. During 1998 the Company recorded a charge of $840,000 on the write-off of
a premium for an option which was purchased as a hedge in the event that the
Hong Kong dollar was allowed to depreciate against the U.S. dollar. After
purchasing the option, the Company invested a portion of its cash surplus in
short term Hong Kong dollar deposits which were earning interest rates between
10% and 14.175% - significantly higher than what was offered on U.S. dollar
deposits. In 1997 and 1996, Nam Tai recorded no gain or loss from hedging
transactions. The Company is continuing to review its hedging strategy and there
can be no assurance that Nam Tai will not suffer losses in the future as a
result of currency hedging.
COMPETITION
General competition in the contract electronic manufacturing industry is
intense. The Company however has two primary competitors in the manufacture of
its traditional product lines of calculators, personal organizers and linguistic
products - Kinpo Electronics, Inc. (formerly Cal-Comp Electronics, Inc.) and
Inventec Co. Ltd. While the Company is continually making efforts to improve its
competitiveness the industry is intensely competitive and certain competitors
may have substantially greater technical, financial and marketing resources than
the Company.
The Company desires 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 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.
TECHNOLOGICAL CHANGES AND PROCESS DEVELOPMENT
The market for the Company's manufacturing services is characterized by
rapidly changing technology and continuing process development. The Company is
continually evaluating the advantages and feasibility of new manufacturing
processes, such as COB, MCM, SMT, TAB, OLB and ACF. The Company believes that
its future success may depend upon its ability to develop and market
manufacturing services which meet changing customer needs, maintain
technological leadership and successfully anticipate or respond to technological
changes in manufacturing processes on a cost-effective and timely basis. There
can be no assurance that the Company's process development efforts will continue
to prove successful.
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DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the abilities and continued
participation of Mr. Tadao Murakami, its Chairman of the Board and Mr. M. K.
Koo, its Senior Executive Officer, Corporate Strategy, Finance and
Administration. The loss of the services of Mr. Murakami or Mr. Koo could have a
material adverse effect on the Company's business.
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is a holding corporation organized as an International Business
Company under the laws of the British Virgin Islands and its principal operating
subsidiary is organized under the laws of Hong Kong, where the Company's
principal executive offices are also located. It may be difficult for investors
to enforce judgments against the Company obtained in the United States based on
actions predicated upon civil liability provisions of Federal securities laws.
In addition, all of the Company's officers and most of its directors reside
outside the United States and nearly all of the assets of these persons and of
the Company are located outside of the United States. As a result, it may not be
possible for investors to effect service of process within the United States
upon such persons, or to enforce against the Company or such persons judgments
predicated upon the liability provisions of U.S. securities laws. The Company
has been advised by its Hong Kong counsel and its British Virgin Islands counsel
that there is substantial doubt as to the enforceability against the Company or
any of its directors and officers located outside the United States in original
actions or in actions for enforcement of judgments of U.S. courts of liabilities
predicated on the civil liability provisions of Federal securities laws.
CERTAIN LEGAL CONSEQUENCES OF INCORPORATION IN THE BRITISH VIRGIN ISLANDS
The Company is organized under the laws of the British Virgin Islands.
Pursuant to the Company's Memorandum and Articles of Association and pursuant to
the laws of the British Virgin Islands, the Board of Directors may amend the
Company's Memorandum and Articles of Association without shareholder approval.
This includes, but is not limited to, amendments increasing or reducing the
authorized capital stock of the Company and increasing or reducing the par value
of its shares. In addition, the Board of Directors may approve certain
fundamental corporate transactions, including reorganizations, certain mergers
or consolidations and the sale or transfer of assets, without shareholder
approval. The ability of the Company to amend its Memorandum and Articles of
Association without shareholder approval could have the effect of delaying,
deterring or preventing a change in control of Nam Tai without any further
action by the shareholders including, but not limited to, a tender offer to
purchase the Common Shares at a premium above current market prices.
Under U.S. law, management, directors and controlling shareholders
generally have certain fiduciary responsibilities to the minority shareholders.
Shareholder action must be taken in good faith and actions by controlling
shareholders which are obviously unreasonable may be declared null and void. The
British Virgin Islands law protecting the interests of minority shareholders
differs from, and may not be as protective of shareholders as, the law
protecting minority shareholders in jurisdictions in the United States. While
British Virgin Islands law does permit a shareholder of a British Virgin Islands
company to sue its directors derivatively, and to sue Nam Tai and its directors
for his or her benefit and the benefit of others similarly situated, the
circumstances in which any such action may be brought and the procedures and
defenses that may be available in respect of any such action may result in the
rights of shareholders of a British Virgin Islands company being more limited
than those rights of shareholders in a company incorporated in a jurisdiction
within the United States. Moreover, lawsuits brought in the British Virgin
Islands appear, from the Company's experience, to take longer to reach interim
or final resolution.
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RISKS OF INTERNATIONAL SALES
The products of the Company are sold in the United States and
internationally, principally in Japan, Europe and Hong Kong. International sales
may be subject to political and economic risks, including political instability,
currency controls and exchange rate fluctuations, and changes in import/export
regulations, tariff and freight rates. Changes in tariffs or other trade
policies could adversely affect the Company's customers or suppliers or decrease
the cost of products for Nam Tai's competitors relative to such costs for the
Company.
VOLATILITY OF MARKET PRICE OF COMPANY'S SECURITIES
The markets for equity securities have been volatile and the price of the
Company's Common Shares has been and could continue to be subject to wide
fluctuations in response to quarter to quarter variations in operating results,
news announcements, trading volume, sales of Common Shares by officers,
directors and principal shareholders of the Company, news issued from affiliated
companies or other publicly traded companies, general market trends both
domestically and internationally, currency movements and interest rate
fluctuations. These same factors can be expected to affect the market price of
the Company's Warrants that were publicly issued in late November 1997. Certain
events, such as the issuance of Common Shares upon the exercise of the Warrants
or other outstanding stock options or warrants of the Company could also
adversely affect the prevailing market prices of the Company's securities.
RISKS OF YEAR 2000 ISSUES
Many existing computer programs, including some programs used by the
Company, in its computer system and equipment use only two digits to identify a
year in the date field. These programs were designed without considering the
impact of the upcoming change in the century. If not corrected, these computer
applications and systems could fail or create erroneous results before, during,
or after the year 2000. The Company's investigations and efforts to date have
included studies, investigations, inquiries to software and equipment suppliers,
testing by internal management and outside consultants, and the purchase of
certain replacement software and rewriting certain sections of existing
programs. Based on these efforts, the cost of which was not material, management
does not anticipate that the Company will incur any material operating expenses
or be required to incur material costs as a result of the year 2000 issue.
Despite management's effort to take reasonable precautions to be year 2000
ready, and its belief that it is currently year 2000 compliant, to the extent
the Company's systems are not fully year 2000 compliant, or failed for any other
reason, there can be no assurance that potential systems interruptions or the
cost necessary to update software would not have a material adverse effect on
the Company's business, financial condition, results of operations and business
prospects.
In addition to the internal preparations discussed above, to prepare
for the year 2000 the Company has sent inquiry letters to its key suppliers and
key customers to ensure that they do not expect any year 2000 problems to impact
their business dealings with Nam Tai. In the event that the Company's
significant customers and suppliers do not successfully and timely achieve year
2000 compliance, the Company's business or operations could be adversely
affected. There is also a risk that year 2000 problems may cause regional or
global problems for utility companies, transportation systems, the global
banking system, or to the global economy. To the extent that these problems
materialize Nam Tai expects that its business will be adversely impacted and to
date the Company has not completed a year 2000 contingency plan.
EXEMPTIONS UNDER THE EXCHANGE ACT AS A FOREIGN PRIVATE ISSUER
The Company is a foreign private issuer within the meaning of rules
promulgated under the Exchange Act. As such, and though its Common Shares and
Warrants are registered under Section 12(g) of the Exchange Act, it is exempt
from certain provisions of the Exchange Act applicable to United States public
companies including: the rules under the Exchange Act requiring the filing with
the Commission of quarterly reports on Form 10-Q or current reports on Form 8-K;
the sections of the Exchange Act regulating the solicitation of proxies,
consents or authorizations with respect to a security registered under the
Exchange Act; and the sections of the Exchange Act requiring insiders to file
public reports of their stock ownership and trading activities and establishing
insider liability for profits realized from any "short-swing" trading
transaction (i.e., a purchase and sale, or sale and purchase, of the issuer's
equity securities within six months or less). Because of the exemptions under
the Exchange Act applicable to foreign private issuers, shareholders
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of the Company are not afforded the same protections or information generally
available to investors in public companies organized in the United States.
PRODUCTS
The following table sets forth the percentage of net sales of each of the
Company's product lines for the years ended December 31, 1998, 1997, and 1996.
YEAR ENDED DECEMBER 31,
-------------------------
PRODUCT LINE 1998 1997 1996
------------ ---- ---- ----
Electronic calculators 60% 52% 35%
Subassemblies, components and other products 24 22 28
Personal digital assistants and linguistic products 15 25 36
Silk screening 1 1 1
--- --- ---
100% 100% 100%
=== === ===
Electronic Calculators
The Company manufactures a wide range of electronic calculators that
include basic function calculators from small credit card size to desk top
display style, printer display with tax function, scientific, and graphic
calculators.
Personal Digital Assistants and Linguistic Products
The Company produces various types of electronic organizers and personal
digital assistants ("PDAs"), particularly telephone directories and business
card organizers with scheduler, clock, memo pad and calculator functions. The
linguistic products manufactured by Nam Tai include electronic spell checkers,
dictionaries and language translators, including some models with voice
functions. Linguistic products generally include a built-in calculator. The
Company has successfully developed its first ODM product, an electronic
dictionary, and production is expected to begin in July 1999. It has also been
appointed to manufacture a palm-sized PC with a Chinese version of Windows CE
software pre-installed.
Subassemblies, Components and Other Products
In 1994, the Company began manufacturing and delivering subassemblies
consisting of LSIs bonded on PCBs utilizing advanced technological processes.
These products are used to manufacture components that are incorporated into
such products as telecommunication products, electronic toys and games.
In 1995, the Company expanded its subassembly manufacturing business into
LCD modules. These subassemblies display information as part of such products as
portable telephones, telephone systems, portable computers and facsimile
machines. They employ the same bonding technologies as are used for the LSI
bonded PCBs.
In 1995, the Company delivered a sample run of IC card balance readers and
in 1996 began volume shipments of these products. These readers are hand-held
devices used to check information contained on the IC cards. (IC cards
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are being developed by certain major banks in Europe and North America as an
alternative to the use of cash and are currently still undergoing market
testing.)
In 1996, the Company again expanded the component products it offers
by completing development and shipping control panel modules for microwave
ovens. These products are incorporated into microwave ovens manufactured by a
division of Sharp Corporation, which, management believes, is a leading
manufacturer of microwave ovens worldwide.
In 1997, the Company began producing LCD modules for use in cellular
(mobile) phones for Epson Precision (HK) Ltd. In 1997, the Company also began
using ACF technology in the manufacture of LCD modules and advanced dictionaries
with personal organizers. This new technology is a fine pitch heat sealing
process for the connection of Tape Carrier Package ("TCP") onto the LCD with ACF
in between using TAB processing.
The Company has successfully developed its first ODM product, an electronic
dictionary, and production is expected to begin in July 1999.
Through Namtek, the Company offers its customers software development
services principally for the design of personal organizers and linguistic
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.
MANUFACTURING
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 process at several points
in the production process. Finally, after the assembly stage, the Company
conducts random testing of finished products. In addition, the Company provides
office space at its China manufacturing facility for representatives of its
major customers to permit them to monitor production of their products and to
provide direct access to the Company's manufacturing personnel. Manufactured
products have a low level of product defect, as required by the Company's OEM
customers. When requested, Nam Tai provides a limited warranty of six months to
one year for products it manufactures. To date, claims under the Company's
warranty program have been negligible.
The Company's Hong Kong and China subsidiaries have maintained ISO 9002
Certification since December 1993 and ISO 9001 Certification since February
1996. The "ISO" or International Organization for Standardization, is a
Geneva-based organization dedicated to the development of worldwide standards
for quality management guidelines and quality assurance. ISO 9000, which was the
first quality system standard to gain worldwide recognition, requires a company
gather, analyze, document, monitor and make improvements where needed. The
Company's receipt of ISO 9001 Certification demonstrates that the Company's
manufacturing operations meet the most demanding of the established world
standards.
Management believes sophisticated customers are increasingly requiring
their manufacturers to be ISO 9000 certified, and 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 three consecutive years 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:
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product quality; quality management; continuous on-time delivery of products;
cycle times; leadership in product pricing and value; customer service;
technology; and environmental leadership. To qualify for the award the first
time requires very high scores in each of the categories. To receive the award
in subsequent years requires continuous improvement over the high scores
required for the first year.
Component Parts and Suppliers
The Company purchases over 3000 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. Orders for components are based on forecasts
that Nam Tai receives from its OEM customers, which reflect anticipated
shipments during the production cycle for a particular model.
The major component parts purchased by the Company are integrated circuits
or "chips", LCDs, solar cells, printer heads and batteries. The Company
purchases both stock "off-the-shelf" chips and custom chips, the latter being
the most expensive component parts purchased by Nam Tai. At the present time,
the Company purchases most of its chips from Toshiba Corporation, Sharp
Corporation and certain of their affiliates, although there are many additional
suppliers from which the Company could purchase chips.
LCDs are readily available from many manufacturers and the Company
currently has two major suppliers, Epson Hong Kong Ltd. and Sharp Corporation.
PCBs and other circuit boards are purchased from circuit board manufacturers in
Hong Kong, China and solar cells are purchased from Matsushita Battery
Industrial Company Ltd. Batteries are standard "off-the-shelf" items, generally
purchased in Hong Kong from agents of Japanese manufacturers. The Company also
purchases various mechanical components such as plastic parts, rubber keypads,
PCBs and packaging materials locally in China. Management believes the low costs
for locally supplied parts adds to the Company's competitive advantage.
Certain components may be subject to limited allocation by certain of Nam
Tai's suppliers. Although such shortages and allocations have not had a material
adverse effect on the Company's results of operations, there can be no assurance
that any future allocation or shortages would not have such an effect.
CUSTOMERS AND MARKETING
Approximate percentages of net sales to customers by geographic area based
upon location of product delivery are set forth below for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------------
GEOGRAPHIC AREAS 1998 1997 1996
- ---------------- ---- ---- ----
North America 47% 49% 34%
Japan 22 23 28
Europe 18 15 12
Hong Kong 9 7 18
Other 4 6 8
--- --- ---
100% 100% 100%
=== === ===
The Company's Hong Kong based management personnel and sales staff is
responsible for marketing products to existing customers as well as potential
new customers. The Company places great emphasis on
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providing quality service to its customers and has, as a result, limited the
number of companies for which it manufactures in an effort to ensure quality
service.
Customers
The Company's OEM customers include the following entities which market Nam
Tai's products under their own brand name or, where no brand name is shown,
incorporate the Company's products into their products:
BRAND CUSTOMER
CUSTOMER NAME PRODUCT SINCE
- -------- ---- ------- --------
Canon, Inc. Canon Personal organizers and calculators 1988
Casio Computer (Hong Kong) Limited Casio Aluminum panels and PVC wallets 1994
Epson Precision (HK) Ltd. ----- LCD Modules for cellular (mobile) phones 1997
Matushita Electronics Corporation ----- IC card readers 1994
(Matsushita Battery Industrial Co. Ltd)
Nitsuko (HK) Co. Ltd. ----- PCB modules for Telecommunications Systems 1995
Optrex Corporation ----- Assemblies for LCD modules 1994
Premier Precision Ltd. Citizen Silk screening and aluminum panel 1993
Sanyo Electric (H. K.) Ltd. Sanyo, Casio Silk screening 1988
Seiko Instruments Inc. Seiko, SII Personal organizers and linguistic products 1991
Sharp Corporation Sharp Personal organizers, calculators and control panel 1989
modules
Texas Instruments Incorporated Texas Instruments Personal organizers and calculators 1989
Whirlpool
Whirlpool Microwave Products Development Ltd. Silk screening for microwave oven control panels 1998
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At any given time, different customers account for a significant portion of
Nam Tai's business. Percentages of total sales to customer vary from year to
year and may fluctuate depending on the timing of production cycles for
particular products. Sales to Nam Tai's four largest customers, aggregated
approximately 92%, 89% and 90% of the Company's total net sales during the years
ended December 31, 1998, 1997 and 1996, respectively. Sales to Texas Instruments
Incorporated and Sharp Corporation, the only customers accounting for more than
10% of sales in 1998, were as follows:
YEAR ENDED DECEMBER 31
------------------------------------------------------
1998 1997 1996
----- ----- -----
Texas Instruments Incorporated 44.2% 38.0% 22.3%
Sharp Corporation 32.0 35.3 38.4
---- ---- ----
76.2% 73.3% 60.7%
==== ==== ====
A number of products are made for its major customers such that the Company
is not necessarily dependent on a single product for one customer. Although
management believes any one of the Company's customers could be replaced with
time, the loss of any of its largest customers, especially its principal
customers, or a substantial reduction in orders from them would have a material
adverse effect on the Company's business. See "--Risk Factors - Customer
Concentration; Dependence on Electronics Industry." While each of the four
largest customers is expected to continue to be a significant customer, the
Company continually tries to lessen its dependence on large customers through
efforts to diversify its customer and product base.
