<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F/A1
[ ] Registration Statement Pursuant to Section 12(b) or (g) of the
Securities Exchange Act of 1934
OR
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
----------------------------------
For the Fiscal Year Ended: Commission File Number:
December 31, 1995 0-16673
----------------------------------
NAM TAI ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
British Virgin Islands
(Jurisdiction of incorporation or organization)
Unit 513-520
No. 1 Hung To Road
Kwun Tong, Kowloon, Hong Kong
(Address of principal executive offices)
----------------------------------
Securities registered or to be registered pursuant to Section 12(b) of
the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common
Shares, $0.01 par value per share
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: NONE
As of December 31, 1995, there were 8,063,177 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
----- -----
Page 1 of ________ Pages (including Exhibits)
Exhibit Index on Page 52
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION .......................................................... 2
PART I .................................................................................................. 3
Item 1. Description of Business ................................................................... 3
Item 2. Properties ................................................................................ 17
Item 3. Legal Proceedings ......................................................................... 18
Item 4. Control of the Company .................................................................... 19
Item 5. Nature of Trading Market .................................................................. 20
Item 6. Exchange Controls and Other Limitations Affecting Security Holders ........................ 20
Item 7. Taxation .................................................................................. 20
Item 8. Selected Financial Data ................................................................... 21
Item 9. Management's Discussion and Analysis of Results of Operations and Financial Condition ..... 22
Item 10. Directors and Executive Officers of the Company ........................................... 31
Item 11. Compensation of Directors and Officers .................................................... 33
Item 12. Options to Purchase Securities from the Company or its Subsidiaries ....................... 33
Item 13. Interest of Management in Certain Transactions ............................................ 33
PART II .................................................................................................. 34
Item 14. Description of Securities to be Registered ................................................ 34
PART III ................................................................................................. 34
Item 15. Defaults Upon Senior Securities ........................................................... 34
Item 16. Changes in Securities and Changes in Security For the Company's Securities ................ 34
PART IV ................................................................................................. 34
Item 17. Financial Statements ...................................................................... 34
Item 18. Financial Statements ...................................................................... 34
Consent of Independent Accountants (to incorporation of their report on
Financial Statements into the Company's Registration Statement on Form S-8) ............. 52
Item 19. Financial Statements and Exhibits ......................................................... 53
SIGNATURES ............................................................................................... 53
</TABLE>
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
The Company prepares its consolidated financial statements in
accordance with generally accepted accounting principles in the United States
of America. See "Report of Independent Accountants" included elsewhere herein.
The Company publishes its financial statements in United States dollars for the
following reasons: (i) the Company is incorporated in the British Virgin
Islands where the currency is the United States dollar; (ii) the Company
conducts the majority of its business transactions in United States dollars;
and (iii) the exchange rate between the Hong Kong dollar and the United States
dollar has been fixed at approximately 7.80 Hong Kong dollars to $1.00 since
1983. See Note 1(g) of Notes to Consolidated Financial Statements appearing in
Item 18 of this Report.
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<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Nam Tai Electronics, Inc. (which together with its subsidiaries is
hereafter referred to as the "Company" or "Nam Tai") was incorporated as a
limited liability International Business Company under the laws of the British
Virgin Islands in August 1987. The Company's corporate administrative matters
are conducted in the British Virgin Islands through its registered agent, Citco
Trust Corporation Limited, P.O. Box 662, Road Town, Tortola, British Virgin
Islands. The Company's principal executive offices are located in Hong Kong in
Unit 513-520 No. 1 Hung To Road, Kwun Tong, 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. As the
United States securities industry is not geared toward the collection of stamp
duties for share transactions, the Company was organized in this manner to
avoid any such requirements.
RECENT DEVELOPMENTS
Inflation continues to be a problem in the People's Republic of China
(hereafter referred to as "China") although the rate of inflation fell in 1995
compared to 1994 and 1993. China's economy grew at annual rates of 10.2% in
1995, 11.8% in 1994 and 13.4% in 1993. Inflation declined to 14.8% in 1995
from 21.7% in 1994 following the application of programs such as credit control
to address major problems with the economy. Typically, countries which have
high inflation experience a currency devaluation against countries such as the
U.S. which have much lower inflation rates. However, the Chinese renminbi has
been relatively stable in value against the U.S. dollar, actually strengthening
slightly, with an average rate of 8.32 renminbi per $1.00 during 1995 and 8.45
renminbi per $1.00 during 1994. This was mainly the result of China's success
in controlling money supply. Although only 6.2% of the Company's expenses were
in Chinese renminbi in 1995, the appreciation of the renminbi against the U.S.
dollar increases the expenses of the Company when translated into U.S. dollars.
In order to expand production capacity, the Company is expanding its
factory on an adjacent site consisting of approximately 283,200 square feet of
land in Shenzhen, China. The Company purchased the right to use this site for
30 years for a total of approximately $2,450,000 in January 1994. Construction
of the approximately 400,000 square feet of new factory complex began in early
1995 and portions were completed in August 1995 to house new factory employees
that the Company is adding to expand production. Construction of the new
factory is on schedule and completion of Phase I was essentially complete at
the end of the first quarter of 1996. Phase II is anticipated to be complete
by the end of 1998. Phase I consists of a factory building of approximately
160,000 square feet, an office building of approximately 40,000 square feet as
well as new dormitories, recreation and dining facilities. In accordance with
an expansion schedule, Nam Tai intends to establish production lines and equip
the new factory on a floor-by-floor basis as required by growth in the
Company's business through 1996 and into early 1997. Phase II of the new
factory complex will consist of another factory building of approximately equal
size to the one now under construction plus a swimming pool facility for all
employees.
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<PAGE> 4
COMPANY OVERVIEW
Nam Tai Electronics, Inc. is an independent provider of high quality
manufacturing services to original equipment manufacturers ("OEMs") in the
consumer electronics industry. All of the Company's manufacturing operations
are based in China. Nam Tai assists OEMs in the design and development of
products and furnishes full turnkey manufacturing services to its OEM
customers. The Company provides the components and other materials used in the
assembly process, assembles the components into finished products or electronic
subassemblies and performs post-assembly testing. The Company manufactures a
broad line of finished products for its OEM customers, including personal
organizers, linguistic products and calculators. In addition, it manufactures
electronic components and subassemblies and is engaged in the development of
products such as integrated circuit ("IC") or smart card readers (referred to
as "IC card readers"). The electronic components and subassemblies are for
printed circuit boards ("PCBs") utilizing advanced processes such as chip on
board ("COB"), multichip modulators ("MCM"), surface mount technology ("SMT"),
tape automated bonding ("TAB") and outer lead bonding ("OLB") technologies.
These products produced by the Company include large scale integrated circuits
("LSI") bonded on PCBs that are used in the manufacture of products such as
electronic toys, and subassemblies for liquid crystal display ("LCD") modules
that are used in the manufacture of communications, camera and computer
products. The Company also provides OEMs with silk screening services for
plastic parts, polyvinyl chloride ("PVC") products and metal parts.
The Company moved its manufacturing facilities to Shenzhen, China in
1987 to take advantage of lower overhead costs and competitive labor rates and
to position itself to achieve low-cost, high volume manufacturing. The
location of Nam Tai's factory in Shenzhen is about 30 miles from Hong Kong,
providing the Company with close access to Hong Kong's infrastructure of
communication and banking. This also facilitates transportation of the
Company's products out of China through the port of Hong Kong. The Company
moved to its present facility which initially consisted of approximately
150,000 square feet from a nearby location in August 1992, permitting Nam Tai
to more than double its then production capacity. The Company reached capacity
at the then current manufacturing facility during the third quarter of 1994 and
became capacity constrained during late 1995. In planning for its future
growth, in January 1994, the Company purchased the right of use of land
adjacent to its existing factory site. Construction of the new factory
complex began in early 1995 and portions were completed in August 1995 to house
new factory employees that the Company is adding to expand production. Phase I
of the new facility was essentially complete by the end of the first quarter
of 1996 with the transfer of personnel and equipment into the new factory
commencing thereafter. This consists of a factory complex of approximately
400,000 square feet, including a 160,000 square foot manufacturing facility, an
office building of approximately 40,000 square feet and new dormitories,
recreation and dining facilities. Phase II of the factory expansion is
anticipated to be complete by the end of 1998.
The Company emphasizes high responsiveness to the needs of OEM
customers through the development and volume production of increasingly
sophisticated products. The Company seeks to build long-term relationships
with its customers through high quality standards (supported by ISO 9001/9002
Certification), competitive pricing, strong research and development support,
advanced assembly processes and high volume manufacturing, and with key
suppliers through volume purchasing and reliable forecasting of component
purchases. The Company believes that the potential for increased manufacturing
outsourcing by Japanese and U.S. OEMs in China is substantial and expects to
take advantage of it by expanding production capacity at its factory complex
in Shenzhen, China. 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 improve
its manufacturing quality and processes.
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<PAGE> 5
THE COMPANY'S SUBSIDIARIES
The Company is a holding company for Nam Tai Electronic & Electrical
Products Limited and its subsidiaries, and Nam Tai Electronics (Canada) Ltd.
The chart below illustrates the organizational structure of the Company and its
principal operating subsidiaries.
Nam Tai
Electronics, Inc.
(A British Virgin
Islands International
Business Company)
/
/
----------------------------------------------
/ /
100% 100%
Nam Tai Nam Tai
Electronics Electronic &
(Canada) Ltd. Electrical Products ---- 75%
(A Canadian Federal Ltd. /
Company) (A Hong Kong /
Limited Liability /
Company) /
/ /
------------------------ /
/ / /
100% 100% /
/
Zastron Plastic & Namtai Electronic /
Metal Products (Shenzhen) Co. /
(Shenzhen) Ltd. Ltd. /
(A Limited Liability (A Limited Liability /
People's Republic of People's of Republic /
China Foreign China Foreign /
Operation) Operation) /
/ /
/ /
/ 25%
/ /
Shenzhen-------- /
Namtek Co., Ltd.
(A Limited Liability
People's Republic
of
China Foreign
Operation)
Nam Tai Electronic & Electrical Products Limited
Nam Tai Electronic & Electrical Products Limited ("NTE&E") was
incorporated in November 1983 and is engaged in the manufacture, assembly and
marketing of electronic products. In 1991, NTE&E became the holding company
for Namtai Electronic (Shenzhen) Co. Ltd. and Zastron Plastic & Metal Products
(Shenzhen) Ltd.
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<PAGE> 6
Namtai Electronic (Shenzhen) Co. Ltd.
Namtai Electronic (Shenzhen) Co. Ltd. ("NTES") was established as
Baoan (Nam Tai) Electronic Co. Ltd. in May 1989 as a joint venture company with
limited liability in Baoan County, China, pursuant to the relevant laws of
China. The equity of NTES was owned 70% by NTE&E and 30% by a Chinese
Governmental agency. During 1992, the joint venture was dissolved and the
company changed its name to NTES. As part of such termination, the company
returned to the Chinese Governmental agency its real property and investment,
and NTES became a wholly owned subsidiary of NTE&E.
NTES is in the business of manufacturing and assembling electronic
products such as personal organizers, linguistic products and calculators. In
addition, it manufactures electronic components and subassemblies and is
engaged in the development of products such as integrated circuit or smart card
readers (referred to as "IC card readers").
Zastron Plastic & Metal Products (Shenzhen) Ltd.
Zastron Plastic & Metal Products (Shenzhen) Ltd. ("Zastron") was
incorporated in March 1992. The company has limited liability pursuant to the
relevant laws of China. Zastron is in the business of manufacturing and silk
screening metal and PVC products, much of which are used in manufactured
products by NTES.
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 previously
acted as a marketing arm in North America for the Company, was engaged in
research and development activities as well as the manufacture of electronic
scales, thermometers and blood pressure meters. In 1994, Nam Tai sold its
electronic scale, thermometer and blood pressure product lines. NT Canada
currently provides finance, administrative and investor relations services to
the Company.
Shenzhen Namtek Co., Ltd.
Shenzhen Namtek Co., Ltd. ("Namtek") was incorporated in December
1995. The company has limited liability pursuant to the relevant laws of
China. Namtek is in the business of developing and commercializing software
for the consumer electronics industry, particularly for products manufactured
or to be manufactured by Nam Tai. It provides the facilities and expertise to
assist in new product development and research, such that Nam Tai can offer its
customers enhanced design and development services.
PRODUCTS
For the fiscal years ended December 31, 1995, 1994 and 1993 an
aggregate of 77%, 81% and 94%, respectively, of the Company's net sales were
from various models of electronic personal organizers, linguistic products and
calculators. Currently, the Company's other products principally include
subassemblies, IC card readers and LCD modules.
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<PAGE> 7
The following table sets forth the percentage of net sales of each of
the Company's product lines for the years ended December 31, 1995, 1994 and
1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
PRODUCT LINE 1995 1994 1993
------------ ---- ---- ----
<S> <C> <C> <C>
Personal organizers and linguistic products 47% 47% 46%
Electronic calculators 30 34 48
Subassemblies and components 21 16 2
Silk screening 1 1 1
Other products and services 1 1 1
Discontinued products(1) 0 1 2
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
(1) Includes health care products, such as electronic scales, thermometers
and blood pressure meters, which were discontinued in 1994.
Personal Organizers and Linguistic Products
The Company produces various types of electronic personal organizers,
including telephone directories and business card organizers, generally with
scheduler, clock, memo pad and calculator functions.
The linguistic products manufactured by Nam Tai include electronic
spell checkers, dictionaries and language translators. One model is a
multi-language translator with a vocabulary of 3,400 words and instant
translation among the English, German, French, Spanish and Italian languages.
These models generally include a built-in calculator.
Electronic Calculators
The Company manufactures a wide range of electronic calculators with a
variety of features. These include calculators designed for different uses or
environments, including mini card, credit card, scientific, desk top, hand
held, and printer calculators.
Subassemblies and Components
In 1994, the Company commenced delivering product whereby LSIs were
bonded on PCBs utilizing advanced technological processes. These are used to
manufacture components used in products such as electronic toys. Management
believes that Nam Tai's PCB assembly process capabilities are comparable to
those currently available from the most technologically advanced U.S. and
Japanese manufacturers. It is the intention of the Company to seek to expand
this business and to have it play an expanded role in future sales.
