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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 20-F o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
 or þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2004
 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 0-16673 Nam Tai Electronics, Inc. (Exact name of registrant as specified in its charter)
 British Virgin Islands(Jurisdiction of incorporation or organization) 116 Main Street
3rd Floor
Road Town, Tortola
British Virgin Islands(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act:
Common Shares, $0.01 par value per share Securities registered pursuant to Section 12(g) of the Act: NONE Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE As of December 31, 2004, there were 42,664,536 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 þ No o Indicate by check mark which financial statement item the registrant has elected to follow:
Item 17. o Item 18. þ




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TABLE OF CONTENTS PART IItem 1. Identity of Directors, Senior Management and Advisors  Not applicable
    
    
    3Item 2. Offer Statistics and Expected Timetable  Not applicable
    
    
    3Item 3. Key Information
    
    
    3Item 4. Information on the Company
    
    
    14Item 5. Operating and Financial Review and Prospects
    
    
    27Item 6. Directors, Senior Management and Employees
    
    
    43Item 7. Major Shareholders and Related Party Transactions
    
    
    48Item 8. Financial Information
    
    
    50Item 9. The Listing
    
    
    54Item 10. Additional Information
    
    
    55Item 11. Quantitative and Qualitative Disclosure about Market Risk
    
    
    60Item 12. Description of Securities Other than Equity Securities  Not applicable
    
    
    61PART IIItem 13. Defaults, Dividend Arrearages and Delinquencies  Not applicable
    
    
    62Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds  Not applicable
    
    
    62Item 15. Controls and Procedures
    
    
    62Item 16. [Reserved]
    
    
    62Item 16 A. Audit Committee Financial Expert
    
    
    62Item 16 B. Code of Ethics
    
    
    63Item 16 C. Principal Accountant Fees and Services
    
    
    63Item 16 D. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    64PART IIIItem 17. Financial Statements  Not applicable
    
    
    64Item 18. Financial Statements
    
    
    64Item 19. ExhibitsEX-4.3 EQUITY INTEREST TRANSFER AGREEMENTEX-4.7 LAND TITLE RIGHTSEX-4.9 MEMO OF UNDERSTANDINGEX-4.10 SALE AND PURCHASER AGREEMENTEX-4.11 TRADEMARK LICENSE AGREEMENTEX-4.12 DEED OF INDEMNITYEX-4.13 UNDERWRITING AGREEMENT DATED APRIL 15, 2004EX-4.14 SUPPLEMENTAL AGREEMENTEX-4.15 UNDERWRITING AGREEMENT DATED APRIL 22, 2004EX-4.16 PRICING DETERMINATION AGREEMENTEX-4.17 STOCK BORROWING AGREEMENTEX-4.18 AMENDED 2001 OPTION PLANEX-4.19 ACCESSION AGREEMENTEX-4.20 ESCROW AGREEMENTEX-4.21 SUBSCRIPTION AGREEMENTEX-4.22 DEED OF ASSIGNMENT OF TRADEMARKSEX-4.23 BANKING FACILITIES LETTEREX-4.24 SHARE TRANSFER AGREEMENTEX-12.1 CERTIFICATION TO SECTION 302EX-12.2 CERTIFICATION TO SECTION 302EX-14.1 CODE OF ETHICSEX-23.1 CONSENT OF DELOITTE TOUCHE TOHMATSUEX-99.1 CERTIFICATION TO SECTION 906EX-99.2 CERTIFICATION TO SECTION 906
  SIGNATURES AND CERTIFICATIONS Consents of Independent Accountants (to incorporation of their report on Financial Statements
into the Companys Registration Statements on Forms F-3 and S-8) This Annual Report onForm 20-Fcontains forward-looking statements. These statements are
subject to certain risks and uncertainties that could cause actual results to differ materially
from those anticipated in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in the section entitled Risk Factors
under Item 3. Key Information. Readers should not place undue reliance on forward-looking statements, which reflect
managements view only as of the date of this Report. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect subsequent events or circumstances.
Readers should also carefully review the risk factors described in other documents the Company
files from time to time with the Securities and Exchange Commission. FINANCIAL STATEMENTS AND CURRENCY PRESENTATION The Company prepares its consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America and publishes its financial
statements in United States dollars. 2




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PART I Unless the context otherwise requires, all references in this annual report, or Report, to
Nam Tai, or we, or our, or us, and the Company refer to Nam Tai Electronics, Inc. and its
consolidated subsidiaries and their respective predecessors. References to dollars or $ are to
United States dollars. 
 Item 1.Identity of Directors, Senior Management and Advisors Not applicable. 
 Item 2.Offer Statistics and Expected Timetable Not applicable. 
 Item 3.Key Information Selected Financial Data Our historical consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States and are presented in U.S. dollars. The
following selected statements of income data for each of the three years in the period ended
December 31, 2004 and the balance sheet data as of December 31, 2003 and 2004 are derived from our
consolidated financial statements and notes thereto included in this Report. The selected
statements of income data for each of the two years in the period ended December 31, 2000 and 2001
and the balance sheet data as of December 31, 2000, 2001 and 2002 were derived from our audited
financial statements, which are not included in this Report. The following data should be read in
conjunction with the Section of the Report entitled Item 5, Operating and Financial Review and
Prospects, and our consolidated financial statements including the related footnotes. All reference
to numbers of common shares, per share data and stock option data have been adjusted to give effect
to a three-for-one stock split effective on June 30, 2003 on a retroactive basis and for the
purposes of earnings per share calculation, all references to numbers of common shares, and per
share data have been adjusted to reflect an issuance of a stock dividend to shareholders at a ratio
of one dividend share for every ten shares, or a ten-for-one stock dividend, effective on November
7, 2003. Year ended December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(in thousands except per share data)Consolidated statements of income data:Net sales  third parties
    
    $
    207,456
    
    
    $
    212,934
    
    
    $
    228,167
    
    
    $
    385,524
    
    
    $
    499,680Net sales  related party
    
    
    6,232
    
    
    
    21,072
    
    
    
    7,849
    
    
    
    20,782
    
    
    
    34,181Total net sales
    
    
    213,688
    
    
    
    234,006
    
    
    
    236,016
    
    
    
    406,306
    
    
    
    533,861Cost of sales
    
    
    182,096
    
    
    
    203,974
    
    
    
    197,956
    
    
    
    340,016
    
    
    
    457,385Gross profit
    
    
    31,592
    
    
    
    30,032
    
    
    
    38,060
    
    
    
    66,290
    
    
    
    76,476Operating costs and expenses:Selling,
general and administrative
    
    
    17,646
    
    
    
    21,974
    
    
    
    17,983
    
    
    
    24,866
    
    
    
    28,053Research and development
    
    
    3,489
    
    
    
    2,954
    
    
    
    2,686
    
    
    
    4,037
    
    
    
    5,045Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    339
    
    
    
    
    
    
    
    Total operating expenses
    
    
    21,135
    
    
    
    24,928
    
    
    
    21,008
    
    
    
    28,903
    
    
    
    33,098Income from operations
    
    
    10,457
    
    
    
    5,104
    
    
    
    17,052
    
    
    
    37,387
    
    
    
    43,378Other income (expenses)  net
    
    
    13,853
    
    
    
    2,709
    
    
    
    (6,043
    )
    
    
    5,525
    
    
    
    37,397Interest expense
    
    
    (165
    )
    
    
    (178
    )
    
    
    (790
    )
    
    
    (121
    )
    
    
    (195
    )Income before income taxes and minority interests
    
    
    24,145
    
    
    
    7,635
    
    
    
    10,219
    
    
    
    42,791
    
    
    
    80,580
 3




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Year ended December 31,2000
    
    
    2001
    
    
    2002

    
    2003
    
    
    2004(in thousands except per share data)Income taxes benefit (expense)
    
    
    33
    
    
    
    (227
    )
    
    
    (773
    )
    
    
    (399
    )
    
    
    (879
    )Income before minority interests and equity in
income (loss) of affiliated companies
    
    
    24,178
    
    
    
    7,408
    
    
    
    9,446
    
    
    
    42,392
    
    
    
    79,701Minority interests
    
    
    12
    
    
    
    (230
    )
    
    
    (164
    )
    
    
    (1,067
    )
    
    
    (6,010
    )Income after minority interests
    
    
    24,190
    
    
    
    7,178
    
    
    
    9,282
    
    
    
    41,325
    
    
    
    73,691Equity in income (loss) of affiliated companies
    
    
    (189
    )
    
    
    1,867
    
    
    
    10,741
    
    
    
    498
    
    
    
    (6,806
    )Discontinued operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,979
    
    
    
    Net income
    
    $
    24,001
    
    
    $
    9,045
    
    
    $
    20,023
    
    
    $
    43,802
    
    
    $
    66,885Earnings per share:Basic
    
    $
    0.80
    
    
    $
    0.27
    
    
    $
    0.57
    
    
    $
    1.09
    
    
    $
    1.57Diluted
    
    $
    0.78
    
    
    $
    0.26
    
    
    $
    0.57
    
    
    $
    1.07
    
    
    $
    1.57Weighted average shares:Basic
    
    
    30,077
    
    
    
    33,905
    
    
    
    34,885
    
    
    
    40,336
    
    
    
    42,496Diluted
    
    
    30,938
    
    
    
    34,298
    
    
    
    35,430
    
    
    
    40,839
    
    
    
    42,548
 At December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(in thousands)Consolidated balance sheet data:Cash and cash equivalents
    
    $
    58,896
    
    
    $
    58,676
    
    
    $
    82,477
    
    
    $
    61,827
    
    
    $
    160,649Working capital
    
    
    88,969
    
    
    
    83,525
    
    
    
    87,184
    
    
    
    93,474
    
    
    
    218,243Property, plant and equipment  net
    
    
    44,599
    
    
    
    70,414
    
    
    
    75,914
    
    
    
    77,647
    
    
    
    97,441Total assets
    
    
    208,370
    
    
    
    224,573
    
    
    
    275,086
    
    
    
    297,695
    
    
    
    460,473Short-term debt, including current
portion of long-term debt
    
    
    1,523
    
    
    
    3,687
    
    
    
    14,970
    
    
    
    3,004
    
    
    
    4,955Long-term debt, less current portion
    
    
    
    
    
    
    12,860
    
    
    
    2,812
    
    
    
    1,688
    
    
    
    5,163Total debt
    
    
    1,523
    
    
    
    16,547
    
    
    
    17,782
    
    
    
    4,692
    
    
    
    10,118Shareholders equity
    
    
    162,364
    
    
    
    169,351
    
    
    
    202,128
    
    
    
    217,118
    
    
    
    305,053Common shares
    
    
    306
    
    
    
    312
    
    
    
    360
    
    
    
    412
    
    
    
    426Total dividend per share
    
    
    0.45
    
    
    
    0.13
    
    
    
    0.49
    
    
    
    1.00
    
    
    
    0.48
 Risk Factors We may from time to time make written or oral forward-looking statements. Written
forward-looking statements may appear in this document and other documents filed with the
Securities and Exchange Commission, in press releases, in reports to shareholders, on our website,
and other documents. The Private Securities Reform Act of 1995 contains a safe harbor for
forward-looking statements on which the Company relies in making such disclosures. In connection
with this safe harbor, we are hereby identifying important factors that could cause actual
results to differ materially from those contained in any forward-looking statements made by us or
on our behalf. Any such statements are qualified by reference to the following cautionary
statements: Risks Related to Our Business We are dependent on a few large customers, the loss of any of which could substantially harm our
business and operating results. Historically, a substantial percentage of our sales have been to a small number of customers.
During the years ended December 31, 2002, 2003 and 2004, sales to our customers accounting for 10%
or more of our net sales aggregated approximately 60.2%, 46.7% and 47.9%, respectively, of our net
sales. The loss of Epson Precision (HK) Ltd., Sharp Corporation, Wuxi Sharp Electronic Components
Co., Ltd., or Motorola Inc., each of which accounted for more than 10% of our net sales during
2004, or a substantial reduction in orders from any of them, would materially and adversely impact
our business and operating results. Our quarterly and annual operating results are subject to significant fluctuations from a wide
variety of factors. Our quarterly and annual operating results are affected by a wide variety of factors that
could materially and adversely affect our business and operating results during any period. This
could result from any one or a combination of factors, such as: 4




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
    the timing, cancellation or postponement of orders;
    the type of product and related margins;
    our customers announcement and introduction of new products or new generations of products;
    the life cycles of our customers products;
    our timing of expenditures in anticipation of future orders;
    our effectiveness in managing manufacturing processes, including, interruptions or slowdowns
in production and changes in cost and availability of components; and
    the mix of orders filled. The volume and timing of orders received during a quarter are difficult to forecast. From time
to time, our customers encounter uncertain and changing demand for their products. Customers
generally order based on their forecasts. If demand falls below such forecasts or if customers do
not control inventories effectively, they may reduce, cancel or postpone shipments of orders. As a consequence of any of the above factors, our results of operations in any period should not
be considered indicative of results to be expected in any future period, and fluctuations in
operating results may also result in fluctuations in the market price of our common shares. Our
results of operations in future periods may fall below the expectations of public market analysts
and investors. This failure to meet expectations could cause the trading price of our common shares
to decline substantially. Cancellations or delays in orders could materially and adversely affect our gross margins and
operating income. Sales to our original equipment manufacturer, or OEM, customers are primarily based on
purchase orders we receive from time to time rather than firm, long-term purchase commitments.
Although it is our general practice to purchase raw materials only upon receiving a purchase order,
for certain customers we will occasionally purchase raw materials based on such customers rolling
forecasts. Further, during times of potential component shortages, we have purchased, and may
continue to purchase, raw materials and component parts in the expectation of receiving purchase
orders for products that use these components. In the event actual purchase orders are delayed, are
not received or are cancelled, we would experience increased inventory levels or possible
write-down of raw material inventory that could materially and adversely affect our business and
operating results. In 2001, we wrote down inventory for $3.8 million for slow-moving raw materials
relating to cancelled, reduced or delayed orders. Subsequently, we were able to use some of these
raw materials in production or we received compensation for the unused raw materials from certain
of our customers, and the gain of $2.0 million was recorded in cost of sales during 2002. If we are unable to produce our new products in a high-quality and cost-effective manner, our gross
margins and business and operating results could be materially and adversely affected. We have experienced increased costs associated with developing advanced manufacturing
techniques to produce our complex products on a mass scale and at a low cost. This has negatively
impacted our gross margins. For example, our initial production runs of liquid crystal display, or
LCD, modules experienced low production yields and other inefficiencies. We have commenced
production of BluetoothTM wireless headset accessory, radio frequency, or RF, modules,
thin film transistor liquid crystal display, or TFT LCD, modules, color LCD modules and complementary metal oxide
semiconductor, or CMOS, sensor modules and flexible printed circuit, or FPC, sub-assemblies in
relation to which we have relatively limited manufacturing experience. We expect that a substantial
portion of our growth will come from our manufacture of these products. While we expect and plan
for such increased costs in our new product manufacturing cycle, we cannot precisely predict the
time and expense required to overcome initial problems and to ensure reliability and high quality
at an acceptable cost. The increased costs and other difficulties associated with manufacturing RF
modules, TFT LCD modules, color LCD modules, CMOS sensor modules, FPC sub-assemblies and other new
products could have a negative impact on our future gross margins. In addition, even if we develop
capabilities to manufacture new products, there can be no guarantee that a market will exist for
such products or that such products will adequately respond to market trends. If we invest
resources to develop capabilities to manufacture new products, like the investment in our new
factory, for which a market does not develop, our business and operating results would be seriously
harmed. Even if the market for our services grows, it may not grow at an adequate pace. Our inability to utilize capacity at our new factory could materially and adversely affect our
business and operating results. In order to expand our production capacity, we have built a new factory consisting of
approximately 265,000 square feet adjacent to our principal manufacturing facilities in Shenzhen,
the Peoples Republic of China, or China or the PRC. The construction was completed in December 2004
and we expect full operations to commence in April 2005. As of December 31, 2004, we had spent
$15.0 million to cover the cost of construction and fixtures and equipment for the new factory. The
financing for these improvements to our manufacturing facilities was obtained from our internal
resources. We have committed substantial expenditures and resources constructing and equipping this
factory but cannot guarantee that we will be able to fully utilize such additional capacity. Our factory
utilization is dependent on our success in providing manufacturing services for new or other
products that we intend to produce at that factory, such as BluetoothTM wireless headset
accessory for cellular phones, CMOS sensor modules for cellular phones with built-in camera
function, home entertainment products and FPC sub-assemblies at a price and volume
sufficient to absorb our increased overhead expenses. Demand for contract manufacturing of these
products may not be as high as we expect, and we may fail to realize the expected benefit from our
investment in our new factory. 5