The Company's sales to all of its OEM customers are based on purchase
orders. Except for these purchase orders, the terms of which in a few cases are
supplemented by basic agreements dependent upon the receipt of purchase orders,
Nam Tai has no written agreements with its OEM customers. Often, the Company
receives letters of credit to cover the next three months of orders and all the
molds, tooling and development charges (including software design) are charged
to the account of OEM customers prior to production. Some customers require COD
terms and request the Company to bear the cost of molds, tooling and development
charges.
Many of Nam Tai's customers have a relationship that extends for a number
of years and consequently the Company believes its relations with these
customers are good. The Company encourages cooperation and communication with
its most important customers. In particular, senior management includes a team
of Japanese professionals who provide technical expertise and work closely with
both the Company's Japanese component suppliers and its Japanese customers.
Management also believes the risk of a sudden withdrawal by any of its major
customers is diminished by: (i) the lengthy production cycle, typically over
three years for each model, which is required to produce the products sold to
customers; (ii) the fact that production cycles may begin while other products
for the same customers are in progress; and (iii) the investment in molds,
tooling and development charges (including software design) which is borne by
some of the OEM customers.
Sales are predominately denominated in U.S. dollars and in many cases are
covered by standard letters of credit.
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
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desired during the expected production cycle. Once the Company and the OEM
customer agree to the Company's quotation for the development costs and the unit
cost, the Company begins the product development. This development period lasts
approximately less than six months, longer if software design is included.
During this time the Company completes all molds, tooling and software required
to manufacture the product with the development costs reimbursed by the
customer. Recently, some of the customers have started to request the Company to
bear responsibility for paying development charges. Upon completion of the
molds, tooling and software, the Company produces samples of the product for the
customer's quality testing, and, once approved, commences mass production of the
product.
The production period usually lasts approximately 18 to 30 months.
Typically, more advanced products have longer production runs. If total
production quantities change, the OEM customer often provides six months notice
before discontinuing orders for a product. At any point in time the Company is
in different stages of the development and production periods for the various
models it has under development or in production for OEM customers.
The majority of the Company's production is based on forecasts received
from OEM customers covering the next six month period, the first three months of
which are scheduled shipments. These forecasts are reviewed and adjusted, where
necessary, at the beginning of each month with confirmed orders covering the
first three months. In many cases, confirmed orders are supported by letters of
credit and may not be canceled once confirmed without the customer becoming
responsible for all costs of the remaining components included in inventory for
that order. During the years ended December 31, 1998 and 1997 the Company did
not suffer a material loss resulting from the cancellation of an OEM customer
confirmed order. For the year ended December 31, 1996, the Company elected to
write-off the cost of certain components included in raw material inventory in
the amount of $415,000. These components were not likely to be used in
connection with future production, and due to the passage of time, could not be
charged to customers who would have otherwise been responsible for the cost.
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
Between 1984 and 1994, the Company spent an average of approximately
$360,000 per annum on research and development, chiefly to advance manufacturing
technology. During the later half of this period Nam Tai concentrated on its OEM
business and expenditures fell below the average by the end of the period. At
that time the major responsibility of the Company's product design personnel was
limited to the production to the satisfaction of and in accordance with the
specifications provided by OEM customers.
Since 1995, the Company has placed increased emphasis on research and
development which provides greater service to OEM customers and assists in
design and development of future products. As a result of decreased orders,
research and development expenses decreased to $1,691,000 in 1998 from
$1,909,000 in 1997, but remains significantly higher than the research and
development expenses of $950,000 and $945,000 in 1996 and 1995, respectively as
some of the Company's customers have requested the Company to bear
responsibility for development charges. Namtek, the Company's software
development subsidiary which began operations in early 1996, accounted for
approximately 7%, 14% and 40% of the research and development expenses in 1998,
1997 and 1996 respectively and these expenses were substantially recovered from
fees paid by third parties.
ODM DEVELOPMENT
In 1998, Nam Tai focused special attention on furthering the research and
development capabilities of its engineering division. This included hiring two
new senior executives, the Company's CEO Mr. Takizawa, and Mr. Koike, Vice
General Manager Research and Development to oversee the development of Nam Tai's
product
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development capabilities. The Company plans to continue acquiring state-of-the
art design equipment and enhancing its technological expertise through continued
education for all engineers and further recruiting of system engineers.
Nam Tai hopes that by enhancing its capabilities it will be able to expand
into Original Design Manufacturing ("ODM") of telecommunication products and
personal computer accessories. In the ODM business, Nam Tai envisions being
responsible for the design and development of new products, the rights to which
it will own. The Company has successfully developed its first ODM product, an
electronic dictionary, and production is expected to begin in July 1999. Nam Tai
plans to sell these products to OEM customers to be marketed to end users under
the customer's brand name. Nam Tai hopes to augment its OEM business with ODM
business in the future. There can be no assurance that Nam Tai's efforts to
enter the OEM business will be successful or that it will achieve material
revenue from its efforts.
COMPETITION
Competition in the contract electronic manufacturing industry is intense
with numerous other companies in the contract electronic manufacturing industry.
For Nam Tai's principal products, competition has been limited by OEMs to a
small number of companies who satisfy the requirements to become approved
suppliers. The Company's primary competitors in the manufacture of its principal
product lines of calculators, personal organizers and linguistic products, are
Kinpo Electronics, Inc. (formerly Cal-Comp Electronics, Inc.) and Inventec Co.
Ltd., Taiwanese Companies manufacturing in China. While an OEM may prefer its
approved suppliers, management believes OEMs tend to order from several
suppliers in order to lessen dependence on any one of them. Competition for OEM
sales is based primarily on unit price, product quality and availability,
promptness of service, reputation for reliability and OEM confidence in the
manufacturer. The Company believes it competes favorably in each of these areas.
EMPLOYEES
At December 31, 1998, Nam Tai employed approximately 1,755 persons on a
full-time basis, of which 1,719 were working in China, 21 in Hong Kong, and 15
in Canada. Of these, approximately 1,499 were engaged in manufacturing, 167 were
engaged in clerical, research and development and marketing positions, and the
balance in supporting jobs such as security, janitorial, food and medical
services. The Company is not a party to any material labor contract or
collective bargaining agreement. The Company has experienced no significant
labor stoppages and believes relations with its employees are satisfactory. The
nature of its arrangement with its manufacturing employees is such that it can
increase or reduce staffing levels without significant difficulty, cost or
penalty.
The Company maintains an employee incentive compensation program in China
whereby a regular bonus is paid to employees on the employee's return to work
following the Chinese New Year holiday. Management believes this method has
contributed to low employee turnover in the factory.
PATENTS, LICENSES AND TRADEMARKS
The Company has no patents, licenses, franchises, concessions or royalty
agreements that are material to its business as a whole. Due to rapid
technological change in the products manufactured, the Company does not believe
the absence of patents has had or will have a material impact on its business.
The Company has obtained trademark registrations in Hong Kong for the mark
"FORTEC" and "SANTRON" in connection with electronic calculators. The Company
has registered the trademark "NAMTAI" in connection with electronic calculators
in Hong Kong, China, the United States, and Canada.
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ITEM 2. PROPERTIES
British Virgin Islands
As of January 17, 1997, the registered office of the Company was
transferred to McNamara Chambers, P.O. Box 3342, Road Town, Tortola, British
Virgin Islands. Only corporate administrative matters are conducted at 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 February 1997, the Company leased new premises at Unit 9, 15/F., Tower
1, China Hong Kong City, 33 Canton Road, TST, Kowloon, Hong Kong for a term of
three years. Rental is approximately $17,900 per month for the first two years,
and will be reduced by 30% in the third year. The Company moved its principal
executive and marketing offices into these new premises in late March 1997.
The Company owns a residential flat in Hong Kong that was purchased for
total consideration of $1,850,000. This property was occupied by the Chairman of
the Company, Mr. Murakami until December 1998 and is now occupied by Mr.
Takizawa, Chief Executive Officer and President and forms part of his overall
compensation. See Item 11. Compensation of Directors and Officers.
Since 1984 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.
Throughout 1997 the Company disposed of approximately six acres of its land
holdings for net proceeds of $5,750,000 realizing a gain of $5,548,000. In 1998
the Company disposed of approximately 0.6 acres of its land holdings for net
proceeds of $815,000 realizing a gain of $795,000. The remaining land that the
Company plans to sell continues to be carried on the books of the Company at its
cost of approximately $185,000.
Shenzhen, China
Nam Tai's manufacturing complex is located in Baoan County, Shenzhen,
China. It includes the original facility and Phase I of the factory expansion
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 additional square feet of manufacturing space, 39,000 square
feet of offices, 212,000 square feet of new dormitories, 26,000 square feet of
full service cafeteria and recreation facilities and a swimming pool. The total
cost of the new factory complex, excluding land, was approximately $21,800,000.
The Company also has a 26,000 square foot facility in Shenzhen, located
approximately one mile from the manufacturing complex. This contains 28
apartment units to house certain factory managers who are married and have
families. The Company purchased this building for approximately $1,000,000,
paying the final installment in June 1993.
Canada
On September 28, 1998, Nam Tai Electronics (Canada) Ltd. moved its
corporate office to new leased premises in Vancouver, British Columbia. The
Company entered into a lease for 3,480 square feet of office space at an annual
rental of $77,649. The lease expires in September 2003.
General
The Company believes its existing manufacturing and office facilities are
adequate for the operation of its business for the foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings other than routine
litigation incidental to its business and there are no material legal
proceedings pending with respect to the property of the Company, other than as
described below.
In September 1993, Tele-Art, Inc., a shareholder of Nam Tai, commenced an
action against the Company seeking an injunction prohibiting the Company from
proceeding with a rights offering which was contemplated at that time.
Tele-Art's application was based on claims that Nam Tai may have violated
British Virgin Islands and United States law. Among other claims, Tele-Art
asserted the Company's rights offering was part of a scheme to enrich directors
and management of Nam Tai and dilute the interest of minority shareholders.
Within four days, a temporary injunction obtained by Tele-Art was discharged,
permitting the Company to proceed with, and complete, its rights and standby
offerings in October 1993. Tele-Art is pursuing claims in the British Virgin
Islands against Nam Tai for damages. In November 1993, Tele-Art applied to the
Court to include the Company's directors in the proceedings, and in March 1994
the application was granted. The Company continues to believe that Tele-Art's
claims are without merit and plans, if necessary, to continue to vigorously
defend against them as well as, if possible, to seek from Tele-Art and its
agents compensation for the damage caused by the injunction and the proceedings
that were brought to obtain it.
In June 1997, Nam Tai Electronics, Inc. filed a petition with the High
Court of Justice in the British Virgin Islands for the winding up of Tele-Art
Inc. on account of an unpaid judgment debt owing to Nam Tai. The High Court of
Justice granted an order to wind up Tele Art Inc. on July 17, 1998. The
Caribbean Court of Appeal upheld the decision on January 25, 1999. On January
22, 1999, pursuant to its Articles of Incorporation, Nam Tai redeemed and
cancelled 138,500 Common Shares of Nam Tai registered in the name of Tele-Art at
a price of $11.19 per share to offset substantially all of the judgment debt,
interest, and legal costs of approximately $1.6 million. On February 12, 1999
the liquidator of Tele-Art filed a summons seeking among other things, a
declaration setting aside the redemption. The Company believes it has acted
properly in this matter and will vigorously contest this application.
The Bank of China Hong Kong branch is pursuing claims in Hong Kong seeking
possession of 308,227 shares of the Company (including the 138,500 redeemed
shares discussed in the above paragraph) allegedly beneficially owned by
Tele-Art but pledged to the Bank of China. Management believes that this claim
is without merit and will vigorously defend them.
Management believes that the outcome of the above cases will not have a
significant effect of the Company.
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ITEM 4. CONTROL OF THE COMPANY
The Company is not directly owned or controlled by another corporation or
by any foreign government. The following table sets forth, as of March 1, 1999,
the beneficial ownership of the Company's Common Shares by each person known by
the Company to own beneficially more than 10% of the Common Shares of the
Company outstanding as of such date and by the officers and directors of the
Company as a group.
NUMBER OF
IDENTITY OF COMMON SHARES PERCENT OF
PERSONS OR GROUPS BENEFICIALLY OWNED CLASS
- ----------------- ------------------ ----------
M. K. Koo 3,499,489(1) 33.0%
Officers and directors as a group (eleven 4,325,884(2) 40.0%
persons)
(1) Includes 2,519,306 shares which are owned by Mr. Koo, 53,333 shares
issuable to Mr. Koo upon exercise of options exercisable within 60 days of
March 1, 1999 and 926,850 shares issuable to Mr. Koo upon exercise of
Warrants.
(2) Includes 3,146,607 shares owned by officers and directors as a group, an
aggregate of up to 53,333 shares issuable to officers upon exercise of
employee options exercisable within 60 days of March 1, 1999, and 1,125,944
shares issuable to officers and directors as a group upon exercise of
Warrants.
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ITEM 5. NATURE OF TRADING MARKET
COMMON SHARES
The Company's authorized capital consists of 20,000,000 Common Shares,
$0.01 par value per share. The Company's Common Shares are traded on The Nasdaq
National Market. Prior to March 12, 1999 the shares traded under the symbol
"NTAIF" and after the symbol changed to "NTAI".
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, 1998.
QUARTER ENDED HIGH LOW
- ------------- ---- ---
December 31, 1998 14.50 9.675
September 30, 1998 9.38 14.94
June 30, 1998 17.25 14.88
March 31, 1998 17.63 12.88
December 31, 1997 27.88 14.00
September 30, 1997 31.63 16.75
June 30, 1997 16.63 9.63
March 30, 1997 11.88 8.13
Of the 9,812,523 Common Shares of the Company outstanding as of December
31, 1998, 6,535,712 are held by 1,019 holders of record in the United States.
WARRANTS
In November 1997, the Company completed rights and standby offerings (the
"1997 Offerings") selling 2,267,917 and 729,212 units at $17.00 and $16.75
respectively. Each Unit consisted of one Common Share and one Warrant. The
Common Shares and the Warrants included in the Units were separately
transferable immediately.
Each Warrant is exercisable to purchase one Common Share at a price of
$20.40 per share at any time until November 24, 2000. The Warrants are
redeemable by the Company at $0.05 per Warrant on 30 days' written notice
provided the closing sale price of the Common Shares for 20 consecutive trading
days within the 30-day period preceding the date of the notice of redemption
equals or exceeds $25.50. In the event the Company exercises the right to redeem
the Warrants, a holder will be forced either to sell or exercise the Warrants
within 30 days of the notice of redemption, or accept the redemption price.
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The Company's Warrants are traded on The Nasdaq National Market. Prior to
March 12, 1999 the shares traded under the symbol "NTAWF" and after the symbol
changed to "NTAIW".
The following table sets forth the high and low closing sale prices as
reported by The Nasdaq National Market during each of the quarters since the
Listing of the warrants.
QUARTER ENDED HIGH LOW
------------- ---- ---
December 31, 1998 1.69 0.88
September 30, 1998 1.94 0.75
June 30, 1998 3.44 1.88
March 31, 1998 3.50 2.44
December 31, 1997 4.00 2.50
Of the 2,997,129 Warrants of the Company outstanding as of December 31,
1998, 127 holders of record in the United States hold 2,706,070.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are no exchange control restrictions on payments of dividends on the
Company's Common Shares or on the conduct of the Company's operations in Hong
Kong, where the Company's principal executive offices are located or the British
Virgin Islands, where Nam Tai is incorporated. Other jurisdictions in which the
Company conducts operations may have various exchange controls. Dividend
distribution and repatriation by Nam Tai's subsidiaries in China are regulated
by Chinese laws and regulations. To date these controls have not had a material
impact on the Company's financial results as sales to customers are generally
made in Hong Kong.
There are no material British Virgin Islands laws which impose foreign
exchange controls on the Company or that affect the payment of dividends,
interest, or other payments to nonresident holders of Nam Tai's securities.
British Virgin Islands law and the Company's Memorandum and Articles of
Association impose no limitations on the right of nonresident or foreign owners
to hold or vote such securities of the Company.
ITEM 7. TAXATION
No reciprocal tax treaty regarding withholding tax exists between the
United States and the British Virgin Islands. Under current British Virgin
Islands law, dividends, interest or royalties paid by the Company to individuals
and gains realized on the sale or disposition of shares are not subject to tax
as long as the recipient is not a resident of the British Virgin Islands. The
Company is not obligated to withhold any tax for payments of dividends and
shareholders receive gross dividends irrespective of their residential or
national status.
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ITEM 8. SELECTED FINANCIAL DATA
The selected financial information set forth below is derived from
consolidated financial statements of the Company. The selected information is
qualified in its entirety by reference to, and should be read in conjunction
with, such consolidated financial statements, related notes and "Management's
Discussion and Analysis of Results of Operations and Financial Condition" under
Item 9. in this report.