IC Card Readers
In 1995, the Company delivered a sample run of IC card readers. These
readers are hand-held devices used to check information contained on the IC
cards which are being developed for use by certain major banks in Europe and
North America as an alternative to the use of cash. Test marketing continues
through 1996. Management believes that IC cards products are a potential
source of significant additional revenue in the years ahead.
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<PAGE> 8
Other
The Company also commenced manufacturing subassemblies for liquid
crystal display ("LCD") modules. These subassemblies display information as
part of such products as portable telephones, portable computers and facsimile
machines, and employ the same bonding technologies as are used for the other
LSI bonded PCBs. The manufacture of subassemblies has not yet contributed a
significant percentage of sales revenue but is expected to become an important
line of business over the coming years.
The sale of electronic typewriters has declined to a relatively
insignificant proportion of total sales.
Silk Screening Services
Through Zastron, the Company provides manufacturing and silk screening
services to customers for plastic parts, PVC products and metal parts. This
service is also supplied to other firms for incorporation into their finished
products.
MANUFACTURING
Quality Control
The Company maintains strict quality control programs for its
products, including use of total quality management ("TQM") systems. All
incoming raw materials and components are checked by the Company's quality
control personnel. During the production stage, Nam Tai's quality control
personnel check all work in process at several points in the production
process. Finally, after the assembly stage, the Company conducts random
testing of finished products. In addition, the Company provides office space
at its Shenzhen 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 received ISO 9001 Certification in
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,
required a company to 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 established
world standards.
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<PAGE> 9
Management believes sophisticated customers are increasingly requiring
their manufacturers to be ISO 9000 certified, and that manufacturers that are
not so qualified are increasingly looking to certified manufacturers like Nam
Tai rather than undertaking the expensive and time-consuming process of
qualifying their own operations.
Component Parts and Suppliers
The Company purchases over 100 different component parts from more
than 30 major suppliers and is not dependent upon any single supplier for any
key component. The Company purchases components for its electronic products
from suppliers in Japan and elsewhere. Orders for components are based on
forecasts that Nam Tai receives from its OEM customers, which reflect
anticipated shipments during the production cycle for a particular model.
The major component parts purchased by the Company are ICs or "chips",
LCDs, solar cells, printer heads and batteries. The Company purchases both
stock "off the shelf" chips and custom chips, the latter being the most
expensive component parts purchased by Nam Tai. At the present time, the
Company purchases most of its chips from Toshiba Corporation, Sharp Corporation
and certain of their affiliates, although there are many additional suppliers
from which the Company could purchase chips.
LCDs are readily available from many manufacturers and the Company
currently has two major suppliers, Epson Hong Kong Ltd. and Sharp Corporation.
PCBs and other circuit boards are purchased from circuit board manufacturers in
Hong Kong and solar cells are purchased from Matsushita Battery Industrial
Company Ltd. Batteries are standard "off the shelf" items, generally purchased
in Hong Kong from agents of Japanese manufacturers. Certain components,
including PCBs and LCDs, are currently subject to limited allocation by certain
of Nam Tai's suppliers. Although such shortages and allocations have not had a
material adverse effect on the Company's results of operations, there can be no
assurance that any future allocation or shortages would not have such an
effect.
In an effort to assure an adequate supply of competitively priced key
components, the Company has purchased a minority interest in its Hong Kong
supplier of plastic parts, Deswell Industries, Inc. ("Deswell"). See -
"Formation of Strategic Alliances".
CUSTOMERS AND MARKETING
General
During the last several years, the Company has concentrated on
marketing its products in Japan, North America and Europe. Approximate
percentages of net sales to customers by geographic area, based upon location
of product delivery, are set forth below for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
GEOGRAPHIC AREAS 1995 1994 1993
---------------- ---- ---- ----
<S> <C> <C> <C>
Japan 34% 24% 10%
North America 30 33 41
Hong Kong 17 23 25
Europe 13 14 17
Other 6 6 7
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
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<PAGE> 10
Six of the Company's major customers have done business with the
Company for five years or more, and management believes that Nam Tai has a
stable relationship with all of its customers. The Company places great
emphasis on providing quality service to its customers and has, as a result,
limited the number of companies for which it manufactures in an effort to
ensure quality service.
During the years ended December 31, 1995, 1994 and 1993, sales to OEM
customers accounted for 99% of total net sales in each year. Management
believes that the sale of personal organizers, linguistic products and
calculators will continue to be the principal line of business for the Company
for the next several years. The importance of subassembly and component sales
is rising, and together with the potential for manufacture of LCD modules and
IC card readers, these product lines are expected to contribute an increasing
and significant proportion of total revenue.
The Company's Hong Kong based management personnel and sales staff are
responsible for marketing products to existing customers as well as potential
new customers.
The Company has in the past marketed products under the "PEACOCK"
brand name in China. Although it has no immediate plans to re-enter the China
market, management would consider doing so if economic and other factors appear
favorable.
Major Customers
The Company's OEM customers are comprised of the following entities.
The OEM customers either market Nam Tai's products under their own brand name
or, where no brand name is shown, incorporate the Company's products into their
products:
<TABLE>
<CAPTION>
BRAND CUSTOMER
CUSTOMER NAME PRODUCT SINCE
-------- ---- ------- -----
<S> <C> <C> <C>
A&A International (Yichi-HK) Ltd. Radio Shack Calculators 1993
Canon, Inc. Canon Personal organizers, calculators 1988
Casio Computer (Hong Kong) Limited Casio Aluminum panels and PVC wallets 1994
Glorysun Graphtech Ltd. Fortec Typewriters 1990
Matsushita Battery Industrial Co. ----- IC card readers 1994
Ltd.
Nintendo, Inc. (through Sharp ----- Bonding on PCBs 1994
Corporation)
Optrex Corporation ----- Assemblies for LCD modules 1994
Premier Precision Ltd. Citizen Silk screening, aluminum panel 1993
Sanyo Electric (H.K.) Ltd. Sanyo, Casio Silk screening 1988
Seiko Instruments Inc. Seiko, SII Personal organizers, linguistic 1991
products
Sharp Corporation Sharp Personal organizers, calculators 1989
Texas Instruments Incorporated Texas Personal organizers, calculators 1989
Instruments
</TABLE>
At any given time, different customers account for a significant
portion of Nam Tai's business. Percentages of total sales by customer vary
from year to year and may fluctuate depending on the timing of production
cycles for particular products. Sales to four major customers, Sharp
Corporation, Seiko Instruments Inc., Nintendo, Inc. (which orders through Sharp
Corporation) and Texas Instruments Incorporated, aggregated approximately 92%,
90% and 86%
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<PAGE> 11
of the Company's total net sales during the years ended December 31, 1995, 1994
and 1993, respectively.
Sales to each of these customers as a percentage of the Company's
total net sales during the years ended December 31, 1995, 1994 and 1993 were
approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
CUSTOMER 1995 1994 1993
-------- ---- ---- ----
<S> <C> <C> <C>
Sharp Corporation 47.9% 47.7% 47.0%
Nintendo, Inc. (made through Sharp Corporation) 18.0 13.0 0
Seiko Instruments Inc. 13.2 19.2 20.6
Texas Instruments, Incorporated 13.2 9.8 18.6
---- ---- ----
92.3% 89.7% 86.2%
==== ==== ====
</TABLE>
Although management believes that any one of the Company's customers
could be replaced with time, the loss of any one of its major customers could
have a material adverse effect on the Company's business. It is of note that a
number of products are made for each of these customers such that the Company
is not necessarily dependent on a single product by one customer. While each
of the companies listed above is expected to continue to be a significant
customer, the Company seeks to lessen its dependence on these customers in the
future through efforts to diversify its customer and product base. There can
be no assurance, however, that such efforts will prove successful.
The Company's sales to all of its OEM customers are based on purchase
orders. Except for these purchase orders, the terms of which in a few cases
are supplemented by basic agreements dependent upon the receipt of purchase
orders, Nam Tai has no written agreements with its OEM customers. The Company
receives letters of credit to cover the next three months of orders and all the
molds, tooling and development charges (including software design) are paid by
OEM customers prior to production.
Many of Nam Tai's customers have a relationship which extends for a
number of years and consequently the Company believes its relations with these
customers are good. The Company encourages cooperation and communication with
its most important customers. For example, senior management includes a team
of Japanese professionals who provide technical experience and work closely
both with 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) that is borne by each OEM customer.
Sales are predominately based on standard letters of credit
denominated in U.S. dollars (except for 18.0% of sales where letters of credit
are denominated in Japanese yen).
Production Scheduling and Backlog
The typical cycle for a product to be manufactured and sold to an OEM
customer is three to four years, including the development period and
production period. Initially an OEM customer gathers data from its sales
personnel as to products for which there is market interest, including features
and unit costs. The OEM then contacts the Company, and possibly other
prospective manufacturers, with forecasted total production quantities and with
design specifications or renderings. From that information, the Company in
turn contacts its suppliers and determines estimated component costs. The
Company later advises the OEM of the development costs, charges (including
molds, tooling and development costs such as software design) and a unit cost
based on the forecasted production quantities desired during the forecasted
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 will begin
developing the product. The development period lasts
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<PAGE> 12
approximately nine to 15 months or longer if including software design. During
this time the Company will complete all molds, tooling and software required
to manufacture the product with the development costs reimbursed by the
customer. Upon completion of the molds, tooling and software, the Company will
produce samples of the product for the customer's quality testing, and once
approved, will commence mass production of the product.
The production period lasts approximately 18 to 30 months. Typically,
more advanced products have longer production runs. If total production
quantities change, the OEM customer will provide six months notice before
discontinuing orders for a product. At any point in time the Company is in
different stages of the development period and production period for the
various models it has under development or in production for OEM customers.
The Company's production is based on the forecast reconfirmation
received from OEM customers every month, covering the following six month
period, the first three months of which are basically firm with shipments
scheduled. The forecasts are reviewed and adjusted where necessary at the
beginning of each month for a rolling six month period with confirmed orders
covering the first three months. Confirmed orders are supported by letters of
credit and may not be cancelled once confirmed without the customer becoming
responsible for all costs of the remaining components included in inventory for
that order. These components will then be shipped to the customer. During the
years ended December 31, 1995, 1994 and 1993, the Company did not suffer a
material loss resulting from the cancellation of an OEM customer confirmed
order. While the Company does not believe that a change in industry practice
is imminent or contemplated, there can be no assurance that this favorable
experience will continue in every case or at all.
Backlog is defined by Nam Tai as the sales value of orders from OEM
customers for which shipments have been scheduled during the following three
months. The Company's backlog at December 31, 1995 and 1994 were approximately
$24,500,000 and $21,100,000, respectively. Although these orders are confirmed
and covered by letters of credit, there can be no assurance that the backlog
can be produced, shipped and sales recorded in its entirety during the
following three month period.
Marketing Plans for China
The Company has approval from the local Chinese government to sell up
to 20% of the products manufactured and 10% of the parts manufactured by the
Company in China. The Company does not have any immediate plans to re-enter
the China market and make domestic sales, however, the Company would consider
doing so if economic and other factors in China appear favorable.
Formation of Strategic Alliances
To support its business strategy, the Company believes that it must
continue to have stable sources of component parts it uses in its manufacturing
operations. Suppliers of these components have from time to time, in periods
of short supply, limited allocation of their production among their customers.
The Company believes that the formation of strategic alliances with certain of
its suppliers will assist the Company to satisfy its OEM customers' needs for
timely delivery of high-quality products and permit Nam Tai to have greater
control over the quality of its suppliers' components.
Consistent with this strategy, in 1994 the Company purchased and holds
approximately 10% of the outstanding common stock of Deswell of Hong Kong, one
of its plastics suppliers. Deswell is the holding company of the Hong Kong
supplier of plastic parts used in many of the Company's products. It also has
manufacturing facilities in Shenzhen.
- 12 -
<PAGE> 13
Transportation
Since the Company sells its products F.O.B. Hong Kong, its customers
are responsible for the transportation of finished products from Hong Kong to
their final destination. Transportation of components and finished products to
and from Shenzhen is by truck. Component parts purchased from Japan are
generally shipped by air. To date, the Company has not been materially
affected by any transportation problems.
TECHNOLOGY DEVELOPMENT
Between 1984 and 1994, the Company spent an average of approximately
$360,000 per annum on research and development, chiefly to advance
manufacturing technology. During the later half of this period Nam Tai
concentrated on its OEM business and expenditures fell below the average by the
end of the period. At that time the major responsibility of the Company's
product design personnel was limited to the production of design to the
satisfaction of and in accordance with the specifications provided by OEM
customers.
Increased emphasis is now being placed on research and development to
provide greater service to OEM customers and assist in design and development
work directed to future products. Research and development expenses increased
accordingly to $945,000 in 1995 from $239,000 in 1994.
COMPETITION
The Company competes with numerous other companies in the contract
electronic manufacturing industry and competition is intense. The Company's
primary competitors in its principal business, namely the manufacture for OEM
customers of personal organizers, linguistic products and calculators are Kimpo
Electronics, Inc. (formerly Cal-Comp Electronics, Inc.) and Inventa Electronic
Co. Ltd., both of Taiwan. Competition is limited by OEMs to a small number of
companies who satisfy the requirements to become approved suppliers. While
individual OEM customers are likely to prefer certain contract manufacturers,
OEMs tend to order from several different suppliers in order to reduce
dependence on any one. The competitors may have substantially greater
technical, financial and marketing resources than Nam Tai, but management
believes that no company dominates the market.
Competition for OEM sales is based primarily on unit price, product
quality and availability, promptness of service, reputation for reliability and
OEM confidence in the manufacturer. The Company believes that it competes
favorably in each of these areas.
EMPLOYEES
At December 31, 1995, Nam Tai employed 2,300 persons on a full-time
basis, of which approximately 2,250 were working in China, 40 in Hong Kong, and
10 in Canada. Of these, approximately 2,000 were engaged in manufacturing, 100
were engaged in clerical, research and development and marketing positions and
the balance in supporting jobs such as security, janitorial, and food and
medical services. The Company is not a party to any material labor contract
or collective bargaining agreement. The Company has experienced no significant
labor stoppages and believes that relations with its employees are
satisfactory.