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We face increasing competition, which has had an adverse effect on our margins. Although certain barriers to entry exist in providing electronics manufacturing services, or
EMS, including technical expertise, substantial capital requirements, difficulties relating to
building customer relationships and a large customer base, the barriers to entry are comparatively
low and we are aware that manufacturers in Hong Kong and China may be developing or have developed
the required technical capability and customer base to compete with our existing business. Competition in the EMS industry is intense and is characterized by price erosion, rapid
technological change, and competition from major international companies. This intense competition
has resulted in pricing pressures, lower sales and reduced margins. Continuing competitive
pressures could materially and adversely affect our business and operating results. Over the last
several years our margins have declined substantially, from 17.2% in 1999 to approximately 14.3% in
2004. Continuing competitive pressures could materially and adversely affect our business and
operating results. We may not be able to compete successfully with our competitors, many of which have substantially
greater resources than we do. The electronics manufacturing services we provide are available from many independent sources
as well as from our current and potential customers with in-house manufacturing capabilities. Our
EMS competitors include Celestica, Inc., Flextronics International Ltd., Hon Hai Precision Industry
Co., Ltd., Jabil Circuit, Inc., Sanmina-SCI Corporation and Solectron Corporation. Our principal
competitors in the manufacture of our traditional product lines of calculators, personal organizers
and linguistic products include Kinpo Electronics, Inc. and Inventec Co. Ltd. Our competitors in
the manufacturing of image capturing devices and their modules include Lite-On Technology
Corporation, The Primax Group and Logitech International S.A. Our principal competitors in the
manufacture of mobile phone accessories include Elcoteq Network Corp. Our competitors in the
manufacturing of RF modules include Wavecom and WKK International (Holdings) Ltd. Our competitors
in the manufacturing of LCD panels include Truly International Holdings Ltd. and Varitronix
International Ltd. We also have numerous competitors in the telecommunication, sub-assemblies and
components product lines, including Philips, Samsung, Solectron and Varitronix International Ltd.
Many of our competitors have greater financial, technical, marketing, manufacturing, regional
shipping capabilities and logistics support and personnel resources than we do. As a result, we may
be unable to compete successfully with these organizations in the future. We must spend substantial amounts to maintain and develop advanced manufacturing processes and
engage additional engineering personnel in order to attract new customers and business. We operate in rapidly changing industries. Technological advances, the introduction of new
products and new manufacturing and design techniques could materially and adversely affect our
business unless we are able to adapt to those changing conditions. As a result, we are continually
required to commit substantial funds for, and significant resources to, engaging additional
engineering and other technical personnel and to purchase advanced design, production and test
equipment. Our future operating results will depend to a significant extent on our ability to continue to
provide new manufacturing solutions that compare favorably on the basis of time to introduction,
cost, and performance with the manufacturing capabilities of OEMs and competitive third-party
suppliers. Our success in attracting new customers and developing new business depends on various
factors, including:  
    utilization of advances in technology;
    development of new or improved manufacturing processes for our customers products;
    delivery of efficient and cost-effective services; and
    timely completion of the manufacture of new products. We generally have no written agreements with suppliers to obtain components and our margins and
operating results could suffer from increases in component prices. We are sometimes responsible for purchasing components used in manufacturing products for our
customers. We generally do not have written agreements with our suppliers of components. This
typically results in our bearing the risk of component price increases because we may be unable to
procure the required materials at a price level necessary to generate anticipated margins from the
orders of our customers. Accordingly, increases in component prices could materially and adversely
affect our gross margins and operating results. Our business and operating results would be materially and adversely affected if our suppliers of
needed components fail to meet our needs. At various times, we have and continue to experience shortages of some of the electronic
components that we use, and suppliers of some components lack sufficient capacity to meet the
demand for these components. In some cases, supply shortages and delays in deliveries of particular
components have resulted in curtailed production, or delays in production, of assemblies using that
component, which contributed to an increase in our inventory levels and reduction in our gross
margins. We expect that shortages and delays in deliveries of some components will continue. If we
are unable to obtain sufficient components on a timely basis, we may experience manufacturing
delays, which could harm our relationships with current or prospective customers and reduce our
sales. We also depend on a small number of suppliers for certain of the 6




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components that we use in our business. For example, we purchase most of our integrated circuits
from Toshiba Corporation and Sharp Corporation and certain of their affiliates. If we were unable
to continue to purchase components from these limited source suppliers, our business and operating
results would be materially and adversely affected. Factors affecting the electronics industry in general and our customers in particular could harm
our operations. Most of our sales are to customers in the electronics industry, which is subject to rapid
technological change, product obsolescence and short product life cycles and has suffered from an
industry-wide slowdown since 2000. The factors affecting the electronics industry in general, or
any of our major customers or competitors in particular, could have a material adverse effect on
our business and operating results. Our success will depend to a significant extent on the success
achieved by our customers in developing and marketing their products, including their products that
use RF modules, color straight-twisted nematic, or STN, LCD modules, TFT LCD modules, CMOS sensor
modules and FPC sub-assemblies, some of which may be new and untested. If our customers products
become obsolete, fail to gain widespread commercial acceptance or become the subject of
intellectual property disputes, our business and operating results could be materially and adversely affected. Future acquisitions or strategic investments may not be successful and may harm our operating
results. An important element of our strategy is to review prospects for acquisition or strategic
investments that would complement our existing companies and products, augment our market coverage
and distribution ability or enhance our technological capabilities. Future acquisitions or strategic investments could have a material adverse effect on our
business and operating results because of:  
    possible charges to operating results for purchased technology, restructuring or impairment charges related to goodwill or
amortization expenses associated with intangible assets;
    potential increase in our expenses and working capital requirements and the incurrence of debt and contingent liabilities;
    difficulties in successfully integrating any acquired operations, technologies, customers products and businesses with our operations;
    diversion of our capital and managements attention to other business concerns;
    risks of entering markets or geographic areas in which we have limited prior experience; or
    potential loss of key employees of acquired organizations or inability to hire key employees necessary for expansion. For example, in September 2004, we made an impairment to write down our $10.0 million investment
in Alpha Star Investments Ltd. to its fair value of approximately $3.0 million, based on advice from
an external valuer. Our customers are dependent on shipping companies for delivery of our products and interruptions to
shipping could materially and adversely affect our business and operating results. Our customers rely on a variety of carriers for product transportation through various world
ports. A work stoppage, strike or shutdown of one or more major ports or airports could result in
shipping delays materially and adversely affecting our customers, which in turn could have a
material adverse effect on our business and operating results. Similarly, an increase in freight
surcharges due to rising fuel costs or general price increases could materially and adversely
affect our business and operating results. Because our operations are international, we are subject to significant worldwide political,
economic, legal and other uncertainties. We are incorporated in the British Virgin Islands and have subsidiaries incorporated in the
Cayman Islands, Hong Kong, Macao, Japan and China. We have administrative offices in Hong Kong and
Macao. We manufacture all of our products in China. As of December 31, 2004, approximately 86.7% of
the net book value of our total fixed assets is located in China. We sell our products to customers
in Hong Kong, North America, Europe, Japan, China and Southeast Asia. Our international operations
may be subject to significant political and economic risks and legal uncertainties, including:  

    changes in economic and political conditions and in governmental policies;

    changes in international and domestic customs regulations;

    wars, civil unrest, acts of terrorism and other conflicts;

    changes in tariffs, trade restrictions, trade agreements and taxation;

    difficulties in managing or overseeing foreign operations; and

    limitations on the repatriation of funds because of foreign exchange controls. The occurrence or consequences of any of these factors may restrict our ability to operate in
the affected region and decrease the profitability of our operations in that region. 7




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Our operating results could be negatively impacted by seasonality. Historically, our sales and operating results have been affected by seasonality. Sales of
calculators, personal organizers and linguistic products are typically higher during the second and
third quarters in anticipation of the start of the school year and the Christmas buying season.
Similarly, our consumers orders for electronics products have historically been lower in the first quarter
from both the closing of our factories in China for the Chinese New Year holidays and the general
reduction in sales following the holiday season. These sales patterns may not be indicative of
future sales performance. Our results could be harmed if we have to comply with new environmental regulations. Our operations create some environmentally sensitive waste that may increase in the future
depending on the nature of our manufacturing operations. The general issue of the disposal of
hazardous waste has received increasing attention from Chinese national and local governments and
foreign governments and agencies and has been subject to increasing regulation. Currently,
relevant Chinese environmental protection laws and regulations impose fines on discharge of waste
materials and empower certain environmental authorities to close any facility which causes serious
environmental problems. Although it has not been alleged that we have violated any current
environmental regulations by China government officials, there is no assurance that the Chinese
government will not amend its current environmental protection laws and regulations. Our business
and operating results could be materially and adversely affected if we were to increase
expenditures to comply with environmental regulations affecting our operations. Our insurance coverage may not be sufficient to cover the risks related to our operations and
losses. We have not experienced any major accidents in the course of our operations which have caused
significant property damage or personal injuries. However, there is no assurance that we will not
experience major accidents in the future. Although we have purchased the necessary insurances,
including a business interruption policy, a fidelity guarantee policy and policies covering losses
or damages in respect of buildings machineries, equipments and inventories, the occurance of
certain incidents such as earthquake, war and flood, and the consequences resulting from them, may
not be covered adequately, or at all, by the insurance policies under which we are protected. We
also face exposure to product liability claims in the event that any of our products is alleged to
have resulted in property damage, bodily injury or other adverse effects. We only have product
liability insurance for some of our products. Losses incurred or payments we may be required to
make, may have a material adverse effect on our results of operations if such losses or payments
are not fully insured. We are a defendant in putative class action lawsuits and this litigation could harm our business
regardless of the final outcome. On March 11, 2003, we were served with a complaint in an action captioned Michael Rocco v. Nam
Tai, et al., 03 Civ. 1148 (S.D.N.Y.), or the Rocco Action. In addition to Nam Tai, certain
directors are named as defendants. On or about April 9, 2003, a second complaint was filed in an
action captioned A.J. & Celine Steigler v. Nam Tai, et al., 03 Civ. 2462 (S.D.N.Y.) or the
Steigler Action, and together with the Rocco Action, the Actions. The Actions have been
consolidated since July 2003 and purport to represent a putative class of persons who purchased
the common stock of Nam Tai from July 29, 2002 through February 18, 2003. Plaintiffs in the Actions
assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and allege that
misrepresentations and/or omissions were made during the alleged class period concerning the
partial reversal of an inventory provision and a charge to goodwill related to Nam Tais LCD panels
and transformers segment, or LPT segment. Defendants motion to dismiss was denied on September 27,
2004. The putative class action has not been certified as a class action by the court but we
expect plaintiffs to seek such certification in the near future. The court has set May 23, 2005 to
hear such a certification motion. Nam Tai believes it has meritorious defenses and it intends to
defend the case vigorously. Nam Tai is aware of no other actions that have been filed which relate
to these matters. The ultimate outcome of this litigation cannot be presently determined. However,
this litigation could be very costly and divert our managements attention and resources. In
addition, we have no insurance covering our liability, if any, or that of our officers and
directors, and we will have to pay the costs of the defense. Any adverse determination in this
litigation could also subject us to significant liabilities, any or all of which could materially
and adversely affect our business and operating results. We depend on our executive officers and skilled management personnel. Our success depends to a large extent upon the continued services of our executive officers.
Generally, our employees are bound by employment or non-competition agreements. However, we cannot
assure you that we will retain our executive officers and other key employees. We could be
seriously harmed by the loss of any of our executive officers. In order to manage our growth, we
will need to recruit and retain additional skilled management personnel and if we are not able to
do so our business and our ability to continue to grow could be harmed. We maintain no key person
insurance on these individuals. The loss of service of any of these officers or key management
personnel could have a material adverse effect on our business growth and operating results. We may be unable to succeed in recovering on our judgment debts against Tele-Art, Inc. We have two judgments in our favor against Tele-Art, Inc. awarded by The High Court of Justice
in the British Virgin Islands for approximately $35.0 million. Because Tele-Art, Inc. is in
liquidation, we may not realize the entire amount of our judgments, and the actual amount of the
recovery, if any, is uncertain and dependent on a number of factors. We may incur substantial
additional costs in pursuing our recovery, and such costs may not be recoverable. We could become involved in intellectual property disputes. We do not have any patents, licenses, or trademarks material to our business. Instead, we rely
on trade secrets, industry expertise and our 8




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customers sharing of intellectual property with us. We may be notified that we are infringing
patents, copyrights or other intellectual property rights owned by other parties. In the event of
an infringement claim, we may be required to spend a significant amount of money to develop a
non-infringing alternative or to obtain licenses. We may not be successful in developing such an
alternative or obtaining a license on reasonable terms, if at all. Any litigation, even without
merit, could result in substantial costs and diversion of resources and could materially and
adversely affect our business and operating results. We may not pay dividends in the future. Although we have declared dividends during each of the last eleven years, we may not be able
to declare them or may decide not to declare them in the future. Our China subsidiaries are
required to reserve 10% of profits for future development, which may affect our ability to declare
dividends. We will determine the amounts of the dividends when they are declared and even if
dividends are declared in the future, we may not continue them in any future period. We are subject to the risk of increased taxes. We base our tax position upon the anticipated nature and conduct of our business and upon our
understanding of the tax laws of the various countries in which we have assets or conduct
activities. Our tax position, however, is subject to review and possible challenge by taxing
authorities and to possible changes in law. We cannot determine in advance the extent to which some
jurisdictions may assess additional tax or interest and penalties on such additional taxes. Several places in which we are located allow for tax holidays or provide other tax incentive
to attract and retain business. We have obtained holidays or other incentives where available. Our
taxes could increase if certain tax holidays or incentives are retracted, or if they are not
renewed upon expiration, or tax rates applicable to us in such jurisdictions are otherwise
increased. Recently enacted changes in the securities laws and regulations are likely to increase our costs. The Sarbanes-Oxley Act of 2002 that became law in July 2002 has required changes in some of
our corporate governance, securities disclosure and compliance practices. In response to the
requirements of that act, the Securities and Exchange Commission, or SEC, and the New York Stock
Exchange, or NYSE, have promulgated new rules on a variety of subjects. Compliance with these new
rules as well as the Sarbanes-Oxley Act of 2002 has increased our legal, financial and accounting
costs, and we expect these increased costs to continue indefinitely, particularly as new rules and
regulations, including Section 404 of the Sarbanes-Oxley Act of 2002, come into effect. We also
expect these developments to make it more difficult and more expensive for us to obtain director
and officer liability insurance, and we may be forced to accept reduced coverage or incur
substantially higher costs to obtain coverage. Likewise, these developments may make it more
difficult for us to attract and retain qualified members of our board of directors or qualified
executive officers. Risks Related to Our Operations in China, Hong Kong, Macao and Japan Our manufacturing facilities are located in China and some of our subsidiaries and several of
our customers and suppliers are located in Hong Kong and China. Some of our subsidiaries are
located in Hong Kong, Macao and Japan. As a result, our operations and assets are subject to
significant political, economic, legal and other uncertainties associated with doing business in
China, Hong Kong, Macao and Japan, which are discussed in more detail below. We are exposed to risks associated with doing business in China. Our principal manufacturing operations are located in Shenzhen, China. These operations could
be severely impacted by evolving interpretation and enforcement of legal standards, by strains on
Chinese energy, transportation, communications, trade and other infrastructures, by conflicts,
embargoes, increased tensions or escalation of hostilities between China and Taiwan, and by other
trade customs and practices that are dissimilar to those in the United States and Europe.
Interpretation and enforcement of Chinas laws and regulations continue to evolve and we expect
differences in interpretation and enforcement to continue in the foreseeable future. Further, we
may be exposed to fluctuations in the value of the renminbi yuan, or RMB, the local currency of
China. Recently, China has been confronted with international pressure demanding the appreciation
of the RMB. Should the Chinese government allow a significant RMB appreciation, our component and
other raw material costs could increase and could adversely affect our financial results. The Chinese government could change its policies toward, or even nationalize, private enterprise,
which could harm our business and operating results. Over the past several years, the Chinese government has pursued economic reform policies
including the encouragement of private economic activities and decentralization of economic
regulation with a move towards a market economy. The Chinese government may not continue to pursue
these policies or may significantly alter them to our detriment from time to time without notice.
Changes in policies by the Chinese government resulting in changes in laws, regulations, or their
interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion or
imports and sources of supply could materially and adversely affect our business and operating
results. The nationalization or other expropriation of private enterprises by the Chinese government could result in the total loss of
our investment in China. 9