SELECTED FINANCIAL INFORMATION
(In thousands of U.S. dollars except per share data)
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Income Statement Data (1)
Net sales $101,649 $132,854 $108,234 $121,240 $96,564
Gross margin 24,710 34,724 22,185 23,152 17,223
Net income 3,529 30,839 9,416 11,419 8,099
Dividends declared 2,829 786 243 120 65
Per share amounts
Basic earnings per share (2) $ 0.34 $ 3.70 $ 1.17 $ 1.42 $ 1.17
Diluted earnings per share (3) $ 0.34 $ 3.68 $ 1.16 $ 1.40 $ 1.09
Dividend declared $ 0.28 $ 0.10 $ 0.03 $ 0.015 $ 0.01
Balance Sheet Data (1)
Current assets $97,015 $133,022 $ 46,609 $47,011 $ 45,520
Property, plant and equipment - net 32,445 32,442 36,487 27,635 14,624
Total assets 147,228 167,788 88,391 79,281 66,287
Current liabilities 19,476 19,552 21,401 19,108 17,838
Non-current liabilities 56 - - - -
Shareholders' equity 127,696 148,236 66,990 60,173 48,449
- ------------
(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, 1998,
1997, 1996, 1995, and 1994 were 10,316,510, 8,324,320, 8,040,497,
8,018,252, and 6,934,098 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, 1998, 1997, 1996, 1995, and 1994 were 10,351,100, 8,391,290, 8,142,131,
8,171,750, and 7,459,570 respectively.
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ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This section contains forward-looking statements involving risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under the section of this Report entitled Item 1.
Description of Business - "Risk Factors". This section should be read in
conjunction with the Company's Consolidated Financial Statements included
elsewhere herein.
RESULTS OF OPERATIONS
General
The Company derives its revenues principally from manufacturing consumer
electronic products and subassemblies for OEM customers in the electronics
industry. Products manufactured by Nam Tai include calculators, personal
organizers, personal digital assistants, linguistic products, integrated circuit
("IC") or smart card readers (referred to as "IC card readers"), and various
components including microwave oven control panel modules.
During each of the years ended December 31, 1998, 1997, and 1996, sales to
OEM customers accounted for 99% of total net sales. Management believes sales of
personal organizers, linguistic products and calculators to its OEM customers
will continue to be an important line of business for the Company for the next
several years. Management expects subassemblies, components, and other products,
along with new products contribute to an increasing proportion of total revenue
in the future. See Item 1. Description of Business -- Customers and Marketing.
The consumer electronics industry is very competitive and the Company is
continuously under pressure to lower the selling price 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 relations and quality. The Company desires 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 and the
lower number of direct competitors. There can be no assurance that the Company
will be successful in obtaining business for such products and failure to move
into more advanced products may result in the Company facing increasing
competition and reduced profit margins.
The Company moved its manufacturing operations to China in 1987 and derives
substantially all of its operating income from these operations. Nam Tai plans
to continue increasing the scope of its operations and investment in China.
Under current British Virgin Islands law, Nam Tai is not subject to tax on
its income. Most of the Company's operating profits accrue in China, where its
effective tax rate is 10%, and in Hong Kong, where the corporate tax rate on
assessable profits is currently 16% in 1998. The Company receives tax credits in
China related to its reinvestment of profits on China operations into share
capital and tax benefits for being a "High and New Technology Enterprise". This
reduces the overall tax payable by the Company. See Note 8 of Notes to
Consolidated Financial Statements.
The Company values its inventory at the lower of cost and market value.
Until March 1997, the Company used a standard cost system to value its
inventory, which is purchased in U.S. dollars, Japanese yen and Hong Kong
dollars. Under this system, the Company revalued its inventory at the end of
each quarter based upon actual costs and the resulting standard cost revaluation
flowed through cost of sales when the inventory was sold. Since March 1997, the
Company uses a cost system which is an actual cost system based on FIFO
inventory flow.
Albatronics Acquisition
On September 14, 1998, the directors of Nam Tai first announced that Nam
Tai had entered into an agreement to acquire a majority interest of slightly
more than 50% of the capital stock of Albatronics. Nam Tai would make the
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investment by purchasing newly issued shares from Albatronics for approximately
US$10,000,000 payable in cash. Albatronics was a publicly traded company listed
on the Hong Kong Stock Exchange. The closing of the transaction was subject to
certain conditions, including satisfactory completion of due diligence involving
Albatronics' bank debt and customer relationships, and the approval of
Albatronics' existing shareholders and Hong Kong regulatory authorities. Closing
occurred in the beginning of December 1998.
At the time of the planned acquisition, Albatronics was principally engaged
in the trade and distribution of Sony semiconductors and CD mechanisms, and OEM
and Original Design Manufacturing development, manufacture and trade of consumer
electronic products. Its manufactured products included CD and Video CD players,
digital cameras and audio amplifiers, which were sold to major customers
including Sony, Aiwa, Panasonic and Fuji Film. Additionally, Albatronics
possessed advanced research and development capabilities in semiconductor system
design, information processing and data communications. Products under
development by Albatronics included telecommunications products, the AC-3 Music
Centre, the Slim Discman, minidisc and digital video disc players. Albatronics
also owned an equity interest of approximately 22% in Shanghai Albatronics Co.,
Ltd., a publicly listed company in the PRC, which manufactured and distributed
consumer electronic products in the PRC. In addition, Albatronics had invested
in joint ventures in the PRC, which were engaged in plastic and metal
manufacturing, the manufacture and sale of telecommunications products, and the
implementation of wire bonding technologies.
At the time of negotiating its agreement with Albatronics through the
closing of the transaction, management of Nam Tai believed Albatronics' sales
[US$350 million per annum], product lines, customer base, Sony agency
relationship, as well as Albatronics' public listing on the Hong Kong Stock
Exchange and its 22% stake in Shanghai Albatronics Co., Ltd. would make this
investment a good opportunity for Nam Tai to augment its business immediately
and significantly impact Nam Tai's growth through the benefit of Albatronics'
sales and potential synergies.
Shortly after the closing of the transaction in December 1998, the
directors of Nam Tai realised that the financial position of Albatronics had
weakened dramatically since the agreement to invest was signed in September
1998. The major reason attributed by Albatronics for its additional losses
through December 31, 1998 was the worsening market conditions for its business
and business customers. Further analysis by Nam Tai and Albatronics personnel
indicated that matters were grave and there was a further need for bad debt
write-offs for uncollectable accounts and loans receivable, impairments on
inventories and assets related to products that would be discontinued and losses
on certain investments as well as other matters.
In the Chairman's statement in Albatronics' annual report for the nine
months ended December 31, 1998 dated February 6, 1999, the Chairman of
Albatronics stated "[s]ince the announcement of the interim results of
[Albatronics] for the six months ended September 30, 1998 on January 6, 1999,
the directors discovered additional problems within the operations of
[Albatronics] based on a further review conducted by Nam Tai which led to
further write-offs and provisions".
In discussing the cash flows of Albatronics, the Chairman further stated
that "[Albatronics] is facing severe funding pressure due to the current adverse
market conditions, the substantial losses incurred and the freezing of its
banking facilities which began in December 1998. In January 1999, eight import
loans became overdue due to shortage of funds. The Board is now studying various
options available to [Albatronics] to resolve its predicament (including the
option to wind up [Albatronics] or restructure the indebtedness of
[Albatronics]. Proposals had been sent to the major trade creditor of
[Albatronics], the bank group and Nam Tai Electronics, Inc. on February 6,
1999..... In spite of above-mentioned funding pressure, the Board is of the
opinion that [Albatronics] can continue its business of trading and distribution
of semi-conductors and CD mechanisms as well as the design , development and
manufacture of consumer electronics products up until the end of February 1999.
If no compromises are reached with the major trade creditor, the bank group and
no new fundings are injected by Nam Tai Electronics, Inc., the Board believed
that [Albatronics] may need to be liquidated".
At December 31, 1998, Albatronics' liabilities exceeded its assets by
US$43.9 million and in January 1999 it started receiving demands from creditors
for repayment of past due obligations. As Albatronics was unable to pay its
liabilities as they came due, management of Nam Tai and Albatronics undertook
negotiations with Albatronics' major
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trade creditor and bankers for forbearance on demands for repayment and
concessions as to amounts payable. At that time, management of Nam Tai believed
it was probable these parties would not grant the concessions necessary to
permit Albatronics to survive and such discussions were ultimately unsuccessful.
In June 1999 Albatronics ceased its operations and, after the creditors
threatened to take legal action to force Albatronics into involuntary
liquidation, the Directors voted on June 30, 1999 to submit to the shareholders
a proposal to liquidate Albatronics. Due to the troubled financial condition of
Albatronics at December 31, 1998, it was probable that Nam Tai would never be in
a position to exercise control over Albatronics, such control would rest with
the creditors. Accordingly, Nam Tai did not consolidate Albatronics' financial
statements as of and for the one month ended December 31, 1998. Instead, Nam Tai
recorded the Albatronics losses in December 1998 ($1.7 million) on the equity
method and wrote down its remaining investment in Albatronics at December 31,
1998 ($8.3 million) to a nominal value. See "The Company's Subsidiaries -
Albatronics" and Note 1 of Notes to Consolidated Financial Statements.
The following summarized financial information of Albatronics as of and for
the nine months ended December 31, 1998 on the going concern basis of accounting
was derived from Albatronics' annual report published in Hong Kong dated
February 6, 1999 and, for the convenience of the readers in the US, has been
adjusted to conform to accounting principles generally accepted in the United
States ("US GAAP") and translated, for convenience, into US dollars at the
exchange rate of 7.73 Hong Kong dollars to 1 US dollar.
(presented in thousands of US dollars except per share data)
Summarized consolidated statement of operations for the nine months ended
December 31, 1998:
Net sales $210,115
Cost of sales (194,580)
--------
Gross profit 15,535
Selling, general and administrative expenses (23,359)
Research and development cost (270)
Non-recurring expense (Note) (53,579)
--------
Loss from operations (61,673)
Interest expense (4,547)
Other income 1,470
Equity in income of affiliated companies 152
--------
Loss before income taxes and minority interest (64,598)
Income taxes expense (296)
Minority interest (44)
--------
Net loss $ (64,258)
--------
Basic loss per share $ (0.29)
--------
Weighted average common shares outstanding, in thousands 222,546
--------
NOTE
Represents write-offs or provisions for the following items arising from the
deterioration of the Albatronics business:
(a) Video CD inventories $13,375
(b) Video CD molds 4,293
(c) Non-video CD inventories 5,595
(d) Non-video CD molds 2,937
(e) Plant and machinery 1,164
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(f) Bad and doubtful debts 9,928
(g) Investment in and receivable from investee companies 7,535
(h) Guarantees for bank facilities of an investee company 2,135
(i) Properties 4,763
(j) Severance payments and other costs 1,854
-------
$53,579
=======
The following commentary, a portion of which is extracted from the Chairman's
statement in Albatronics' annual report for the nine months ended December 31,
1998 dated February 6, 1999 explains the reasons for the write-offs and
provisions. Certain figures have been adjusted to conform to US GAAP.
(a) and (b) Video CD ("VCD") operations
The VCD operations of Albatronics were established in mid 1996. Given the
existence of various hybrid formats of VCD in the PRC market with each one
competing to become the market leader, the market has become segmented. In light
of the promulgation of the "Specification for Super VCD System" in late
September 1998 by the Ministry of Information Industry of the PRC which became
effective on November 1, 1998, the Albatronics Board was of the opinion that
there would be limited room for significant expansion in the VCD market and
profit margins on VCD products would diminish further in the foreseeable future.
Accordingly, the Albatronics' Board decided to exit the VCD market and a
provision of $17,668 was taken to reduce the related assets to their net
realizable value.
(c) Non-video CD inventories
Due to the adverse market conditions, Albatronics was realizing negative gross
margins and, accordingly, reduced its non-video CD inventories to market.
(d) and (e) Non-video CD molds and plant and machinery
Due to the adverse market conditions, Albatronics was realizing negative gross
margins and, accordingly, provided impairments in the carrying value of molds
and plant and machinery.
(f) Bad and doubtful debts
Provision for bad and doubtful debts of $9,928 included provision for trade
receivable of $6,370, provision for receivable from an affiliated company of
$1,812, provision for loan receivable of $957 and provision for other receivable
of $789. Due to the Asian economic crisis, the financial positions of several
customers and business partners deteriorated significantly. Provision was made
for overdue balances. Albatronics was also preparing to stop the subcontracting
agreement with an affiliated company and the amount receivable from it became
doubtful.
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(g) Investment in and receivable from investee companies
Albatronics had 2 investee companies. One of them was engaged in plastic
injection business and Albatronics had a 19% interest in it. Another investee
company was engaged in plastic and metal injection business in which Albatronics
had a 9.9% interest. The financial positions of both investee companies appeared
to have deteriorated (including operating loss and the uncertainty concerning
possible withdrawal or reduction of banking facilities). As a result, the
investment of $1,910 in and receivable of $5,625 from the investee companies
were fully provided.
(h) Guarantees for bank facilities of an investee company
Albatronics guaranteed the repayment of bank borrowings and capital lease
obligations by an investee company amounting to $3,234 and the unsettled amount
at December 31, 1998 was $2,135. As the investee company's ability to repay the
above amount was in doubt, a provision of $2,135 had been made by Albatronics.
(i) Properties
Due to the adverse market conditions, Albatronics had been operating in a loss
position. The Albatronics Board was of the view that the carrying value of the
properties should be written down to market and engaged independent professional
valuers to conduct a professional valuation. The amount of the properties'
market values falling below their book values was booked as a charge to income.
(j) Severance payments and other costs
This represented the estimated severance payments and incidental costs required
for layoff staff and the costs relating to the closure of some of Albatronics'
operations.
-31-
32
Summarized consolidated balance sheet as at December 31, 1998:
ASSETS
Current assets:
Cash and cash equivalents $10,538
Accounts receivable, net of provision of $4,517 12,096
Prepaid expenses and deposits and other current assets 4,176
Inventories 15,592
-------
Total current assets 42,402
Investment in affiliated companies and other investments 5,036
Property, plant and equipment - net 21,997
-------
Total assets $ 69,435
-------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $61,175
Bank borrowings and capital lease obligations
- due within one year 48,502
Other current liabilities 2,463
-------
Total current liabilities 112,140
Long-term liabilities 1,218
-------
Total liabilities 113,358
-------
Shareholders' deficit:
Common shares 5,175
Additional paid-in capital 15,316
Deficit and statutory reserve (63,628)
Accumulated comprehensive loss (786)
-------
Total shareholders' deficit (43,923)
-------
Total liabilities and shareholders' deficit $ 69,435
-------
-32-
33
Summarized consolidated statement of cash flows for the nine months ended
December 31, 1998:
Cash flows from operating activities:
Net loss $(64,258)
--------
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for inventory write downs 18,970
Provision for doubtful accounts 15,553
Write-down of property, plant and machinery 13,157
Provision for guarantees and other costs 3,989
Provision for diminution in value of a long-term investment 1,910
Depreciation and amortization 3,992
Equity in income of affiliated companies (152)
Minority interest (44)
Deferred income tax (303)
Changes in current assets and liabilities:
Accounts receivable 12,388
Prepaid expenses and deposits and other current assets 1,278
Inventories 8,853
Accounts payable and accrued expenses (7,351)
Other current liabilities 174
-------
Total adjustments 72,414
-------
Net cash provided by operating activities 8,156
-------
Cash flows from investing activities:
Purchase of property, plant and equipment (3,961)
Other net outflows (1,893)
-------
Net cash used in investing activities (5,854)
-------
Cash flows from financing activities:
Net proceeds from issue of shares 8,494
Repayment of bank borrowings and capital lease obligations (8,313)
Other net inflows 99
-------
Net cash provided by financing activities 280
-------
Effect of exchange rate changes on cash 21
-------
Net increase in cash and cash equivalents 2,603
Cash and cash equivalents at beginning of period 7,935
-------
Cash and cash equivalents at end of period $10,538
-------
Supplemental schedule of cash flow information:
Interest paid $4,547
-------
Income taxes paid $ 77
-------
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34
Consolidated statements of shareholders' equity for the nine months ended
December 31, 1998:
ACCUMULATED TOTAL
COMMON COMMON ADDITIONAL RETAINED OTHER SHAREHOLDERS'
SHARES SHARES PAID-IN EARNINGS COMPREHENSIVE STATUTORY EQUITY
OUTSTANDING AMOUNT CAPITAL (DEFICIT) INCOME (LOSS) RESERVE (DEFICIT)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at April 1, 1998 200,000,000 $ 2,587 $ 9,410 $ 235 $ (817) $ 395 $ 11,810
Issue of shares to ultimate
holding company 200,002,000 2,588 5,906 -- -- -- 8,494
Net loss -- -- -- (64,258) -- -- (64,258)
Other comprehensive income:
Foreign currency translation -- -- -- -- 31 -- 31
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 400,002,000 $ 5,175 $ 15,316 $ (64,023) $ ( 786) $ 395 $ (43,923)
=========== =========== =========== =========== =========== =========== ===========
Accumulated other comprehensive income represents foreign currency translation
adjustments.