An employee incentive compensation program is in place in China
whereby a regular bonus payment on the employee's return to work following the
Chinese New Year holiday is paid to employees following the reopening of the
factory. Management believes this method has contributed to low employee
turnover in the factory.
- 13 -
<PAGE> 14
Subject to the profitability of the Company, stock options and cash
bonuses will be considered on a year by year basis to management personnel and
employees.
As the new factory complex commences production, additional employees
will be added as required based on production and the introduction of new high
technology machines. This number is expected to reach up to an additional
1,500 to 2,000 employees during 1997.
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 changes in the products manufactured, the Company does not
believe the absence of patents has had or will have a material impact on its
business.
The Company has obtained trademark registrations in Hong Kong for the
mark "FORTEC" in connection with electronic calculators and in the United
States in connection with electronic typewriters. Nam Tai has also obtained a
trademark registration in Hong Kong for the mark "SANTRON" in connection with
electronic calculators. The Company has registered the trademark "NAMTAI" in
connection with electronic calculators and electronic typewriters in Hong Kong,
in connection with calculators in the United States and in connection with
calculators in Canada. The trademark "PEACOCK" is registered in China although
no products are currently being produced under this name.
CERTAIN FOREIGN ISSUER CONSIDERATIONS
Political, Legal, Economic and Other Uncertainties of Operations in China and
Hong Kong
Internal Political and Other Risks. All of the Company's
manufacturing facilities are located in China. As a result, the Company's
operations and assets are subject to significant political, economic, legal and
other uncertainties. Changes in policies by the Chinese government resulting
in changes in laws, regulations, or the interpretation thereof, confiscatory
taxation, restrictions on imports and sources of supply, currency devaluations
or the expropriation of private enterprise could materially adversely affect
the Company. Under its current leadership, the Chinese government has been
pursuing economic reform policies including the encouragement of private
economic activity and greater economic decentralization. There can be no
assurance, however, 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 investments in that country. Economic development
may be limited as well by the imposition of austerity measures intended to
reduce inflation, the inadequate development of an infrastructure and the
potential unavailability of adequate power, water supplies, transportation,
communications, raw materials and parts. If for any reason the Company were
required to move its manufacturing operations outside of China, the Company's
profitability would be substantially impaired, its competitiveness and market
position would be materially jeopardized and there can be no assurance that the
Company could continue its operations.
Uncertain Legal System and Application of Laws. The legal system of
China relating to foreign investments is both new and continually evolving, and
currently there can be no certainty as to the application of its laws and
regulations in particular instances. China does not have a comprehensive
system of laws. Enforcement of existing laws or agreements may be sporadic and
implementation and interpretation of laws inconsistent. The Chinese judiciary
is relatively inexperienced in enforcing the laws that exist, leading to a
higher than usual degree of uncertainty as to the outcome of any litigation.
Even where adequate law exists in China, it may not be possible to obtain swift
and equitable enforcement of that law.
- 14 -
<PAGE> 15
Current Dependence on Single Factory Complex. The Company's products
are manufactured exclusively at its factory complex located in Baoan County,
Shenzhen, China. The Company does not own this factory complex or the
dormitories used to house workers. It occupies the original factory and its
new factory site under agreements with the local Chinese government. In the
case of the original factory, the lease agreement covers an aggregate of
approximately 200,000 square feet of factory space and expires in August 2007.
In the case of the new facility, the Company is entitled to use the land upon
which its new factory complex is situated until 2024. 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
will 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 may be difficult in China.
Possible Changes and Uncertainties in Economic Policies. As part of
its economic reform, China has designated certain areas, including Shenzhen
where the Company has its manufacturing facilities, as Special Economic Zones.
Foreign enterprises in these areas benefit from greater economic autonomy and
more favorable tax treatment than enterprises in other parts of China. Changes
in the policies or laws governing special Economic Zones would have a material
adverse effect on the Company.
Recent Turbulent Relations with the U.S. In 1995, the United States
considered revocation of China's most favored nation ("MFN") trade status,
which provides China with the trading privileges available generally to trading
partners of the United States, and the United States and China have recently
been involved in controversy over the protection in China of intellectual
property rights. President Clinton extended China's MFN status until July 3,
1996. Various interest groups continue to urge that the United States not
renew China's trade status and the United States continues to threaten China
with a loss of MFN status. There can be no assurance that current or future
controversies will not arise that again threaten the status quo involving trade
between the United States and China or that the United States will not revoke
or refuse to extend China's MFN status. In any of such eventualities, the
business of the Company could be adversely affected.
Relations Between China and Taiwan. Relations between China and
Taiwan have been unresolved since Taiwan was established in 1949. The March
23, 1996 general election in Taiwan heightened tensions between them. Although
not directly a threat to Nam Tai, peaceful and normal relations between China
and its neighbors reduces the potential for events which could have an adverse
impact on the Company's business.
Operations in Hong Kong. The Company's executive and sales office,
and several of its customers and suppliers are located in Hong Kong, which is
currently a British Crown Colony. Sovereignty over Hong Kong will be
transferred effective July 1, 1997 to China. As a result, there can be no
assurance as to the continued stability of political, economic or commercial
conditions in Hong Kong.
Enforceability of Civil Liabilities
The Company is a holding corporation organized as an International
Business Company under the laws of the British Virgin Islands and its principal
operating subsidiary is organized under the laws of Hong Kong, where the
Company's principal executive offices are also located. The Company has
appointed Mr. Stephen Seung, an attorney engaged in the private practice of law
and a director of Nam Tai since 1995, of 2 Mott St., Suite 601, New York, New
York 10013 as its agent upon whom process may be served in any action brought
against the Company under the securities laws of the United States. However,
outside the United States, it may be difficult for investors to enforce
judgments against the Company obtained in the United States in any such
actions, including actions predicated upon civil liability provisions of
Federal securities laws. In addition, all of the Company's officers and 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 the U.S.
securities laws. The Company has been advised by its Hong Kong counsel, and
its British Virgin Island counsel, that there is substantial doubt as to the
enforceability against the Company or any of its directors and officers located
outside the United States in original actions or in actions for enforcement of
judgments of U.S. courts of liabilities predicated on the civil liability
provisions of Federal securities laws.
- 15 -
<PAGE> 16
Certain Legal Consequences of Incorporation in the British Virgin Islands
The Company is organized under the laws of the British Virgin Islands.
Principles of law relating to matters affecting the validity of corporate
procedures, the fiduciary duties of the Company's management, directors and
controlling shareholders and the rights of Nam Tai's shareholders differ from,
and may not be as protective of shareholders as, those that would apply if the
Company were incorporated in a jurisdiction within the United States.
Directors of the Company have the power to take certain actions without
shareholder approval, including an amendment of the Company's Memorandum or
Articles of Association, a change in the Company's authorized capital, and
certain fundamental corporate transactions, including reorganizations, certain
mergers or consolidations, and the sale or transfer of assets. In addition,
there is doubt that the courts of the British Virgin Islands would enforce
liabilities predicated upon U.S. securities laws.
Risks of International Operations
The products of the Company are sold in the United States and
internationally, principally in Japan, Europe, Hong Kong and Canada.
International operations and 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. The Company acquires some
of the components used in its products from firms located in Japan and sells
its products to OEMs, most of which have operations based in Japan. Japan's
rising trade surplus has forced revaluations of the Japanese yen and future
revaluations may increase the cost of components used by Nam Tai. In addition,
trade restrictions could be implemented to counter Japan's overseas trade
surplus.
Volatility of Share Price
The markets for equity securities have been volatile and the price of
the Company's common shares has been and could continue to be subject to wide
fluctuations in response to quarter to quarter variations in operating results,
news announcements, trading volume, sales of common shares by officers,
directors and principal shareholders of the Company, general market trends and
other factors.
- 16 -
<PAGE> 17
ITEM 2. PROPERTIES
British Virgin Islands
The registered office of the Company is located in the Citco Building,
Wickhams Cay, P.O. Box 662, Road Town, Tortola, British Virgin Islands. Only
corporate administrative matters are conducted at such office, through Nam
Tai's registered agent, Citco Trust Corporation Limited. The Company neither
owns nor leases property in the British Virgin Islands.
Hong Kong
In Hong Kong, the Company leases Unit 513-520 No. 1 Hung To Road,
from September 1994 to September 1997. These premises house Nam Tai's
principal executive and marketing offices. Rental to September 14, 1996 is
approximately $17,800 per month, and $20,500 per month thereafter to September
1997.
The Company owns a residential flat in Hong Kong which was purchased
for total consideration of $1,850,000. This property houses the Chief
Executive Officer of the Company and forms part of his overall compensation -
(See Item 11. Compensation of Directors and Officers). The Company also owns
approximately ten acres of agriculture land in Hong Kong which the Company
plans to sell.
Shenzhen, China
The Company leases approximately 150,000 square feet of manufacturing
space at its present factory site in Baoan County, Shenzhen, China which it
first occupied in August 1992. Included within the factory site are four
dormitory buildings and two cafeteria buildings for Nam Tai's employees. Also
included within the factory complex are a library, several television rooms, a
large karaoke room for 120 people, several exercise rooms, table tennis and
billiard tables, basketball and badminton courts and a medical center. The
Company has leased the factory site for 15 years and currently pays rent of
approximately $32,000 per month. This rate is fixed for five years, with a 20%
increase in years five and ten.
Nam Tai has the right to use approximately 286,600 square feet of land
adjacent to its existing factory site in Shenzhen for fifty years purchased at
a total cost of approximately $2,450,000. The Company has since constructed a
second manufacturing facility on this new site in order to expand its
production capacity in China.
During 1992, the Company purchased for development rights to leasehold
land in Baoan County, Shenzhen, China. The purchase price was approximately
$343,000. The land area consists of approximately 70,000 square feet of land
in a developed area of commercial buildings and residences. The purchase of
the leasehold land gives Nam Tai the right to use the land for fifty years. It
was the Company's intention to build a high rise office building to house its
corporate headquarters and to lease office and commercial space to third
parties. The Company subsequently reevaluated the development of this
property and concluded it preferred to concentrate on its core contract
manufacturing business. Nam Tai has determined that it will not develop the
property, except possibly with respect to the portion that it would utilize for
its own administrative operations, and will seek to have the property developed
by a third party who will be responsible for developing, financing and managing
the project.
The Company also has another facility in Shenzhen, consisting of
approximately 26,000 square feet and located approximately one mile from its
manufacturing facility, which contains 28 apartment units and which the Company
uses to house certain of its factory managers who are married with families.
The Company purchased this building for approximately $1,000,000, paying the
final instalment in June 1993.
- 17 -
<PAGE> 18
Canada
On November 1, 1995, Nam Tai Canada moved its corporate office to a
new leased premises in Vancouver, British Columbia. The Company entered into a
lease for approximately 2,637 square feet of office space at an annual rental
of $26,000. The lease expires in August 1998.
Commencing in October 1994, the Company developed a residential
property in West Vancouver, British Columbia. Prior to the end of December
1995, the Company concluded arrangements for the sale of this property to Mr.
M.K. Koo, the Chairman of the Board of the Company. The property was purchased
for its book value of $2,620,445, being the higher of the book value and the
appraised value of the property.
In 1995, the Company completed construction of an office and
manufacturing complex in Burnaby, British Columbia. The two-story building
consists of approximately 7,000 square feet of office space and 8,000 square
feet of factory area. Construction was completed in mid 1995 at a cost of
approximately $2,400,000 including the cost of land. The property is currently
listed for sale.
General
The Company believes that its existing offices and manufacturing
facilities, including the new manufacturing facility, with expansion of the
factory facilities, are adequate for the operation of its business for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings other than routine
litigation incidental to its businesses and there are no material legal
proceedings pending with respect to the property of the Company other than as
described below.
In September 1993, Tele-Art, Inc., a shareholder of Nam Tai, commenced
an action against the Company seeking an injunction prohibiting the Company
from proceeding with a rights offering which was contemplated at that time.
Tele-Art's application was based on claims that Nam Tai may have violated
British Virgin Islands and United States law. Among other claims, Tele-Art
asserted that the Company's rights offering was part of a scheme to enrich
directors and management of Nam Tai and dilute the interest of minority
shareholders. After a hearing, a temporary injunction obtained by Tele-Art was
discharged, permitting the Company to proceed with, and complete, its rights
and standby offerings in October 1993. Tele-Art is pursuing claims 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 to continue to vigorously defend them as well as to
seek from Tele-Art and its agents compensation for the damage caused by the
injunction and the proceedings that were brought to obtain it.
- 18 -
<PAGE> 19
ITEM 4. CONTROL OF THE COMPANY
The Company is not directly owned or controlled by another corporation
or by any foreign government, other than such control, if any, by Lully
Corporation Limited as may arise out of its shareholdings, as is more fully set
forth below. The following table sets forth, as of December 31, 1995, 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.
<TABLE>
<CAPTION>
Number of
Identity of Common Shares Percent of
Persons or Groups Beneficially Owned Class
----------------- ------------------ ----------
<S> <C> <C> <C>
M. K. Koo 1,039,071 (Note 1.) 12.9%
c/o Suite 530
999 West Hastings Street
Vancouver, B.C. V6C 2W2 Canada
Lully Corporation Limited 2,346,290 (Note 2.) 29.1%
c/o 1507 Pinecrest Drive
West Vancouver, B.C. V7S 3E8 Canada
Officers and directors as a group 3,719,361 (Note 3.) 44.9%
(five persons)
</TABLE>
Notes
1. These shares are personally owned by Mr. Koo and do not
include shares owned by Lully Corporation Limited ("Lully")
(see Note 2.). A total of 738,388 common shares of the
Company beneficially owned by Mr. Koo have been pledged to
Wardley Canada Investment Fund Ltd. ("Wardley") pursuant to a
secured convertible note. The note is convertible at the
option of Wardley into 201,567 common shares of the Company
owned by Mr. Koo.
2. By virtue of his majority interest in, and positions with,
Lully, Mr. Koo may be deemed to be the beneficial owner of
these shares. If so, he would beneficially own 3,385,361 of
Nam Tai's outstanding common shares at December 31, 1995 or
41.9% of the outstanding common shares at that date.
3. Includes shares held and a total of up to 225,000 shares
issuable to officers upon exercise of employee options
exercisable at and within 60 days of December 31, 1995.