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The Chinese legal system has inherent uncertainties that could materially and adversely impact our
ability to enforce the agreements governing our factories and to do business. We do not own the land on which our factories in China are located. We occupy our principal
manufacturing facilities under land use agreements with agencies of the Chinese government and we
occupy other facilities under lease agreements with peasant collectives or other companies. The
performance of these agreements and the operations of our factories are dependent on our
relationship with the local government. Our operations and prospects would be materially and
adversely affected by the failure of the local government to honor these agreements or an adverse
change in the law governing them. In the event of a dispute, enforcement of these agreements could
be difficult in China. Unlike the United States, China has a civil law system based on written
statutes in which judicial decisions have limited precedential value. The Chinese government has
enacted laws and regulations dealing with economic matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. However, its experience in
implementing, interpreting and enforcing these laws and regulations is limited, and our ability to
enforce commercial claims or to resolve commercial disputes in China is unpredictable. These
matters may be subject to the exercise of considerable discretion by agencies of the Chinese
government, and forces and factors unrelated to the legal merits of a particular matter or dispute
may influence their determination. Fire, severe weather, flood or earthquake could cause significant damage to our facilities in China
and disrupt our business operations. Our products are manufactured exclusively at our factories located in China. Fire fighting and
disaster relief or assistance in China is not well developed. Material damage to, or the loss of,
our factories due to fire, severe weather, flood, earthquake or other acts of God or cause may not
be adequately covered by proceeds of our insurance coverage and could materially and adversely
affect our business and operating results. In addition, any interruptions to our business caused by
such disasters could harm our business and operating results. Controversies affecting Chinas trade with the United States could harm our results of operations
or depress our stock price. While China has been granted permanent most favored nation trade status in the United States
through its entry into the World Trade Organization, controversies between the United States and
China may arise that threaten the status quo involving trade between the United States and China.
These controversies could materially and adversely affect our business by, among other things,
causing our products in the United States to become more expensive resulting in a reduction in the
demand for our products by customers in the United States. Political or trade friction between the
United States and China, whether or not actually affecting our business, could also materially and
adversely affect the prevailing market price of our common shares. Changes to Chinese tax laws and heightened efforts by the Chinese tax authorities to increase
revenues could subject us to greater taxes. Under applicable Chinese law, we have been afforded a number of tax concessions by, and tax
refunds from, the Chinese tax authorities on a substantial portion of our operations in China by
reinvesting all or part of the profits attributable to our Chinese manufacturing operations.
However, the Chinese tax system is subject to substantial uncertainties with respect to its
interpretation and enforcement. Following the Chinese governments program of privatizing many
state-owned enterprises, the Chinese government has attempted to augment its revenues through
heightened tax collection efforts. Continued efforts by the Chinese government to increase tax
revenues could result in decisions or interpretations of the tax laws by the Chinese tax
authorities that would increase our future tax liabilities or deny us expected concessions or
refunds. For example, the tax reform of reducing the VAT tax refund from 17% to 13%, with effect
from January 1, 2004, has adversely affected our margins. Our results have been affected by changes in currency exchange rates. Changes in currency rates
involving the Japanese yen, Hong Kong dollar or Chinese renminbi could increase our expenses. Our financial results have been affected by currency fluctuations, resulting in total foreign
exchange gains of $189,000 during the year ended December 31,
2004, total foreign exchange
losses of $62,000 during the year ended December 31, 2003 and total foreign exchange losses of
$345,000 during the year ended December 31, 2002. We sell most of our products in United States
dollars and pay our expenses in United States dollars, Japanese yen, Hong Kong dollars, and Chinese
renminbi. While we face a variety of risks associated with changes among the relative value of
these currencies, we believe the most significant exchange risk presently results from material
purchases we make in Japanese yen. Approximately 8%, 16% and 6% of our material costs have been in
Japanese yen during the years ended December 31, 2002, 2003 and 2004, respectively, but sales made in Japanese yen
accounted for less than 11% of sales for each of the last three years. An appreciation of the Japanese yen
against the United States dollar would increase our expenses when translated into United States
dollars and would materially and adversely affect our margins unless we made sufficient sales in
Japanese yen to offset against material purchases made in Japanese yen. Approximately 8% and 6% of our revenues and 12% and 12% of our expenses were in Chinese
renminbi and Hong Kong dollars, respectively, during the year ended December 31, 2004.
Approximately 1% and 8% of our revenues and 13% and 12% of our expenses were in Chinese renminbi
and Hong Kong dollars, respectively, during the year ended December 31, 2003. An appreciation of
the Chinese renminbi or Hong Kong dollar against the United States dollar would increase our
expenses when translated into United States dollars and could materially and adversely affect our
margins. In addition, a significant devaluation in the Chinese renminbi or Hong Kong dollar could
harm our business if it destabilizes the economy of China or Hong Kong, creates serious domestic problems or increases our
borrowing costs. 10




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We have suffered losses from hedging against our currency exchange risk. From time to time, we have attempted to hedge our currency exchange risk. We did not engage in
currency hedging transactions for fiscal year 2003 and 2004. We have experienced in the past and
may experience in the future losses as a result of currency hedging. Political and economic instability in Hong Kong could harm our operations. Some of our subsidiaries offices and several of our customers and suppliers are located in
Hong Kong, formerly a British Crown Colony. Sovereignty over Hong Kong was resumed by China
effective July 1, 1997. Since then, Hong Kong has become a Special Administrative Region of China,
enjoying a high degree of autonomy except for foreign and defense affairs. Moreover, Chinas
political system and policies are not practiced in Hong Kong. Under the principle of one country,
two systems, Hong Kong maintains a legal system that is based on the common law and is different
from that of China. It is generally acknowledged as an open question whether Hong Kongs future
prosperity in its role as a hub and gateway to China after Chinas accession to the World Trade
Organization (introducing a market liberalization in China) will be diminished. The continued
stability of political, economic or commercial conditions in Hong Kong remains uncertain, and any
instability could materially and adversely impact our business and operating results. The spread of severe acute respiratory syndrome or similar illnesses may have a negative impact on
our business and operating results. In March 2003, several economies in Asia, including Hong Kong and southern China, where our
operations are located, were affected by the outbreak of severe acute respiratory syndrome, or
SARS. If there is a recurrence of a serious outbreak of SARS, it may adversely affect our business
and operating results. For example, the future SARS outbreak could result in quarantines or
closures to some of our factories if our employees are infected with SARS and ongoing concerns
regarding SARS, particularly its effect on travel, could negatively impact our China-based
customers and suppliers and our business and operating results. In addition, there has recently been an outbreak of avian influenza in humans in Asian
countries, including Vietnam, South Korea and Japan, which has proven fatal in some instances. As
the human death toll continues to grow, many are concerned that the virus will mutate and trigger a
human pandemic. If such an outbreak were to spread to southern China, where our operation
facilities are located, it may adversely affect our business operating results. We conduct operations in a number of countries and the effect of business, legal and political
risks associated with international operations could significantly harm us. We conduct operations in number of countries. There are risks inherent in doing business in
international markets, including:  
    Difficulties in staffing and managing international operations;
    Compliance with laws and regulations, including environmental laws, which vary from country to country and over time,
increasing the costs of compliance and potential risks of non-compliance;
    Exposure to political and financial instability, leading to currency exchange losses, collection difficulties or other losses;
    Exposure to fluctuations in the value of local currencies;
    Changes in value-added tax or VAT reimbursement;
    Imposition of currency exchange controls; and
    Delays from customs brokers or government agencies. Any of these risks could significantly harm our business, financial condition and operating
results. Risks Related to Our Industry We are exposed to general economic conditions. Any slowdown in the technology products industry may
affect our business and operating results adversely. As a result of the economic downturn in the United States and internationally, and reduced
capital spending, sales to OEMs in the electronics industry declined beginning in the second
quarter of fiscal year 2001 and continuing through 2002. Lower consumer demand and high customer
inventory levels have resulted in the delay and cancellation of orders for nearly all types of
electronic products. As a result of order cancellations in 2001, we were required to write down
slow-moving inventory, which materially and adversely impacted our
net income in 2001. Although the
industry experienced a recovery in 2003 and 2004, we cannot assure that this recovery is
sustainable or that the industry will not further decline. If the economic conditions in the United
States or the other markets we serve worsen, particularly in the electronics and contract manufacturing
businesses particularly, or if a wider or global economic slowdown occurs, this could materially
and adversely impact our business and operating results. 11




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Our business and operating results are dependent on growing global outsourcing trends. Over the last two decades, the EMS industry experienced rapid change and growth as the
capabilities of EMS companies continued to expand and consumer electronic product manufacturers
adopted, and became increasingly reliant on, manufacturing outsourcing strategies to remain
competitive. Despite the slow down of the EMS industry in 2001 and 2002 as a result of consumer electronic product
manufacturers decreasing production requirement, growth has been renewed in 2003
and 2004 and we believe that the EMS industry has the potential for further growth as many consumer
electronic product manufacturers continue to favor outsourcing over internal manufacturing, and the
market for outsourcing, as a whole, continues to flourish. However, there can be no assurance that
the trends of adopting manufacturing outsourcing strategies by consumer electronic product
manufacturers will continue to grow. If the growing outsourcing trends discontinue, this could
materially and adversely impact our business and operating results. Risks Related to Ownership of Our Common Shares The market price of our shares will likely be subject to substantial price and volume fluctuations. The markets for equity securities have been volatile and the price of our common shares has
been and could continue to be subject to wide fluctuations in response to variations in operating
results, news announcements, trading volume, sales of common shares by our officers, directors and
our principal shareholders, customers, suppliers or other publicly traded companies, general market
trends both domestically and internationally, currency movements and interest rate fluctuations.
Certain events, such as the issuance of common shares upon the exercise of our outstanding stock
options could also materially and adversely affect the prevailing market price of our common
shares. Further, the stock markets have recently experienced extreme price and volume fluctuations
that have affected the market prices of equity securities of many companies and that have been
unrelated or disproportionate to the operating performance of such companies. These fluctuations
may materially and adversely affect the market price of our common shares. The concentration of share ownership in our senior management allows them to control or
substantially influence the outcome of matters requiring shareholder approval. On February 28, 2005, members of our management and Board of Directors as a group beneficially
owned approximately 42.0% of our common shares. As a result, acting together, they may be able to
control and substantially influence the outcome of all matters requiring approval by our
shareholders, including the election of directors and approval of significant corporate
transactions. This ability may have the effect of delaying or preventing a change in control of Nam
Tai, or causing a change in control of Nam Tai that may not be favored by our other shareholders. If we do not receive an unqualified opinion on the adequacy of our internal control over financial
reporting as of December 31, 2006 and future year-ends as required by Section 404 of the
Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial
statements, which could result in a decrease in the value of our shares. As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring
public companies to include a report of management on the companys internal control structure and
procedures over financial reporting in their annual reports on Form 20-F that contains an
assessment by management of the effectiveness of the companys internal control structure and
procedures over financial reporting. In addition, the public accounting firm auditing the companys
financial statements must attest to and report on managements assessment of the effectiveness of
the companys internal control structure and procedures over financial reporting. While we intend
to conduct a rigorous review of our internal control structure and procedures over financial
reporting in order to assure compliance with Section 404 requirements, if our independent auditors
interpret Section 404 requirements and the related rules and regulations differently from us or if
our independent auditors are not satisfied with our internal control structure and procedures over
financial reporting or with the level at which it is documented, operated or reviewed, they may
decline to attest to managements assessment or issue a qualified report. This could result in an
adverse reaction in the financial markets due to a loss of confidence in the reliability of our
financial statements, which could cause the market price of our shares to decline. Changes to financial accounting standards may affect our reported results of operations and could
result in a decrease in the value of our shares. The Financial Accounting Standards Board recently published amendments to Statement of
Financial Accounting Standards No. 123 that would require stock-based compensation issued to
employees to be treated as compensation expense using the fair value method. If we are required to
record an expense for our stock-based compensation plans using the fair value method, we would
incur significant compensation charges. Although we currently are not required to record any
compensation expense in connection with options granted that have an exercise price equal to fair
market value of our common stock at the grant date, if future laws and regulations require us to
treat all stock-based compensation as a compensation expense using the fair value method, our
results or operations could be adversely affected. For discussion of our employee stock option and employee stock purchase plans,
see Note 2  Summary of Significant Accounting Policies  Stock
Options and Note 11 
Shareholders Equity to the Consolidated Financial Statements. 12




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Risks Related to Our Foreign Private Issuer Status It may be difficult to serve us with legal process or enforce judgments against our management or
us. We are a British Virgin Islands holding corporation with
subsidiaries in Hong Kong, Macao, Japan and China. We have appointed Stephen Seung, 2 Mott Street, Suite 601, New York, New York 10013 as our
agent upon whom process may be served in any action brought against us under the securities laws of
the United States. However, outside the United States, it may be difficult for investors to enforce
judgments against us obtained in the United States in any of these actions, including actions based
upon civil liability provisions of the Federal securities laws. In addition, all of our officers
and most of our directors reside outside the United States, and all of our assets, and the assets of
those persons who reside outside of the United States, 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 those persons, or to enforce against those persons or use judgments obtained in United
States courts grounded upon the liability provisions of the United States securities laws. There is
substantial doubt as to the enforceability against us or any of our directors and officers located
outside of the United States in original actions or in actions for enforcement of judgments of
United States courts of liabilities based solely on the civil liability provisions of the
securities laws of the United States. No treaty exists between Hong Kong or the British Virgin Islands and the United States
providing for the reciprocal enforcement of foreign judgments. However, the courts of Hong Kong and
the British Virgin Islands are generally prepared to accept a foreign judgment as evidence of a
debt due. An action may then be commenced in Hong Kong or the British Virgin Islands for recovery
of this debt. A Hong Kong or British Virgin Islands court will only accept a foreign judgment as
evidence of a debt due if:  
    the judgment is for a liquidated amount in a civil matter;
    the judgment is final and conclusive and has not been stayed or satisfied in full;
    the judgment is not, directly or indirectly, for the payment of foreign taxes, penalties, fines or charges of a like nature (in this
regard, a Hong Kong or British Virgin Islands court is unlikely to accept a judgment for an amount obtained by doubling, trebling or
otherwise multiplying a sum assessed as compensation for the loss or damage sustained by the person in whose favor the judgment was
given);
    the judgment was not obtained by actual or constructive fraud or duress;
    the foreign court has taken jurisdiction on grounds that are recognized by the common law rules as to conflict of laws in Hong Kong
or the British Virgin Islands;
    the proceedings in which the judgment was obtained were not contrary to natural justice (i.e., the concept of fair adjudication);
    the proceedings in which the judgment was obtained, the judgment itself and the enforcement of the judgment are not contrary to the
public policy of Hong Kong or the British Virgin Islands;
    the person against whom the judgment is given is subject to the jurisdiction of the Hong Kong or the British Virgin Islands court; and
    the judgment is not on a claim for contribution in respect of damages awarded by a judgment, which does not satisfy the criteria
stated previously. Enforcement of a foreign judgment in Hong Kong or the British Virgin Islands may also be
limited or affected by applicable bankruptcy, insolvency, liquidation, arrangement and moratorium,
or similar laws relating to or affecting creditors rights generally, and will be subject to a
statutory limitation of time within which proceedings may be brought. No treaty exists between Macao and the United States providing for the reciprocal enforcement
of foreign judgments. However, the courts of Macao are generally prepared to accept a foreign
judgment as evidence of a debt due. An action may then be commenced in Macao for recovery of this
debt. A Macao court will only accept a foreign judgment as evidence of a debt due if:  
    there is no doubt to the authenticity of the judgment documents and the understanding of the judgment;
    pursuant to the law of the place of judgment, the judgment is final and conclusive;
    the judgment was not obtained by fraud or the matter in relation to the judgment is not within the exclusive jurisdiction of Macao courts;
    the judgment will not be challenged on the ground that the relevant matter has been adjudicated by
the Macao court, except matters which have first been adjudicated by courts outside Macao;
    pursuant to the law of the place of the judgment, the defendant has been summoned and the proceedings
in which the judgment was obtained were not contrary to natural justice; and
    the enforcement of the judgment will not cause any orders that may result in apparent public disorder. Enforcement of a foreign judgment in Macao may also be limited or affected by applicable
bankruptcy, insolvency, liquidation, arrangement and moratorium, or similar laws relating to or
affecting creditors rights generally, and will be subject to a statutory limitation of time within
which proceedings may be brought. 13




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Future issuances of preference shares could materially and adversely affect the holders of our
common shares or delay or prevent a change of control. Our Board of Directors may amend our Memorandum and Articles of Association without
shareholder approval to create from time to time and issue one or more classes of preference shares
(which are analogous to preferred stock of corporations organized in the United States). While
currently no preference shares are issued or outstanding, we may issue preference shares in the
future. Future issuance of preference shares could materially and adversely affect the rights of
the holders of our common shares, or delay or prevent a change of control. Our status as a foreign private issuer exempts us from certain of the reporting requirements under
the Securities Exchange Act of 1934 and corporate governance standards of the NYSE, limiting the
protections and information afforded to investors. We are a foreign private issuer within the meaning of rules promulgated under the Securities
Exchange Act of 1934. As such, we are exempt from certain provisions applicable to United States
public companies including:  
    the rules under the Securities Exchange Act of 1934 requiring the filing with the SEC of quarterly reports on Form 10-Q,
current reports on Form 8-K or annual reports on Form 10-K;
    the sections of the Securities Exchange Act of 1934 regulating the solicitation of proxies, consents or authorizations in
respect of a security registered under the Securities Exchange Act of 1934;
    the provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; and
    the sections of the Securities Exchange Act of 1934 requiring insiders to file public reports of their stock ownership
and trading activities and establishing insider liability for profits realized from any short-swing trading transaction
(i.e., a purchase and sale, or sale and purchase, of the issuers equity securities within less than six months). In addition, because the Company is a foreign private issuer, certain corporate
governance standards of the NYSE that are applied to domestic companies listed on that exchange may
not be applicable to us. Because of these exemptions, investors are not afforded the same protections or information
generally available to investors holding shares in public companies organized in the United States
or traded on the NYSE. 
 Item 4.Information on the Company History and Development of Nam Tai Nam Tai Electronics, Inc. was founded in 1975 and moved its manufacturing facilities to China
in 1980 to take advantage of lower overhead costs, lower material costs and competitive labor rates
available and subsequently relocated to Shenzhen, China in order to capitalize on opportunities
offered in southern China. We were reincorporated as a limited liability International Business
Company under the laws of the British Virgin Islands in August 1987. Our principal manufacturing
and design operations are based in Shenzhen, China, approximately 30 miles from Hong Kong. Our PRC
headquarters is at Macao, China. Some of our subsidiaries offices are located in Hong Kong and
Macao, which provides us access to Hong Kongs and Macaos infrastructure of communication and
banking and facilitates management of our China operations. One of our subsidiaries also has an
office in Japan. Our corporate administrative matters are conducted in the British Virgin Islands through our
registered agent, McW. Todman & Co., McNamara Chambers, P.O. Box 3342, Road Town, Tortola, British
Virgin Islands. Our agent for service of process in the United States is Stephen Seung, 2 Mott
Street, Suite 601, New York, New York 10013. Our principal executive offices are located in the
British Virgin Islands at 116 Main Street, 3rd Floor, Road Town, Tortola, British Virgin Islands,
and the telephone number is (284) 494-7752. In 1978, Mr. Koo, the founder of the Company, began recruiting operating executives from the
Japanese electronics industry. These executives brought years of experience in Japanese
manufacturing methods, which emphasize quality, precision, and efficiency in manufacturing. Senior
management currently includes Japanese professionals who provide technical expertise and work
closely with both our Japanese component suppliers and customers. For a number of years, we specialized in manufacturing large-volume, hand-held digital
consumer electronic products and established a leading position in electronic calculators and
handheld organizers for OEMs such as Texas Instruments Incorporated and Sharp Corporation. Over the
years, we have broadened our product mix to include a range of digital products for business and
personal use, as well as key components and sub-assemblies for telecommunications and consumer
electronic products. In August 1999, we established Nam Tai Telecom (Hong Kong) Company Limited,
which targeted the expanding market for telecommunications components including LCD modules as well
as end products, including cordless phones and family radio systems. Nowadays, color and monochrome
LCD modules displaying information have become one of our major products. Since December 2002, we
have also produced RF modules for integration into cellular phones and other hand-held consumer
electronic products, such as personal digital assistants, or PDAs, laptop computers and other
products with wireless connectivity. In 2003, we further diversified our product mix by
manufacturing CMOS sensor modules for integration into various image 14