The comprehensive loss of the Company was $64,227 for the nine months ended
December 31, 1998.
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35
Updated unaudited financial information as at March 31, 1999
On May 10, 1999, the directors of Albatronics presented the results for the
three months ended March 31, 1999 prepared under the liquidation basis of
accounting. The directors further explained that "[b]ased on the working capital
situation, [Albatronics] is having difficulties in meeting its financial
obligations which the management believes will severely erode the confidence of
the customers and the suppliers of [Albatronics]. The Board believes that
[Albatronics] may have to be liquidated within a short period of time if among
other things:
(i) the customers and suppliers do not continue to support [Albatronics],
(ii) the major trade creditor, the bank group and Nam Tai cannot within a
short time agree on the proposal for the restructuring of the
indebtedness of [Albatronics], or
(iii) any parties among Nam Tai, the bank group and the major trade creditor
proceed with legal action against [Albatronics].
Due to the aforesaid reasons and following the principle of conservatism of
accounting principles generally accepted in Hong Kong, the Board [of
Albatronics] is of the view that the quarterly results should be prepared on a
liquidation basis. All long term assets are written down to their net realisable
value."
In June 1999, Albatronics ceased its operations and on June 30, 1999, the
directors of Albatronics voted to submit to the shareholders a proposal to
liquidate Albatronics.
Updated unaudited summarized financial information prepared under accounting
principles generally accepted in Hong Kong for the three months ended March 31,
1999 reported to the Albatronics' shareholders on the liquidation basis of
accounting and translated, for convenience, into US dollars at the exchange rate
of 7.73 Hong Kong dollars to 1 US dollar is as follows:
Sales $ 36,609
Cost of operations (41,992)
--------
Operating loss (5,383)
Write off arising from the liquidation basis of accounting (19,823)
--------
Loss from operations (25,206)
Equity in income of affiliated companies 37
--------
Loss before income taxes and minority interest (25,169)
Income taxes expense (10)
Minority interest 9
--------
Net loss for the three months ended March 31, 1999 prepared under
the liquidation basis of accounting (25,168)
Shareholders' deficit at December 31, 1998 (43,923)
--------
Shareholders' deficit at March 31, 1999 prepared under the liquidation
Basis of accounting $(69,091)
--------
35
36
The consolidated balance sheet of Albatronics as at March 31, 1999 prepared
under the liquidation basis of accounting was not disclosed to its shareholders
and, accordingly, is not included herein.
Management of Nam Tai believes that there is little possibility of any
significant recovery of its investment nor does it believe that Nam Tai is
subject to any continuing obligation with respect to Albatronics.
The first quarter is historically a slower sales period for the Company
as its factories are closed for two weeks for the Chinese New Year holidays as
is customary in China. First quarter sales, as a percentage of total sales, were
stronger than usual in 1998 because the impact of the Asian Flu which had a more
severe impact on the Company as the year progressed. The following table sets
forth selected operating data for the quarters indicated. This information has
been derived from the unaudited consolidated financial statements of the Company
which, in the opinion of management, contain all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of such
information. These operating results are not necessarily indicative of results
for any future period and results may fluctuate significantly from quarter to
quarter in the future.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(In thousands of U.S. dollars except per share data)
----------------------------------------------------------------
1998
- ----
Summary of operations
$ 26,280 $ 30,857 $ 23,659 $ 20,853
Net sales
6,591 7,465 5,513 5,141
Gross profit
3,321 2,432 1,838 793
Income from operations
5,865 2,802 2,565 (7,703)
Net income
$ 0.53 $ 0.27 $ 0.26 $ (0.78)
Basic earnings per share
$ 0.53 $ 0.27 $ 0.26 $ (0.78)
Diluted earnings per share
1997
- ----
Summary of operations
Net sales $ 31,152 $ 40,444 $ 31,245 $ 30,013
Gross profit 7,246 12,594 7,536 7,348
Income from operations 3,630 8,005 3,878 3,503
Net income 5,570 7,763 8,751 8,755
Basic earnings per share $ 0.71 $ 0.98 $ 1.07 $ 0.93
Diluted earnings per share $ 0.71 $ 0.97 $ 1.06 $ 0.93
1996
- ----
Summary of operations
Net sales $ 25,357 $ 24,885 $ 28,005 $ 29,987
Gross profit 5,036 4,907 6,344 5,898
Income from operations 2,007 1,201 2,893 2,432
Net income 2,333 1,409 3,318 2,356
Basic earnings per share $ 0.29 $ 0.17 $ 0.41 $ 0.30
Diluted earnings per share $ 0.29 $ 0.17 $ 0.41 $ 0.30
36
37
The following table presents selected consolidated financial information
stated as a percentage of net sales for the years ended December 31, 1998, 1997,
and 1996:
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ----- ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 75.7 73.9 79.5
----- ----- -----
Gross profit 24.3 26.1 20.5
----- ----- -----
Costs and expenses:
Selling, general and administrative expenses 13.0 10.4 11.7
Research and development expenses 1.6 1.4 0.9
Non-recurring expense 1.4 - -
----- ----- -----
16.0 11.8 12.6
----- ----- -----
Income from operations 8.3 14.3 7.9
Profit (loss) on disposal of fixed assets 0.7 3.3 (0.1)
Provision for impairment of value of investment (8.2) - -
Other income - net 4.8 5.8 1.1
Interest expense - - (0.1)
----- ----- -----
Income from consolidated companies
before income taxes and minority interests 5.6 23.4 8.8
----- ----- -----
Net income 3.5% 23.2% 8.7%
===== ===== =====
Year ended December 31, 1998 Compared to Year ended December 31, 1997
Nam Tai's sales decreased by 24% to $101,649,000 for the year ended
December 31, 1998 compared to $132,854,000 for the year ended December 31, 1997,
primarily due to the decrease in customer orders from all of its major
customers. As a result of the Asian economic turmoil, both sales quantities and
unit prices fell. Management believes that the quantity of products ordered by
Asian OEM customers fell as a result of reduced demand by end users. Sales also
declined as a result of reductions in unit prices. Management reduced unit
prices to maintain market share as a result of the increasingly competitive
environment, and it reduced unit prices to pass material and component cost
savings resulting from currency depreciations on to its OEM customers.
The Company's gross profit decreased to $24,710,000 for the year ended
December 31, 1998 from $34,724,000 for the year ended December 31, 1997. The
principal reason for the decrease in gross profit was the decrease in customer
orders and lower unit prices. Nam Tai's gross profit margin decreased to 24.3%
in 1998 from 26.1% in 1997.The major reasons for the decrease in profit margins
was the lowering unit prices caused by the increasingly competitive environment,
a changing product mix and the fact that fixed depreciation overhead costs
accounted for a larger percentage of cost of sales.
37
38
Selling, general and administrative expenses decreased to $13,190,000 or
13.0% of sales from $13,799,000 or 10.4% of sales in the year ended December 31,
1997. The decrease in absolute dollars principally reflected reduced direct
selling expenses incurred as a result of the decrease in sales. The increase in
such expenses as a percent of sales was the result of the Company having to
cover fixed general and administrative expenses during a time of declining
sales.
Research and development expenses as a percentage of sales were
essentially the same in 1998 and 1997 at 1.6% and 1.4% respectively. Research
and development expenses decreased to $1,691,000 in 1998 from $1,909,000 in 1997
in part because there were fewer customer orders that involved non-reimbursable
expenses for research and development work. Namtek, the Company's software
development subsidiary which began operations in early 1996, accounted for
approximately 7% of the research and development expenses in 1998 and 14% of the
research and development expenses in 1997. These expenses were recovered from
fees paid by third parties.
Normally the Company does not have to pay custom duties in the PRC on
foreign purchases which are incorporated into manufactured goods that are
subsequently exported. During the last audit, PRC customs was not satisfied with
supporting documentation provided by the Company for certain material purchases
of prior years. As a result, a non-recurring expense of $1,445,000 was incurred
relating to customs assessment in China in 1998.
Loss on disposal of property, plant and equipment was $82,000 for the
year ended December 31, 1998 as compared to $1,198,000 for the year ended
December 31, 1997. The loss in 1998 related primarily to the relocation of the
Canadian office and the write-off of the unamortized leasehold improvements.
Gain on disposal of property, plant and equipment was $848,000 for the
year ended December 31, 1998 as compared to $5,548,000 for the year ended
December 31, 1997. The gains in both 1998 and 1997 related primarily to the sale
of portions of the Company's landholdings in Hong Kong. (See the discussion
regarding the sale in 1998 under Liquidity and Capital Resources below.)
A provision for the impairment of value of $8,271,000 was made to reduce
to a nominal carrying value Nam Tai's investment in Albatronics. (See the
discussion regarding the Albatronics investment under Liquidity and Capital
Resources below.)
Other income decreased to $4,865,000 for the year ended December 31,
1998 compared to $7,791,000 for the year ended December 31,1997. Other income in
1998 consisted primarily of interest income of $5,047,000, a gain of $1,207,000
on the disposal of the Company's investment in Deswell Industries Inc.
("Deswell") and a gain of $394,000 on foreign exchange. Such gains were offset
by the write-off of the $840,000 premium of an option purchased by Nam Tai as a
hedge against the devaluation of the Hong Kong dollar against the U.S. dollar,
unrealized losses of $468,000 incurred as a result of the decline in the market
value of short-term investments and miscellaneous expenses of $266,000. Other
income in 1997 derived principally from interest income of $1,847,000 and gains
on the sale of shares of Deswell of $5,488,000. Interest income increased in
1998 as a result of interest earned on the proceeds received in November 1997
from the sale of securities in the Company's rights and standby offerings.
Income from continuing operations from consolidated companies before
income tax was $5,743,000 for the year ended December 31, 1998 compared to
$31,118,000 for the year ended December 31, 1997. The decrease of 82% was
primarily due to the 24% decrease in 1998 sales, tightening gross profit margins
and the provisions for the impairment of value of Albatronics.
The income tax expense of $1,040,000 for the year ended December 31,
1998 compares to an expense of $279,000 for the prior year. The income tax
expense relates to income taxes on the Hong Kong and China operations. 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
prepayments. In early 1999, the Company learned that for the 1996 and 1997 tax
years it would not receive a 100% tax refund on taxes already paid, and was
required to reduce the prepayment by the amount of the refund that was not
obtained. For 1996, the Company received
38
39
tax refunds of $484,000 on taxes paid of $917,000. For 1997, the Company now
expects to receive a refund of $1,329,000 on taxes paid of $1,769,000. Only
$6,000 of the expected refund had been received as of December 31, 1998. A full
refund was denied for 1997 and 1996 because the large intercompany receivable
between the China subsidiary and the Hong Kong subsidiary was not considered by
the China Tax Authorities to be a reinvestment of profits. In January 1999, the
Company's Shenzhen manufacturing facility received was recognized as a "High and
New Technology Enterprise" which entitles it to various tax benefits including
lowering the corporate profits tax rate to 7.5% until January 7, 2004.
Net income decreased $27,310,000 or 89% to $3,529,000 (3.5% of sales)
for the year ended December 31, 1998 compared to $30,839,000 (or 23.2% of sales)
for the year ended December 31, 1997. This resulted in diluted earnings per
share for the year ended December 31, 1998 of $0.34 ($0.34 basic) compared to
diluted earnings per share of $3.68 ($3.70 basic) for the year ended December
31, 1997. The decrease in net income and earnings per share is the result of:
(i) a decrease in sales; (ii) lower operating margins; (iii) fixed general and
administrative expenses; (iv) fewer gains from the disposal of fixed assets; (v)
the provision for impairment of value for Albatronics; (vi) a non-recurring
customs assessment; (vii) increased income tax expenses as a result of 1997 and
1996 tax refunds not being received as expected; (viii) Nam Tai's share of
Albatronics' losses in December 1998 of $1,708,000; and (ix) an increase in the
weighted average number of shares outstanding resulting from the issuance of
approximately 3,000,000 additional shares in late November 1997. The decrease in
net income was partially offset by Nam Tai's share of Group Sense
(International) Limited's ("Group Sense") net income for the first six months of
fiscal 1999 (ending September 30, 1998) of $534,000 and an increase in net
interest income of $3,238,000 as a result of the increased amount of cash on
hand throughout the year.
The diluted weighted average number of common shares outstanding
increased to 10,351,000 (basic 10,317,000) for the year ended December 31, 1998
from 8,391,000 (basic 8,324,000) for the year ended December 31, 1997,
reflecting the issuance of approximately 3,000,000 additional shares around the
end of November 1997 in the Company's rights and standby offerings, offset by
the repurchase during 1998 of shares pursuant to the Company's repurchase
program.
Year ended December 31, 1997 Compared to Year ended December 31, 1996
Nam Tai's sales increased by 23% to $132,854,000 for the year ended
December 31, 1997 compared to $108,234,000 for the year ended December 31, 1996
primarily due to increased sales to Texas Instruments Incorporated and Sharp
Corporation.
The Company's gross profit increased to $34,724,000 for the year
ended December 31, 1997 from $22,185,000 for 1996. The principal reason for the
increase in gross profit was the increase in sales. Also contributing to the
increase in gross profit were improved gross profit margins.
Nam Tai's gross profit margin improved to 26.1% in 1997 from 20.5% in
1996. The major reasons for the increase in profit margin were (i) the
production of new, higher margin products, (ii) improvements in quality control
which resulted in the reduction of the scrap rate, (iii) lower cost of raw
materials and components, in part the result of the weakness of the Japanese yen
in relation to the U.S. dollar which benefitted the Company as it purchases a
substantial volume of components from Japanese companies which are paid for in
Japanese yen, and (iv) changes in materials used in production to reduce
manufacturing costs.
Selling, general and administrative expenses increased by 8.6% to
$13,799,000 or 10.4% of sales in the year ended December 31, 1997 from
$12,702,000 or 11.7% of sales for the year ended December 31, 1996. The increase
in absolute dollars principally reflected additional staff and costs required to
provide services to the Company as a result of the growth in sales. The decrease
in such expenses as a percent of sales was the result of efficiencies obtained
in general administrative expenses as the Company handled a greater level of
activity with available resources.
Research and development expenses increased to $1,909,000 in 1997 from
$950,000 in 1996 as some of the Company's customers have requested the Company
to bear responsibility for paying development charges. Namtek, the Company's
software-development subsidiary which began operations in early 1996, accounted
for approximately 14%
39
40
of the research and development expenses in 1997 and 40% of the research and
development expenses in 1996. These expenses were substantially recovered from
fees paid by third parties.
Loss on disposal of property, plant and equipment was $1,198,000 for the
year ended December 31, 1997 as compared to $123,000 for the year ended December
31, 1996. The loss in 1997 related to the sale of certain of the Company's real
property in Burnaby, British Columbia, Canada and the write-off of equipment.
See the discussion regarding this sale under Liquidity and Capital Resources
below.
Gain on disposal of property, plant and equipment was $5,548,000 for the
year ended December 31, 1997 as compared to nil for the year ended December 31,
1996. The gain in 1997 principally related to the sale of a portion of the
Company's land holdings in Hong Kong. See the discussion regarding this sale
under Liquidity and Capital Resources below.
Other income (net) increased to $7,791,000 for the year ended December
31, 1997 from $1,253,000 for the year ended December 31, 1996. This income
consisted of profit on the disposal of investments of $5,488,000, interest
income of $1,847,000 on the Company's cash balances, foreign exchange gains of
$500,000 and miscellaneous income of $650,000 net of bank charges of $343,000
and donations of $351,000.
Interest expense decreased to $39,000 for the year ended December 31,
1997 from $89,000 for the year ended December 31, 1996 as a result of the
reduction in the Company's utilization of trade credit facilities under its
banking arrangements.
Income from continuing operations before income tax was $31,118,000 for
the year ended December 31, 1997 as compared to $9,574,000 for the year ended
December 31, 1996. The increase of 225% was primarily due to increased 1997
sales, improved profit margins, and gains on the disposal of investments and
gains on the disposal of fixed assets.
The income tax expense of $279,000 for the year ended December 31, 1997
compares to an expense of $158,000 for the prior year. The income tax expense in
1997 relates to income taxes on Hong Kong operations and is comparable to 1996
income taxes paid with respect to Hong Kong operations. In 1995, the Company
reversed a provision of $705,000 against income taxes owing from China
operations following receipt of a refund of 1994 income taxes on China
operations. The refund in 1995 from 1994 China income taxes resulted in an
overall recovery of total income taxes paid for 1995. As a result of expected
refunds of income taxes attributable to China operations, the Company made no
provision for such income taxes in 1997, 1996 or 1995. The refund of 1995 income
taxes on China operations was received in 1996 and the refund of 1996 and 1997
income taxes is expected in 1998.
Net income increased by 228% to $30,839,000 (or 23.2% of sales) for the
year ended December 31, 1997 compared to $9,416,000 (or 8.7% of sales) for the
year ended December 31, 1996. This resulted in diluted earnings per share for
the year ended December 31, 1997 of $3.68 ($3.70 basic) compared to diluted
earnings per share of $1.16 ($1.17 basic) for the year ended December 31, 1996.
The increase in net income and earnings per share is the result of (i) increase
in sales; (ii) higher operating margins; (iii) increases in other income; and
(iv) gains from the disposal of fixed assets.