Assumes that the common shares owned by Lully are beneficially
owned by Mr. Koo (see Note 2. above).
- 19 -
<PAGE> 20
ITEM 5. NATURE OF TRADING MARKET
COMMON SHARES
The Company's common shares are traded in The Nasdaq National Market
under the symbol "NTAIF".
The following table sets forth the share prices for the quarters
during the last two years indicating the high and low last reported sale prices
as reported by The National Market.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
March 31, 1994 $ 15.50 $ 9.75
June 30, 1994 14.00 10.25
September 30, 1994 13.75 10.50
December 31, 1994 13.38 9.38
March 31, 1995 9.75 7.94
June 30, 1995 10.50 9.00
September 30, 1995 17.25 9.00
December 31, 1995 13.88 10.75
</TABLE>
Of the 8,063,177 common shares of the Company outstanding as of
December 31, 1995, approximately 4,500,000 are beneficially held by holders in
the United States by approximately 1,300 record holders.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are no exchange control restrictions on payments of dividends on
the Company's common shares or on the conduct of the Company's operations
either in Hong Kong, where the Company's principal executive offices are
located, or the British Virgin Islands, where Nam Tai is incorporated. Other
jurisdictions in which the Company conducts operations may have various
exchange controls. Dividend distribution and repatriation by Nam Tai's
subsidiaries in China are regulated by Chinese laws and regulations. To date
these controls have not had and are not expected to have a material impact on
the Company's financial results. There are no material British Virgin Islands
laws which impose foreign exchange controls on the Company or that affect the
payment of dividends, interest, or other payments to nonresident holders of the
Nam Tai's securities. British Virgin Islands law and the Company's Memorandum
and Articles of Association impose no limitations on the right of nonresident
or foreign owners to hold or vote such securities of the Company.
ITEM 7. TAXATION
British Virgin Islands Tax Considerations
No reciprocal tax treaty regarding withholding tax exists between the
United States and the British Virgin Islands. Under current British Virgin
Islands law, dividends, interest or royalties paid by the Company to
individuals and gains realized on the sale or disposition of shares are not
subject to tax as long as the recipient is not a resident of the British Virgin
Islands. The Company is not obligated to withhold any tax for payments of
dividends and shareholders receive gross dividends irrespective of their
residential or national status.
- 20 -
<PAGE> 21
ITEM 8. SELECTED FINANCIAL DATA
The selected financial information set forth below is derived from
consolidated financial statements of the Company. The selected information is
qualified in its entirety by reference to, and should be read in conjunction
with, such consolidated financial statements, related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this annual report.
SELECTED FINANCIAL INFORMATION
(In thousands of U.S. dollars except per share data, see Note 1.)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Income Statement Data
- ---------------------
<S> <C> <C> <C> <C> <C>
Net sales $121,240 $96,564 $70,844 $57,955 $38,418
Gross margin 23,152 17,223 14,098 10,940 8,118
Income from continuing operations 11,419 8,099 5,197 2,503 1,492
Discontinued operations (see Note 2.) - - - - 1,476
Net income 11,419 8,099 5,197 2,503 2,968
Dividends paid 120 65 - 853 189
Per share amounts (Note 3.)
- ---------------------------
Income from continuing operations $ 1.40 $ 1.09 $ 0.87 $ 0.47 $ 0.38
Discontinued operations - - - - 0.38
Net income 1.40 1.09 0.87 0.47 0.76
Dividend paid 0.015 0.01 - 0.20 0.05
Balance Sheet Data
- ------------------
Current assets $ 47,011 $45,520 $31,247 $23,071 $19,543
Property, plant and equipment - net 27,635 14,624 7,396 6,337 2,852
Total assets 79,281 66,287 39,530 29,474 22,980
Current liabilities 19,108 17,838 10,644 12,475 10,128
Non current liabilities - - 609 631 678
Shareholders' equity 60,173 48,449 28,162 16,368 11,323
</TABLE>
Notes
1. Assets and liabilities are translated into United States Dollars using
the appropriate rates of exchange at the balance sheet date. Income
and expenses are translated at the average exchange rate in effect
during the year.
2. Income from the sale of property in Hong Kong in 1991.
3. The weighted average number of shares outstanding and common stock
equivalents for the years ended December 31, 1995, 1994, 1993, 1992
and 1991 were 8,171,750, 7,459,570, 5,976,136, 5,301,996, and
3,880,564, respectively.
- 21 -
<PAGE> 22
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
General
The Company derives its revenues principally from manufacturing
consumer electronic products and subassemblies for OEM customers in the
electronics industry. The Company manufactures a broad line of finished
products for its OEM customers, including personal organizers, linguistic
products and calculators. In addition, it manufactures electronic components
and subassemblies and is engaged in the development of products such as
integrated circuit or smart card readers (referred to as "IC card readers").
In 1994, the Company discontinued sales of its proprietary products, sales of
which had not been material to the Company prior to the sale of the product
lines.
The consumer electronics industry is very competitive and the Company
is continuously under pressure to lower the selling price, and therefore reduce
the gross profit margin of its existing product lines. In response to these
pressures, the Company seeks to upgrade its technology in order to be capable
of manufacturing more advanced products with higher unit prices and greater
margins. The Company believes there is less competition in more advanced
products due to the complexity involved in manufacturing.
Since 1987, when the Company moved its manufacturing operations to
China, Nam Tai has derived substantially all of its operating income from its
China operations. The Company plans to continue increasing the scope of its
operations and investment in China such that the trend of increased income from
operations in China is expected to continue.
Under current British Virgin Islands law, Nam Tai is not subject to
tax on its income. Most of the Company's operating profits accrue in China,
where its effective tax rate is 10%, and in Hong Kong, where the corporate tax
rate on assessable profits is currently 16.5%. The Company also receives tax
credits in China related to its investment there which reduces the overall tax
rate of the Company. For additional information concerning Nam Tai's income
taxes - see Note 9 of Notes to Consolidated Financial Statements.
The Company uses a standard cost system to value its inventory, which
is purchased in U.S. dollars, Japanese yen and Hong Kong dollars. At the end
of each quarter, the Company revalues its inventory based upon actual costs and
the resulting standard cost revaluation flows through cost of sales when the
inventory is sold.
- 22 -
<PAGE> 23
The first quarter is typically the Company's slowest sales period
because, as is customary in China, the Company's manufacturing facilities in
China are closed for two weeks for the Chinese New Year holidays. The
following table sets forth certain unaudited quarterly financial information
for the four quarters of 1995, 1994 and 1993.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(In thousands of U.S. dollars, except per share data)
<S> <C> <C> <C> <C>
1995
- ----
Summary of Operations
Net sales $22,443 $30,065 $35,514 $33,218
Gross profit 4,256 5,987 6,967 5,942
Income from operations 1,609 2,880 3,736 2,541
Net income 1,556 3,210 4,637 2,016
Net income per share $ 0.19 $ 0.39 $ 0.57 $ 0.25
1994
- ----
Summary of Operations
Net sales $14,888 $24,625 $32,127 $24,924
Gross profit 2,602 4,681 5,702 4,238
Income from operations 672 2,111 3,137 1,694
Net income 655 2,003 3,494 1,947
Net income per share $ 0.09 $ 0.28 $ 0.48 $ 0.24
1993
- ----
Summary of Operations
Net sales $13,398 $16,092 $23,106 $18,248
Gross profit 2,719 3,283 4,477 3,619
Income from operations 912 1,265 2,058 1,581
Net income 886 797 1,669 1,845
Net income per share $ 0.16 $ 0.14 $ 0.29 $ 0.28
</TABLE>
- 23 -
<PAGE> 24
The following table presents selected consolidated financial information
stated as a percentage of net sales for the years ended December 31, 1995, 1994
and 1993:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of sales 80.9 82.2 80.1
----- ----- -----
Gross profit 19.1 17.8 19.9
Costs and expenses
Selling, general and administrative expenses 9.4 9.7 10.9
Research and development expenses 0.8 0.2 0.8
----- ----- -----
10.2 9.9 11.7
Income from operations 8.9 7.9 8.2
Other income 0.2 0.8 (0.6)
Interest expense (0.2) (0.2) (0.2)
----- ----- -----
Income from consolidated companies before income
taxes and minority interests 8.9 8.5 7.4
----- ----- -----
Net income 9.4 8.4 7.3
----- ----- -----
</TABLE>
- 24 -
<PAGE> 25
Year ended December 31, 1995 Compared to Year Ended December 31, 1994
Nam Tai's sales increased by 26% to $121,240,000 in the year ended
December 31, 1995 compared to $96,564,000 for the year ended December 31,
1994, primarily due to increases in sales to Sharp Corporation, Nintendo, Inc.
(which orders through Sharp Corporation) and Texas Instruments Incorporated.
The Company also received additional orders from Optrex Corporation.
The Company's gross profit margin increased to $23,152,000 or 19.1% of
sales for the year ended December 31, 1995 from $17,223,000 or 17.8% of sales.
The principal reasons for the increase in profit margins were (i) low cost of
raw materials, in part the result of the weakness of the Japanese yen in
relation to the US dollar, and (ii) improvements to quality control which
resulted in a reduction of the scrap rate.
Selling, general and administrative expenses increased by 22.1% to
$11,441,000 or 9.4% of sales in the year ended December 31, 1995 from
$9,370,000 or 9.7% of sales for the year ended December 31, 1994. The increase
in absolute dollars mainly reflected additional staff and costs required to
provide services to the Company in line with growth in sales. The decrease in
such expenses as a percent of sales was the result of efficiencies obtained in
general administrative expense as the Company handled a greater level of
activity with existing resources. Other expenses included the initial start up
expenses associated with the formation of the new subsidiary operation, Namtek.
No gain or loss on disposal of fixed assets was incurred in the year
ended December 31, 1995 compared to a net loss on disposal of fixed assets of
$48,000 in the year ended December 31, 1994. Other income - net declined to
$225,000 for the year ended December 31, 1995 from $761,000 for the year ended
December 31, 1994. This income mainly consists of $1,548,000 of interest
income less a $560,000 charge relating to undepreciated cost of the Deferred
Compensation Arrangement and $376,000 associated with a one-time bonus to
staff in Hong Kong, China and Canada to recognize exceptional work in the
fourth quarter of 1995 (a period of high activity). The provision taken to
expense the Deferred Compensation Arrangement applied to certain senior
management who are the beneficiaries of such arrangement but did not involve
the payment of any funds and will eliminate the need to accrue for this expense
in the future.
Interest expense increased to $161,000 for the year ended December 31,
1995 from $129,000 for the year ended December 31, 1994.
Income from continuing operations before income taxes increased to
$10,830,000 for the year ended December 31, 1995 from $8,198,000 for the year
ended December 31, 1994. The improvement of 32.1% was primarily attributable
to higher operating income reflecting increased sales volume and higher gross
profit margins associated with 1995 sales.
The income tax benefit of $589,000 for the year ended December 31,
1995 compared to a provision for income tax expense of $173,000 for the year
ended December 31, 1994. The tax recovery resulted from the refund of $782,000
China tax paid for the year ended December 31, 1994 which was received during
the second quarter of 1995. Hong Kong tax payable was $106,000 for the year
ended December 31, 1995.
Minority interest in subsidiaries declined to nil for the year ended
December 31, 1995 from $74,000 for the year ended December 31, 1994 following
the repurchase of shares of NT Canada from a minority shareholder during 1994.
Net income increased by 41% to $11,419,000 (or 9.4% of sales) for the
year ended December 31, 1995 compared to $8,099,000 (or 8.4% of sales) for the
year ended December 31, 1994. This resulted in earnings per share for the year
ended December 31, 1995 of $1.40 compared to earnings per share of $1.09 for
the year ended December 31, 1994. The increase in net income and earnings per
share was in line with the increase in sales taking into consideration the
higher operating margins. The weighted average number of common shares
outstanding and common stock equivalents increased to 8,171,750 for the year
ended December 31, 1995 from 7,459,570 for the year ended December 31, 1994,
reflecting the exercise of warrants issued according to the 1993 Rights
Offering which occurred in September 1994.
- 25 -
<PAGE> 26
Current assets remained relatively stationary at $47,011,000 for the
year ended December 31, 1995 compared to $45,520,000 for the year ended
December 31, 1994. Cash, cash equivalents and term deposits declined to
$17,362,000 for the year ended December 31, 1995 from $23,681,000 for the year
ended December 31, 1994. This decline of $6,319,000 resulted from expenditures
on new plant construction. The increase in accounts receivable and inventories
for the year ended December 31, 1995 to the equivalent period in 1994 was in
line with the increase in sales plus additional receivables at December 31, 1995
in the amount of $2,620,000, which relates to the residential property in
West Vancouver, British Columbia, Canada. The sale of this property was
concluded as at December 31, 1995 and the title registration completed at
February 9, 1996.
Long term investment, representing primarily the investment in common
shares of Deswell remained an asset of the Company through 1995. This
investment is shown at cost, approximately 87% of the market value of Deswell
common shares as reported on The National Market as at December 31, 1995. The
increase in property, plant and equipment - net to $27,635,000 for the year
ended December 31, 1995 from $14,624,000 for the year ended December 31, 1994
reflects the expenditure of capital on new plant facilities, net of
depreciation.
Current liabilities increased by 7.1% to $19,108,000 for the year
ended December 31, 1995 from $17,838,000 for the year ended December 31, 1994.
This increase was in line with the increase in current assets and represents a
smaller increase than the increase in sales for the subject period.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Nam Tai's sales increased by 36% to $96,564,000 in the year ended
December 31, 1994 compared to $70,844,000 for the year ended December 31, 1993,
primarily due to increases in sales to Sharp Corporation and sales of PCBs to
Nintendo, Inc. which orders through Sharp Corporation. The Company also
received additional orders from Seiko Instruments, Inc.
The Company's gross profit margins decreased slightly from 19.9% in
the year ended December 31, 1993 to 17.8% in the year ended December 31, 1994.
The three principal reasons for this decline were (i) a change in product mix
whereby proportionately more personal organizers, which have a lower gross
profit, were produced; (ii) higher scrap rates in the newly expanded PCB
department; and (iii) higher labor and material costs in the fourth quarter as
a new product was introduced which required the employment of new technology
and training of the work force.