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capturing devices such as
digital cameras for cellular phones and home entertainment products, FPC sub-assemblies for integration
into various LCD modules, front light panels for handheld video game devices and digital camera
accessories for use with the cellular phones and home entertainment products. In 2004, we expanded
our business on CMOS sensor modules and FPC sub-assemblies. We also further broadened our product
line by manufacturing back light panels for handheld video game devices and BluetoothTM
wireless headset accessory for cellular phones. In September 2000, we acquired for $2.0 million a 5% indirect shareholding in both TCL Mobile
Communication (HK) Co., Ltd. and Huizhou TCL Mobile Communication Co., Ltd., together known as TCL
Mobile, through the acquisition of 25% of the outstanding shares of Mate Fair Group Limited, or
Mate Fair, a privately held investment holding company incorporated in the British Virgin Islands
with a 20% shareholding interest in TCL Mobile. TCL Mobile is engaged in manufacturing,
distributing and trading of digital mobile phones and accessories in China as well as in overseas
markets. In October 2000, we completed the acquisition of the J.I.C. Group (BVI) Limited. The J.I.C.
Group (BVI) Limited and its subsidiaries, or the J.I.C. Group, are principally engaged in the
manufacture and marketing of transformers and LCD panels, a key component for a variety of consumer
electronic products. Of the purchase price of $32.8 million, we paid $11.0 million in cash and
issued 3.48 million of our common shares. In November 2002, Mate Fair sold a portion of its equity interest in Huizhou TCL Mobile
Communication Co., Ltd. for which we received proceeds of approximately $10.4 million, reducing our
direct equity interest (held through Mate Fair) in TCL Mobile to approximately 3%. In November
2002, we invested $5.1 million of the proceeds in TCL International Holdings Limiteds 3%
convertible notes that are due in November 2005. In August 2003, we disposed of those convertible
notes to independent third parties and received proceeds of approximately $5.03 million in cash.
TCL International Holdings Limited is another company in the TCL Group, which consists of the TCL
Corporation and its subsidiaries, and is publicly listed on The Stock Exchange of Hong Kong
Limited, or the Hong Kong Stock Exchange. In January 2002, we acquired a 6% equity interest in TCL Corporation (formerly known as TCL
Holdings Corporation Ltd.), for a consideration of approximately $12.0 million. TCL Corporation, an
enterprise established in China, is the parent company of the TCL Group of companies. TCL
Corporation changed from a limited liability company to a company limited by shares in April 2002.
In January 2004, TCL Corporation listed its A-shares on the Shenzhen Stock Exchange at RMB 4.26 (equivalent to $0.52) per A-share. The Companys interest in TCL Corporation has
since been diluted to 3.69% and represents 95.52 million promoters shares of TCL Corporation after
its initial public offering. Pursuant to Article 147 of the Company Law of China, the Company is
restricted from transferring its promoters shares within three years from the establishment date.
The Company is, however, entitled to receive dividends and other rights similar to holders of
A-shares. As these promoters shares have a restriction on their sale prior to April 2005, the
Company hired an independent valuer to determine the fair value of these shares as of December 31,
2004 and recognized an unrealized gain of $6.55 million, which has been recorded as a separate
component of accumulated other comprehensive income, based on the Companys cost of $11.97 million
and an estimated fair value of $20.70 million. In January 2002, we entered into a transaction which resulted in the listing of a company
holding J.I.C. Groups business on the Hong Kong Stock Exchange. To effect the transaction, we
entered into an agreement with the liquidators of Albatronics, whose shares had been listed on the
Hong Kong Stock Exchange and which was placed into voluntary liquidation in August 1999. Under the
agreement, we agreed to transfer the J.I.C. Group into J.I.C. Technology Company Limited, a new
company, for a controlling interest in J.I.C. Technology Company Limited. Albatronics listing
status on the Hong Kong Stock Exchange was withdrawn and J.I.C. Technology Company Limited was
listed on the Hong Kong Stock Exchange free from the liabilities of Albatronics. This arrangement
was more cost effective than using an initial public offering. For our contribution to J.I.C.
Technology Company Limited, we received a combination of ordinary and preference shares, which are
analogous to common stock and convertible preferred stock, respectively, of companies organized
under United States law and which upon their full conversion, could result in us, the creditors and
the Hong Kong public owning approximately 92.9%, 5.8% and 1.3%, respectively, of the outstanding
ordinary shares of J.I.C. Technology Company Limited. On June 4, 2002, the reverse merger was
completed and all the shares of Albatronics were transferred to the liquidators for a nominal
consideration. The preference shares are non-redeemable, non-voting shares that rank pari passu
with ordinary shares of J.I.C. Technology Company Limited on the payment of dividends or other
distribution other than on a winding-up. No holder of preference shares (including Nam Tai) may
convert them if such conversion would result in the minimum public float of 25% (required
under the Hong Kong Stock Exchange Listing Rules) not being met. In August 2002, we acquired an
additional 7,984,000 ordinary shares of J.I.C. Technology Company Limited for a cash consideration
of $437,000. During the period from June to November 2003, we disposed of a total of 42,600,000
ordinary shares for cash consideration of $4.0 million. In November 2003, we converted 175,100,000
preference shares into 170,000,000 ordinary shares of J.I.C. Technology Company Limited. During the period from November to December 2004, we further disposed of a total of
128,000,000 ordinary shares of J.I.C. Technology Company Limited for cash consideration of $12.95 million. The disposal resulted in a
net gain on partial disposal of a subsidiary of $6.25 million and the release of unamortized
goodwill of $3.52 million. During the same period, we converted all 423,320,000 preference shares
into 410,990,290 ordinary shares. As of December 31, 2004, we held 546,890,978 ordinary shares
of J.I.C. Technology Company Limited, equivalent to 71.63% of issued ordinary shares. In January 2003, we invested $10.0 million for a 25% equity interest in Alpha Star Investments
Ltd., the ultimate holding company of JCT Wireless Technology Limited, or JCT. JCT is engaged in the design,
development and marketing of wireless communication terminals and wireless application software and
is using us to manufacture wireless communication terminals and their related modules. As
of December 31, 2004, we recognized net sales of $34.2 million to JCT for the year. However, in
September 2004, we made an impairment to write down our
$10.0 million investment in Alpha Star to a fair value of approximately $3.0 million. As of December 31,
2004, another analysis had been conducted by an independent valuer, who determined that no further
impairment to value was required. 15




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In January 2003, we disposed of 20% of our equity interest in Namtek Software Development
Company Limited to a company that is owned by the management of Namtek Software Development Company
Limited for a cash consideration of $160,000. As of the date of disposal, Namtek Software
Development Company Limited was fair valued at $3.3 million. On January 23, 2003, the listing of our shares was transferred to the NYSE from the NASDAQ
National Market with symbol of NTE. On June 30, 2003, we implemented a three-for-one stock split
with both the stock size and market price to be divided by three. As of December 31, 2004, there
were 42,664,536 common shares outstanding. In June 2003, one of our subsidiaries, J.I.C. Technology Company Limited, disposed of its
transformers operation to a third party for a cash consideration of $2.4 million. The gain from
disposal of this discontinued operation amounted to $2.0 million, net of $0.1 million shared by
minority interest. In August 2003, we set up our first subsidiary, Nam Tai Investments Consultant (Macao
Commercial Offshore) Company Limited in Macao as our PRC headquarters. Macao, like Hong Kong, is a
special administrative region of the China and has recently introduced an incentive program to
attract investment to Macao. In March and November 2004, we further established Zastron (Macao
Commercial Offshore) Company Limited and J.I.C. (Macao Commercial Offshore) Company Limited in
Macao, respectively. In November 2003, our common shares were listed in the Regulated Unofficial Market
(Freiverkehr) on the Frankfurt Stock Exchange, in Germany. The stocks are being traded on Xetra,
the Deutsche Borse AG electronic trading system under the stock symbol 884852. In December 2003, we placed approximately $5.3 million into an escrow account for an
investment in Stepmind. The investment was to occur in two phases. For the first phase, approximately
$2.64 million, representing 7.66% of the equity interest in Stepmind, was released to Stepmind in
January 2004. The second phase amounting to approximately $2.65 million was released to
Stepmind in August 2004 subject to fulfillment of certain conditions. In August 2004, we disposed of
our entire interest in Stepmind to one of the shareholders of Stepmind at the original subscription
price for those shares. In April 2004, we increased our shareholding in TCL Mobile from approximately 3% to 9% through
the acquisition of Jasper Ace Limited, or Jasper Ace, which directly holds a 9% equity interest in
TCL Mobile, for a consideration of approximately $102.2 million. The consideration was satisfied by
the exchange of our 72.2% equity interest in Mate Fair, plus cash of $25 million in cash, and the issuance
of 1,416,764 new Nam Tai shares and resulted in a net investment cost of $79.5 million. In July
2004, Nam Tai transferred all its shares in TCL Mobile to TCL Communication Technology Holdings
Limited, or TCL Communication, in exchange for 90 shares of TCL Communication. In August 2004, we
further subscribed for 254,474,910 shares in TCL Communication at a consideration of approximately
$16 million. The consideration was satisfied by the dividend receivable from TCL Communication.
Together with the 90 shares it received in July 2004, Nam Tai in total holds 254,475,000 shares in
TCL Communication, representing 9% of the shareholding of TCL Communication. In September 2004,
shares of TCL Communication were listed on the Hong Kong Stock Exchange by way of introduction.
There were no new shares issued or sold in connection with the listing, and therefore no dilution
to Nam Tais original stake in TCL Communication. As of December 31, 2004, we still hold
254,475,000 shares, representing 9% of the total issued shares of TCL Communication. As of December 31, 2004, the Companys investment in TCL Communication was stated at fair
value based on the traded market price of TCL Communications shares. The Company recognized an
unrealized loss of $58.3 million in its consolidated statements of income based on the Companys
cost of $79.5 million and a fair value of $21.2 million. In April 2004, shares of Nam Tai Electronic & Electrical Products Limited, or NTEEP, a wholly
owned subsidiary of the Company, were listed on the Hong Kong Stock Exchange. Since all of the
shares of NTEEP involved in the initial public offering, or IPO, were existing shares of NTEEP
owned by Nam Tai, all of the proceeds raised in the IPO went to Nam Tai instead of NTEEP. The offer
price of NTEEPs share was $0.497, which resulted in net proceeds of approximately $92.8 million
and a gain of approximately $71.1 million to the Company. As of December 31, 2004, we held
600,000,000 shares of NTEEP, representing 75% of the total issued shares of NTEEP. Also refer to the section of this Report entitled Item 5. Operating and Financial Review and
Prospects for a further discussion of our investments and acquisitions. An important element of our strategy is to acquire companies that would complement our
existing products and services, augment our market coverage and sales ability or enhance our
technological capabilities. Accordingly, we may acquire additional businesses, products or
technologies in the future or make investments in related businesses for strategic business
purposes. Capital Expenditures Our principal capital expenditures and divestitures over the last three years include the
following: 16




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##### Table of Contents



2002
    
    2003
    
    2004Property, plant and equipment (net)
    
    $
    18,485,000
    
    
    
    17,053,000
    
    
    
    38,611,000
 Our major capital expenditure in 2004 included:  

    $13.8 million for new factory expansion;

    $7.7 million for the expansion of an LCD factory (which included 5.8 million paid as a deposit for fixed assets);

    $0.7 million for the expansion of our high-resolution color LCD module production capacity;

    $14.5 million for machineries used mainly for FPC sub-assemblies;

    $5.6 million for other capital equipment; and

    $2.1 million for construction work in relation to the electricity supply for Nam Tai Electronic (Shenzhen) Co., Ltd. Our major capital expenditures in 2003 included:  

    $6.0 million for machinery for manufacturing RF modules;

    $1.2 million for new factory expansion;

    $0.4 million for machinery on FPC sub-assemblies;

    $1.7 million for expansion of our high-resolution color LCD module production capacity;

    $6.7 million for other capital equipment; and

    $1.1 million for construction of a new trade union building for the use of our workers in China. Our major capital expenditures in 2002 included:  

    $12.3 million for a new STN LCD panel production line; and

    $4.0 million for completion of the new factory expansion. In order to expand production capacity, we have built a new factory consisting of
approximately 265,000 square feet adjacent to our principal manufacturing facilities in Shenzhen,
China. The construction was completed in December 2004 and we expect full operations to commence in
April 2005. As of December 31, 2004, we had spent $15.0 million to cover the cost of construction,
fixtures and equipment for the new factory. The financing for these improvements to our
manufacturing facilities were obtained from internal resources. In October 2004, our existing
production facility for the LCD panels segment also relocated to new factory premises which are
approximately 670,000 square feet and twice the size of the former factory premises. This new
factory provides room for the future expansion of production capacity. As of December 31, 2004, we
had spent $7.7 million for this relocation and financed this amount with a combination of internal
resources and bank financing. Other capital expenditures we have planned for 2005 include:  

    $ 8.0 million for land purchase;

    $16.5 million for new factory expansion;

    $14.0 million for machinery; and

    $4.5 million for other equipment. Our plans for capital expenditures are subject to change from time to time and could result
from, among other things, our consummation of any significant amount of additional acquisition or
strategic investment opportunities, which we regularly explore. Business Overview We are an electronics manufacturing and design services provider to a select group of the
worlds leading OEMs of telecommunications and consumer electronic products. Through our
electronics manufacturing services operations, we manufacture electronic components and
sub-assemblies, including LCD panels, LCD modules, RF modules, FPC sub-assemblies and image sensors
modules. These components are used in numerous electronic products, including cellular phones,
laptop computers, digital cameras, copiers, fax machines, electronic toys, handheld video game
devices and microwave ovens. We also manufacture finished products, including cellular phones,
palm-sized PCs, personal digital assistants, electronic dictionaries, calculators, digital camera
accessories and BluetoothTM wireless headset accessory for use with cellular phones. We assist our OEM customers in the design and development of their products and furnish full
turnkey manufacturing services that utilize advanced manufacturing processes and production
technologies. Our services include hardware and software design, component purchasing, assembly
into finished products or electronic sub-assemblies and post-assembly testing. These services are
value-added and assist us in 17




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obtaining new business but do not represent a material component of our revenue. We also provide original
design manufacturing, or ODM, services, in which we design and develop proprietary products that
are sold by our OEM customers using their brand name. We were founded in 1975 as an electronic products trading company based in Hong Kong and
shifted our focus to manufacturing of electronic products in 1978. We moved our manufacturing
facilities to China in 1980 to take advantage of lower overhead costs, lower material costs and
competitive labor rates, subsequently relocating to Shenzhen, China in order to
capitalize on opportunities offered in southern China. We were reincorporated as a limited
liability International Business Company under the laws of the British Virgin Islands in August
1987. Our principal manufacturing and design operations are based in Shenzhen, China, approximately
30 miles from Hong Kong. Some of our subsidiaries offices are located in Hong Kong and Macao,
which provides us access to Hong Kongs and Macaos infrastructure of communication and banking and
facilitates management of our China operations. One of our subsidiaries also has an office in
Japan. Our Customers Historically, we have had substantial recurring sales from existing customers. About 89.4% of
our 2004 net sales came from customers that also used our services in 2003. While we seek to
diversify our customer base, a small number of customers currently generate a significant portion
of our sales. Sales to our 10 largest customers accounted for 84.8%, 84.9% and 82.5% of our net
sales during the years ended December 31, 2002, 2003 and 2004, respectively. Sales to customers
accounting for 10% or more of our net sales in the year ended December 31, 2002, 2003 or 2004 were
as follows: Year endedDecember 31,2002
    
    
    2003
    
    
    2004Epson Precision (HK) Ltd.
    
    
    32.2
    %
    
    
    24.8
    %
    
    
    14.1
    %Sony Ericsson Mobile Communications AB
    
    
    16.9
    %
    
    
    11.3
    %
    
    
    *Texas Instruments Incorporated
    
    
    11.1
    %
    
    
    *
    
    
    
    *Toshiba Matsushita Display Technology Co. Ltd
    
    
    *
    
    
    
    10.6
    %
    
    
    *Motorola Inc.
    
    
    *
    
    
    
    *
    
    
    
    10.2
    %Sharp Corporation
    
    
    *
    
    
    
    *
    
    
    
    13.5
    %Wuxi Sharp Electronic Components Co., Ltd.
    
    
    *
    
    
    
    *
    
    
    
    10.1
    %
   * Less than 10% of our total net sales. Our largest OEM customers based on net sales during 2004 include the following (listed
alphabetically): Customer
    
    ProductsAdvance Watch Co. (Far East) Ltd.
    