The weighted average number of common shares outstanding increased
to 8,390,290 for the year ended December 31, 1997 from 8,142,131 for the year
ended December 31, 1996, reflecting the repurchase of 1,000 shares through the
facilities of the Toronto Stock Exchange, the issuance of 386,667 common shares
upon exercise of stock options granted under the Company's stock option plan and
issuance by the Company of 2,997,129 common shares in its 1997 Offerings of
units, which was completed at the end of November 1997. In the 1997 Offerings,
the Company sold a total of 2,997,129 units, each unit consisting of one common
share and one common share purchase warrant. Each warrant is exercisable to
purchase one common share at a price of $20.40 per share until November 24,
2000. 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.
40
41
LIQUIDITY AND CAPITAL RESOURCES
Current assets decreased to $97,015,000 for the year ended December 31,
1998 compared to $133,022,000 for the year ended December 31, 1997. Cash and
cash equivalents, consisting of cash and short-term term deposits, decreased to
$71,215,000 for the year ended December 31, 1998 versus $102,411,000 for the
year ended December 31, 1997. The principal reasons for the decrease in cash and
cash equivalents were: (i) the repurchase of an aggregate of 1,407,500 common
shares of the Company for $21,255,000; (ii) a strategic investment of
approximately 20% of the common shares of Group Sense for $16,000,000; (iii) an
acquisition of just over 50% of the shares of Albatronics for $9,980,000; (iv)
dividends paid of $2,141,000; and (v) additions to fixed assets of $4,699,000.
Accounts receivable at December 31, 1998 decreased to $16,138,000 from
$16,985,000 at December 31, 1997, in part because of a decrease in sales in
1998. Inventories at December 31, 1998 decreased by $5,483,000 or 56% from
levels at December 31, 1997, reflecting an inventory turnover period of 21 days
in 1998 versus 37 days in 1997. The decrease in inventory levels is a result of
both decreased sales levels and improved inventory management.
In December 1994, the Company invested $3,931,000 for approximately 14%
of Deswell's then outstanding capital stock. In July 1995, Deswell completed an
initial public offering of its securities in the United States and the Company's
investment was diluted to approximately 10.5% of Deswell's outstanding shares as
at December 31, 1995. In July 1996, the Company exercised warrants to purchase
an additional 12,000 shares of Deswell for $119,000. As at December 31, 1996,
this investment was shown at cost and was approximately 87% of the market value
of Deswell common shares as reported on the Nasdaq National Market at December
31, 1996. In 1997, the market price of the Deswell shares rose substantially on
the Nasdaq National Market and the Company elected to sell a portion of its
investment in Deswell, reducing its stake in Deswell to below 2% of its shares
reported outstanding at December 31, 1997 and realizing a gain of approximately
$5.5 million on sales of 390,000 shares. In 1998, the Company sold the remainder
of its Deswell holdings for $2,132,000, realizing a gain of approximately $1.3
million.
On September 12, 1998, Nam Tai signed an agreement to acquire
Albatronics by subscribing for slightly over 50% of the outstanding shares of
Albatronics. The transaction was completed on November 30, 1998 for $9.98
million, including transaction fees. When Nam Tai announced the completion of
the Albatronics acquisition on December 2, 1998, the Company indicated that it
would take steps to support Albatronics depending on the results of a
comprehensive study investigating opportunities for corporate restructuring and
the streamlining of Albatronics' overhead expenses. Since that time, the
December 31, 1998 Albatronics' accounts have been prepared and show a company in
financial difficulty with a deficiency in shareholders' equity of $43.9 million,
up from the $22.6 million adjusted deficiency in shareholders' equity reported
in Albatronics' unaudited August 31, 1998 accounts. The deficiency increased
despite the capital injection from Nam Tai's share subscription, reflecting
Albatronics' continuing losses, which for the month of December 1998 were $1.71
million. In January 1999 Albatronics started receiving demands from creditors
for repayment of past due obligations. As Albatronics was unable to pay its
liabilities as they came due, management of Nam Tai and Albatronics undertook
negotiations with Albatronics' major trade creditor and bankers for forbearance
on demands for repayment and concessions as to amounts payable. At that time,
management of Nam Tai believed it was probable these parties would not grant the
concessions necessary to permit Albatronics to survive and such discussions were
ultimately unsuccessful. In June 1999 Albatronics ceased its operations and,
after the creditors threatened to take legal action to force Albatronics into
involuntary liquidation, the Directors voted on June 30, 1999 to submit to the
shareholders a proposal to liquidate Albatronics. Due to the troubled financial
condition of Albatronics at December 31, 1998, it was probable that Nam Tai
would never be in a position to exercise control over Albatronics, such control
would rest with the creditors. Accordingly, Nam Tai did not consolidate
Albatronics' financial statements as of and for the one month ended December 31,
1998. Instead, Nam Tai accounted for Albatronics on an equity basis and recorded
as separate line items on its Consolidated Statements of Income all of
Albatronics' December 1998 losses of $1.71 million as "Share of losses of
unconsolidated subsidiary" and also made a "Provision for impairment of value"
of $8.27 million against the remaining carrying value of this investment. As a
result, the carrying value of Nam Tai's investment in Albatronics has been
recorded on Nam Tai's Consolidated Balance Sheet at December 31, 1998 at a
nominal value as "Investment in unconsolidated subsidiary (less provision for
impairment of value)."
On May 27, 1998, Nam Tai completed a strategic investment of $16 million
for approximately 20% of the outstanding shares of Group Sense, a publicly
listed Hong Kong company (Hang Seng company #601). During 1998, the Company
received dividend payments from Group Sense of $590,000 and earned $534,000 as
its share of Group
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Sense's results (since its May 27, 1998 investment) for the six-month period
ending September 30, 1998, which are the most recent results announced to date.
Property, plant and equipment - net of $32,445,000 as at December 31,
1998 is virtually unchanged from $32,442,000 as at December 31, 1997.
Depreciation on fixed assets for 1998 was $4,258,000 while additions to plant
and equipment during 1998 were $4,699,000. New equipment and machines purchased
in 1998 included four sets of SMT systems, five sets of ACF heat seal machines,
and equipment for product development including a laser rapid prototyping
machine and a Hast Chamber for product reliability testing.
At December 31, 1998, 58% and 29% of the Company's identifiable assets
were located in Hong Kong and China, respectively, as compared to 14.7% and
26.7%, respectively, at December 31, 1997. Cash and cash equivalents consisting
of cash and short-term term deposits representing 23% of the total cash and cash
equivalents of $71,215,000 was held by the Company in North America at December
31, 1998 compared to 93.2% of the $102,411,000 cash and cash equivalents at
December 31, 1997. The decrease in the percentage of funds held in North America
occurred because in the second half of 1998 the Company took advantage of the
higher Hong Kong dollar interest rates by shifting a portion of its surplus
funds from U.S. dollar deposits into Hong Kong dollar term deposits and
purchased an option contract to hedge the risk of a devaluation of the Hong Kong
dollar. As a result, identifiable assets in North America declined to 13% of
total assets at December 31, 1998 compared to 58.6% of total assets at December
31, 1997. The Company expects that in the future the majority of its surplus
funds will be held in North America.
In the past, the Company used short-term bank borrowing to assist in
meeting its working capital requirements and to provide funds for investments in
property, plant and equipment; however, since 1996 the Company's capital
requirements have been financed from internally generated funds, and short-term
borrowing was reduced to nil at December 31, 1998 and 1997 respectively. The
Company had working capital of $77,539,000 and $113,470,000 as of December 31,
1998 and 1997 respectively.
At December 31, 1998, Nam Tai had in place general banking facilities
with four financial institutions aggregating $50,100,000. For the three years
ended December 31, 1998, banking facilities bore Nam Tai's corporate guarantee
and there was an undertaking not to pledge any assets to any other banks without
the prior consent of the Company's bankers. Such facilities, which are subject
to annual review, permit the Company to obtain overdrafts, lines of credit for
forward exchange contracts, letters of credit, import facilities, trust receipt
financing, shipping guarantees and working capital, as well as fixed loans. As
at December 31, 1998, the Company had utilized approximately $1,201,000 under
such general credit facilities and had available unused credit facilities of
$48,899,000. Interest on notes payable averaged 5.8% per annum during the year
ended December 31, 1998. During the year ended December 31, 1998, the Company
paid a total of $1,000 in interest on indebtedness.
Accounts payable increased by 4.7% to $18,377,000 for the year ended
December 31, 1998 from $17,551,000 for the year ended December 31, 1997,
principally as a result of the extension of credit terms from suppliers.
The Company had no long-term debt during either 1998 or 1997.
Cash flow from operations for 1998 was $19,400,000, including net income
of $3,529,000, depreciation of $4,258,000 and other non-working capital
adjustments of $7,978,000. The net cash increase due to changes in working
capital (excluding cash and bank borrowings) was $3,635,000.
During 1998, the Company's net investment activities used $27,222,000.
This principally includes proceeds on the disposal of shares of Deswell of
$2,132,000 and proceeds from the disposal of land in Hong Kong of $815,000, less
the investment in Group Sense (net of dividends received) of $15,819,000, the
investment in Albatronics of $9,980,000 and additions to fixed assets of
$4,699,000.
Net cash used by financing activities was approximately $23,396,000 in
1998. Financing activities during 1998 included share repurchases of $21,255,000
and the payment of dividends of $2,141,000.
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The Company believes there are no material restrictions (including
foreign exchange controls) on the ability of Nam Tai's non-China subsidiaries to
transfer funds to the Company in the form of cash dividends, loans, advances or
product/material purchases. With respect to the Company's China subsidiaries,
there are restrictions on the payment of dividends and the removal of dividends
from China due to the Company's reinvestment program for tax purposes and the
10% reserve fund. (See note 15 of the Notes to the Consolidated Financial
Statements.) In the event that dividends are paid by the Company's China
subsidiaries, they would reduce the amount available for the reinvestment
program and accordingly taxes would be payable on the profits not reinvested.
The Company believes such restrictions will not have a material effect on the
Company's liquidity or cash flow.
In 1994, the Company resumed paying annual dividends, paying
shareholders aggregate dividends of $65,000 ($0.01 per share) in 1994. Since
then dividends paid per share have increased annually to $120,000 ($0.015 per
share) in 1995, $243,000 ($0.03 per share) in 1996, $786,000 ($0.10 per share)
in 1997 and $2,141,000 or ($0.28 per share) in 1998. On February 15, 1999, the
Company announced that it was increasing the annual dividend to $0.32 per share
to be paid on a quarterly basis commencing with the first quarter 1999 dividend
of $0.08 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. In spite of the lower net sales and income in 1998 compared to
1997, the Company increased the dividends per share marginally to reflect its
positive outlook for 1999, the continued strong cash flows from operations in
1998 and taking into account the reduced number of shares outstanding at
December 31, 1998 compared to December 31, 1997. Future dividends will be in the
form of cash or stock or a combination of both. There can be no assurance that
any dividend on the Common Shares will be declared, or if declared, what the
amounts of dividends will be or whether such dividends, once declared, will
continue for any future period.
IMPACT OF INFLATION
Inflation in China and Hong Kong, estimated at -0.8% and 2.6%
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. Furthermore, increases in
labor costs, which represent the most significant component of the Company's
production costs (other than material costs), would not materially affect its
business because of the Company's utilization of less expensive labor through
its operations in China. Labor and overhead expenses related to Nam Tai's
Chinese factory amounted to 13.7% of the Company's total expenses before
operating income during the year ended December 31, 1998 and 10.9% during the
year ended December 31, 1997.
EXCHANGE RATES
The Company sells a majority of its products in U.S. dollars and pays
for its material components in Japanese yen, U.S. dollars and Hong Kong dollars.
It pays labor costs and overhead expenses in renminbi, the currency of China
(the basic unit of which is the yuan), Hong Kong dollars and Canadian dollars.
The exchange rate of the Hong Kong dollar to the 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.
At the end of 1997 and in early 1998, in light of the currency turmoil
experienced by many other Southeast Asian countries, there has been increasing
pressure for a devaluation of the currencies of Hong Kong and China. While the
governments of Hong Kong and China have indicated they will support their
currencies, possible devaluations may occur. 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.
Canadian operations are relatively small with the percentage of expense
in Canadian dollars representing 2% of the total expenses for the year ended
December 31, 1998.
Management believes the Company's most significant foreign exchange risk
results from material purchases made in Japanese yen. Approximately 18%, 23% and
28% of Nam Tai's material costs have been in Japanese yen during
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the years ended December 31, 1998, 1997 and 1996, respectively. Sales made in
yen account for approximately 0.3% of sales for the year ended December 31,
1998, 6.3% of sales for the year ended December 31, 1997 and 15% of sales for
the year ended December 31, 1996. The net currency exposure has increased as a
result of the decision to price the majority of goods sold in U.S. dollars. 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. 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. This is in spite of significant inflation during 1994
and 1995 that placed devaluation pressure on the renminbi. The Chinese
Government took steps to restrict credit to counteract these pressures, which
taken together with the net inflow of capital into China, resulted in stability
of the currency against the U.S. dollar.
The Company believes that because its Chinese operations are presently
confined to manufacturing products for export, 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 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 has become 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.
As at December 31, 1998 and December 31, 1997, the Company had no open
forward contracts and no option contracts. During 1998, the Company recorded a
charge of $840,000 on the write-off of a premium on an option which was
purchased as a hedge in the event that the Hong Kong dollar was de-pegged and
allowed to depreciate against the U.S. dollar. Under the terms of the option,
Nam Tai had the right to purchase US$30 million at a fixed exchange rate of
HK$7.8 for each U.S. dollar. After purchasing the option, the Company invested a
portion of its cash surplus in short-term Hong Kong dollar deposits which were
earning interest rates between 10% and 14.175%, significantly higher than what
was offered on U.S. dollar deposits. In 1997 and 1996, Nam Tai recorded no gain
or loss from hedging transactions. The Company is continuing to review its
hedging strategy and there can be no assurance that Nam Tai will not suffer
losses in the future as a result of currency hedging.
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YEAR 2000 ISSUE
Many existing computer programs, including some programs used by the
Company in its computer systems and equipment, use only two digits to identify a
year in the date field. These programs were designed without considering the
impact of the upcoming change in the century. If not corrected, these computer
applications and systems could fail or create erroneous results before, during,
or after the year 2000. The Company's investigations and efforts to date have
included studies, investigations, inquiries to software and equipment suppliers,
testing by internal management and outside consultants, and the purchase of
certain replacement software and rewriting certain sections of existing
programs. Based on these efforts, the cost of which has not been material to
date, management does not anticipate that the Company will incur any material
operating expenses or be required to incur material costs as a result of the
year 2000 issue. Management believes that as a result of its efforts to date,
the Company is year 2000 compliant. Despite management's effort to take
reasonable precautions to be year 2000 ready, and its belief that it is
currently year 2000 compliant, to the extent the Company's systems are not fully
year 2000 compliant, there can be no assurance that potential systems
interruptions or the cost necessary to update software would not have a material
adverse effect on the Company's business, financial condition, results or
operations and business prospects.
In addition to the internal preparations discussed above, the Company
has sent inquiry letters to its key suppliers and key customers to ensure that
they do not expect any year 2000 problems to impact their business dealings with
Nam Tai. In the event that the Company's significant customers and suppliers do
not successfully and timely achieve year 2000 compliance, the Company's business
or operations could be adversely affected. There is also a risk that year 2000
problems may cause regional or global problems for utility companies,
transportation systems, banking systems, or the global economy. To the extent
that these problems materialize, Nam Tai expects that its business will be
adversely impacted and to date the Company has not completed a year 2000
contingency plan.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share. The new
rule requires specific disclosure of both diluted earnings per share and
earnings per common share calculated without the dilutive impacts of outstanding
stock options or convertible securities. As disclosed in Note 1(e) of Notes to
Consolidated Financial Statements appearing in Item 18 of this Report, the
Company has adopted this method of accounting for earnings per share.
In 1998, the Company adopted a new disclosure standard, SFAS No. 130,
"Reporting Comprehensive Income." which requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from non-owner sources.
NEW ACCOUNTING STANDARDS NOT YET DISCLOSED
The Financial Accounting Standards Board has issued a new standard SFAS
No. 133 "Derivative Instruments and Hedging Activities." Management has not yet
completed the analysis of the impact this would have on the financial statements
of the Company.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Management
The directors and executive officers of the Company are as follows:
Name Position with Company
- ---- ---------------------
Tadao Murakami Chairman of the Board and Director
Shigeru Takizawa Chief Executive Officer, President and Director
M. K. Koo Senior Executive Officer and Director
Hidekazu Amishima General Manager of NTSZ
Y.C. Chang Vice General Manager of NTSZ
Mamoru Koike Vice General Manager Research and Development
Mark Waslen Treasurer
Lorne Waldman Secretary
Charles Chu Director
Stephen Seung Director
TADAO MURAKAMI Mr. Murakami has served the Company in various executive
capacities since 1984. He became Secretary and a Director of the Company in
December 1989. From June 1989, he has been employed as the President of the
Company's Hong Kong subsidiary. In July 1994, Mr. Murakami succeeded Mr. Koo as
President and in June 1995 became the Company's Chief Executive Officer. Mr.