Selling, general and administrative expenses increased by 21% to
$9,370,000 (or 9.7% of sales) in the year ended December 31, 1994 from
$7,735,000 (or 10.9% of sales) in the year ended December 31, 1993. Selling
expenses increased to $1,240,000 in the year ended December 31, 1994 from
$878,000 in the year ended December 31, 1993. This increase mainly reflected
additional advertising expenses of $301,000 incurred to promote Nam Tai's own
brand name health care products, which were discontinued following the sale of
the health care product line in 1994, and increases in shipping expense and
export duties reflecting the higher sales volume for the period. Increases in
general and administrative expenses reflect increases in salaries resulting
from annual incremental salary increases and the addition of employees and
additional depreciation resulting from newly purchased assets. In spite of
these increases, selling, general and administrative expenses as a percentage
of net sales decreased to 9.7% of sales in the year ended December 31, 1994
from 10.9% of sales in the comparable period in 1993.
Research and development expenses decreased by approximately 56% to
$239,000 for the year ended December 31, 1994 compared to $547,000 for the year
ended December 31, 1993 as Nam Tai terminated its research activity in Canada
and sold its line of health care products in 1994. The Company's research and
development activities in China continue.
- 26 -
<PAGE> 27
Net loss on disposal of fixed assets was $48,000 in the year ended
December 31, 1994 compared to zero in 1993. The loss in 1994 mainly reflected
the write off of leasehold improvements and a loss on disposal of automobiles
and equipment.
Other income (loss) - net, which consists of foreign exchange gains
and losses, interest income, bank charges and miscellaneous income and expenses
(see Note 6 to Consolidated Financial Statements), was $761,000 for the year
ended December 31, 1994 compared to a loss of $413,000 for the year ended
December 31, 1993. Results for 1994 include a foreign exchange gain of
$68,000 and a gain of $594,000 on the release of the remaining deferred credit
- - (see Note 1(c) to Consolidated Financial Statements) previously included on
the Company's balance sheet. Previously, the credit was being amortized over
40 years. However, because the subsidiary to which the credit related began
liquidation proceedings, the remaining balance of $594,000 was credited to
other income in the third quarter of 1994. Results for 1993 were negatively
affected by a foreign exchange loss of $400,000.
Interest expense decreased by approximately 6% to $129,000 in the year
ended December 31, 1994 from $137,000 in the year ended December 31, 1993
because the discounted bills in 1994 were mainly in Japanese yen, which had a
much lower interest rate.
Income from continuing operations before income taxes (excluding gain
or loss on disposal of fixed assets) increased to $8,320,000 in the year ended
December 31, 1994 from $5,270,000 in the year ended December 31, 1993. This
58% improvement was primarily attributable to higher operating income of
approximately $1,800,000 reflecting increased sales volume for the period, and
the increase in other income.
Provision for income tax expense was $173,000 for the year ended
December 31, 1994 compared to $73,000 for the year ended December 31, 1993.
Income tax expense for 1994 included a refund of taxes paid of $270,000 as a
result of Nam Tai's additional investment in China. These refunds, which
consisted of $212,000 and $58,000 of taxes paid on 1993 and 1992 profits,
respectively, of the Company's China subsidiary, resulted from reinvestment of
such profits as additional equity in the subsidiary. The tax provision for
1993 benefited from the settlement of a tax dispute and release of bank
guarantees of $305,000 relating to the Company's dormant subsidiary.
Earnings per share for the year ended December 31, 1994 were $1.09
compared to $0.87 in the comparable period in 1993. Weighted average common
shares outstanding and common stock equivalents increased to 7,459,570 during
the year ended December 31, 1994, compared to 5,976,136 for the year ended
December 31, 1993. Increases in weighted average common shares and common
stock equivalents resulted primarily from the sale to shareholders and the
public of 750,000 units ("Units") in rights and standby offerings completed in
October 1993. Each Unit consisted of one and two Common Share Purchase
Warrants ("Warrants"). The Company called the Warrants for redemption in
August 1994, resulting in the issuance and sale of an additional 1,485,202
common shares in September 1994.
Accounts receivable were up 18% to $11,744,000 at December 31, 1994
compared to $9,887,000 in the previous year. This increase reflected the 37%
increase in sales in the fourth quarter 1994 compared to the fourth quarter of
1993. Days outstanding accounts receivable decreased to 44 days in 1994 from
51 days in 1993. This reflected the reduced proportion of receivables with 60
days terms at December 31, 1994 compared to December 31, 1993. Nam Tai trade
receivables are largely backed by letters of credit, therefore the Company has
incurred no bad debt expense.
Inventory increased by 36% to $9,087,000 at December 31, 1994 compared
to $6,673,000 at December 31, 1993. This increase in inventory mainly relates
to increases in raw materials and work in process and reflects the 31% increase
in orders for the first quarter of 1994 compared to the first quarter of 1993.
The 38% increase in accounts payable to $10,532,000 at December 31,
1994 compared to $7,615,000 at December 31, 1993 was primarily the result of an
increase in trade payables in 1994 reflecting the higher sales volume.
- 27 -
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
In August 1992, Nam Tai moved to its present factory in Shenzhen,
China. This factory is leased under a 15 year agreement with an agency of the
Government of China. The lease provides for a 20% increase in rental payments
every five years. The current monthly rental is approximately $32,000. The
lease commitment is not expected to have a significant effect on future
reported earnings or cash flows as the compound annual increase in rentals
averages only 2.5% per year. The next increase is scheduled for August 1997.
During 1995, the Company commenced the expansion of its manufacturing
capacity in China and construction of its new factory complex, adjacent to the
Company's present factory, was complete by the end of the first quarter, 1996.
The Company expects to spend in excess of $20,000,000 in total to develop the
new factory and dormitory facilities and to purchase manufacturing equipment.
The Company will use its existing cash balances to finance the construction and
purchase equipment. To December 31, 1995, the Company had spent an aggregate
of approximately $15,000,000 on this project.
In September 1994, the Company agreed to a three-year lease for new
office space in Hong Kong and effective March 1, 1995 moved its principal
executive offices there. The rent for the first two years is approximately
$17,800 per month and for the final year is $20,500 per month. Rental for the
new space is not expected to have a material impact on Nam Tai's liquidity or
results of operations.
In recent years, the Company has shifted investment and operations
from Hong Kong to China as the Company has attempted to take advantage of the
lower overhead and labor costs in China. On December 31, 1995, 32% and 54% of
the Company's identifiable assets were located in Hong Kong and China,
respectively, as compared to 35% and 29%, respectively as at December 31, 1994.
Identifiable assets in Canada totalled 14% as at December 31, 1995 as compared
to 36% of total assets as at December 31, 1994. This decrease principally
resulted from decreased cash and term deposits.
The Company has traditionally relied on short-term bank borrowings to
meet its working capital requirements and to provide funds for investments in
property, plant and equipment. These borrowings have been supplemented by
internally generated funds, trade credits from suppliers and proceeds from the
sale of its equity. The average aggregate outstanding balance of short-term
bank borrowings (including notes payable) was $2,671,000 for the year ended
December 31, 1995 and $2,844,000 for the year ended December 31, 1994. As at
December 31, 1995 the Company had working capital of approximately $27,903,000.
Cash flow from operations for 1995 included net income of $11,419,000
and depreciation of $2,612,000. The net cash utilized by changes in working
capital (excluding cash and bank borrowings) was $6,250,000.
During 1995, the Company's investment activities utilized $13,696,000
in additions to property, plant and equipment, mainly consisting of capitalized
construction costs for the Company's new factory in China and additional
bonding equipment. The Company invested $3,931,000 for 14% of Deswell in 1994.
In July 1995, Deswell completed an initial public offering of its securities in
the United States and, as a result, the Company's investment amounted to
approximately 10.5% of Deswell's outstanding shares as at December 31, 1995.
Net cash utilized by financing activities was $37,000 in 1995. No
major financing was undertaken during the year.
At December 31, 1995, Nam Tai had in place general banking facilities
with three financial institutions aggregating $38,202,000. Such facilities,
which are subject to annual review, permit the Company to obtain overdrafts,
lines of credit for forward exchange contracts, letters of credit, import
facilities, trust receipt financing, shipping guarantees and working capital,
as well as fixed loans. As at December 31, 1995, the Company had utilized
approximately $10,216,000 under such general credit facilities and had
available unused credit facilities of $27,986,000. Interest on notes payable
averaged 3.6% per annum during the year ended December 31, 1995. During the
year ended December 31, 1995, the Company paid a total of $161,000 in interest
on indebtedness. During 1994, the Company
- 28 -
<PAGE> 29
arranged for a construction loan to be secured by a mortgage against the
residential building and office complex that the Company constructed in
Burnaby, British Columbia. This loan was repaid during 1995.
The Company believes that there are no material restrictions
(including foreign exchange controls) on the ability of Nam Tai's non-China
subsidiaries to transfer funds to the Company in the form of cash dividends,
loans, advances, or product/material purchases. With respect to the Company's
China subsidiaries, there are restrictions on the payment of dividends and the
removal of dividends from China. However, the Company believes that such
restrictions will not have a material effect on the Company's liquidity or cash
flow.
In the third quarter of 1991, the Company began paying dividends at
the rate of $0.025 per common share. In 1992, Nam Tai increased the quarterly
dividends to $0.05 per common share. Total dividends paid in the year ended
December 31, 1992 were $853,000 as compared to $189,000 in the year ended
December 31, 1991. Quarterly dividends were discontinued in January 1993 and
the Company resumed payment of annual dividends in 1994, paying shareholders
aggregate dividends of $65,000 ($0.01 per share) in 1994 and $120,000 (0.015
per share) in 1995.
IMPACT OF INFLATION
The Company believes that inflation has not had a material effect on
its past business. The Company has generally been able to increase the prices
of its products in order to keep pace with inflation. The Company believes
that increases in labor costs, which represent the most significant component
of the Company's production costs (other than material costs), will not
materially affect its business because of the Company's utilization of less
expensive labor through its operations in China. Moreover, the Company
believes that any possible significant increases in material costs would also
affect the entire electronics industry, and thus would not have a significant
negative impact on the Company's competitive position.
EXCHANGE RATES
The Company sells most of its products in U.S. dollars and pays for
its material components in Japanese yen, U.S. dollars and Hong Kong dollars.
It pays labor costs and overhead expenses in renminbi, the currency of China
(the basic unit of which is the yuan), Hong Kong dollars and Canadian dollars.
The exchange rate of the Hong Kong dollar to the United States dollar has been
fixed by the Hong Kong government since 1983 at approximately HK$7.80 to U.S.
$1.00 through the currency issuing banks in Hong Kong and accordingly has not
presented a currency exchange risk. Canadian operations are relatively small
with the percentage of expense in Canadian dollars representing 2.0% of the
total expenses before operating income for the year ended December 31, 1995.
Labor and overhead expenses related to Nam Tai's Chinese factory amounted to
6.2% during the year ended December 31, 1995 and 6.5% of the Company's total
expenses before operating income during the year ended December 31, 1994.
Management believes that the Company's only significant foreign
exchange risk results from material purchases made in Japanese yen.
Approximately 33%, 35% and 14% of Nam Tai's material costs have been in yen
during the years ended December 31, 1995, 1994 and 1993, respectively. Sales
made in yen have increased substantially since 1994, accounting for
approximately 18% of sales for the year ended December 31, 1995, versus 13% of
sales for the prior year. In addition, the Company believes its customers will
accept an increase in the selling price of manufactured products if the
exchange rate of the Japanese yen moves beyond a range of 5% to 10%. Oral
agreements have been reached as are customary in the industry and which do not
affect production in process. Based on the close working relationships with
its principal customers, and because management believes that similar oral
agreements exist between these OEMs and their other suppliers, the Company
believes that the oral nature of these agreements will not prevent its OEMs
from honoring them. However, there can be no assurance that such agreements
will be honored, and the refusal to honor such an agreement in the event of a
severe fluctuation of the 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.
- 29 -
<PAGE> 30
Effective January 1, 1994, China adopted a floating currency system
whereby the official exchange rate is equal to the market rate. Since the
market and official yuan rates were unified, the value of the yuan against the
dollar has been stable. However, China suffered significant inflation during
1994 and 1995 which placed devaluation pressure on the yuan. 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 a stable
currency against the United States dollar for the year ended December 31, 1995.
The Company believes that because its Chinese operations presently are confined
to manufacturing products for export, any devaluation of the yuan would benefit
Nam Tai provided that action or other economic pressures do not lead to
fundamental changes in the present economic climate in China.
Foreign exchange transactions involving the renminbi take place
through the Bank of China or other institutions authorized to buy and sell
foreign exchange or at an approved foreign exchange adjustment center (known as
a "swap center"). In the past, when exchanging Hong Kong dollars for
renminbi, the Company used the swap center to obtain the best rate possible.
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.
The Company also hedges its currency exchange risk in an effort to
minimize it. In an attempt to lower the costs of expenditures in foreign
currencies, management will periodically enter into forward contracts to buy or
sell foreign currency(ies) against the U.S. dollar through one of its banks. A
buy contract allows Nam Tai to buy a targeted currency at a fixed price for up
to one year, but which the Company normally books forward six months.
Conversely, a sale contract allows the Company to sell the currency at a fixed
price during the contract period. The type of contract and currency that the
Company enters into depends on whether management believes the currency will
rise or fall against the dollar in the succeeding period. Nam Tai will enter
into buy forward contracts if it appears the currency will rise and sell
forward contracts if it appears the currency will fall against the dollar. If
there is a fluctuation in the two currencies a gain or loss occurs between the
buy forward exchange rate and the sell forward exchange rate. The Company
enters into foreign currency contracts in order to manage foreign exchange
exposures. However, since the foreign currency contracts are not intended to
hedge identifiable foreign currency commitments, as required by generally
accepted accounting principles, the contracts are marked to the market with any
realized and unrealized gains or losses recorded as other income (loss) - net.
As at December 31, 1995, the Company had open forward contracts
amounting to $60,000 and at December 31, 1994 there were no open contracts.