    LCD panels for watchesAppeal Telecom Co., Ltd.
    
    CMOS sensor modulesCanon Electronic Business Machines (H.K.) Co. Ltd.
    
    Electronic dictionaries, calculators, PDAs and dictionaries, LCD
panel sub-assemblies for copy machines and software developmentEpson Precision (H.K.) Ltd.
    
    LCD modules for cellular phones and FPC sub-assembliesGoyo Paper Working Co., Ltd.
    
    Game front light panel and back light panel assemblyJCT Wireless Technology Ltd.
    
    RF modules and cellular phones in semi-knocked down, or SKD, formKanda Tsushin Kogyo Co Ltd. (affiliate of Fujitsu)
    
    Assemblies for cordless phonesMotorola Inc.
    
    CMOS sensor modulesNanox Ltd.
    
    LCD panels for cordless phones and household appliancesNational Electronic & Watch Company Ltd.
    
    LCD panelsOptrex Corporation
    
    Assemblies for LCD modulesPolar Group
    
    LCD panelsSeiko Instruments Inc.
    
    Electronic dictionaries and PDAs, software developmentSharp Corporation
    
    FPC sub-assemblies, calculators,
PDAs and dictionariesSony Computer Entertainment Europe Ltd.
    
    Home entertainment productsSony Corporation
    
    Electronic dictionaries and software developmentSony Ericsson Mobile Communications AB
    
    Mobile phone digital camera accessories, BluetoothTM
wireless headset accessoryStanley Electric (Asia Pacific) Ltd.
    
    LCD panels for car audio devicesTexas Instruments Incorporated
    
    CalculatorsToshiba Matsushita Display Technology Co. Ltd.
    
    LCD modules for cellular phonesUniden HK Ltd.
    
    LCD panelsWuxi Sharp Electronic Components Co. Ltd.
    
    Telecom printed circuit board, or PCB, modules and FPC sub-assemblies
 18




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##### Table of Contents



At any given time, different customers account for a significant portion of our business.
Percentages of net sales to customers vary from quarter to quarter and year to year and fluctuate
depending on the timing of production cycles for particular products. Sales to our OEM customers are primarily based on purchase orders we receive from time to time
rather than firm, long-term purchase commitments from our customers. Although it is our general
practice to purchase raw materials only upon receiving a purchase order, for certain customers we
will occasionally purchase raw materials based on such customers rolling forecasts. Uncertain
economic conditions and our general lack of long-term purchase commitments with our customers make
it difficult for us to accurately predict revenue over the longer term. Even in those cases where
customers are contractually obligated to purchase products from us or repurchase unused inventory
from us, we may elect not to immediately enforce our contractual rights because of the long-term
nature of our customer relationships and for other business reasons, and instead may negotiate
accommodations with customers regarding particular situations. Our Products During 2003, our operations are generally organized in two segments, Consumer Electronics
Products, or CEP, and LCD panels and transformers, or LPT. The activities of our LPT segment relate
primarily to our J.I.C. subsidiary that we acquired in October 2000. In 2004, our operations were
re-organized into three reportable segments consisting of consumer electronics and communication
products, or CECP, telecommunication components assembly, or TCA and LCD panels, or LCDP. In 2003,
CECP and TCA were classified as a single reportable segment as CEP while LCDP also comprised the
transformers operations and collectively referred to as LPT as a result of the disposal of
transformer business in 2003. The dollar amount (in thousands) and percentage of our net sales by business segment and
product category for the years ended December 31, 2002, 2003 and 2004 were as follows: Year ended December 31,2002
    
    
    2003
    
    
    2004Dollars
    
    
    Percent
    
    
    Dollars
    
    
    Percent
    
    
    Dollars
    
    
    PercentConsumer Electronics and Communication
Products
    
    $
    94,032
    
    
    
    40
    %
    
    $
    128,778
    
    
    
    32
    %
    
    $
    163,584
    
    
    
    31
    %Telecom, Components Assembly:Telecom, components assembly(1)
    
    
    103,800
    
    
    
    44
    
    
    
    232,163
    
    
    
    57
    
    
    
    316,695
    
    
    
    59Software development services
    
    
    2,923
    
    
    
    1
    
    
    
    4,041
    
    
    
    1
    
    
    
    4,872
    
    
    
    1LCD Panels and TransformersLCD panels
    
    
    23,937
    
    
    
    10
    
    
    
    35,040
    
    
    
    9
    
    
    
    48,710
    
    
    
    9Transformers(2)
    
    
    11,324
    
    
    
    5
    
    
    
    6,284
    
    
    
    1
    
    
    
    
    
    
    
    Total
    
    $
    236,016
    
    
    
    100
    %
    
    $
    406,306
    
    
    
    100
    %
    
    $
    533,861
    
    
    
    100
    %
   (1)
    
    Included in telecom, components assembly are our sales from our manufacture of
rechargeable battery packs through a joint venture we had with Toshiba
Battery Co., Ltd. We sold our interest in the joint venture to a
Toshiba-related company and ceased manufacturing rechargeable battery
packs as of April 30, 2002. Accordingly, revenue from sales of battery
packs was not included after that date.(2)
    
    We sold our transformers operation to a third party in June 2003. Please refer to Note 19
Segment Information of the Consolidated Financial
Statements and Item 8 Financial Information  Export Sales which sets forth the information of net sales to customers by
geographic area. Consumer Electronic and
Communication Products, or CECP The consumer electronic and communication products we manufacture are primarily finished
products and include:  
    A BluetoothTM wireless headset accessory for cellular phones, which we began manufacturing in March 2004.
    CMOS sensor modules, which we began manufacturing in June 2003, for integration into various image-capturing devices such as
digital cameras for cellular phones and home entertainment products.
    Digital camera accessories for use with cellular phones and home entertainment products.
    Electronic calculators that include basic function calculators, desktop display style, scientific and advanced graphic calculators.
    Digital management devices that include PDAs and electronic personal organizers.
    Linguistic products, including electronic dictionaries, spell checkers and language translators. Telecommunication
Component Assembly, or TCA Telecommunications
Components Assembly We manufacture the following sub-assemblies and components:  
    Color and monochrome LCD modules to display information as part of telecommunication products such as cellular
phones and telephone 19




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##### Table of Contents



systems, appliances and office automation products, such as copiers and facsimile
machines. Our LCD modules could be manufactured for use in most other hand-held consumer electronic devices,
such as electronic games and digital cameras.  
    RF modules, which we began manufacturing in December 2002, for integration into cellular phones. These modules
could be manufactured for use in most other hand-held consumer electronic products, such as PDAs, laptop
computers and other products with wireless connectivity.
    Cellular phones in SKD form.
    FPC sub-assemblies which we began manufacturing in March 2003 for integration into various LCD modules.
    Front light panels for handheld video game devices.
    Back light panels for handheld video game devices, which we began manufacturing in August 2004.
    1.9 and 2.4 GHz high frequency cordless telephones, home feature phones, family radio systems and transceivers. Software Development Services We offer software development services principally for the electronic dictionary products for
major Japanese customers. In addition, we focus on research and development for car navigation
products which we aim to results in providing license and/or manufacturing services to the OEM
customers. LCD Panels, or LCDP With the acquisition of the J.I.C. Group in October 2000, we began producing LCD panels. LCD panels are found in numerous applications in electronics products, such as
watches, clocks, calculators, pocket games, PDAs and mobile and cordless telephones. We are a
customized LCD panel manufacturer, and we develop each product from design concept all the way to a
high quality mass producible product. Our Manufacturing and Assembly Capabilities We utilize the following production techniques:  
    Chip on Film,or COF, is an assembly method for bonding integrated
circuit chips and other components onto a flexible printed circuit.
This process allows for greater compression of the size of a product
when assembled enabling the production and miniaturization of small
form factor devices like cellular phones, PDAs, digital cameras and
notebook PCs. As of December 31, 2004, we had 14 COF machines. These
machines connect the bump of large scale integrated, or LSI, driver
onto FPC pattern with anisotropic conductive film, or ACF, and mount
chip resister cap components to FPC through surface mount technology,
or SMT, is available. These COF machines have the ability to pitch
fine to 38 micrometers and a total production capacity of up to
4,000,000 chips per month.
    Chip On Glass,or COG, is a process that connects integrated circuits
directly to LCD panels without the need for wire bonding. We apply
this technology to produce advanced LCD modules for high-end
electronic products, such as cellular phones and PDAs. As of December
31, 2004, we had 21 COG lines in our principal manufacturing
facilities. These machines provide an LCD of dimension of up to 200
millimeters (length) x 150 (width) x 2.2 (height), a process time per
chip of five seconds, a pin pitch fine to 38 micrometers and a total
production capacity of up to 4,000,000 chips per month. During 2004,
our subsidiary, Jetup Electronic (Shenzhen) Co. Ltd., or Jetup, also
started manufacturing COG LCD modules. As of December 31, 2004, Jetup
had five COG lines and is capable of bonding 1,000,000 pieces of COG
LCD modules a month. They are able to bond LCD panels up to sizes of
100 millimeters x 100 millimeters x 2.2 millimeters thick, with an
accuracy of five microns tolerence, in a cycle time of 12-15 seconds
per piece.
    Chip On Board,or COB, is a technology that utilizes wire bonding to
connect large-scale integrated circuits directly to printed circuit
boards. We use COB in the assembly of consumer products such as
calculators, personal organizers and linguistic products. As of
December 31, 2004, we had 52 COB machines. These machines are fully
automatic bonding machines and use ultrasonic mounting technology. The
bonding time, pressure, power and each wire loop are under machine
programmable control. These machines provide a high speed chip
mounting time of per 2 millimeters wire per 0.25 second, a bond pad
fine to 75 micrometers and a total production capacity of up to
3,000,000 chips per month.
    Outer Lead Bonding,or OLB, is an advanced technology used to connect
PCBs and large-scale integrated circuits with a large number of
connectors. We use this technology to manufacture complex miniaturized
products, such as high-memory PDAs. As of December 31, 2004, we had
three OLB machines. The machines include multi-pinned tape carrier
packaged large scale integrated circuit, or TCP LSIC, bonding which is
up to 280 pins, which also provide ultra thin assembly with module
thickness to around one millimeter and high accuracy bonding with pin
pitch to 100 micrometers. The total production capacity is 12,000
units per
month.
    Tape Automated Bonding with Anisotropic Conductive Film,or TAB with
ACF, is an advanced heat sealing technology that connects a liquid
crystal display component with an integrated circuit in very small LCD
modules, such as those used in cellular phones and pagers. As of
December 31, 2004, we had 35 systems of TAB with ACF machines. The
machines provide process time of 24 to 25 seconds per component, a pin
pitch fine to 200 micrometers and a total production capacity of up to
3,660,000 components per month. During 2004, Jetup also started
manufacturing TAB LCD modules. As of December 31, 2004, Jetup had two
TAB lines and is capable of bonding 250,000 pieces of TAB LCD modules
a month. They are able to bond LCD panels up to sizes of 120 millimeters
x 120 millimeters x 2.2 millimeters thick, with an accuracy of 10
microns tolerence in a cycle time of 20-25 seconds per piece. 20




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
    Fine Pitch Heat Seal Technology,or FPHS technology, allows us to
connect LCD displays to PCBs produced by COB and outer lead bonding that enables very thin connections. This method is highly specialized
and is used in the production of finished products such as PDAs. As of
December 31, 2004, we had eight machines utilizing FPHS technology.
The machines provide a pin pitch fine to 260 micrometers and a total
production capacity of up to 268,000 units per month.
    Surface Mount Technology,or SMT, is a process by which electronic
components are mounted directly on both sides of a printed circuit
board, increasing board capacity, facilitating product miniaturization
and enabling advanced automation of production. We use SMT for
products such as electronic linguistic devices. As of December 31,
2004, we had 29 SMT productions lines. The production time per chip
ranges from 0.072 second per chip to 0.8 second per chip and high
precision ranging from +/-0.05 millimeter to +/-0.1 millimeter. The
components size ranges from 0.6 millimeter (length) x 0.3 millimeter
(width) to 55 millimeters (length) x 55 millimeters (width). Ball grid
array, or BGA, ball pitch is 0.5 millimeter and ball diameter is 0.2
millimeter. The total production capacity is 670,000,000 resistor
capacitor chips per month.
    Twisted Nematic LCDs,or TN type LCD, is the most conventional and
economical and is suitable for low information content display systems
such as those found in calculators, watches, car audio, car clusters
and other medical instruments. As of December 31, 2004, J.I.C. had two
TN LCD lines capable of total capacity of about 100,000 pairs of
glass panels (each sheet of glass of 360 millimeters x 400 millimeters
size) per month.
    Super-Twisted Nematic LCDs,or STN, type LCDs capable of providing
higher information content display systems are found in applications
such as cordless phones, mobile phones, MP3 players, pocket games and
PDAs. J.I.C. started producing STN LCDs in 2002 and, as of December 31
2004, was equiped with a automated line capable of capacity 50,000
pairs of glass (each sheet of glass of 360 millimeters x 400
millimeters size) panels per month. As of December 31, 2004, we had four clean rooms at our principal manufacturing facilities,
which housed COF and COG capabilities for LCD module and front light or back light panel
manufacturing. We also have five clean rooms at another of our factories, which are used to
manufacture LCD panels. Of our nine clean rooms as of December 31, 2004, six were class ten
thousand, three were class thousand. Quality Control We maintain strict quality control programs for our products, including the use of total
quality management, systems and advanced testing and calibration equipment. Our quality control
personnel test the quality of incoming raw materials and components. During the production stage,
our quality control personnel also test the quality of work-in-progress at several points in the
production process. Finally, after the assembly stage, we conduct testing of finished products. In
addition, we provide office space at our principal manufacturing facilities for representatives of
our major customers to permit them to monitor production of their products and we provide them with
direct access to our manufacturing personnel. All of our manufacturing facilities are certified under ISO 9001 quality standards, the
International Organization for Standardizations, or ISOs highest standards. The ISO is a
Geneva-based organization dedicated to the development of worldwide standards for quality
management guidelines and quality assurance. ISO 9000, which was the first quality system standard
to gain worldwide recognition, requires a company to gather, analyze, document, monitor and make
improvements where needed. Our certification under an ISO 9001 quality standard demonstrates that
our manufacturing operations meet the most demanding of the established world standards. Our
principal manufacturing facilities are also certified under an ISO 14001 quality standard, which
was published in 1996 to provide a structured basis for environmental management control. We started the implementation of the Six Sigma approach in 2004 and our principal
manufacturing facilities have been recognized by the China Association for Quality of the Chinese
Government as a National Advanced Enterprise for the Promotion of Six Sigma. Six Sigma is an
internationally recognized approach that uses facts and data to develop better solutions, thereby
reducing defects and production times, and improving customer satisfaction. This approach allows the
Company to lower its costs due to the minimization of manufacturing defects. This results in
improved profit margins and higher competitiveness. Our Suppliers We purchase thousands of different component parts from numerous suppliers. We are not
dependent upon any single supplier for any key component. We purchase components from suppliers in
Japan, China and elsewhere. We generally base component orders on received purchase orders in an
effort to minimize our inventory risk by ordering components and products only to the extent
necessary although for certain customers we will occasionally purchase raw materials based on such
customers rolling forecasts. The major component parts we purchase include the following:  
    off-the-shelf and custom integrated circuits or chips, most of which
we purchase presently from Toshiba Corporation, Sharp Corporation and
certain of their affiliates;
    LCD panels, which are available from many manufacturers. In 2004, we
purchased LCD panels from Epson Hong Kong Ltd., Toshiba Matsushita
Display Technology Co. Ltd., Optrex Corporation and Sharp Corporation
for LCD panels and in the future we may produce some LCD supplies
internally;
    CMOS sensors, which we purchase mainly from Omnivision Technologies Inc.;
    solar cells and batteries, which are standard off-the-shelf items that
we generally purchase in Hong Kong from agents of Japanese
manufacturers; and
    various mechanical components such as plastic parts, rubber keypads,
PCBs, indium tin oxide, or ITO, glass used in the production of LCD
panels, and packaging materials from various local suppliers in China. 21