Murakami assumed the position of Vice-Chairman in January 1996 and is in charge
of the manufacturing and marketing operations of the Company. In September 1998,
Mr. Murakami succeeded Mr. Koo as the Chairman of the Board of Directors. Mr.
Murakami graduated from Japan Electronic Technology College in 1964.
SHIGERU TAKIZAWA Mr. Takizawa joined the Company in September 1998 after a
forty year career with Toshiba Corporation holding various senior management and
executive positions. He assumed the positions of President and Chief Executive
Officer of the Company, succeeding Mr. Murakami. Mr. Takizawa is responsible for
the management and direction of all business operations and technological
development of the Nam Tai group of companies. He is also a director.
M. K. KOO Mr. Koo had served as Chairman of the Board and a Director of Nam
Tai and its predecessor companies since inception. Mr. Koo assumed the role as
Chief Financial Officer of the Company from April 1997 until January 1998 and
again in February 1998 to May 1998. Mr. Koo assumed the newly created position
of Senior Executive Officer, Corporate Strategy, Finance and Administration when
Mr. Murakami succeeded him as Chairman of the Board. Mr. Koo also serves on the
Company's audit committee. Mr. Koo received his Bachelor of Laws degree from
National Taiwan University in 1970.
HIDEKAZU AMISHIMA Mr. Amishima joined the Company in August 1996 as Vice
General Manager and assumed the responsibility for overseeing day-to-day factory
operations of the Company's Shenzhen, China manufacturing complex as General
Manager in November 1996. From 1964 until joining the Company, Mr. Amishima was
employed by Kanda Tsushin Industrial Co. Ltd., a Japanese electronics
manufacturer.
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Y.C. CHANG 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 late 1997. Mr.
Chang is in charge of production at the Company's Shenzhen, China manufacturing
facility. Prior to joining Nam Tai he was Assistant Production Manager for
Inventec Co. Ltd. and Production and Quality Control Manager for Supercom Co.
Ltd.
MAMORU KOIKE Mr. Koike joined Nam Tai in April 1998 as Vice General Manager
of Nam Tai's Research and Development Department in charge of design and
development. Before joining Nam Tai, Mr. Koike serve Sharp Corporation for
thirty-five years since his graduation from Osaka Electric Communication High
School in 1963.
MARK WASLEN Mr. Waslen first joined Nam Tai in July 1990 to oversee Nam
Tai's financial reporting and accounting. In June 1993 Mr. Waslen was appointed
the Company's Financial Controller. From the end of 1995 to May 1998 Mr. Waslen
worked for Deloitte Touche Tohmatsu where he pursued further training in the
area of tax before rejoining Nam Tai in June 1998 as Treasurer. Mr. Waslen is
both a Chartered Accountant ("C.A"). and a Certified Public Accountant
("C.P.A"). He earned his Bachelor of Commerce degree at the University of
Saskatchewan in 1982.
LORNE WALDMAN Mr. Waldman joined Nam Tai in December 1996 as in-house
counsel for Nam Tai Electronics (Canada) Ltd. He 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
LL.B. and MBA degrees from the University of British Columbia.
CHARLES CHU Mr. Chu originally served as Secretary and a Director of the
Company from August 1987 to September 1989. He was reappointed a Director in
December 1992. Since July 1988, Mr. Chu has been engaged in the private practice
of law in Hong Kong. Mr. Chu serves on Nam Tai's audit committee. Mr. Chu
received his Bachelor of Laws degree and Post-Graduate Certificate of Laws from
the University of Hong Kong in 1980 and 1981, respectively.
STEPHEN SEUNG Mr. Seung was appointed a Director of Nam Tai in 1995. Mr.
Seung is an attorney and C.P.A. and has been engaged in the private practice of
law in New York since 1981. Mr. Seung received a B.S. degree in Engineering from
the University of Minnesota in 1969, an M.S. degree in Engineering from the
University of California at Berkeley in 1971, an MBA degree from New York
University in 1973 and a J.D. degree from New York Law School in 1979. Mr. Seung
serves on Nam Tai's audit committee and acts as Nam Tai's authorized agent in
the United States.
No family relationship exists among any of the named directors, executive
officers or key employees. No arrangement or understanding exists between any
such director or officer and any other persons pursuant to which any director or
executive officer was elected as a director or executive officer of the Company.
Directors of the Company are elected each year at its annual meeting of
shareholders and serve until their successors take office or until their death,
resignation or removal. Executive officers serve at the pleasure of the Board of
Directors of the Company.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate amount of compensation paid by Nam Tai and its subsidiaries
during the year ended December 31, 1998 to all directors and officers as a group
for services in all capacities was approximately $1,903,000. The includes
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.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY OR ITS SUBSIDIARIES
At March 1, 1999, the Company had outstanding options to purchase an
aggregate of 353,333 Common Shares, all of which were granted under the
Company's 1993 Stock Option Plan including; 53,333 options granted on January
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12, 1996 and exercisable at $10.50 per share and expiring on January 11, 2001;
3500 options granted on March 16, 1998 with an exercise price of $15.75 and
expiring March 15, 2001; and 296,500 options were granted on August 27, 1998 and
are exercisable after August 27, 1999 at $10.50 per share and expire on March
15, 2001. All options are granted with an exercise price equal to or exceeding
the average of the daily per share high and low prices on the 10 consecutive
trading days immediately preceding the grant date.
At March 1, 1999, the Company had outstanding warrants to purchase an
aggregate of 3,427,129 Common Shares. Of these, 2,997,129 warrants which were
issued to the public in the 1997 Offering (the "Warrants") are exercisable to
purchase 2,997,129 Common Shares at $20.40 per share until November 24, 2000;
130,000 warrants are exercisable beginning November 30, 1998 to purchase 130,000
Units (consisting of one Common Share and one Warrant) at $20.40 per Unit until
November 24, 2000; and 300,000 warrants issued on October 5, 1998 are
exercisable to purchase 300,000 Commons Shares at $10.25 per share until October
4, 2001.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Not Applicable
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PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not Applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR THE COMPANY'S
SECURITIES
Not Applicable.
PART IV
ITEM 17. FINANCIAL STATEMENTS
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements are filed as part of this Report:
Page No.
--------
Report of Deloitte Touche Tohmatsu......................................................50
Report of PricewaterhouseCoopers........................................................51
Consolidated Statements of Income for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996...............................................52
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997...............53
Consolidated Statement of Changes in Shareholders' Equity for the years
ended December 31, 1998, December 31, 1997 and December 31, 1996......................54
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996...............................................55
Notes to Consolidated Financial Statements..............................................56
All schedules for which provisions are made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
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50
[LETTERHEAD OF DELOITTE TOUCHE TOHMATSU]
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Directors of Nam Tai Electronics, Inc.
We have audited the accompanying consolidated balance sheet of Nam Tai
Electronics, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of income, shareholders' equity and cash flows for the
year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Nam Tai Electronics, Inc. and
subsidiaries at December 31, 1998, and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte Touche Tohmatsu
- ----------------------------
DELOITTE TOUCHE TOHMATSU
March 12, 1999
Hong Kong
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51
[LETTERHEAD OF PRICE WATERHOUSE]
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
NAM TAI ELECTRONICS, INC.
We have audited the accompanying consolidated balance sheet of Nam Tai
Electronics, Inc. and its subsidiaries as of December 31, 1997 and the related
statements of income, shareholders' equity, and cash flows for each of the two
years ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nam Tai Electronics, Inc. and
its subsidiaries as of December 31, 1997 and the results of their operations and
their cash flows for each of the two years ended December 31, 1997 and 1996 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Price Waterhouse
- ----------------------------
PRICE WATERHOUSE
Certified Public Accountants
HONG KONG
March 11, 1998
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NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------
Net sales $ 101,649 $ 132,854 $ 108,234
Cost of sales 76,939 98,130 86,049
-----------------------------------
Gross profit 24,710 34,724 22,185
-----------------------------------
Selling, general and administrative expenses 13,190 13,799 12,702
Research and development expenses 1,691 1,909 950
Non-recurring expense (Note 4) 1,445 - -
-----------------------------------
16,326 15,708 13,652
-----------------------------------
Income from operations 8,384 19,016 8,533
Net gain (loss) on disposal of property, plant and equipment 766 4,350 (123)
Provision for impairment of investment in an
unconsolidated subsidiary (Note 1) (8,271) - -
Other income - net (Note 5) 4,865 7,791 1,253
Interest expense (1) (39) (89)
-----------------------------------
Income before income taxes and equity in results of an affiliated
company and unconsolidated subsidiary 5,743 31,118 9,574
Income taxes (Note 8) (1,040) (279) (158)
-----------------------------------
Income before equity interest 4,703 30,839 9,416
Equity in income of an affiliated company, less amortization
of goodwill 534 - -
Equity in loss of an unconsolidated subsidiary (Note 1) (1,708) - -
-----------------------------------
Net income $ 3,529 $ 30,839 $ 9,416
===================================
Basic earnings per share (Note 9) $ 0.34 $ 3.70 $ 1.17
===================================
Diluted earnings per share (Note 9) $ 0.34 $ 3.68 $ 1.16
===================================
See accompanying notes to consolidated financial statements.
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NAM TAI ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
---------------------
1998 1997
- ---------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 71,215 $102,411
Marketable securities (Note 10) 513 -
Accounts receivable, net 16,138 16,985
Inventories (Note 11) 4,355 9,838
Prepaid expenses and deposits 4,794 3,788
-------- --------
Total current assets 97,015 133,022
Long-term investments (Note 12) - 833
Investment in an unconsolidated subsidiary (Note 1) 1 -
Investment in an affiliated company (Note 13) 16,223 -
Property, plant and equipment - net (Note 14) 32,445 32,442
Other assets 1,544 1,491
-------- --------
Total assets $147,228 $167,788
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 329 $ 1,814
Accounts payable and accrued expenses 18,377 17,551
Dividend payable 665 -
Income taxes payable 105 187
-------- --------
Total current liabilities 19,476 19,552
Deferred income taxes 56 -
-------- --------
Total liabilities 19,532 19,552
-------- --------
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, 1998 - 9,812,523
December 31, 1997 - 11,220,023) 98 112
Additional paid-in capital 80,044 80,044
Retained earnings 47,509 68,050
Accumulated other comprehensive income 45 30
-------- --------
Total shareholders' equity 127,696 148,236
-------- --------
Total liabilities and shareholders' equity $147,228 $167,788
======== ========
See accompanying notes to consolidated financial statements.
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54
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
ACCUMULATED TOTAL
COMMON COMMON ADDITIONAL STOCK OTHER SHARE -
SHARES SHARES PAID-IN OPTION RETAINED COMPREHENSIVE HOLDERS'
OUTSTANDING AMOUNT CAPITAL GRANTS EARNINGS INCOME EQUITY
----------------------------------------------------------------------------------------
Balance at January 1, 1996 $ 8,063,177 $80 $28,182 $ 467 $ 31,417 $ 27 $60,173
Share buy-back program (273,500) (3) - - (2,583) - (2,586)
Shares issued on exercise of options 47,550 1 390 (91) - - 300
Options cancelled - - - (71) - - (71)
Comprehensive income:
Net income - - - - 9,416 - 9,416
Foreign currency translation - - - - - 1 1
Dividends ($0.03 per share) - - - - (243) - (243)
----------------------------------------------------------------------------------------
Balance at December 31, 1996 7,837,227 78 28,572 305 38,007 28 66,990
Share buy-back program (1,000) - - - (10) - (10)
Shares issued on exercise of
options 386,667 4 3,802 (305) - - 3,501
Shares and warrants issued
on rights offering 2,997,129 30 47,670 - - - 47,700
Comprehensive income:
Net income - - - - 30,839 - 30,839
Foreign currency translation - - - - - 2 2
Dividends ($0.10 per share) - - - - (786) - (786)
----------------------------------------------------------------------------------------
Balance at December 31, 1997 11,220,023 112 80,044 - 68,050 30 148,236
Share buy-back program (1,407,500) (14) - - (21,241) - (21,255)
Issue of options - - - 75 - - 75
Options cancelled - - - (75) - - (75)
Comprehensive income:
Net income - - - - 3,529 - 3,529
Foreign currency translation - - - - - 15 15
Dividends ($0.28 per share) - - - - (2,829) - (2,829)
----------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 9,812,523 $ 98 $80,044 $ - $47,509 $45 $ 127,696
========================================================================================
Accumulated other comprehensive income represents foreign currency translation
adjustments.
The comprehensive income of the Company was $3,544, $30,841 and $9,417 for the
years ended December 31, 1998, 1997 and 1996, respectively.
See accompanying notes to consolidated financial statements.
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55
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 3,529 $ 30,839 $ 9,416
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 4,258 4,331 2,675
Net (gain) loss on disposal of property, plant and equipment (766) (4,350) 123
Gain on disposal of long-term investments (1,299) (5,488) -
Unrealized loss on decline of market value of marketable securities 468 - -
Equity in income of an affiliated company less dividend
received and amortization of goodwill (404) - -
Equity in loss of an unconsolidated subsidiary 1,708 - -
Provision for impairment of investment in an unconsolidated
subsidiary 8,271 - -
Changes in current assets and liabilities:
Increase in marketable securities (981) - -
Decrease (increase) in accounts receivable 824 (396) 1,110
Decrease (increase) in inventories 5,483 673 (86)
Increase in prepaid expenses and deposits (1,006) (2,020) (243)
Decrease in notes payable (1,485) (3,372) (134)
Increase in accounts payable and accrued expenses 826 1,330 2,776
(Decrease) increase in income taxes payable (26) 156 (76)
-----------------------------------
Total adjustments 15,871 (9,136) 6,145
-----------------------------------
Net cash provided by operating activities 19,400 21,703 15,561
-----------------------------------
Cash flows from investing activities:
Purchase of interest in an affiliated company (15,819) (12) (119)
Purchase of interest in an unconsolidated subsidiary (9,980) - -
Purchase of property, plant and equipment (4,699) (3,602) (11,650)
Purchase of other assets (53) (246) (541)
Proceeds from disposal of long-term investments 2,132 8,717 -
Proceeds from disposal of property, plant and equipment 1,197 7,666 -
-----------------------------------
Net cash (used in) provided by investing activities (27,222) 12,523 (12,310)
-----------------------------------
Cash flows from financing activities:
Share buy-back program (21,255) (10) (2,583)
Dividends paid (2,141) (749) (243)
Decrease in short-term bank loans and overdraft - - (273)
Proceeds from shares issued in rights offering, net - 47,700 -
Additional shares issued, net - 3,501 226
-----------------------------------
Net cash (used in) provided by financing activities (23,396) 50,442 (2,873)
-----------------------------------
Foreign currency translation adjustments 22 2 1
-----------------------------------
Net (decrease) increase in cash and cash equivalents (31,196) 84,670 379
Cash and cash equivalents at beginning of period 102,411 17,741 17,362
-----------------------------------
Cash and cash equivalents at end of period $ 71,215 $ 102,411 $ 17,741
===================================
Supplemental schedule of cash flow information:
Interest paid $ 1 $ 39 $ 89
===================================
Income taxes paid $ 161 $ 123 $ 234
===================================
See accompanying notes to consolidated financial statements.
55
56
NAM TAI ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ACQUISITIONS
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 are 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 has weakened dramatically since the agreement to invest in
Albatronics was signed in September 1998. As Albatronics is unable to pay
its liabilities as they come due, management of the Company and Albatronics
have undertaken negotiations with Albatronics' major trade creditors for
forbearance on demands for repayment and concessions as to amounts payable.
However, the Company's management does not believe it is probable these
discussions will ultimately be successful. Due to the troubled financial
condition of Albatronics at December 31, 1998, it is probable that the
Company will never be in a position to exercise control over Albatronics,
such control will rest with the creditors. Accordingly, the Company has not
consolidated Albatronics' financial statements at December 31, 1998 or for
the year then ended. Instead, the Company recorded as separate line items
on its consolidated statements of income Albatronics' loss for the month of
December 1998 of $1,708 as "equity in loss of an unconsolidated subsidiary"
and a "provision for impairment of investment in an unconsolidated
subsidiary" of $8,271 against the remaining carrying value of this
investment. As a result, the carrying value of the Company's investment in
Albatronics has been recorded on the consolidated balance sheet at December
31, 1998 as "investment in an unconsolidated subsidiary" at a nominal value
of $1.
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. Group Sense and its subsidiaries
manufacture consumer electronics products.
Group Sense has been accounted for as an affiliated company and the results
of Group Sense have been included in the consolidated financial statements
from the date of acquisition to September 30, 1998 (interim announcement
date of Group Sense, the date of latest available results) as permitted by
Accounting Principles Board ("APB") Opinion No. 18 "The equity method of
accounting for investments in common stock".