During 1995, Nam Tai recorded a gain of $52,000 from hedging transactions
involving Canadian dollars. The Company's financial results have been affected
in the past due to hedging activities, resulting in foreign exchange gains of
approximately $52,000 in 1995 and $68,000 in 1994 and foreign exchange losses
of approximately $400,000 in 1993 and $350,000 in 1992. These exchange gains
and losses were caused by the difference between the buy forward rate and sell
forward rate for exchange contracts between the foreign currencies (Japanese
yen in 1992 and 1993, Canadian dollars in 1994 in 1995) entered into by the
Company. The Company is continuing to review its hedging strategy and there
can be no assurance that Nam Tai will not suffer losses in the future as a
result of currency hedging.
- 30 -
<PAGE> 31
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Management
As at January 2, 1996, the directors and executive officers of the
Company were as follows:
<TABLE>
<CAPTION>
Name Position with Company
- ---- ---------------------
<S> <C>
M.K. Koo Chairman of the Board
and Director
Tadao Murakami Chief Executive Officer, Vice-Chairman
and Director
Yoshio Inagawa Chief Operating Officer
and Director
Ronald G. Erdman Chief Financial Officer, Secretary
and Director
Maxwell Yeung Financial Controller, Treasurer
and Director
Charles Chu Director
Stephen Seung Director
</TABLE>
M.K. KOO. Mr. Koo has served as Chairman of the Board and a Director
of Nam Tai and its predecessor companies since inception. Mr. Koo serves on
the Company's audit committee. Mr. Koo received his Bachelor of Laws degree
from National Taiwan University in 1970.
TADAO MURAKAMI. Mr. Murakami has served the Company in various
executive capacities since 1984. He became Secretary and a Director of the
Company in December 1989. From June 1989, he has been employed as the
President of the Company's Hong Kong subsidiary. In July 1994, Mr. Murakami
succeeded Mr. Koo as President and in June 1995 became the Company's Chief
Executive Officer. Mr. Murakami assumed the position of Vice-Chairman in
January 1996 and is in charge of the day-to-day manufacturing and marketing
operations of the Company. Mr. Murakami graduated from Japan Electronic
Technology College in 1964.
YOSHIO INAGAWA. Mr. Inagawa joined the Company as Vice President in
June 1994, at which time he also became a Director. He assumed the position of
Chief Operating Officer in January 1996 and is responsible for managing Nam
Tai's manufacturing activities in China and overseeing the new factory
development. From 1953 to 1993, Mr. Inagawa was employed by Sharp Corporation
in various positions, his latest being the Factory Deputy General Manager of
Sharp Corporation's factory located in Nara, Japan.
RONALD G. ERDMAN. Mr. Erdman joined Nam Tai as Chief Financial
Officer, Secretary and Director in January 1996 based in Vancouver, Canada. He
also serves as President of Nam Tai Electronics (Canada) Ltd. Mr. Erdman was
employed by HSBC Capital Canada Inc. (formerly Wardley Canada Inc.), acting as
Chief Executive Officer since 1992. Mr. Erdman obtained a BSc. (Eng.) from
Queen's University, Kingston, Ontario, Canada in 1973 and M.B.A. from Cranfield
School of Management, Cranfield, United Kingdom in 1979.
- 31 -
<PAGE> 32
MAXWELL YEUNG. Mr. Yeung joined Nam Tai as Financial Controller,
Treasurer and Director with responsibility for finance and administration in
the People's Republic of China and Hong Kong. Mr. Yeung has worked in the
banking industry since 1983, most recently as Assistant General Manager of
Banque Worms in Hong Kong. Mr. Yeung obtained a B.Soc. Sc. from the University
of Hong Kong in 1983 and M.B.A. from the Chinese University of Hong Kong in
1990.
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 Certified Accountant and has been engaged in the
private practice of law in New York since 1981. Mr. Seung received a B.S.
degree in Engineering from the University of Minnesota in 1969, an M.S. degree
in Engineering from the University of California at Berkeley in 1971, an MBA
degree from New York University in 1973 and a J.D. degree from New York Law
School in 1979. Mr. Seung serves on Nam Tai's audit committee, serves as a
Director and member of the audit committee of Deswell and serves Nam Tai as its
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.
- 32 -
<PAGE> 33
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate amount of compensation (including non-cash benefits)
paid by Nam Tai and its subsidiaries during the year ended December 31, 1995 to
all directors and officers as a group for services in all capacities was
approximately $773,750. The Company also provides housing for the Chief
Executive Officer in Hong Kong.
On August 13, 1990 the Company fixed compensation for loss of office
at $500,000 for Mr. M.K. Koo and $300,000 each for Mr. Tadao Murakami and
another officer who retired from the Company in 1991. The Company also fixed
the age of retirement for directors at age 65 years. For the years prior to
and including 1995, the Company accrued $240,000 in connection with this
arrangement. A provision for the balance of $560,000 was taken at December 31,
1995.
Directors who are not employees of the Company or any of its
subsidiaries are paid $1,000 per month for services as a director, $750 per
meeting attended in person, $500 per meeting attended by telephone and are
reimbursed for all reasonable expenses incurred in connection with services as
a director.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY OR ITS SUBSIDIARIES
As of December 31, 1995, the Company had outstanding options to
purchase an aggregate of 570,850 common shares. Of these options, all of which
were granted under the Company's 1993 stock option plan, 200,100, 360,750 and
10,000 options are exercisable at $5.35, $11.00 and $11.375 per share and
expire on September 9, 1998, and July 15, 1999 and July 15, 1999, respectively.
Of these options, an aggregate of 225,000 options to purchase common shares
were held by the Company's officers and directors as a group as at December 31,
1995.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
In January 1995, Nam Tai entered into an arrangement with Mr. M.K.
Koo, Chairman of the Board, requiring Mr. Koo to purchase a residential
property in West Vancouver, British Columbia, Canada no later than December 31,
1995 at the higher of book value or market value. The commitment was honored
as at December 29, 1995, with registration of transfer of ownership completed
as at February 9, 1996.
It is the Company's policy that all transactions between the Company
and any interested director or executive officer be approved by a majority of
the disinterested directors and on terms no more favorable than would be
available from an independent third party.
- 33 -
<PAGE> 34
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:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Consolidated Statements of Income for the years ended December 31, 1995,
December 31, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Consolidated Balance Sheets as of December 31, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . 37
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1995, December 31, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . 38
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
December 31, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
</TABLE>
All other schedules for which provisions made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
- 34 -
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
NAM TAI ELECTRONICS, INC.
We have audited the accompanying consolidated balance sheets of Nam Tai
Electronics, Inc and its subsidiaries as of December 31, 1995 and 1994, and the
related statements of income, shareholders' equity, and cash flows for each of
the three years ended December 31, 1995, 1994 and 1993. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years ended December 31,
1995, 1994 and 1993 in conformity with accounting principles generally
accepted in the United States of America.
PRICE WATERHOUSE
Certified Public Accountants
HONG KONG, March 28, 1996
- 35 -
<PAGE> 36
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of U.S. Dollars except share data)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net sales $121,240 $ 96,564 $ 70,844
Cost of sales 98,088 79,341 57,746
------ ------ ------
Gross profit 23,152 17,223 14,098
------ ------ ------
Costs and expenses
Selling, general and
administrative expenses 11,441 9,370 7,735
Research and development expenses 945 239 547
------ ------ ------
12,386 9,609 8,282
------ ------ ------
Income from operations 10,766 7,614 5,816
(Loss) on disposal of fixed assets 0 (48) 0
Other income (loss) - net (Note 6) 225 761 (413)
Interest expense (161) (129) (137)
------ ------ ------
Income from consolidated companies
before income taxes and minority
interests 10,830 8,198 5,266
Income tax benefit (expense)(Note 9) 589 (173) (73)
------ ------ -----
11,419 8,025 5,193
Minority interests in subsidiaries 0 74 4
------ ----- -----
Net income $ 11,419 $ 8,099 $ 5,197
====== ====== ======
Earnings per share $ 1.40 $ 1.09 $ 0.87
====== ====== ======
Weighted average Common Shares
outstanding and common stock
equivalents (Note 1) 8,171,750 7,459,570 5,976,136
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
- 36 -
<PAGE> 37
NAM TAI ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. Dollars)
<TABLE>
<CAPTION>
As at December 31,
------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 13) $ 10,927 $ 23,281
Term deposit 6,435 400
Accounts receivable 17,699 11,744
Inventories (Note 4) 10,425 9,087
Prepaid expenses and deposits 1,525 1,008
------ ------
Total current assets 47,011 45,520
------ ------
Long term investment (Note 5) 3,931 3,931
------ ------
Property under development (Note 11) 0 1,887
------ ------
Property, plant and equipment, at cost 35,365 20,121
Less: Accumulated depreciation and
amortization (7,730) (5,497)
------ ------
27,635 14,624
------ ------
Other assets 704 325
------ ------
Total assets $ 79,281 $ 66,287
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ 273 $ 563
Notes payable 5,320 6,117
Accounts payable and accrued expenses 13,408 10,532
Income taxes payable 107 626
------ ------
Total current liabilities 19,108 17,838
------ ------
Shareholders' equity:
Common stock (Note 14) 80 80
Additional paid-in capital 28,182 27,645
Stock option grants (Note 14(b)) 467 631
Retained earnings 31,417 20,118
Foreign currency translation adjustment 27 (25)
------ ------
Total shareholders' equity 60,173 48,449
------ ------
Total liabilities and shareholder's equity $ 79,281 $ 66,287
====== ======
Commitments and contingencies (Note 12)
</TABLE>
See accompanying notes to consolidated financial statements.
- 37 -
<PAGE> 38
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of U.S. Dollars except shares outstanding)
<TABLE>
<CAPTION>
Common Shares Foreign Total
------------- Additional Stock Currency Share-
Shares Paid-in Option Retained Translation holders'
Outstanding Amount Capital Grants Earnings Adjustment Equity
----------- ------ ------- ------ -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 5,272,098 $ 53 $ 9,417 - $ 6,887 $ 11 $16,368
Shares issued on exercise of options 476,727 4 1,188 - - - 1,192
Shares issued on Rights Offering 750,000 8 4,750 - - - 4,758
Stock options issued - - - 690 - - 690
Net income - - - - 5,197 - 5,197
Foreign currency translation adjustments - - - - - (43) (43)
--------- ----- ------ ------ ----- ------ ------
Balance at December 31, 1993 6,498,825 $ 65 $15,355 $ 690 $12,084 $ (32) $28,162
Shares issued on exercise of options 9,000 - 69 (21) - - 48
Options cancelled - - - (38) - - (38)
Warrants cancelled - - (657) - - - (657)
Shares issued on exercise of warrants 1,485,202 15 12,878 - - - 12,893
Net income - - - - 8,099 - 8,099
Dividends paid - - - - (65) - (65)
Foreign currency translation adjustments - - - - - 7 7
--------- ----- ------ ------ ------ ------ ------
Balance at December 31, 1994 7,993,027 $ 80 $27,645 $ 631 $20,118 $ (25) $48,449
Shares issued on exercise of options 70,150 - 537 (161) - - 376
Options cancelled - - - (3) - - (3)
Net income - - - - 11,419 - 11,419
Dividends paid - - - - (120) - (120)
Foreign currency translation adjustments - - - - - 52 52
--------- ----- ------ ------ ------ ------ ------
Balance at December 31, 1995 8,063,177 $ 80 $28,182 $ 467 $31,417 $ 27 $60,173
========= ===== ====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
- 38 -
<PAGE> 39
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 11,419 $ 8,099 $ 5,197
------ ------ ------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,612 2,063 1,186
Amortization of deferred credit - (15) (22)
Gain on release of deferred credit
to income - (594) -
Loss on disposal of property,
plant and equipment - 48 -
Gain on disposal of product lines - (129) -
Stock option (recovery) compensation expense - (38) 690
Minority interests - (74) (4)
Other items - 62 16
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable (5,955) (1,857) (2,601)
(Increase) decrease in inventories (1,338) (2,414) (1,566)
(Increase) decrease in prepayments
and deposits (517) (337) 475
Increase (decrease) in notes payable (797) 4,244 (221)
Increase (decrease) in accounts payable
and accrued expenses 2,876 2,917 (2,308)
(Decrease) increase in income taxes
payable (519) (140) 308
------ ------ ------
(3,638) 3,736 (4,047)
------ ------ ------
Net cash provided by operating activities 7,781 11,835 1,150
------ ------ ------
Cash flows from investing activities:
Proceeds from disposal of property,
plant and equipment 12 12 -
Proceeds from disposal of product lines - 270 -
Additions to property, plant and equipment (13,696) (10,673) (3,065)
Other assets (379) (199) (60)
Term deposit (6,035) - (400)
Purchase of long term investment - (3,931) -
------ ------ ------
Net cash used in investing activities (20,098) (14,521) (3,525)
------ ------ ------
Cash flows from financing activities:
Increase (decrease) in short-term bank
loans and overdraft (290) 173 390
(Distributed to) received from minority
interests - (41) 119
Additional shares issued (net) 373 12,284 5,950
Dividends paid (120) (65) -
------ ------ ------
Net cash (used in) provided by financing activities (37) 12,351 6,459
------ ------ ------
Net increase (decrease) in cash and cash equivalents (12,354) 9,665 4,084
Cash and cash equivalents at beginning of period 23,281 13,616 9,532
Cash and cash equivalents at end of period $ 10,927 $ 23,281 $ 13,616
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 186 $ 131 $ 135
Income taxes paid $ 47 $ 313 $ 70
</TABLE>
See accompanying notes to consolidated financial statements.
- 39 -
<PAGE> 40
NAM TAI ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)
1 Summary of Significant Accounting Policies
a Basis of presentation
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in
the United States of America.
b Principles of consolidation
The consolidated financial statements include the financial
statements of Nam Tai Electronics, Inc. ("the Company") and
all its subsidiaries. Intercompany accounts and transactions
have been eliminated on consolidation. The details of the
Company's subsidiaries are described in Note 10.
c Deferred credit
When a subsidiary is purchased, the excess of the fair value
of the net assets acquired over the purchase price is recorded
as a reduction to non-current assets with any remainder being
recorded as a deferred credit. If the purchase price exceeds
the fair value of net assets acquired, the excess cost is
recorded as goodwill. Any goodwill or deferred credit which
may result is amortized over its estimated useful life, not to
exceed forty years. The remaining deferred credit of $594,000
at September 30, 1994 was credited to income in 1994 as the
subsidiary to which the deferred credit related commenced
liquidation procedures.
d Inventories
Inventories are stated at the lower of cost and market value.