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Whenever practical, we use domestic China suppliers who are often able to provide items at low
costs and with short lead times. Certain components may be subject to limited allocation by certain of our suppliers. During
2000, there was an industry-wide shortage of components in the electronics industry as supply was
unable to satisfy growing world demand. In some cases, supply shortages and delays in deliveries of
particular components have resulted in curtailed production, or delays in production of assemblies
using scarce components. These supply shortages have contributed to an increase in our inventory
levels and reduction in our margins. We expect that shortages and delays in deliveries of some
components will continue. If we are unable to obtain sufficient components on a timely basis, we
may experience manufacturing delays, which could harm our relationships with current or prospective
customers and reduce our sales. The principal raw materials used by the Company are large scale integrated, or LSI,
circuits (CMOS), semiconductors, LCD panels and batteries. At times, the pricing and availability
of these raw materials can be volatile, due to numerous factors beyond the Companys control,
including general economic conditions, currency exchange rates, industry cycles, production levels
or a suppliers tight supply. In the past, we have asked our customers to share in the increased

costs of raw materials where such increased costs would adversely affect the Companys business,
results of operations and financial condition. Our customers have generally agreed when so
requested in the past. We cannot assure you, however, that our customers will agree to share costs
in the future and that our business, results of operations and financial condition would not be
adversely affected by increased volatility of raw materials. Production Scheduling The typical cycle for a product to be designed, manufactured and sold to an OEM customer is
one to two years, which includes the production period, the development period and the period for
market research and data collection (which is undertaken primarily by our OEM customers). Initially
an OEM customer gathers data from its sales personnel on products for which there is market
interest, including features and unit costs. The OEM customer then contacts us, and possibly other
prospective manufacturers, with forecasted total production quantities and design specifications or
renderings. From that information, we in turn contact our suppliers and determine estimated
component and material costs. We later advise our OEM customer of the development costs, charges
(including molds, tooling and software design, if applicable) and unit cost based on the forecasted
production quantities desired during the expected production cycle. Once we and the OEM customer agree to the quotation for the development costs and the unit
cost, we begin the product development if we are engaged to do so. This development period
typically lasts less than six months, but may be longer if software design is included. During this
time we complete all molds, tooling and software required to manufacture the product with the
development costs generally borne by our customer. Upon completion of the molds, tooling and
software, we produce samples of the product for the customers quality testing, and, once approved,
commence mass production of the product. We recover the development costs in relation to molds,
tooling and software from our customers. The production period usually lasts approximately six to twelve months. In some cases, our
OEM customer handles all product design and development and engages us only at the point of initial
production. Typically, more advanced products have shorter production runs. If total production
quantities change, the OEM customer often provides only limited notice before discontinuing orders
for a product. At any point in time we may be in different stages of the development and production
periods for the various models under development or in production for our OEM customers. Generally, our production is based on purchase orders received from OEM customers. Purchase
orders are often supported by letters of credit or written confirmation from the OEM customer and
generally may not be cancelled once confirmed without the mutual consent of the parties. Even in
those cases where customers are contractually obligated to purchase products from us or repurchase
unused inventory from us, we may elect not to immediately enforce our contractual rights because of
the long-term nature of our customer relationships and for other business reasons, and instead may
negotiate accommodations with customers regarding particular situations. We did not suffer a material loss resulting from the cancellation of OEM customer orders in
2001 to 2004. In 2001, we wrote down our inventory for $3.8 million for slow-moving raw materials
relating to cancelled, reduced or delayed orders. However, subsequently we were able to use some of
these raw materials in production or we received compensation for the unused raw materials from
certain of our customers, and the gain of $2.0 million was recorded in cost of sales during 2002. Sales and Marketing We focus on developing close relationships with our customers at the development and design
phases and continuing throughout all stages of production. We identify, develop and market new
technologies that benefit our customers and position us well as an EMS provider. Sales and marketing operations are integrated processes involving direct salespersons, project
managers and senior executives. We direct our sales resources and activities at several management
and staff levels within our customers and prospective customers. We receive unsolicited inquiries
resulting from word of mouth, from public relations activities, and through referrals from current
customers. We evaluate these opportunities against our customer selection criteria and assign
direct salespersons. 22




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Seasonality Historically, our sales and operating results are often affected by seasonality. Sales of
calculators, personal organizers and linguistic products are often higher during the second and
third quarters in anticipation of the start of the school year and the Christmas buying season.
Similarly, our consumer services for electronics products have historically been lower in the first
quarter resulting from both the closing of our factories in China for the Chinese New Year holidays
and the general reduction in sales following the holiday season. As we have diversified our
services for complex components, we expect that seasonality may be less of a factor affecting our
business. Transportation 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, we have not been materially
affected by any transportation problems. However, transportation difficulties affecting air cargo
or shipping, such as an extended closure of ports that materially disrupts the flow of our
customers products into the United States, could materially and adversely affect our sales and
margins if, as a result, our customers delay or cancel orders or seek concessions to offset
expediting charges they incurred pending resolution of the problems causing the port closures. Competition General competition in the contract EMS industry is intense and characterized by price
erosion, rapid technological change and competition from major international companies. This
intense competition has resulted in pricing pressures, lower sales and reduced margins. We believe
that the principal competitive factors in our targeted markets are product quality, pricing,
flexibility and timeliness in responding to design and schedule changes, reliability in meeting
product delivery schedules, technological sophistication and geographic location. Many of our
competitors have greater financial, technical, marketing, manufacturing, regional shipping
capabilities and logistics support and personnel resources than we do and we may not be able to
continue to compete successfully. The EMS services we provide are available from many independent sources as well as from
current and potential customers with in-house manufacturing capabilities. Our EMS competitors
include Celestica, Inc., Flextronics International Ltd., Hon Hai Precision Industry Co., Ltd.,
Jabil Circuit, Inc., Sanmina-SCI Corporation and Solectron Corporation. Our principal competitors
in the manufacture of our traditional product lines of calculators, personal organizers and
linguistic products include Kinpo Electronics, Inc. and Inventec Co. Ltd. Our competitors in the
manufacturing of image capturing devices and their modules include Lite-On Technology Corporation,
The Primax Group and Logitech International S.A. Our principal competitors in the manufacture of
mobile phone accessories include Elcoteq Network Corp. Our competitors in the manufacturing of RF
modules include Wavecom and WKK International (Holdings) Ltd. Our competitors in the manufacturing
of LCD panels include Truly International Holdings Ltd. and Varitronix International Ltd. We have
numerous competitors in the telecommunication, sub-assemblies and components product lines,
including Philips, Samsung and Varitronix International Ltd. Our competitors in our FPC
sub-assemblies business include Solectron Corporation. Research and Development We invest in research and development for manufacturing and assembly technology that provide
us with the potential to offer better and more technologically advanced services to our OEM
customers or assist us in working with our OEM customers in the design and development of future
products. We plan to continue acquiring advanced design equipment and to enhance our technological
expertise through continued training of our engineers and further hiring of qualified system
engineers. These investments are intended to improve the speed, efficiency and quality of our
assembly processes. In our ODM business, we are responsible for the design and development of new products, the
rights to which we own. We sell these products to OEM customers to be marketed to end users under
the customers brand names. To date, we have successfully developed a number of electronic
dictionaries, cordless telephones and calculator products. Our efforts to expand or maintain the
ODM business may not be successful and we may not achieve material revenues or profits from our
efforts. To date, our ODM design activities have not been a material portion of our research and
development budget. Patents, Licenses and Trademarks We do not have any patents, licenses or trademarks on which our business is substantially
dependent. Instead, we rely on our trade secrets, industry expertise and long-term relationships
with our customers and suppliers. Organizational Structure We are a holding company for Nam Tai Group Management Limited, Nam Tai Electronic & Electrical
Products Limited, Zastron Precision-Tech Limited, Namtek Software Development Company Limited and
J.I.C. Technology Company Limited and their subsidiaries. The chart below illustrates the
organizational structure of the Company and our principal operating subsidiaries as of December 31,
2004. 23




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(ORGANISATION CHART) Our significant operating entities are described below: Nam Tai Group Management Limited Nam Tai Group Management Limited was established on March 9, 2001 in Hong Kong and provides
management services to other group companies. Nam Tai Electronic & Electrical Products Limited Nam Tai Electronic & Electrical Products Limited, or NTEEP, was incorporated in June 2003 in
the Cayman Islands, and is the holding company for Namtai Electronic (Shenzhen) Co., Ltd. and Nam
Tai Investments Consultant (Macao Commercial Offshore) Company Limited. Its shares were listed on
the Hong Kong Stock Exchange on 28 April 2004 and we hold 75% of the issued ordinary shares of
NTEEP. Namtai Electronic (Shenzhen) Co., Ltd. Namtai Electronic (Shenzhen) Co., Ltd. was established as Baoan (Nam Tai) Electronic Co. Ltd.
in June 1989 as a contractual joint venture company with limited liability pursuant to the relevant
laws of China. The equity of Baoan (Nam Tai) Electronic Co. Ltd. was 70% owned by Nam Tai
Electronic & Electrical Products Limited and 30% owned by a Chinese company. In 1992, the Chinese
company transferred all of its equity interest in the contractual joint venture to Nam Tai
Electronic & Electrical Products Limited, a Hong Kong subsidiary of Nam Tai, which name was
subsequently changed to Nam Tai Trading Company Limited, and the company changed its name to Namtai
Electronic (Shenzhen) Co., Ltd. It is the principal operating arm of NTEEP. Nam Tai Investments Consultant (Macao Commercial Offshore) Company Limited Nam Tai Investments Consultant (Macao Commercial Offshore) Company Limited was established in
August 2003 in Macao, China. In March 2004, the equity interest of Nam Tai Investments Consultant
(Macao Commercial Offshore) Company Limited was transferred from the Company to NTEEP and became
its wholly owned subsidiary. Its principal business is the provision of management and sales
co-ordination and marketing services to other companies within the NTEEP group. 24




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Zastron Precision-Tech Limited Zastron Precision-Tech Limited, or Zastron, was incorporated in June 2003 in the Cayman
Islands, and is the holding company for Zastron Electronic (Shenzhen) Co., Ltd. and Zastron (Macao
Commercial Offshore) Company Limited. Zastron Electronic (Shenzhen) Co. Ltd. Zastron Electronic (Shenzhen) Co. Ltd. was organized as Zastron Plastic & Metal Products
(Shenzhen) Ltd. in March 1992 as a limited liability company pursuant to the relevant laws of
China. Zastron Plastic & Metal Products (Shenzhen) Ltd. was engaged in the production of metallic
parts and PVC plastic products, much of which is used in the products manufactured in our principal
manufacturing facilities. In August 2002, Zastron Plastic & Metal Products (Shenzhen) Ltd. changed
its name to Zastron Electronic (Shenzhen) Co. Ltd. and expanded the nature of its business to
include manufacturing of telecommunication products, LCD modules, TFT LCD modules and others. It
also became one of our principal manufacturing arms. Zastron Electronic (Shenzhen) Co. Ltd. is
currently a wholly-owned subsidiary of Zastron. Zastron (Macao Commercial Offshore) Company Limited Zastron (Macao Commercial Offshore) Company Limited was established in March 2004 in Macao,
China and is a wholly owned subsidiary of Zastron. Its principal business is the provision of
management, sales co-ordination and marketing services to other companies within the Zastron group. J.I.C. Technology Company Limited J.I.C. Technology Company Limited, or J.I.C., was formed in the Cayman Islands in January 2002
in connection with a reverse merger with Albatronics, of which we owned slightly more than 50% of
the outstanding capital stock. J.I.C. was listed on the Hong Kong Stock Exchange in June 2002. We
currently hold 71.63% of the issued ordinary shares of J.I.C. Jetup Electronic (Shenzhen) Co., Ltd. Jetup Electronic was incorporated in 1993 in China and handles the manufacturing and
processing works of LCD panels through its factory plants in Baoan County, Shenzhen. J.I.C. (Macao Commercial Offshore) Company Limited J.I.C. (Macao Commercial Offshore) Company Limited was incorporated in November 2004 in Macao,
China and is a wholly-owned subsidiary of J.I.C. Technology Company Limited. Its principal business
is the provision of management, sales co-ordination and marketing services to other companies with
the J.I.C. Group. Namtek Software Development Company Limited Namtek Software Development Company Limited was incorporated in May 2002 in the Cayman Islands
and was established as the holding company for Shenzhen Namtek Co., Ltd. and Namtek Japan Company
Limited. Shenzhen Namtek Co., Ltd. Shenzhen Namtek Co., Ltd. was organized in December 1995 as a limited liability company
pursuant to the relevant laws of China. Shenzhen Namtek Co., Ltd. commenced operations in early
1996 developing and commercializing software for the consumer electronics industry, particularly
for our customers and for products we manufacture or we will manufacture in the future. At December
31, 2004, Shenzhen Namtek Co., Ltd employed approximately 93 software engineers and provides the
facilities and expertise to assist in new product development and research, enabling us to offer
our customers program design for microprocessors, enhanced software design and development
services, and strengthening our ODM capabilities. Namtek Japan Company Limited Namtek Japan Company Limited was incorporated in June 2003 in Tokyo, Japan and is the sales
and marketing arm of software business of Namtek Group in Japan. Property, Plant and Equipment Our registered office in the British Virgin Islands is located at McNamara Chambers, P.O. Box
3342, Road Town, Tortola. Our principal 25




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executive office in the British Virgin Islands is located at 116 Main Street, 3rd Floor,
Road Town, Tortola. Corporate administrative matters are conducted at this office through our
registered agent, McNamara Corporate Services Limited. We do not own any property in the British
Virgin Islands. The table below lists the locations, square footage, principal use and lease
expiration dates of the facilities used in our principal operations. Owned or leaseLocation
    
    Square Footage
    
    
    Principal Use
    
    expiration date(1)Hong Kong
    
    
    24,200
    
    
    Offices
    
    Owned(2)Macao
    
    
    1,875
    
    
    Offices
    
    2005Macao (for J.I.C. Macao)
    
    
    964
    
    
    Offices
    
    2006British Virgin Islands
    
    
    300
    
    
    Offices
    
    2005Principal Manufacturing Facilities
    
    
    557,835
    
    
    Manufacturing
    
    2043/2049 (3)Shenzhen, China
    
    
    87,462
    
    
    Offices
    
    2043/2049 (3)189,952
    
    
    Dormitories
    
    2043/2049 (3)26,939
    
    
    Cafeteria
    
    204333,826
    
    
    Recreational
    
    2049Other facilitiesOther facilities
Shenzhen, China
    
    
    383,547
    
    
    Manufacturing LCD panels
    
    201232,005
    
    
    Offices
    
    2012221,666
    
    
    Dormitories
    
    201222,259
    
    
    Cafeteria
    
    201214,548
    
    
    Recreational
    
    2012Shekou, Shenzhen, China
    
    
    12,374
    
    
    Software development
    
    2005Tokyo, Japan
    
    
    904
    
    
    Software development
    
    2005
   (1)
    
    Only the Chinese government and peasant collectives may own land in
China. Our principal manufacturing facilities are located on land in
which we have entered into a land lease agreement with the Chinese
government that gives us the right to use the land for 50 years. Based
on our understanding of the practice as it exists today, at the
expiration of the land lease we may be given the right to renew the
lease. However, at the end of the lease term, all improvements we have
made will revert to the government. For our other facilities, we have
entered into factory building lease agreements with peasant
collectives or other companies for 10 years or less.(2)
    
    Although we own the office space, the land on which the building is
located is subject to a 75-year lease with the government that expires
in 2055, with a right to renew for 75 more years.(3)
    
    Our principal manufacturing facilites occupy two pieces of land with
50-year leases which we acquired in 1993 and 1999, respectively. In order to expand our production capacity, we have built a new factory consisting of
approximately 265,000 square feet adjacent to our principal manufacturing facilities in Shenzhen,
China. The construction completed in December 2004. We expect full operations can commence in April
2005. As of December 31, 2004, we had spent $15.0 million to cover the cost of construction and
fixtures and equipment for the new factory. The financing of these improvements to our
manufacturing facilities were obtained from internal resources. In October 2004, our existing production facility for the LCD panels segment also relocated to new
factory premises which are approximately 670,000 square feet and twice the size of the former
factory premises. This new factory provides room for future expansion of production capacity. As of
December 31, 2004, we had spent $7.7 million for this relocation and financed this amount with a
combination of internal resources and bank financing. Hong Kong In 2001, our Hong Kong offices relocated to 15/F, China Merchants Tower, Shun Tak Centre,
168-200 Connaught Road, Central, Hong Kong. The office is conveniently located above the ferry
terminal and beside the highway, permitting easy transportation by sea or by land to and from the
manufacturing facilities in Shenzhen. The purchase and renovation of the 24,200 square feet of
contiguous prime office space, including transaction fees, cost $13.0 million. As of December 31, 2004, we own one residential flat in Hong Kong purchased for total
consideration of $1,108,000. This property is occupied by one member of senior management and forms
a part of his compensation. Until 1996, we owned approximately ten acres of land in Hong Kong carried on our books at a
cost of approximately $523,000. Between 1997 and 2004, we sold approximately 7.7 acres of land for
net proceeds of $7.28 million; realizing a gain of $7.03 million. We plan to sell the remaining land
and, pending the sale, to continue to carry the land at a cost of approximately $134,000. 26