The following table sets out certain proforma information for the years
ended December 31, 1998 and 1997 to reflect the acquisition of Albatronics
as though it had occurred on January 1, 1997:
UNAUDITED
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997
---------------------------------
Provision for impairment of investment in an unconsolidated
subsidiary $ - $ -
Equity in results of an unconsolidated subsidiary, less
amortization of goodwill (11,525) 1,545
Proforma net income 1,343 31,685
Proforma basic earnings per share 0.13 3.81
Proforma diluted earnings per share 0.13 3.78
56
57
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Nam Tai Electronics, Inc. (the "Company") and all its subsidiaries,
excluding Albatronics. Intercompany accounts and transactions have been
eliminated on consolidation. The details of the Company's subsidiaries are
described in Note 15.
The Company's investments in Group Sense and Albatronics, 20% and 50.00025%
owned companies, respectively, in which it has the ability to exercise
significant influence over operating and financial policies, are accounted
for by the equity method. Accordingly, the Company's share of the earnings
of these companies is included in consolidated net income.
b GOODWILL
The excess of the purchase price over the fair value of net assets acquired
is recorded on the consolidated balance sheet as goodwill and is amortized
to expense on a straight line basis.
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 and market value. Cost is
determined on the first-in, first-out basis.
f MARKETABLE SECURITIES
All marketable securities are classified as trading securities and are
stated at fair market value. Market value is determined by the most
recently traded price of the security at the balance sheet date. Net
realized and unrealized gains and losses on trading securities are included
in other income. The cost of securities sold is based on the average cost
method and interest earned is included in other income.
g LONG-TERM INVESTMENTS
Long-term investments are stated at the lower of cost and market value.
h PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and include interest on
funds borrowed to finance construction in Canada. Capitalized interest was
nil, nil and $13 for the years ended December 31, 1998, 1997 and 1996,
respectively. 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.
All land in the Hong Kong Special Administration Region ("Hong Kong") of
the People's Republic of China (the "PRC") is owned by the government of
Hong Kong which leases the land at public auction to nongovernmental
entities. With the exception of those leases which expire after June 30,
1997 and before June 30, 2047 with no right of renewal, the Sino-British
Joint Declaration extends the terms of all currently existing land leases
for another 50 years beyond June 30, 1997. Thus, all of the Company's land
leaseholds in Hong Kong are considered to be medium-term assets. The cost
of such land leaseholds is amortized on the straight-line basis over the
respective terms of the leases.
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58
h PROPERTY, PLANT AND EQUIPMENT - CONTINUED
All land in other regions in the PRC is owned by the PRC government. The
government in the PRC, according to PRC law, may sell the right to use the
land for a specified period of time. Thus all of the Company's land
purchases in the PRC are considered to be land leaseholds and are amortized
on the straight-line basis over the respective term of the right to use the
land.
Depreciation rates computed using the straight-line method are as follows:
CLASSIFICATION RATE
Medium-term leasehold buildings 2.0% - 4.5%
Freehold buildings 3.3% - 4.0%
Furniture and fixtures 18.0% - 25.0%
Machinery and equipment 9.0% - 25.0%
Molds and tools 18.0% - 25.0%
Motor vehicles 18.0% - 25.0%
Leasehold improvements 18.0% - 33.0%
In 1996, management reassessed the useful life of certain plant and
equipment assets and changed their estimated useful life from four to five
years effective January 1, 1996. As a result of this change, the 1998, 1997
and 1996 depreciation expenses were lower by $899, $835 and $860,
respectively, than they would have been had an estimated life of four years
been used.
i. IMPAIRMENT
The Company review its long-lived assets 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.
j REVENUE RECOGNITION
Revenue from sales of products is generally recognized upon shipment to
customers.
k RESEARCH AND DEVELOPMENT COSTS
Research and development costs relating to the development of new products
and processes, including significant improvements and refinements to
existing products, are expensed as incurred. The amounts charged against
income were $1,691, $1,909 and $950 for the years ended December 31, 1998,
1997 and 1996, respectively.
l STAFF RETIREMENT PLAN COSTS
The Company's contributions to the staff retirement plan (Note 6) are
charged to the consolidated statement of income as incurred.
m DEFERRED COMPENSATION ARRANGEMENT COSTS
For the years 1990 through 1994, the liability relating to the Deferred
Compensation Arrangement (Note 7) was provided ratably over the future
employment periods of the beneficiaries of the plan until their dates of
retirement or earlier departure from the Company. At December 31, 1995, the
remaining balance was fully provided for. Consequently, for the three years
ended December 31, 1998, no further provision was made.
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59
n 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 in respect of any
year would be refunded after the profits earned in that year are reinvested
in the business by way of subscription for new shares. Accordingly, any PRC
tax paid during the year 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.
o FOREIGN CURRENCY TRANSLATIONS
The consolidated financial statements have been stated in U.S. dollars, the
official currency used in the British Virgin Islands (the Company's place
of incorporation). Although the operating facilities are located in Hong
Kong and the PRC, the U.S. dollar is the currency of the primary economic
environment in which the Company's consolidated operations are conducted.
The exchange rate between the Hong Kong dollar and the U.S. dollar has been
pegged (HK$7.80 to US$1.00) since October 1983.
All transactions in currencies other than functional currencies during the
year are translated at the exchange rates prevailing on the respective
transaction dates. Related accounts payable or receivable existing at the
balance sheet date denominated in currencies other than functional
currencies are translated at the exchange rates existing on that date.
Exchange differences arising are dealt with in the consolidated statement
of income.
The 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." With the exception of Namtai Electronic
(Shenzhen) Co. Ltd. ("NTES"), Zastron Plastic & Metal Products (Shenzhen)
Ltd. ("Zastron") and Shenzhen Namtek Co. Ltd. ("Namtek"), which are
companies established in the PRC, all assets and liabilities are translated
at the rates of exchange ruling at the balance sheet date and all income
and expense items are translated at the average rates of exchange over the
year. Also with the exception of the above named PRC companies, all
exchange differences arising from translation of subsidiaries' financial
statements are dealt with as a separate component of equity.
As NTES, Zastron and Namtek act as production centers for the Company, the
Company controls their operations and the majority of their transactions
are made in Hong Kong dollars. Therefore, the Hong Kong dollar has been
determined to be the functional currency of NTES, Zastron and Namtek.
Accordingly, all monetary assets and liabilities are translated at the
rates of exchange ruling at the balance sheet date, non-monetary assets and
liabilities are translated at the historical rate, all income and expense
items are translated at the average rates of exchange over the year and all
translation adjustments resulting from the conversion of NTES, Zastron and
Namtek's financial statements to Hong Kong dollars are taken to the
consolidated statement of income. Exchange rates used to translate and
remeasure transactions and balances of NTES, Zastron and Namtek are the
rates quoted by the Bank of China.
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P EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
during the period.
Diluted earnings per share gives effect to all dilutive potential common
shares outstanding during the period. The weighted average number of common
shares outstanding is adjusted to include the number of additional common
shares that would have been outstanding if the dilutive potential common
shares had been issued.
In computing the dilutive effect of potential common shares, the average
stock price for the period is used in determining the number of treasury
shares assumed to be purchased with the proceeds from exercise of warrants
and options.
q CURRENCY CONTRACTS
The Company enters into forward currency contracts in its management of
foreign currency exposures. Since the forward currency contracts are not
intended to hedge identifiable foreign currency commitments, generally
accepted accounting principles require that the contracts are marked to
market with the net realized or unrealized gains or losses recognized in
other income - net. (Note 5).
r STOCK OPTIONS
SFAS No. 123 allows companies which have stock-based compensation
arrangements with employees to adopt a new fair value basis of accounting
for stock options and other equity instruments or to continue to apply the
existing accounting rules under APB Opinion No. 25, "Accounting for Stock
Issued to Employees," but with additional financial statement disclosure.
The Company plans to continue to account for stock-based compensation
arrangements under APB Opinion No. 25 and provides additional disclosure to
that effect in Note 19(a).
s COMPREHENSIVE INCOME
In 1998, the Company adopted a new disclosure standard SFAS No.130,
"Reporting Comprehensive Income" which requires that an enterprise report,
by major components and as a single total, the change in its net assets
during the period from non-owner sources.
t NEW ACCOUNTING STANDARD NOT YET ADOPTED
The Financial Accounting Standards Board has issued a new standard SFAS
No.133 "Derivative Instruments and Hedging Activities". Management has not
yet completed the analysis of the impact this would have on the financial
statements of the Company.
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3. FINANCIAL INSTRUMENTS
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of its cash equivalents, term deposits and
trade receivables.
The Company's cash and cash equivalents and term deposits are high-quality
deposits placed with banking institutions with high credit ratings. This
investment policy limits the Company's exposure to concentrations of credit
risk.
The trade receivable balances largely represent amounts due from the
Company's principal customers who are generally international organizations
with high credit ratings. Letters of credit are the principal security
obtained to support lines of credit or negotiated contracts from a
customer. As a consequence, concentrations of credit risk are limited.
All of the Company's significant financial instruments at December 31, 1998
are reported in current assets or current liabilities in the consolidated
balance sheet at carrying amounts which approximate their fair value.
From time to time, the Company hedges its currency exchange risk, which
primarily arises form materials purchased in currencies other than U.S.
dollar, through the purchase and sale of forward currency contracts. Such
contracts typically allow the Company to buy or sell currencies at a fixed
price for up to one year, but the Company normally books forward six
months. At December 31, 1998 and 1997 there were no open forward currency
contracts.
4. NON-RECURRING EXPENSE
The amount represents the provision relating to a non-recurring customs
assessment in the PRC in 1998.
5. OTHER INCOME - NET
Other income - net consists of:
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
----------------------------
Interest income $ 5,047 $ 1,847 $ 1,092
Gain on disposal of securities, net 1,207 5,488 -
Foreign exchange gains 394 500 20
Currency option premium written off (840) - -
Unrealized loss on decline of market value of
marketable securities (468) - -
Bank charges (252) (343) (406)
Miscellaneous (expense) income (196) 650 547
Donations (27) (351) -
-----------------------------
$ 4,865 $ 7,791 $ 1,253
=============================
6. STAFF RETIREMENT PLANS
The Company maintains staff contributory retirement plans (defined
contribution pension plans) which cover certain of its employees. The cost
of the Company's contributions amounted to $79, $55 and $92 for the years
ended December 31, 1998, 1997 and 1996, respectively.
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7. DEFERRED COMPENSATION ARRANGEMENT
In August 1990, the Company agreed to provide compensation in the event of
loss of office, for whatever reason, for two officers. The amount of
compensation to be ultimately provided is $500 for Mr. M. K. Koo, the
senior executive officer of the Company and $300 for Mr. T. Murakami, the
Chairman of the Company. During the year ended December 31, 1996, pursuant
to an agreement between Mr. Koo and the Company, Mr. Koo elected to apply
an amount of $450 payable to him under the provision for compensation for
loss of office against an amount receivable from him. In July 1997, Mr. Koo
reversed the election and retained his right to receive the sum of $500 for
the compensation of loss of office (Note 16).
8. INCOME TAXES
The components of income before income taxes and equity in results of an
affiliated company and unconsolidated subsidiary are as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
----------------------------
PRC, excluding Hong Kong $8,207 $17,241 $10,339
Hong Kong (2,843) 5,768 3,079
Other 379 8,109 (3,844)
-----------------------------
$5,743 $31,118 $9,574
=============================
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% (1997 and 1996: 16.5%) to the estimated taxable income earned in or
derived from Hong Kong during the period.
Deferred tax, where applicable, is provided under the liability method at
the rate of 16% (1997 and 1996: 16.5%), being the effective Hong Kong
statutory income tax rate applicable to the ensuing financial year, on the
difference between the financial statement and income tax bases of
measuring assets and liabilities.
The basic corporate tax rate for Foreign Investment Enterprises ("FIEs") in
the PRC, such as NTES, Zastron and Namtek, is currently 33% (30% state tax
and 3% local tax). However, because NTES, Zastron and Namtek are located in
the designated Special Economic Zone ("SEZ") of Shenzhen and are involved
in production operations, they qualify for a special reduced state tax rate
of 15%. In addition, the local tax authorities in the Shenzhen SEZ are not
currently assessing any local tax.
Since NTES, Zastron and Namtek have agreed to operate for a minimum of 10
years in the PRC, a two-year tax holiday from the first profit making year
is available, following which in the third through fifth years there is a
50% reduction to 7.5%. In any event, for FIEs such as NTES, Zastron and
Namtek which export 70% or more of the production value of their products,
a reduction in the tax rate is available; in all cases apart from the years
in which a tax holiday is available, there is an overall minimum tax rate
of 10%. For the years ended December 31, 1990 and 1991, NTES qualified for
a tax holiday; tax was payable at the rate of 7.5% on the assessable
profits of NTES for the years ended December 31, 1992, 1993 and 1994, and
10% in 1995, 1996, 1997 and 1998. On January 8, 1999, NTES received the
recognition of "High and New Technology Enterprise" which entitles it to
various tax benefits including a lower income tax rate of 7.5% until
January 7, 2004. For the years ended December 31, 1992 and 1993, Zastron
qualified for a tax holiday; tax was payable at the rate of 7.5% on the
assessable profits of Zastron for the years ended December 31, 1994, 1995
and 1996 and 10% for the years ended December 31, 1997 and 1998. In 1996
and 1997, Namtek qualified for a tax holiday. For the year ended December
31, 1998, tax was payable at the rate of 7.5% on the assessable profit.
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8. INCOME TAXES - CONTINUED
Notwithstanding the foregoing, an FIE whose foreign investor directly
reinvests by way of subscription for new shares its share of profits
obtained from that FIE 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 qualified for such refunds of its 1994 and 1995 taxes as a result of
reinvesting its profits earned in those years. Zastron qualified for such
refunds of its 1994 and 1995 taxes as a result of reinvesting its profits
earned in those years. As a result of expected refunds of income taxes
attributable to the PRC operations, the Company recorded tax payments in
1996 and 1997 as prepayments. In early 1999 the Company learned that for
the 1996 and 1997 tax years it would not receive a 100% tax refund on taxes
already paid for NTES and was required to reduce the prepayments by the
amount of the refund that was not obtained. The full refund was denied for
the 1996 and 1997 tax years because the large intercompany receivable
between NTES and a Hong Kong subsidiary was not considered by the tax
authorities to be a reinvestment of profits. The Company has accordingly
made a provision of $700 in the year ended December 31, 1998 and is
continuing to work with tax consultants in the PRC to determine what can be
done to minimize the impact of the PRC tax and will consider increasing its
tax provision in the future. For Zastron, as the management fee expense
charged by the Hong Kong subsidiary for the years ended December 31, 1996
and 1997 was not allowed for PRC tax purposes, the related tax charge for
the 1996 and 1997 tax years was paid during the year. Zastron intends to
apply for tax refund after reinvestment of profits.
The tax refunds received or receivable during the three years ended
December 31, 1998, 1997 and 1996 were as follows:
Related to
Company tax year Paid Refunded Date Received
- ----------------------------------------------------------------------------------------
NTES 1995 $ 919 $919 December 1996
1996 $ 895 $484 April 1998, balance
awaiting refund
1997 $1,709 - Awaiting refund
1998 $1,243 - Application for
reinvestment of
profits in progress
Zastron 1995 $ 31 $ 31 August 1997
1996 $ 22 - Application for
reinvestment of
profits in progress
1997 $ 60 $ 6 July 1998, balance
awaiting refund
The amounts stated above include the amounts denied by the PRC tax
authorities for refund.
The current and deferred components of the income tax expense appearing in
the consolidated statements of income are as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
----------------------------
Current tax $ (984) $(279) $(158)
Deferred tax (56) - -
----------------------------
$(1,040) $(279) $(158)
=============================
The deferred income tax represents the tax effect of timing differences
attributable to the excess of tax allowances over depreciation.
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8. INCOME TAXES - CONTINUED
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,
----------------------------
1998 1997 1996
----------------------------
Income before income taxes $5,743 $ 31,118 $9,574
PRC minimum tax rate 10.0% 10.0% 10.0%
Income tax expense at PRC minimum tax rate on
income before income tax $(574) $ (3,112) $ (957)
Effect of difference between Hong Kong and PRC tax (325) (375) (180)
rates applied to Hong Kong income
Effect of Canadian net profits (losses) for which no income
tax expense (benefit) is payable (available) 38 811 (384)
Effect of PRC tax concessions, giving rise to no PRC tax
liability 720 1,712 1,034
Tax benefit (expense) arising from items which are not
assessable/deductible for tax purposes:
Gain on disposal of land in Hong Kong 125 899 -
Provision for impairment of investment in an
unconsolidated subsidiary (827) - -
Underprovision of income tax in previous year (833) (80) (27)
Other 636 (134) 356
-----------------------------
$ (1,040) $ (279) $ (158)
=============================
No income tax arose in the United States of America in any of the periods
presented.
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9. EARNINGS PER SHARE
The calculations of basic earnings per share and diluted earnings per share
are in accordance with SFAS No.128 and are computed as follows:
Per share
YEAR ENDED DECEMBER 31, 1998 Income Shares amount
---------------------------- -------------------------------------------------
Basic earnings per share
Income available to common shareholders $ 3,529 10,316,510 $0.34
Effect of dilutive securities
- Stock options - 23,162
- Warrants - 11,428
------------------------------------------------
Diluted earnings per share
Income available to common shareholders $ 3,529 10,351,100 $0.34
================================================
Stock options to purchase 3,500 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, 1998 but were not included in the computation
of diluted earnings per share because the redeemable price of the share
options and warrants was greater than the average market price of the
common shares during the relevant period.