Cost is determined on the first-in, first-out basis.
e Property, plant and equipment
Property, plant and equipment are recorded at cost. The cost
of major improvements and betterments is capitalized whereas
the cost of maintenance and repairs is expensed in the year
incurred.
All land in Hong Kong is owned by the government which leases
the land at public auction to nongovernmental entities. With
the exception of those leases which expire after June 30, 1997
and before June 30, 2047 with no right of renewal, the
Sino-British Joint Declaration extends the terms of all
currently existing land leases for another 50 years beyond
1997. Thus, all of the Company's land leaseholds are
considered to be purchased long-term assets. The cost of such
land leaseholds is amortized on the straight-line basis over
the respective terms of the leases.
All land in the People's Republic of China ("PRC") is owned by
the government. The government in the PRC, according to PRC
law, may sell the right to use the land for a specified period
of time. Thus all of the Company's land purchases in the PRC
are considered to be land leaseholds and are amortized on the
straight line basis over the respective term of the right to
use the land.
- 40 -
<PAGE> 41
1 Summary of Significant Accounting Policies (cont'd)
e Property, plant and equipment (cont'd)
Depreciation and amortization rates computed using the
straight-line method are as follows:
<TABLE>
<CAPTION>
Classification Rate
-------------- ----
<S> <C>
Long-term leasehold buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2%-4.5%
Freehold buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4%
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18%-25%
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9%-25%
Molds and tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18%-25%
Motor vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 18%-25%
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25%-33%
</TABLE>
f Per share amounts
The per share amounts in the consolidated statements of income
have been computed based on the weighted average number of
Common Shares and Common stock equivalents outstanding during
each period, adjusted retroactively to reflect the stock
splits (Note 14(a)). Common stock equivalents include the
number of shares that would be issued from the exercise of in
the money stock options reduced by the number of shares that
could be purchased from the proceeds based on the average
market price of the Company's common stock.
The weighted average number of shares outstanding for the
years ended December 31, 1995, 1994 and 1993 were 8,018,252,
6,934,098 and 5,717,551, respectively. Common stock
equivalents for the years ended December 31, 1995, 1994 and
1993 were 153,498, 525,472, and 258,585, respectively. Fully
diluted earnings per share do not differ materially from the
undiluted figures.
g Foreign currency translations
The financial statements have been stated in United States
dollars, the official currency used in the British Virgin
Islands (the Company's place of incorporation). Although the
operating facilities are located in Hong Kong and the PRC, the
United States dollar is the currency of the primary economic
environment in which the Company's consolidated operations are
conducted. The exchange rate between the Hong Kong dollar and
the United States dollar has been pegged (HK$7.80 to US$1.00)
since October 1983.
All transactions in currencies other than functional
currencies during the year are translated at the exchange
rates existing on the respective transaction dates. Related
accounts payable or receivable existing at the balance sheet
date denominated in currencies other than functional
currencies are translated at the exchange rates existing on
that date. Exchange differences arising in these cases are
dealt with in the income statements.
The financial statements of all subsidiaries expressed in
currencies other than the United States dollar are translated
in accordance with Statement of Financial Accounting Standards
No. 52 "Foreign Currency Translation". Accordingly, all
assets and liabilities are translated at the rates of exchange
ruling at the balance sheet date and all income and
expenditure items are translated at the average rates of
exchange over the year. With the exception of Namtai
Electronic (Shenzhen) Co. Ltd. ("NTES") and Zastron Plastic &
Metal Products (Shenzhen) Ltd. ("Zastron"), which are
companies incorporated in the PRC, all exchange differences
arising from translation of subsidiaries' financial statements
are dealt with as a separate component of equity.
- 41 -
<PAGE> 42
1 Summary of Significant Accounting Policies (cont'd)
g Foreign currency translations (cont'd)
As NTES and Zastron 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 and Zastron. Accordingly, all translation
adjustments resulting from the conversion of NTES and
Zastron's financial statements to Hong Kong dollars are taken
to the income statements. Exchange rates used to translate
and remeasure transactions and balances of NTES and Zastron
are the rates quoted by the Bank of China.
h Income taxes
The Company provides for all taxes based on income whether due
at year end or estimated to become due in future periods but
based on profits earned to date. However, under the current
tax legislation in the People's Republic of China ("PRC"), the
Company has reasonable grounds to believe that income taxes
paid in respect of any year would be refunded after the
profits earned in that year are reinvested in the business.
Deferred income taxes are provided to recognize the effect of
temporary differences between profit as computed for tax
reporting purposes and profit as stated in the accounts to the
extent that a liability or an asset is expected to be payable
or realizable in the foreseeable future.
i Staff retirement plan costs
The Company's contributions to the staff retirement plan (Note
7) are charged to the income statements as incurred.
j Deferred Compensation Arrangement costs
For the years 1990 to 1995, the liability relating to the
Deferred Compensation Arrangement (Note 8) 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.
k Cash and cash equivalents
Cash includes certificates of deposit having a maturity date
of three months or less.
l Currency contracts
The Company enters into forward currency contracts in its
management of foreign currency exposures. However, since the
forward currency contracts are not intended to hedge an
identifiable foreign currency commitment, generally accepted
accounting principles require that the contracts are marked to
the market rate with the net realized or unrealized gains or
losses on forward currency contracts recognized in other
income (loss). (See Note 6).
m Property under development
Property under development is stated at the lower of cost and
market value.
- 42 -
<PAGE> 43
2 Comparative Figures
Certain expenses have been reallocated between cost of sales, selling,
general and administrative expenses and research and development
expenses. As a result, the comparative figures for prior periods have
been reclassified, where appropriate, in order to conform with the
presentation used in the current period.
3 Financial Instruments
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of its cash equivalents and trade
receivables.
The Company's cash equivalents are in high-quality deposits placed
with a wide array of institutions with high credit ratings. This
investment policy limits the Company's exposure to concentration of
credit risk.
The trade receivable balances largely represent amounts due from the
Company's principal customers who are generally international
organizations with high credit ratings. As a consequence,
concentrations of credit risk are limited. Letters of credit are the
principal security obtained to support lines of credit or negotiated
contracts when the financial strength of a customer is not considered
sufficient.
All of the Company's significant financial instruments at December 31,
1995 are reported in current assets or current liabilities in the
consolidated balance sheet at carrying amounts which approximate their
fair value.
From time to time, the Company hedges its currency exchange risk,
which primarily arises from materials purchased in currencies other
than the United States dollar, through the purchase and sale of
forward exchange contracts. Such contracts typically allow the
Company to buy or sell currency at a fixed price for up to one year,
but the Company normally books forward six months. At December 31,
1994, there was no open forward currency contract and at December 31,
1995, the open forward contracts amounted to $60,000.
4 Inventories
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
As at December 31,
------------------
1995 1994
---- ----
<S> <C> <C>
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,927 $ 435
Work-in-progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,690 2,828
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,808 5,824
------ ------
$10,425 $ 9,087
====== ======
</TABLE>
5 Long Term Investment
In December 1994, the Company purchased 14.04% or 477,370 of the
outstanding common shares of Deswell Investment Holdings Limited
("Deswell"), a supplier of plastic parts to the Company, for a total
consideration of $3,931,284.
In 1995, Deswell changed its name to Deswell Industries, Inc. and
completed its initial public offering which reduced the Company's
ownership to approximately 10.5% at December 31, 1995.
- 43 -
<PAGE> 44
6 Other Income (Loss) - Net
Other income (loss) - net consists of (in thousands):
<TABLE>
<CAPTION>
As At December 31,
------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Foreign exchange gains (losses)
on forward contracts . . . . . . . . . . . . . . . . . . . . . . $ 52 $ 68 $ (400)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . 1,548 591 298
Bank charges . . . . . . . . . . . . . . . . . . . . . . . . (490) (364) (268)
Release of deferred credit (Note 1(c)) . . . . . . . . . . . . . . - 594 -
Offering costs written off . . . . . . . . . . . . . . . . . . . . (334) - -
Full provision for Deferred Compensation
Arrangement (Note 8) . . . . . . . . . . . . . . . . . . . . . . (560) - -
Special bonus . . . . . . . . . . . . . . . . . . . . . . . . (376) - -
Miscellaneous income (expenses) . . . . . . . . . . . . . . . . . 385 (128) (43)
------ ------ ------
$ 225 $ 761 $ (413)
======= ======= =======
</TABLE>
7 Staff Retirement Plan
The Company maintains staff retirement plans (defined contribution
pension plans) which cover certain of its employees. The cost of the
Company's contributions amounted to $80,545, $67,034 and $63,256 for
the years ended December 31, 1995, 1994 and 1993 respectively.
8 Deferred Compensation Arrangement
In August 1990, the Company agreed to provide compensation in the
event of loss of office, for whatever reason, for two officers. The
amount of compensation to be ultimately provided is $500,000 for Mr.
Koo and $300,000 for Mr. Murakami. A provision of $40,000 was made in
each of the years ended December 31, 1995, 1994 and 1993. At December
31, 1995, the balance of the deferred compensation arrangement, which
amounted to $560,000, was provided for.
9 Income Taxes
Under the current British Virgin Islands law, the Company's income is
not subject to taxation. In Hong Kong, the holding company of a group
of companies does not file a consolidated tax return but instead each
company having operations in Hong Kong is required to file a separate
tax return. As a consequence, income tax returns are filed on an
individual company basis.
The parent Company has no income subject to taxation. However,
subsidiaries, primarily operating in Hong Kong and the PRC, are
subject to income tax as described below.
The provision for current income taxes of the subsidiaries operating
in Hong Kong has been calculated by applying the current rate of
taxation of 16.5% (1994: 16.5% and 1993: 17.5%) to the estimated
taxable income earned in or derived from Hong Kong during the period.
Deferred tax, where applicable, is provided under the liability method
at the rate of 16.5% (1994: 16.5%, 1993: 17.5%), being the effective
Hong Kong statutory income tax rate applicable to the ensuing
financial year, on the temporary differences between taxable income
and income reported in the financial statements.
- 44 -
<PAGE> 45
9 Income Taxes (cont'd)
The basic corporate tax rate for Foreign Investment Enterprises
("FIE's") in the PRC, such as NTES and Zastron, is currently 33% (30%
state tax and 3% local tax). However, because both NTES and Zastron
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 and Zastron have agreed to operate for a minimum of
ten years in the PRC, a two year tax holiday from the first profit
making year is available, following which in the third through fifth
years there is a 50% reduction to 7.5%. In any event, for FIE's such
as NTES and Zastron which export 70% or more of the production value
of their products, a reduction in the tax rate is available; in all
cases apart from years in which a tax holiday is available, there is
an overall minimum tax rate of 10%. In 1990 and 1991, NTES qualified
for a tax holiday; tax was payable at the rate of 7.5% on the
assessable profits of NTES in 1992, 1993 and 1994, and 10% in 1995.
In 1992 and 1993, Zastron qualified for a tax holiday; tax was payable
at the rate of 7.5% on the assessable profits of Zastron in 1994 and
1995.
An FIE whose foreign investor directly reinvests its share of profits
obtained from that FIE in establishing or expanding an export-oriented
or technologically advanced enterprise in the PRC for a minimum period
of five years may obtain a refund of the taxes already paid on those
profits. NTES qualified for such a refund of its 1992, 1993 and 1994
taxes as a result of the reinvestment of its 1992, 1993 and 1994
profits. In May 1994, NTES received a tax refund of $58,000 for the
reinvestment of its 1992 profits, in November 1994 received a tax
refund of $212,000 for the reinvestment of its 1993 profits, and in
August 1995 received a tax refund of $714,000 for the reinvestment of
its 1994 profit. Similarly, in August 1995, Zastron also received a
tax refund of $68,000 for the reinvestment of its 1994 profits. At
December 31, 1994, $391,000 was accrued for 1994 PRC taxes based on a
prudent approach pending the establishment of a pattern of receiving
the tax refunds to which the PRC subsidiaries were entitled. As such a
pattern has now been established, this accrual was reversed in 1995.
The Company intends to reinvest profit earned in 1995 by NTES and
Zastron and accordingly no provision for PRC taxes was made in 1995.
The Company has gained reasonable assurance through previous
experience that when profits are reinvested, PRC taxes paid are
refunded in full in the ensuing year.
The current and deferred components of the income tax (expense)
benefit are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current tax . . . . . . . $589 $(173) $(73)
Deferred tax . . . . . . . 0 0 0
---- ----- ----
$589 $(173) $(73)
==== ===== ====
</TABLE>
- 45 -
<PAGE> 46
9 Income Taxes (cont'd)
A reconciliation of the tax (expense) benefit to the amount computed by
applying the current tax rate to the income (loss) from continuing
operations before taxes in the consolidated statements of income is as
follows (in thousands except tax rate):
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Hong Kong statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . 16.5% 16.5% 17.5%
Income tax expense at current
tax rate on income from
consolidated companies before
income taxes and minority interests . . . . . . . . . . . . . . . . . . . . . . . $(1,787) $(1,353) $ (921)
Tax (expense) benefit arising from
items which are (not allowable)
assessable for tax purposes:
Gain on write-off of deferred credit
which is not taxable under Hong Kong
tax law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 98 0
Effect of difference between PRC and
Hong Kong tax applied to PRC
taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,659 873 368
Reversal of subsidiary's tax provision . . . . . . . . . . . . . . . . . . . . . 314 0 305
Income tax refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391 270 0
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (61) 175
------ ------ ------
$ 589 $ (173) $ (73)
====== ====== ======
</TABLE>
No income tax arose in the United States of America in any of the
periods presented.
In prior years, the purchase cost of patents and trademarks and
certain expenses incurred by a subsidiary, Nam Tai Supplies Ltd., were
claimed as tax deductible expenses. The Hong Kong Inland Revenue
Department ("IRD") has taken issue on the deductibility of these
expenses and issued revised assessments to recover taxes of $995,000.
In January 1994, the IRD petitioned the Hong Kong court to wind up the
subsidiary for non-payment of assessed taxes. A winding up order was
made on March 9, 1994, and the Official Receiver was appointed as
liquidator. In 1995, the tax provision of $314,000 for this
subsidiary was reversed as the subsidiary was in the process of
liquidation.