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Macao In August 2003, we established our PRC headquarters in Macao, China and set up Nam Tai
Investments Consultant (Macao Commercial Offshore) Company Limited in Macao, China. Macao, like
Hong Kong, is a special administrative region of China and has recently introduced an incentive
program to attract investments to Macao. In March and November 2004, we further established Zastron
(Macao Commercial Offshore) Company Limited and J.I.C.(Macao Commercial Offshore) Company Limited
in Macao, China, respectively. We currently lease three offices and all of them under two-year
leases expiring in July 2005 and December 2006, respectively. The monthly rental cost is
approximately $905 per office. Shenzhen, China Principal Manufacturing Facilities Our principal manufacturing facilities are located in Baoan County, Shenzhen, China. In
December 1993, we acquired a 50-year lease for the first piece of land for approximately $2.45 million. The first phase facility consisted of 160,000 square feet of manufacturing
space, 39,000 square feet of offices, 212,000 square feet of new dormitories, 26,000 square feet of
full service cafeteria, recreation facilities and a swimming pool. The total cost of this addition
to our complex, excluding land, was approximately $21.8 million. In November 2000, we began
construction of another addition to our factory complex. We completed construction in October 2002,
adding a new five-story factory with 138,000 square feet of production facilities, including one
floor for assembling, one floor of office space, one floor for warehouse use and two floors of
class thousand clean room facilities. Prior to this addition, we had only one floor of class ten
thousand clean room facilities at our factory complex. As of December 31, 2002, we had spent $9.1
million to complete the construction of the new facility. With this new addition, we had
approximately 626,000 square feet of manufacturing space at our manufacturing facilities as
of December 31, 2002, with only minimal additions in 2003. In July 1999, we purchased another vacant lot of approximately 280,000 square feet
(approximately 6.5 acres) bordering our current manufacturing complex located in Shenzhen, China at
a cost of approximately $1.2 million. We have built another factory consisting of approximately
265,000 square feet of space. Construction started in September 2003 and completed in December 2004. We
expect full operation can commence in April 2005. With this new
addition, our principal manufacturing facilities now consists
of 557,835 square feet of manufacturing space, 87,462 square feet of offices, 189,952 square feet
of dormitories and 60,765 square feet of cafeteria space and a full services recreational building.
As of December 31, 2004, we had spent $15.0 million to cover the cost of construction and fixtures
and equipment for the new factory. The financing for these improvements to our manufacturing
facilities was obtained from internal resources. LCD Factory In
October 2003, Jetup Electronic (Shenzhen) Co., Ltd. entered into a tenancy agreement for new
factory premises, which is also located in Baoan County, Shenzhen, China, and relocated to the new
factory premises in October 2004. The new factory premises are about twice the size of the former
factory premises and consist of 383,547 square feet of manufacturing space, 32,005 square feet of
offices, 221,666 square feet of dormitories, and 36,807 square feets of cafeteria and recreational
spaces. This new factory provides room for the future expansion of production capacity. As of
December 31, 2004, we had spent $7.7 million for this relocation and financed this amount with a
combination of internal resources and bank financing. Software Development We currently lease two offices in which we conduct software development. Our Shekou, Shenzhen,
China office is approximately 12,374 square feet, which we lease under two one-year leases
expiring in July 2005. The monthly rental is approximately $7,667. In July 2003, we opened an
office in Tokyo, Japan to further expand our sales and marketing team in Japan for our software
development business. The Tokyo office has approximately 904 square feet, which we lease under a
two-year lease expiring in June 2005. The monthly rental for the Tokyo office is approximately
$1,975. See Item 3. Key Information  Risk Factors.  Risks Related to Our Operations in China, Hong Kong, Macao and Japan. 
 Item 5.Operating and Financial Review and Prospects Except for statements of historical facts, this section contains forward-looking statements
involving risks and uncertainties. You can identify these statements by forward-looking words
including expect, anticipate, believe, seek, estimate, intends, should, or may.
Forward-looking statements are not guarantees of our future performance or results and our actual
results could differ materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under the section of this Report entitled Item
3. Key Information  Risk Factors. This section should be read in conjunction with our
Consolidated Financial Statements included as Item 18 of this Report. 27




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Operating Results Overview We are an electronics manufacturing and design services provider to a select group of the
worlds leading OEMs of telecommunications and consumer electronic products. Through our
electronics manufacturing services operations, we manufacture electronic components and
sub-assemblies, including LCD panels, LCD modules, RF modules, FPC sub-assemblies and image sensors
modules. These components are used in numerous electronic products, including cellular phones,
laptop computers, digital cameras, copiers, fax machines, electronic toys, handheld video game
devices and microwave ovens. We also manufacture finished products, including cellular phones,
palm-sized PCs, PDAs, electronic dictionaries, calculators, and digital
camera accessories and BluetoothTM wireless headset accessory for use with cellular
phones. We assist our OEM customers in the design and development of their products and furnish full
turnkey manufacturing services that utilize advanced manufacturing processes and production
technologies. Our services include hardware and software design, component purchasing, assembly
into finished products, or electronic sub-assemblies and post-assembly testing. These services are
value-added and assist us in obtaining new business but do not represent a material component of
our revenue. We also provide ODM services, in which we design and develop proprietary products that
are sold by our OEM customers using their brand name. Net Sales and Cost of Sales We derive our net sales principally from manufacturing services that we provide to OEMs of
telecommunications and consumer electronic products. The market for the products we manufacture is
generally characterized by declining unit prices and short product life cycles. Sales to our OEM
customers are primarily based on purchase orders we receive from time to time rather than firm,
long-term purchase commitments from our customers. We recognize sales, net of product returns and
warranty costs, typically at the time of product shipment or, in some cases, as services are
rendered. Our production is typically based on
purchase orders received from OEM customers. However, for
certain customers, we will occasionally purchase raw materials based on such customers rolling
forecasts. Purchase orders are often supported by letters of credit or written confirmation from
our OEM customers. We generally do not obtain firm, long-term commitments from our customers.
Uncertain economic conditions and our general lack of long-term purchase commitments with our
customers make it difficult for us to accurately predict our revenue over the longer term. Even in
those cases where customers are contractually obligated to purchase products from us or to
repurchase unused inventory from us, we may elect not to immediately enforce our contractual rights
because of the long-term nature of our customer relationships and for other business reasons, and
instead may negotiate accommodations with customers regarding particular situations. Gross Margins Complex products generally have relatively high material costs
as a percentage of total unit costs and accordingly our strategic
shift to produce more of such products has historically been a factor that has adversely affected our
gross margins. This is the primary reason for the decline in our gross margins between 1999 and
2001. During this period, we diversified our product mix from predominantly low complexity
electronic products, including calculators and electronic dictionaries, to include more complex
components and sub-assemblies, like LCD modules and RF modules. We believe our gross margin
improved in 2002 and 2003 as a result of the experience we acquired in manufacturing these more
complex products as we changed our strategic focus. Despite the lower gross margin on more complex
products, we believe that the opportunity for growth in the demand for these complex products
justifies the shift in our strategic focus. Furthermore, we believe that the experience in
manufacturing processes and know-how that we have developed from producing more complex products
are a competitive advantage for us relative to many of our competitors. The increased costs associated with developing advanced manufacturing techniques to produce
complex products on a mass scale and at a low cost have also negatively impacted our gross margins.
For example, in our initial production runs of LCD modules and RF modules, we experienced low
production yields and other inefficiencies that caused our gross margin to decrease. Although we
believe we have improved the efficiency and quality of our manufacturing processes relating to LCD
modules and RF modules, we may not be able to improve or maintain our gross margin for these
products. Furthermore, in January 2003, we began to produce color and TFT LCD modules, each a
complex component used in a variety of devices. The increased costs associated with manufacturing
these products and other new complex products could have a negative impact on our future gross
margins. The complex manufacturing processes involved in the production of complex products is also
capital intensive, thereby increasing our fixed overhead costs. It has been our strategy to shift
our focus more to the business of key components sub-assembly. The key components sub-assembly
business generally accounts for relatively lower gross profit margin business. Nam Tai has been
very successful in shifting its focus to key components sub-assembly, which accounted for 59% of
our sales in 2004. We believe that the strong growth of this business will offset the impact of
lower gross profit margins and we can continue to achieve strong growth in our overall profits. In
the long run, we expect to achieve an overall gross profit margins of around 12%. 28




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##### Table of Contents



Income Taxes Under current BVI law, our income is not subject to taxation. Subsidiaries operating in Hong
Kong and China are subject to income taxes as described below, and our subsidiary operating in
Macao is exempted from income taxes. This would be valid unless the Macao government changes its
policy towards offshore companies. Under current Cayman Islands law, Nam Tai Electronic & Electrical Products Limited, Zastron
Precision-Tech Limited, J.I.C. Technology Company Limited and Namtek Software Development Company
Limited are not subject to profit tax in the Cayman Islands as they have no business operations in
the Cayman Islands. However, they may be subject to Hong Kong income
taxes as described below if they are registered in Hong Kong. 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% for 2002 and 17.5% for both 2003 and
2004 to the estimated taxable income earned in or derived from Hong Kong during the applicable
period. The basic corporate tax rate for Foreign Investment Enterprises in China, such as our Chinese
subsidiaries, is currently 33% (30% state tax and 3% local tax). However, because all of our
Chinese subsidiaries are located in 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
regions in which our subsidiaries operate in Shenzhen are not currently assessed any local tax,
though that could change at any time. Moreover, several of our Chinese subsidiaries are entitled
to certain tax benefits and certain of our Chinese subsidiaries have qualified for tax refunds as a
result of reinvesting their profits earned in previous years in China. Efforts by the Chinese government to increase tax revenues could result in decisions or
interpretations of the tax laws by the Chinese tax authorities that are unfavorable to us and which
increase our future tax liabilities, or deny us expected refunds. Changes in Chinese tax laws or
their interpretation or application may subject us to additional Chinese taxation in the future. Our effective tax rates were 8%, 1% and 1% for 2002, 2003 and 2004, respectively. The
significant factors that caused our effective tax rates to differ from the applicable statutory
rates of 15% were as follows: 2002
    
    2003
    
    2004Applicable statutory tax rates
    
    
    15
    %
    
    
    15
    %
    
    
    15
    %Effect of
loss / income for which no income tax benefit/expense is
receivable/payable
    
    
    6
    %
    
    
    (2
    %)
    
    
    (10
    %)Tax losses not recognised
    
    
    
    
    
    
    
    
    
    
    1
    %Tax holidays and incentives
    
    
    (5
    %)
    
    
    (5
    %)
    
    
    (3
    %)Effect of China tax concessions, giving rise to no China tax liability
    
    
    (21
    %)
    
    
    (8
    %)
    
    
    (3
    %)Under / (over) provision of income tax expense in prior years
    
    
    5
    %
    
    
    
    
    
    
    Other items which are not assessable (deductible) for tax purposes
    
    
    8
    %
    
    
    1
    %
    
    
    1
    %Effective tax rates
    
    
    8
    %
    
    
    1
    %
    
    
    1
    %
 Strategic Investments An important element of our strategy is to make investments in companies that provide the
potential to complement our existing products and services, become new customers, augment our
market coverage and sales ability, enhance our technological capabilities and expand our service
offerings. We account for investments of less than 20% under the cost method and we account for
investments between 20% and 50% under the equity method. Our material investments over the last
five years include: Stepmind. In December 2003, we placed approximately $5.3 million into an escrow account for
an investment in Stepmind. The investment was to occur in two phases. For the first phase,
approximately $2.64 million, representing 7.66% of the equity interest in Stepmind, was released to
Stepmind in January 2004. The second phase amounting to $2.65 million was released to
Stepmind in August 2004 subject to fulfillment of certain conditions. In August 2004, we disposed
of our entire interest in Stepmind to one of the shareholders of Stepmind at the original
subscription price for those shares. 29




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##### Table of Contents



Alpha Star/JCT.In January 2003, we invested $10.0 million for a 25% equity interest in Alpha
Star Investments Ltd., the ultimate holding company of JCT. JCT is engaged in the design,
development and marketing of wireless communication terminals and wireless application software and
is using us to manufacture wireless communication terminals and their related modules. In September
2004, we made an impairment to write down our $10.0 million investment in Alpha Star to a fair value
of approximately $3.0 million. As of December 31, 2004, another analysis had been conducted by an
independent valuer, who determined that no further impairment to value was required. TCL Group.Over the period from September 2000 through November 2002, we made three
investments in the TCL Group of companies and disposed of a portion of the investment in 2002 and
2003. In 2004, we further increased our investment in TCL Mobile from holding approximately 3% to
9% through the acquisition of Jasper Ace. The TCL group of companies is a leading OEM for numerous
consumer electronic and telecommunications products in the domestic Chinese market.  
    In September 2000, we made a strategic investment of $2.0 million to
acquire a 5% indirect equity interest (through a 25% direct equity
interest in Mate Fair) in both TCL Mobile Communication (HK) Co., Ltd.
and Huizhou TCL Mobile Communication Co., Ltd., together known as TCL
Mobile. TCL Mobile is engaged in manufacturing, distributing and
trading of digital mobile phones and accessories in China and overseas
markets. In October 2002, we began to provide TCL Mobile with LCD
modules used in its mobile phones.  
    In January 2002, we acquired a 6% equity interest in TCL Corporation
(formerly known as TCL Holdings Corporation Ltd.), the parent of the
TCL Group of companies, for approximately $12.0 million.  
    In November 2002, Mate Fair sold a portion of its equity interest in
Huizhou TCL Mobile Communication Co. Ltd. for which we received
proceeds of approximately $10.4 million, reducing our direct equity
interest (held through Mate Fair) in TCL Mobile to approximately 3%.  
    In November 2002, we invested $5.1 million in the 3% convertible notes
of TCL International Holdings Limited that are due in November 2005.
TCL International Holdings Limited is another company in the TCL Group
and is publicly listed on the Hong Kong Stock Exchange. Those
convertible notes of TCL International Holdings Limited were disposed
of in August 2003 for approximately $5.03 million.  
    In April 2004, we increased our shareholding in TCL Mobile from
approximately 3% to 9% through acquiring Jasper Ace, which directly
holds 9% equity interest in TCL Mobile, at a consideration of
approximately $102.2 million. The consideration was satisfied, by the exchange of our 72.2% equity interest in Mate Fair,
plus cash of $25 million and the issuance of 1,416,764 new Nam Tai
shares and resulted in a net investment cost of $79.5 million. Deswell Industries.In September 2000, we purchased 500,000 common shares in Deswell
Industries Inc., a Nasdaq-listed company, representing approximately 9% of the outstanding shares
of Deswell at the time of the purchase for an aggregate of $7.5 million. Deswell is a manufacturer
of injection-molded plastic parts and components, electronic products and sub-assemblies and
metallic molds and accessory parts for OEMs and contract manufacturers. During the first quarter of
2002, we sold our Deswell shares in the open market for aggregate proceeds of $10.1 million. The following details the impact of our strategic investments on our income statements for
each of the years ended 2002, 2003 and 2004: 2002
    
    
    2003
    
    
    2004(in thousands)Cost InvestmentsIncluded in other income:Deswell
    
    Realized gain on disposal of marketable securities
    
    $
    642
    
    
    $
    
    
    
    $
    Deswell
    
    Dividend income received from marketable securities
    
    
    114
    
    
    
    
    
    
    
    TCL Corporation
    
    Dividend income received from investment
    
    
    803
    
    
    
    1,696
    
    
    
    926Huizhou TCL
    
    Dividend income received from investment
    
    
    
    
    
    
    2,018
    
    
    
    17,369$
    1,559
    
    
    $
    3,714
    
    
    $
    18,295Equity InvestmentsIncluded in equity
in income (loss) of affiliated companies:Mate Fair
    
    
    
    $
    10,741
    
    
    $
    
    
    
    $
    Alpha Star Investments Limited
    
    $
    
    
    
    $
    498
    
    
    $
    (6,806
    )Equity in income (loss) of affiliated companies
    
    $
    10,741
    
    
    $
    498
    
    
    $
    (6,806
    )Included in other income:Mate Fair
    
    Release of unamortized goodwill of affiliated
companies
    
    $
    (520
    )
    
    $
    
    
    
    $
    $
    10,221
    
    
    $
    498
    
    
    $
    (6,806
    )
 30




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##### Table of Contents



Toshiba Joint Venture In March 2000, we formed a joint venture with Toshiba Battery Company Ltd. called BPC
(Shenzhen) Co., Ltd., or BPC, to manufacture rechargeable lithium ion battery packs at our
manufacturing complex in Shenzhen, China. Toshiba Battery Company Ltd. owned a 13% interest in BPC
and we owned the balance of BPC for a cash investment of $1.3 million. During 2000 and 2001 and
from January 1 to April 30, 2002, we recognized net sales of $6.2 million, $21.1 million, and $7.8
million, respectively, from Toshiba and its related companies. In 2002, we sold our 87% joint
venture interest in BPC and a related manufacturing license to a Toshiba-related company for an
aggregate of $2.9 million, resulting in a gain of $77,000. Based on the 2001 full year results of BPC, we estimate that the sale of BPC will result in a
reduction of annual revenues for 2002 of approximately $21.1 million and a reduction in profits of
$1.3 million for 2002. We further estimate that the BPC sale will result in a reduction of annual operating
expenses of approximately $600,000 for 2002. Cash flows from operations for 2002 would decline by approximately
$1.7 million. J.I.C. Group We acquired the J.I.C. Group in October 2000 for $32.8 million. We paid a portion of the
purchase price to the seller by issuing approximately 3.48 million of our common shares and paid
$11.0 million in cash. The J.I.C. Group is principally engaged in the manufacture and marketing of
transformers and LCD panels, a key component for a variety of consumer electronic products. We
accounted for the acquisition of the J.I.C. Group under the purchase method of accounting and the
results of the J.I.C. Groups operations have been consolidated with our results since the date of
its acquisition. In June 2002, through a reverse merger, we arranged for the listing of the J.I.C. Group on the
Hong Kong Stock Exchange. To effect the listing, we entered into an agreement with the liquidators
of Albatronics to effect the restructuring proposal of Albatronics and the listing of J.I.C.
Technology Company Limited as this arrangement was more cost effective than using an initial public
offering. Due to the reverse merger, our effective interest in the J.I.C. Group was reduced from 100% to
92.9%. As a result of this reduction in interest during 2002, we have released unamortized goodwill
of $1.5 million, representing 7.1% of the goodwill that had previously been recorded upon
purchasing the J.I.C. Group in October 2000. The release of unamortized goodwill is included as
part of the loss on the reverse merger of the J.I.C. Group. In August 2002, we acquired an additional 7,984,000 ordinary shares of J.I.C. Technology
Company Limited for a cash consideration of $437,000, resulting in additional goodwill of $253,000.
As of December 31, 2002, we held 93.97% of effective interest in J.I.C. Group, which represented
74.78% of the existing ordinary shares and 93.97% of the outstanding ordinary shares upon full
conversion of the 598,420,000 preference shares. During the period from June to November 2003, we disposed of a total of 42,600,000 ordinary
shares of J.I.C. Technology Company Limited for cash consideration of $4.0 million. The disposal
resulted in a net gain on partial disposal of a subsidiary of $1.8 million and the releasing of
unamortized goodwill of $1.2 million. The release of unamortized goodwill is netted off with the
gain on the partial disposal of a subsidiary. In November 2003, we converted 175,100,000 preference
shares into 170,000,000 ordinary shares of J.I.C. Technology Company Limited. In June 2003, in order to concentrate its effort on its LCD panels reporting unit, J.I.C.
Technology Company Limited disposed of its transformers reporting unit to a third party for a cash
consideration of $2.4 million. Sales of the transformers reporting unit for the years ended
December 31, 2002 and 2003 were $11.3 million and $6.3 million, respectively, and were
insignificant compared to the sales as a whole. The net income from this discontinued operation for
the years ended December 31, 2002 were also immaterial. In 2003, the net income from discontinued
operation represented the gain of $2.0 million, being the proceeds from the disposal less the
carrying value of the net assets of the transformers reporting unit,
and minority interests. Excluding this gain, the basic and diluted earnings per share for the year ended December 31, 2003
would have been $1.04 and $1.02, respectively. During the period from November to December 2004, we further disposed of a total of
128,000,000 ordinary shares of J.I.C. Technology Company Limited for cash consideration of $12.95
million. The disposal resulted in a net gain on partial disposal of a subsidiary of $6.25 million.
During the same period, we converted all 423,320,000 preference shares into 410,990,290 ordinary
shares. As of December 31, 2004, we held 546,890,978 ordinary shares of J.I.C. Technology Company
Limited, equivalent to 71.63% of issued ordinary shares. 31