Per share
YEAR ENDED DECEMBER 31, 1997 Income Shares amount
---------------------------- -------------------------------------------------
Basic earnings per share
Income available to common shareholders $ 30,839 8,324,320 $3.70
Effect of dilutive securities
- Stock options - 66,970
--------------------------------------------------
Diluted earnings per share
Income available to common shareholders $ 30,839 8,391,290 $3.68
==================================================
Warrants to purchase 2,997,129 shares of common shares at $20.40 were
outstanding at December 31, 1997 but were not included in the computation
of diluted earnings per share because the redeemable 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, 1996 Income Shares amount
---------------------------- -------------------------------------------------
Basic earnings per share
Income available to common shareholders $ 9,416 8,040,497 $1.17
Effect of dilutive securities
- Stock options - 101,634
-------------------------------------------------
Diluted earnings per share
Income available to common shareholders $ 9,416 8,142,131 $1.16
==================================================
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10. MARKETABLE SECURITIES
During 1998, the Company acquired equity securities listed in Hong Kong and
all of them were classified as trading securities and included in current
assets at December 31, 1998.
AT DECEMBER 31,
-------------------
1998 1997
------ ------
Cost $ 981 --
Unrealized loss on decline of market value (468) --
----- ----
Market value $ 513 --
===== ====
Proceeds and realized loss from sale of securities for the year ended
December 31, 1998 were $620 and $92, respectively. For the purposes of
determining realized gains and losses, the cost of securities sold was
ascertained based on the average cost method.
11. INVENTORIES
Inventories consist of:
AT DECEMBER 31,
-------------------
1998 1997
------ ------
Raw materials $3,324 $7,198
Work-in-progress 863 1,399
Finished goods 168 1,241
------ ------
$4,355 $9,838
====== ======
12. LONG-TERM INVESTMENTS
In December 1994, the Company purchased 14.04% or 477,370 of the
outstanding common shares of Deswell Investment Holding Limited which later
changed its name to Deswell Industries, Inc. ("Deswell"), a supplier of
plastic parts to the Company, for a total consideration of $3,931. In 1995,
Deswell completed its initial public offering which reduced the Company's
ownership to approximately 10.5% at December 31, 1995. In July 1996, the
Company elected to exercise warrants which increased its holdings by 12,000
shares to 489,370 or 10.6% of the outstanding common shares of Deswell. In
February 1997, the Company elected to exercise warrants which increased its
holdings by 1,152 shares to 490,522 or 10.2% of the outstanding common
shares of Deswell at March 31, 1997.
During the year ended December 31, 1997, the Company sold 390,000 shares of
Deswell realizing a net gain of $5,488 and the Company sold the remaining
100,522 shares for $2,132 during the year ended December 31, 1998,
realizing a net gain of $1,299.
13. INVESTMENT IN AN AFFILIATED COMPANY
The Company's investment in Group Sense includes the unamortized excess of
the Company's investment over its equity in Group Sense's assets. The
excess was approximately $2,331 at December 31, 1998 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, 1998 was
$80. At December 31, 1998, the aggregate market value of the Company's
investment in Group Sense as quoted on The Stock Exchange of Hong Kong
Limited was $10,501.
During 1998, the Company received dividend payments from Group Sense of
$590 ($460 pre-acquisition dividend and $130 post acquisition dividend).
Retained earnings at December 31, 1998 included undistributed earnings less
amortization of goodwill of affiliates of $534.
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14. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
AT DECEMBER 31,
------------------------
1998 1997
------------------------
At cost
Land and buildings $ 22,288 $ 22,661
Machinery and equipment 15,801 14,106
Leasehold improvements 7,558 5,881
Automobiles 1,198 675
Furniture and fixtures 1,167 885
Tools and molds 105 87
------------------------
Total 48,117 44,295
Less: accumulated depreciation and amortization (15,672) (11,853)
-------------------------
Net book value 32,445 32,442
========================
15. INVESTMENT IN SUBSIDIARIES
Percentage of ownership,
Place of Principal as at December 31,
incorporation activity 1998 1997
------------- --------- -------- --------
Consolidated subsidiaries:
Nam Tai Electronic &
Electrical Products Ltd. Hong Kong Trading 100% 100%
Nam Tai Electronics
(Canada) Ltd. Canada Services 100% 100%
Namtai Electronic
(Shenzhen) Co. Ltd. PRC Manufacturing 100% 100%
Zastron Plastic & Metal
Products (Shenzhen) Ltd. PRC Manufacturing 100% 100%
Shenzhen Namtek Co. Ltd. PRC Software
development 100% 100%
Unconsolidated subsidiary:
Albatronics Hong Kong Trading and 50.00025% --
manufacturing
Retained earnings are not restricted as to the payment of dividends except
to the extent dictated by prudent business practices. The Company believes
that there are no material restrictions, including foreign exchange
controls, on the ability of its non-PRC subsidiaries to transfer surplus
funds to the Company in the form of cash dividends, loans, advances or
purchases. With respect to the Company's PRC subsidiaries, there are
restrictions on the purchase of materials by these companies, the payment
of dividends and the removal of dividends from the PRC. In the event that
dividends are paid by the Company's PRC subsidiaries, such dividends will
reduce the amount of reinvested profits (Note 8) and accordingly, the
refund of taxes paid will be reduced to the extent of tax applicable to
profits not reinvested. However, the Company believes that such
restrictions will not have a material effect on the group's liquidity or
cash flows.
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16. RELATED PARTY TRANSACTIONS
In June 1995, the Company completed the construction of a residential
property pursuant to an agreement dated January 13, 1995. As the property
had not been sold to a third party by December 31, 1995, Mr. M.K. Koo, the
then Chairman of the Company, purchased the property for $2,620 being the
higher of the market value and the book value of the property as required
by the contract. At December 31, 1995 this amount was included in accounts
receivable. In March 1996, Mr. Koo elected to apply $450 available from his
compensation for loss of office against the account receivable. The balance
outstanding of the accounts receivable at December 31, 1996 amounting to
$2,120 was repayable by Mr. Koo on or before December 31, 1997. In July
1997, Mr. Koo reversed his election and retained his right to receive the
sum of $500 for the compensation for loss of office and agreed to pay the
full purchase price of $2,620 for the property. This amount was paid by Mr.
Koo in full in August 1997.
17. COMMITMENTS AND CONTINGENCIES
a As at December 31, 1998, the Company has entered into commitments for
capital expenditures of approximately $846 for plant and machinery
which are expected to be disbursed during the year ending December 31,
1999.
b Lease commitments
At December 31, 1998, the Company was obligated under operating
leases, which relate to land and buildings, requiring minimum rentals
as follows:
Year ending December 31,
- 1999 $ 756
- 2000 569
- 2001 470
- 2002 501
- 2003 503
- 2004 and thereafter 1,520
------
$4,319
======
c Significant legal proceedings
i. Tele-Art, Inc., a shareholder of the Company, is pursuing claims
in a court in the British Virgin Islands for damages allegedly
suffered as a result of the rights offering completed in 1993.
ii. 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 US$11.19 per share to offset substantially all of the
judgement debt, interest and legal costs of approximately
US$1,600. On February 12, 1999, the liquidator of Tele-Art Inc.
filed a summons in the British Virgin Islands on its behalf
seeking among other things, a declaration setting aside the
redemption. The Courts of the British Virgin Islands have yet to
fix a specific date for the hearing of the substantive
application.
iii. Bank of China Hong Kong branch is pursuing claims in Hong Kong
seeking the possession of 308,227 shares of the Company allegedly
beneficially owned by Tele-Art, Inc. and allegedly pledged to the
Bank of China Hong Kong branch for the debt mentioned in (ii)
above.
Management believes that the above claims are without merit and will
vigorously defend them and believes that the outcome of the cases will
not have a significant effect on the consolidated financial
statements.
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18. BANKING FACILITIES
The Company has credit lines with various banks representing trade
acceptances and overdrafts. At December 31, 1998 and 1997 these facilities
totalled $50,100 and $43,200, of which $1,201 and $3,318 were utilized at
December 31, 1998 and 1997, 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.
For the three years ended December 31, 1998, banking facilities bore the
corporate guarantee of Nam Tai Electronics, Inc., and there was an
undertaking by Nam Tai Electronics, Inc. not to pledge any assets to any
other banks without the prior consent of the Company's bankers.
The notes payable, which include trust receipts and shipping guarantees,
may not agree to utilized banking facilities due to a timing difference
between the Company receiving the goods and the bank issuing the trust
receipt to cover financing of the purchase. The Company recognizes the
outstanding letter of credit as a note payable when the goods are received,
even though the bank may not have issued the trust receipt. However, this
will not affect the total bank facility utilization, as an addition to
trust receipts will be offset by a reduction in the same amount of
outstanding letters of credit.
AT DECEMBER 31,
--------------------
1998 1997
-------- --------
Outstanding letters of credit $1,174 $2,429
Usance bills pending maturity 27 889
------- ------
Total banking facilities utilized 1,201 3,318
Less: Outstanding letters of credit (1,174) (2,429)
Plus: Goods received but trust receipts not issued by the bank 302 925
------- ------
Notes payable per balance sheets $ 329 $1,814
======= ======
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19. COMMON SHARES
a STOCK OPTIONS
In August 1993, the Board of Directors approved a stock option plan
which authorized the issuance of 300,000 vested options to key
employees of the Company at an exercise price of $5.35. The options
expired in September 1998. Because the option's exercise price was
less than the market value of the Company's common shares on the date
of grant, the Company recorded compensation expense of $690 reflecting
the excess of the fair value of the underlying stock over the exercise
price. In December 1993 and January 1996, the option plan was amended
and the maximum number of shares to be issued pursuant to the exercise
of options granted was increased to 650,000 and 1,000,000,
respectively. A summary of stock option activity during the three
years ended December 31, 1998 is as follows:
Number of Option price per share with the weighted
options average option price in parenthesis
---------- ----------------------------------------
Outstanding at January 1, 1996 570,850 $5.35, $11.00 &11.375 ($9.03)
Exercised (47,550) $5.35 & $11.00 ($6.30)
Granted 170,000 $10.50
Cancelled (156,000) $5.35 & $11.00 ($9.95)
-------
Outstanding at December 31, 1996 537,300 $5.35, $10.50, $11.00 & $11.375
($9.47)
Exercised (386,667) $5.35, $10.50, $11.00 & $11.375
($9.06)
Cancelled (97,300) $5.35, $10.50, & $11.00 ($10.52)
-------
Outstanding at December 31, 1997 53,333 $10.50
Granted 596,500 $10.50 & $15.75 ($13.14)
Cancelled (296,500) $15.75
-------
Outstanding at December 31, 1998 353,333 $10.50 & $15.75 ($10.55)
-------
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,
--------------------------------
1998 1997 1996
-------- -------- --------
Net Income As reported $3,529 $30,839 $9,416
Pro forma 3,273 30,583 9,081
Diluted earnings per share As reported $0.34 $3.68 $1.16
Pro forma 0.32 3.65 1.12
There were no stock options granted during the year ended December 31,
1997. The weighted average fair value of options granted during 1998
and 1996, and taking into account outstanding stock options at January
1, 1996, was $3.24 and $4.52, respectively, using the Black-Scholes
option-pricing model based on the following assumptions:
1998 1996
---------------------- ---------------------------------
$15.75 $10.50 $11.00 $11.375 $10.50
Options Options Options Options Options
------- ------- ------- ------- -------
Risk-free interest rate 5.5% 5.0% 6.0% 5.4% 5.3%
Expected life 3/15/01 3/15/01 8/1/98 12/1/98 1/12/00
Expected volatility 61.1% 60.9% 44.0% 49.0% 48.0%
Expected dividends .070 .070 .030 .030 .030
The weighed average remaining contractual life of the stock options outstanding
at December 31, 1998 was 2.18 years.
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19. COMMON SHARES - CONTINUED
b SHARE BUY - BACK PROGRAM
During 1998, the Company bought back 1,407,500 common shares of its
outstanding capital stock at an average price of $15.10 per share.
c SHARES AND WARRANTS ISSUED ON RIGHTS OFFERING
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 National Market 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.
d 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.
On October 5, 1998, the Company issued 300,000 warrants to an advisor
as consideration of advisory services under a service contract for a
period of 3 years. The holder of each warrant is entitled to purchase
from the Company one common share at $10.25 per share for the period
from October 5, 1998 to October 4, 2001. The fair value of the
warrants, using the Black-Scholes option-pricing model, was $780 and
is amortized over the life of the contract commencing October 1998.
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20. BUSINESS SEGMENT INFORMATION
The Company operates principally in only one segment of the consumer
electronic products industry. A summary of the net sales, income (loss)
from operations and identifiable assets by geographic areas and net sales
to major customers is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
-------- --------- --------
Net sales from operations within:
-- Hong Kong:
Unaffiliated customers $100,081 $ 131,052 $105,170
-------- --------- --------
-- PRC, excluding Hong Kong:
Unaffiliated customers 1,568 1,802 3,064
Intersegment sales 93,556 123,115 95,669
-------- --------- --------
95,124 124,917 98,733
-------- --------- --------
-- Intersegment eliminations (93,556) (123,115) (95,669)
-------- --------- --------
Total net sales $101,649 $ 132,854 $108,234
======== ========= ========
Income (loss) from operations within:
-- PRC, excluding Hong Kong 7,272 17,229 10,339
-- Hong Kong (4,122) 5,501 2,921
-- Canada 379 8,109 (3,844)
-------- --------- --------
Total net income $ 3,529 $ 30,839 $ 9,416
======== ========= ========
AT DECEMBER 31,
-------------------------------------------
1998 1997 1996
-------- --------- --------
Identifiable assets by geographic area:
-- PRC, excluding Hong Kong 42,690 44,781 44,975
-- Hong Kong 85,419 24,738 24,564
-- Canada 19,119 98,269 18,852
-------- --------- -------
Total assets $147,228 $ 167,788 $88,391
======== ========= =======
Intersegment sales arise from the transfer of finished goods between
subsidiaries operating in different areas. These sales are generally at
estimated market prices.
At December 31, 1998, the identifiable assets in Hong Kong included the
investment in an affiliated company of $16,223.
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
-------- --------- --------
Net sales to customers by geographic area:
-- North America $ 48,204 $ 65,432 $ 36,595
-- Japan 21,839 30,972 30,483
-- Europe 18,770 19,105 13,187
-- Hong Kong 8,731 9,835 19,404
-- Other 4,105 7,510 8,565
-------- --------- --------
Total net sales $101,649 $ 132,854 $108,234
======== ========= ========
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The Company's sales to the customers which accounted for more than
10% of its sales are as follows:
Customer
A $ 44,975 $ 50,510 $ 24,138
B 32,478 46,868 41,569
C (through Customer B) N/A N/A 17,395
D N/A N/A 14,642
-------- --------- --------
$ 77,453 $ 97,378 $ 97,744
======== ========= ========
21. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform with the
current year's presentation.
ITEM 19. FINANCIAL STATEMENT AND EXHIBITS
(a) Financial Statements. See list under Item 18. of this Report
(b) Exhibits. The following documents were previously filed on March 31,
1999 in the Company's original filing of Form 20-F:
Exhibit
Number Exhibit
- ------- -------
2.1 Nam Tai Electronics, Inc. Amended Memorandum and Articles of Association.
2.2 Subscription Agreement between Nam Tai Electronics, Inc. and Albatronics (Far East)
Company Limited dated September 11, 1998.
2.3 Employment contract between Nam Tai Electronics (Canada) Ltd. and Edward K.
W. Chan dated April 26, 1998.
2.4 Termination Agreement between Nam Tai Electronics (Canada) Ltd. and Edward
K. W. Chan dated January 11, 1999.
2.5 Agreement dated January 11, 1999 between Nam Tai Electronics, Inc. and
Edward K. W. Chan to negotiate settlement of dispute.
2.6 Agreement dated October 5, 1998 between Nam Tai Electronics, Inc. and
National Securities Corporation for financial advisory services.
2.7 Warrant Certificate issued to National Securities Corporation dated October
5, 1998.
2.8 Diagram of the Company's operating subsidiaries. See page 4 of this report.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned thereunto duly authorized.
NAM TAI ELECTRONICS, INC.
Date: August 9, 1999 By: /s/ Tadao Murakami
------------------------------------
Tadao Murakami
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[Deloitte Touche Tohmatsu Letterhead]
INDEPENDENT AUDITORS' CONSENTS
We hereby consent to the incorporation by reference of our report dated March
12, 1999 relating to the consolidated financial statements of Nam Tai
Electronics, Inc. (the "Company") for the year ended December 31, 1998 appearing
in this annual report on Form 20-F in (1) the Registration Statement on Form S-8
of the Company (file no. 33-73954); (2) the Registration Statement on Form S-8
of the Company (file no. 333-27761; and (3) the Registration Statement on Form
F-3 of the Company (file no. 333-36135).
/s/ Deloitte Touche Tohmatsu
- -------------------------------------
DELOITTE TOUCHE TOHMATSU
Hong Kong
July 28, 1999
75