- 46 -
<PAGE> 47
10 Investment in Subsidiaries
<TABLE>
<CAPTION>
Percentage of
ownership
-------------
Consolidated Country of Principal December 31,
subsidiaries incorporation activity 1995 1994
------------ ------------- --------- ---- ----
<S> <C> <C> <C> <C>
Nam Tai Electronic &
Electrical Products
Limited 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%
</TABLE>
In March 1994, NTEE invested $9,944,000 in NTES to result in total
investment of $14,944,000. This investment consisted of a
reinvestment of NTES's 1993 net income of $4,162,000 and the
conversion of an intercompany loan between NTEE and NTES totalling
$5,782,000. In February 1995, NTEE invested a further $9,546,000 in
NTES by reinvesting NTES's 1994 net income. This increased NTEE's
total investment in NTES to $24,490,000.
At December 31, 1995, NTEE's investment in Zastron was $3,100,000 and
Nam Tai Electronics, Inc's investment in Nam Tai Electronics (Canada)
was $256,000.
Retained earnings are not restricted as to the payment of dividends
except to the extent dictated by prudent business practices. The
Company believes that there are no material restrictions, including
foreign exchange controls, on the ability of its non-PRC subsidiaries
to transfer surplus funds to the Company in the form of cash
dividends, loans, advances or purchases. With respect to the
Company's PRC subsidiaries, there are restrictions on the purchase of
materials by these companies, the payment of dividends and the removal
of dividends from the PRC. However, the Company believes that such
restrictions will not have a material effect on the group's liquidity
or cash flows.
11 Related Party Transactions
In June 1995, the Company completed the construction of a residential
property pursuant to an agreement dated January 13, 1995. As the
property had not been sold to a third party by December 31, 1995, Mr.
M.K. Koo, the Chairman of the Company, purchased the property for book
value of $2,620,000 being the higher of the market value and book
value of the property as required by the contract. At December 31,
1995 this amount was included in accounts receivable.
- 47 -
<PAGE> 48
12 Commitments and Contingencies
a Pursuant to the August 17, 1992 land purchase and development
agreement between NTES and Baoan County City Development
Foundation, NTES is required to construct a multi-purpose
business building of seven floors or more in Baoan City,
Shenzhen, PRC. The Company is looking for a partner to
develop, manage and finance the entire project. To date, the
Company has invested $488,000 to purchase the land and in
capitalized design fees. Should the project not proceed, the
Company expects its maximum exposure will be $488,000.
b Lease commitments
At December 31, 1995, there were annual commitments under
operating leases which relate to land and buildings as follows
(in thousands):
<TABLE>
<S> <C>
- 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 935
- 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 746
- 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513
- 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481
- 2000 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 4,907
------
$7,582
======
</TABLE>
c The Company has been advised that Tele-Art, Inc., a
shareholder of the Company, intends to pursue claims in a
court in the British Virgin Islands for damages allegedly
suffered as a result of the rights offering completed in 1993
(Note 14(c)). Management believes that the claim is without
merit and will vigorously defend it and believes that the
outcome of the case will not have a significant effect on the
financial statements.
- 48 -
<PAGE> 49
13 Banking Facilities
General banking facilities amounted to $38,202,000 at December 31,
1995, (December 31, 1994 - $24,022,000; December 31, 1993 -
$20,849,000), with interest charged based on the Hong Kong prime rate
for Hong Kong dollar transactions and banks' cost of funds rate for
transactions in other currencies (effectively 8.75% and 0.55%,
respectively at December 31, 1995).
The total amount of banking facilities utilized as at December 31,
1995 was $10,216,000 (December 31, 1994 - $8,701,000).
The notes payable, which include trust receipts, shipping guarantees
and discounted bills, may not agree to utilized banking facilities due
to a timing difference between the Company receiving the goods and the
bank issuing the trust receipt to cover financing of the purchase.
The Company recognizes the outstanding letter of credit as a note
payable when the goods are received, even though the bank may not have
issued the trust receipt. However, this will not affect the total
bank facility utilization, as an addition to trust receipts will be
offset by a reduction in the same amount of outstanding letters of
credit.
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
---- ----
<S> <C> <C>
Outstanding letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,724 $ 5,789
Usance bills pending maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,159 -
Discounted bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,349
Trust receipts and shipping guarantees . . . . . . . . . . . . . . . . . . . . . . . . . - -
Short-term bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 563
Forward Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 -
------ ------
Total banking facilities utilized . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,216 8,701
Less:
Outstanding letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,724) (5,789)
Short-term bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (273) (563)
Forward Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60) -
Plus:
Goods received but trust receipts not issued
by the bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,161 3,768
------ ------
Notes payable per balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,320 $ 6,117
====== ======
</TABLE>
Discounted bills normally have a term to maturity of 30 days. Trust
receipts normally have terms from 90 to 100 days. The interest rate
for the above facilities is normally prime plus 3/4% for all
currencies.
At December 31, 1994, cash and term deposits totalling $2,605,000,
certain fixed assets and a corporate guarantee were pledged to secure
the banking facilities. In the third quarter of 1995, the Company's
bankers agreed to release the charges on the pledged assets and to
provide the banking facilities with only the corporate guarantee from
Nam Tai Electronics, Inc., the parent company, and its undertaking not
to pledge any assets to any banks without the prior consent of the
Company's bankers.
- 49 -
<PAGE> 50
14 Common Shares
a Authorized shares
In July 1992, the Company effected a 2 for 1 forward stock
split, and the number of authorized Common Shares was
increased to 10,000,000. At the same time, the par value for
each Common Share decreased to $0.01. In July 1994, the Board
of Directors increased the number of authorized Common Shares
to 20,000,000.
b Stock options
In January 1988, the Company issued options at fair market
value to certain directors and shareholders. Remaining
options of 476,727 were exercised during 1993 at $2.50 per
share realizing $1,191,818 proceeds for the Company.
In August 1993, the Board of Directors approved a stock option
plan which authorized the issuance of 300,000 options to key
employees of the Company at an exercise price of $5.35. The
options expire in September 1998. Because the option's
exercise price was less than the market value of the Company's
Common Shares, the Company recorded compensation expense of
$690,000 in accordance with U.S. generally accepted accounting
principles, reflecting the fair value of the total discount of
the options at the inception date. In December 1993, 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. A summary of stock option activity is
as follows:
<TABLE>
<CAPTION>
Number of Option Price
Options Per Share
------- ---------
<S> <C> <C>
Outstanding at December 31, 1992 . . . . . . . . . . . . . . . . . . . . . 476,727 $2.50
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (476,727) $2.50
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 $5.35
--------
Outstanding at December 31, 1993 . . . . . . . . . . . . . . . . . . . . . 300,000 $5.35
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,000) $5.35
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365,000 $11.00
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,750) $5.35 & $ 11.00
--------
Outstanding at December 31, 1994 . . . . . . . . . . . . . . . . . . . . . 615,250 $5.35 & $ 11.00
Reissued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,750 $11.00
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (70,150) $5.35
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,000) $11.00
Reissued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 $11.38
--------
Outstanding at December 31, 1995 . . . . . . . . . . . . . . . . . . . . . 570,850
========
</TABLE>
c Rights Offering
On October 14, 1993 the Company completed a public offering of
750,000 Units at $7.65 per Unit for total proceeds of
$5,737,500. After deducting total offering expenses of
$979,500, the Company received net proceeds of $4,758,000.
Each Unit consisted of one Common Share and two identical
Common Share Purchase Warrants.
- 50 -
<PAGE> 51
15 Business Segment Information
The Company operates principally in the consumer electronic products
industry. The following is a summary of sales, income from continuing
operations and assets by geographic area (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net sales from operations within
Hong Kong:
Unaffiliated customers $119,417 $ 95,470 $ 70,405
Related parties - - -
Intersegment sales 353 - 969
------- ------- -------
119,770 95,470 71,374
People's Republic of China:
Unaffiliated customers 1,445 810 350
Intersegment sales 112,804 92,612 62,278
------- ------- -------
114,249 93,422 62,628
Canada:
Unaffiliated customers 378 284 89
Intersegment eliminations (113,157) (92,612) (63,247)
------- ------- -------
Total net sales $121,240 $ 96,564 $ 70,844
======= ======= =======
Income (loss) from continuing operations
within:
- Hong Kong 4,196 2,020 1,031
- People's Republic of China 10,448 7,491 4,760
- Canada (3,225) (1,412) (594)
------- ------- -------
Income from continuing operations $ 11,419 $ 8,099 $ 5,197
======= ======= =======
Identifiable assets by geographic
area:
- Hong Kong 25,505 23,463 17,912
- People's Republic of China 42,416 19,116 14,192
- Canada 11,360 23,708 7,426
------- ------- -------
Total assets $ 79,281 $ 66,287 $ 39,530
======= ======= =======
</TABLE>
Intersegment sales arise from the transfer of finished goods between
subsidiaries operating in different areas. These sales are generally
at estimated market prices.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net sales to customers by geographic
area:
- Japan $ 41,532 $ 23,547 $ 6,888
- North America 36,730 31,686 29,107
- Hong Kong 20,544 21,855 17,416
- Europe 16,003 13,831 12,218
- Other 6,431 5,645 5,215
------- ------ ------
Total net sales $121,240 $ 96,564 $ 70,844
======= ====== ======
</TABLE>
The Company had sales to four major customers, each individually
exceeding 10% of total sales in 1995 as follows:
<TABLE>
<CAPTION>
Customer
--------
<S> <C> <C> <C>
A $ 58,124 $ 46,032 $ 33,330
B (through A) 21,805 12,600 0
C 16,022 9,421 13,191
D 15,962 18,573 14,617
------- ------ ------
$111,913 $ 86,626 $ 61,138
======= ====== ======
</TABLE>
- 51 -
<PAGE> 52
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements. See list under Item 18 of this Report.
(b) Exhibits. The following documents are filed as exhibits
herewith, unless, otherwise specified and are incorporated
herein by this reference:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------- -------
<S> <C>
2.1* Tenancy agreement dated September 13, 1995 with Lord Realty Holdings
Limited for Suite 530, 999 West Hastings Street, Vancouver,
British Columbia, Canada
2.2* Letter Agreement dated July 25,1995 revising banking facilities
with The Hongkong and Shanghai Banking Corporation Limited
2.3* Letter Agreement dated September 18, 1995 revising banking facilities with
The Sanwa Bank Limited
2.4* Letter Agreement dated September 5, 1995 revising credit facilities with
Banque Worms
2.5* Construction Agreement dated March 3, 1995 with Guangdong 2nd Building
Engineering Co. for construction of the new factory in China
2.6* Construction Agreement dated May 19, 1995 with Shimizu Corporation
for construction of the new factory in China
2.7* Supply Contract dated May 19, 1995 with Shimizu Hong Kong Co., Ltd.
for Diesel Generators at the new factory in China
2.8* Contracts of Purchase and Sale dated December 29, 1995 with Mr. M.K. Koo
regarding a residential property in West Vancouver
2.9 Diagram of the Company's operating subsidiaries and affiliates - (see page five
of this Report)
3.1 Consent of Independent Accountants to incorporation of report on financial
statements into Registrant's Registration Statement on Form S-8 (Page 54)
3.2 Consent of Independent Accountants to incorporation of report on financial
statements into Registrant's Registration Statement on Form S-3 (Page 55).
</TABLE>
- -------------
* Previously filed on April 2, 1996 with registrant's Form 20-F for the year
ended December 31, 1995.
- 52 -
<PAGE> 53
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: June 19, 1996 By: /s/ M.K. KOO
---------------------
M.K. Koo
Chairman of the Board
- 53 -
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------- -------
<S> <C>
2.1* Tenancy agreement dated September 13, 1995 with Lord Realty Holdings
Limited for Suite 530, 999 West Hastings Street, Vancouver,
British Columbia, Canada
2.2* Letter Agreement dated July 25,1995 revising banking facilities
with The Hongkong and Shanghai Banking Corporation Limited
2.3* Letter Agreement dated September 18, 1995 revising banking facilities with
The Sanwa Bank Limited
2.4* Letter Agreement dated September 5, 1995 revising credit facilities with
Banque Worms
2.5* Construction Agreement dated March 3, 1995 with Guangdong 2nd Building
Engineering Co. for construction of the new factory in China
2.6* Construction Agreement dated May 19, 1995 with Shimizu Corporation
for construction of the new factory in China
2.7* Supply Contract dated May 19, 1995 with Shimizu Hong Kong Co., Ltd.
for Diesel Generators at the new factory in China
2.8* Contracts of Purchase and Sale dated December 29, 1995 with Mr. M.K. Koo
regarding a residential property in West Vancouver
2.9 Diagram of the Company's operating subsidiaries and affiliates - (see page five
of this Report)
3.1 Consent of Independent Accountants to incorporation of report on financial
statements into Registrant's Registration Statement on Form S-8 (Page 54)
3.2 Consent of Independent Accountants to incorporation of report on financial
statements into Registrant's Registration Statement on Form S-3 (Page 55).
</TABLE>
- -------------
* Previously filed on April 2, 1996 with registrant's Form 20-F for the year
ended December 31, 1995.
<PAGE> 1
EXHIBIT 3.1
PRICE WATERHOUSE [LOGO]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-73954) of Nam Tai Electronics, Inc. of our
reported dated March 28, 1996 appearing in this Form 20-F.
/s/ PRICE WATERHOUSE
- -------------------------------
PRICE WATERHOUSE
Certified Public Accountants
HONG KONG, March 28, 1996
<PAGE> 1
EXHIBIT 3.2
[PRICE WATERHOUSE LETTERHEAD] [LOGO]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the
Registration Statement on Form F-3 (the "Registration Statement") of Nam Tai
Electronics, Inc. (File No. 33-91553) of our report dated March 28, 1996
appearing on page 35 of Nam Tai Electronics, Inc.'s Annual Report on
Form 20-F/A1 for the year ended December 31, 1995. We hereby further consent to
the reference to us under the heading "Experts" in the Prospectus included as
part of the Registration Statement.
/s/ PRICE WATERHOUSE
Price Waterhouse
Certified Public Accountants
Hong Kong
June 20, 1996