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##### Table of Contents



Summary of Results Net
sales for 2004 increased 31% to $533.8 million compared to $406.3
million for 2003. The increase in sales was primarily due to an increase in the sales
in telecom components sub-assemblies and optical devices. The
increase in our net sales base
year-over-year represents stronger demand from existing customers, as well as organic growth from
new and existing customers. The following table sets forth key operating results (in thousands, except per share data) for
the years ended December 31, 2002, 2003 and 2004: Year Ended December 31,2002
    
    
    2003
    
    
    2004Net sales
    
    $
    236,016
    
    
    $
    406,306
    
    
    $
    533,861Gross profit
    
    
    38,060
    
    
    
    66,290
    
    
    
    76,476Operating income
    
    
    17,052
    
    
    
    37,387
    
    
    
    43,378Net income
    
    
    20,023
    
    
    
    43,802
    
    
    
    66,885Basic earnings per share
    
    
    0.57
    
    
    
    1.09
    
    
    
    1.57Diluted earnings per share
    
    
    0.57
    
    
    
    1.07
    
    
    
    1.57
 Key Performance Indicators The following table sets forth, for the quarterly periods indicated, certain of managements
key financial performance indicators that management utilizes to assess the Companys operating
results: Three Months EndedDecember 31,
    
    
    September 30,
    
    
    June 30
    
    
    March 31,2003
    
    
    2003
    
    
    2003
    
    
    2003Sales cycle (1)
    
    27 days
    
    23 days
    
    27 days
    
    32 daysInventory turns (2)
    
    13 turns
    
    17 turns
    
    16 turns
    
    9 turnsDays in accounts receivable (3)
    
    58 days
    
    61 days
    
    60 days
    
    61 daysDays in accounts payable (4)
    
    60 days
    
    60 days
    
    55 days
    
    69 days
 Three Months EndedDecember 31,
    
    
    September 30,
    
    
    June 30
    
    
    March 31,2004
    
    
    2004
    
    
    2004
    
    
    2004Sales cycle (1)
    
    9 days
    
    29 days
    
    41 days
    
    29 daysInventory turns (2)
    
    20 turns
    
    15 turns
    
    11 turns
    
    10 turnsDays in accounts receivable (3)
    
    62 days
    
    54 days
    
    86 days
    
    56 daysDays in accounts payable (4)
    
    72 days
    
    49 days
    
    79 days
    
    64 days
   (1)
    The sales cycle is calculated as the sum of days in accounts receivable and days in
inventory, less the days in accounts payable.  (2)
    Inventory turns are calculated as the ratio of four times our year to date cost of sales
divided by inventory, net, at period end divided by numbers of quarters.  (3)
    Days in accounts receivable is calculated as the ratio of accounts receivable, net, at period
end divided by year to date average daily net sales.  (4)
    Days in accounts payable is calculated as the ratio of accounts payable, net, at period end
divided by year to date average daily net cost of sales. 32




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##### Table of Contents



Critical Accounting Policies and Estimates The preparation of our financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America requires management to
make estimates and judgments that affect our reported amounts of assets and liabilities, revenues
and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates and assumptions based upon historical experience and various other
factors and circumstances. Management believes that our estimates and assumptions are reasonable
under the circumstances; however, actual results may vary from these estimates and assumptions
under different future circumstances. We have identified the following critical accounting policies
that affect the more significant judgments and estimates used in the preparation of our
consolidated financial statements. For further discussion of our significant accounting policies,
refer to Note 2  Summary of Significant Accounting Policies to the Consolidated Financial
Statements. Marketable securities Marketable securities at December 31, 2004 are principally equity securities and are
classified as available-for-sale. Securities classified as available-for-sale are stated at fair
value with unrealized gains and losses recorded as a separate component of accumulated other
comprehensive income (loss). Fair value is determined by reference to market price or analysis
conducted by independent valuer. In the event where the fair value of the securities has been below
the carrying value for a period of time, we will assess whether this decline in value is
other-than-temporary. Our
assessment includes the consideration of the duration and severity of
the decline in values and our ability
and intent to hold the investments for a reasonable period of time sufficient for a forecasted
recovery of the fair value up to or beyond the cost of the investment, and an assessment of the
evidence indicating that the cost of the investment is recoverable
within a reasonable period of time which outweighs the evidence to the contrary. If it is determined that the decline is other-than-temporary, an impairment
charge to the income statement will be made. Valuation of long-lived
assets, including goodwill and purchased intangible assets The Company reviews the carrying value
of its long-lived assets, including goodwill and purchased intangible assets, for impairment whenever events
or changes in circumstances indicate that the carrying value may not be recoverable. The Company assesses
the recoverability of the carrying value of long-lived assets, other than goodwill and purchased
intangible assets with indefinite useful lives, by first grouping its long-lived assets with other assets
and liabilities at the lowest level for which identifiable cash flows largely independent of the cash flows of
other assets and liabilities (the asset group) and, secondly, estimating the undiscounted future cash flows
that are directly associated with and expected to arise from the use of and eventual disposition of such
asset group. The Company estimates the undiscounted cash flows over the remaining useful life of the primary
asset within the asset group. If the carrying value of the asset group exceeds the estimated undiscounted
cash flows, the Company records an impairment charge to the extent the carrying value of the long-lived asset
exceeds its fair value. The Company determines fair value through quoted market prices in active markets or,
if quoted market prices are unavailable, through the performance of internal analysis of discounted cash flows
or external appraisals. The undiscounted and discounted cash flow analyses are based on a number of estimates
and assumptions, including the expected period over which the asset will be utilized, projected future
operating results of the asset group, discount rate and long-term growth rate. To assess goodwill for impairment,
the Company performs an assessment of the carrying value of its reporting units at least on an annual basis
or when events and changes in circumstances occur that would more likely than not reduce the fair value of
the Companys reporting units below their carrying value. If the carrying value of a reporting unit exceeds
its fair value, the Company would perform the second step in its assessment process and would record an
impairment charge to earnings to the extent the carrying amount of the reporting unit goodwill exceeds
its implied fair value. The Company estimates the fair value of its reporting units through internal
analysis and external valuations, which utilize income and market valuation approaches through the
application of capitalized earnings, discounted cash flow and market comparable methods. These
valuation techniques are based on a number of estimates and assumptions, including the projected
future operating results of the reporting unit, discount rate, long-term growth rate and appropriate
market comparables. 33




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##### Table of Contents



The Companys assessments of impairment
of long-lived assets, including goodwill and purchased intangible assets, and its periodic review of the
remaining useful lives of its long-lived assets are an integral part of the Companys ongoing strategic
review of its business and operations. Therefore, future changes in the Companys strategy and other changes in the
operations of the Company could impact the projected future operating results that are inherent in the
Companys estimates of fair value, resulting in impairments in the future. Additionally, other changes
in the estimates and assumptions, including the discount rate and expected long-term growth rate, which drive
the valuation techniques employed to estimate the fair value of long-lived assets and goodwill could change
and, therefore, impact the assessments of impairment in the future. In performing the annual assessment of
goodwill for impairment, the Company determined that none of the reporting units carrying values were
close to exceeding their respective fair values. Revenue recognition The Company recognizes revenue when all of the following conditions are met:  
    Persuasive evidence of an arrangement exists;
    Delivery has occurred or services have been rendered;
    Price to the customer is fixed or determinable; and
    Collectibility is reasonably assured. Revenue from sales of products is recognized when the title is passed to customers upon
shipment and when collectibility is assured. The Company does not provide its customers with the
right of return (except for quality), price protection, rebates or discounts. There are no
customer acceptance provisions associated with the Companys products, except for quality. All
sales are based on firm customer orders with fixed terms and conditions, which generally cannot be
modified. Deferred Income Taxes We provide deferred income taxes using the asset and liability method. Under this method, we
recognize deferred income taxes for all significant temporary differences and classified as current
or non-current based upon the classification of the related asset or liability in the financial
statements. We provide a valuation allowance to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion, or all, of the deferred tax asset will not be
realized. When
considering whether a valuation allowance is necessary, we will assess
the history of operating losses and unexpired tax credit, losses
expected in the future and any unsettled circumstances that, if
unfavorably resolved, would adversely affect future operations and
profit levels on a continuing basis in future years. Therefore, any
changes in our assessment of the above would impact our estimation of
the amount of valuation allowance. Accruals and Provisions for Loss Contingencies We make provisions for all loss contingencies when information available to us prior to the
issuance of the financial statements indicates that it is probable that an asset had been impaired
or a liability had been incurred at the date of the financial statements and the amount of loss can
be reasonably estimated. For provisions or accruals related to litigations, we make provisions based on information
from legal counsels and the best estimation of management. As discussed in Note (19b) to our
consolidated financial statements, we are involved in various legal proceedings and contingencies.
We have recorded a liability for the Tele-Art matter in accordance with Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies, or FAS 5. FAS 5 requires a liability to
be recorded based on our estimate of the probable cost of the resolution of a contingency. The
actual resolution of this contingency may differ from our estimates. If the contingency were
settled for an amount greater than our estimate, a future charge to income would result. Likewise,
if the contingency were settled for an amount that is less than our estimate, a future credit to
income would result. 34




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##### Table of Contents



Results of Operations The following table presents selected consolidated financial information stated as a percentage of
net sales for the years ended December 31, 2002, 2003 and 2004 (certain amounts may not calculate
due to rounding and amounts may not add due to rounding). Year Ended December 31,2002
    
    
    2003
    
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    (83.9
    )
    
    
    (83.7
    )
    
    
    (85.7
    )Gross profit
    
    
    16.1
    
    
    
    16.3
    
    
    
    14.3Selling, general and administrative expenses
    
    
    (7.6
    )
    
    
    (6.1
    )
    
    
    (5.2
    )Research and development expenses
    
    
    (1.1
    )
    
    
    (1.0
    )
    
    
    (1.0
    )Impairment of goodwill
    
    
    (0.2
    )
    
    
    
    
    
    
    Income from operations
    
    
    7.2
    
    
    
    9.2
    
    
    
    8.1Other (expenses) income, net
    
    
    (2.9
    )
    
    
    0.7
    
    
    
    3.2Gain on partial disposal of subsidiaries
    
    
    
    
    
    
    0.5
    
    
    
    14.5Unrealised loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    (10.9
    )Interest income
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.2Interest expense
    
    
    (0.3
    )
    
    
    
    
    
    
    Income before income taxes and minority interests
    
    
    4.3
    
    
    
    10.6
    
    
    
    15.1Income taxes
    
    
    (0.3
    )
    
    
    (0.1
    )
    
    
    (0.2
    )Income before minority interests and equity in
income (loss) of affiliated companies
    
    
    4.0
    
    
    
    10.5
    
    
    
    14.9Minority interests
    
    
    (0.1
    )
    
    
    (0.3
    )
    
    
    (1.1
    )Equity in income (loss) of affiliated companies
    
    
    4.6
    
    
    
    0.1
    
    
    
    (1.3
    )Income after minority interests and equity in
income (loss) of affiliated companies
    
    
    8.5
    
    
    
    10.3
    
    
    
    12.5Discontinued operation
    
    
    
    
    
    
    0.5
    
    
    
    Net income
    
    
    8.5
    %
    
    
    10.8
    %
    
    
    12.5
    %
 Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Net Sales.Our net sales increased 31.4% to $533.9 million for 2004, up from $406.3 million in
2003. The increase was due to increased sales levels across all business segments. Specific
increases include a 27.0% increase in the sales of consumer electronics and communication products,
a 36.4% increase in the sales of telecommunication components
assembly, a 17.9% increase in the sales
of LCD panels and a 20.6% increase in the sales of software development services. The increased
sales levels were due to the addition of new customers, and organic growth in these business segments. The increase
in the consumer electronics and communication products was primarily
attributable to the increased sales levels in optical devices. The increase in telecom, components
assembly was primarily attributable to sales of FPC sub-assemblies in 2004 and the increase
in sales of levels of mobile phone handsets in SKD forms and lighting panels for hand-held devices. The following table sets forth, for the periods indicated, revenue by business
segments expressed as a percentage of net sales. The distribution of revenue across our business
segments has fluctuated, and will continue to fluctuate, as a result of numerous factors, including
but not limited to the following: increased business from new and existing customers, fluctuations
in customer demand and seasonality. Year Ended December 31,2002
    
    
    2003
    
    
    2004Consumer Electronics and Communication Products
    
    
    40
    %
    
    
    32
    %
    
    
    31
    %Telecommunication Components Assembly :Telecommunication components assembly(1)
    
    
    44
    %
    
    
    57
    %
    
    
    59
    %Software development services
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %LCD Panels and TransformersLCD panels
    
    
    10
    %
    
    
    9
    %
    
    
    9
    %Transformers(2)
    
    
    5
    %
    
    
    1
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
   (1)
    Included in telecommunication components assembly are our sales from
our manufacture of rechargeable battery packs through a joint venture
we had with Toshiba Battery Co., Ltd. We sold our interest in the
joint venture to a Toshiba-related company and ceased manufacturing
rechargeable battery packs as of April 30, 2002. Accordingly, revenue
from sales of battery packs was not included after that date.(2)
    We sold our transformers operation to a third party in June 2003. 35




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##### Table of Contents



Gross
Profit.Gross profit decreased to 14.3% of net sales in 2004 from 16.3% in 2003.
Generally, the gross margin for box-built products is higher than key components assembly. Our
target was to shift our business to the high-growth and high-technology key components assemblies
sector, and we succeeded in increasing net sales in the TCA segment. The percentage decrease
in gross profit was primarily due to a higher proportion of TCA segment revenue. Additionally, we have been
impacted by the reduction of input credit in respect of value-added tax related to domestic
purchase materials by the PRC government during 2004. In terms of dollar values, gross profit for 2004 increased by $10.2 million from 2003, due to the
increased revenue base. Selling, General and Administrative Expenses.Selling, general and administrative expenses
increased to $28.1 million, or 5.2% of net sales in 2004 from $24.9 million, or 6.1% of net
sales in 2003. The $3.2 million increase was primarily attributable to the increase in sales commission paid to marketing staff as a result of increased revenue, and the commission paid to
external agents for particular products during 2004. The decrease as a percentage of net sales was
due primarily to the increased revenue base in 2004. Research and development Expenses.Research and development expenses in 2004 increased to $5.0
million from $4.0 million in 2003 but remained at 1.0% of net sales for each of 2004 and 2003. The absolute dollar increase was primarily attributable to the recruitment of more engineers to support our R&D activities, including design of production process, development of new
products and products associated with customer design-related programs. Other (Expenses) Income.During 2004, other income was $17.3 million. We received $17.4
million and $0.9 million dividend income from our investment in TCL Communication and TCL
Corporation, respectively. This income was partially offset by
$0.2 million in bank charges and $0.9 million in other non-operating charges. During 2003, other income was $2.9 million. The amount included dividend income of $2.0
million from our indirect investment in TCL Communication, dividend income of $1.7 million from TCL
Corporation, and income of $0.5 million related to the recovery of a non-trade receivable which had
been written off previously. This income was partially offset by $0.3 million in bank charges during
2003. Gain on Partial Disposal of Subsidiaries.In April 2004, one of the previously wholly-owned
subsidiaries of the Company, NTEEP, completed a public offering of its common stock on The Hong Kong
Stock Exchange. As a result, the Company disposed of a 25% interest in this subsidiary, resulting
in a gain on partial disposal of US$71.1 million. In November and December 2004, the Company disposed of 128 million ordinary shares of
J.I.C. for cash consideration of $12.9 million. The disposal resulted in a net gain on partial
disposal of interest in J.I.C. of $6.3 million after deducting the release of unamortized goodwill
of $3.5 million. During 2003, we recorded a $1.8 million gain on partial disposal of interest in J.I.C. Unrealized Loss of Marketable Securities. At December 31, 2004, the Companys investment in
TCL Communication was stated at fair value based on the traded market price of TCL Communications
shares and the Company recognized an unrealized loss of $58.3 million, based on the Companys cost of $79.5
million and a fair value of $21.2 million. As the loss is considered to be other-than-temporary,
it has been recorded in the consolidated statements of income. Interest Income. Interest income increased to $1.1 million in 2004 from $0.8 million in 2003.
The increase was primarily due to higher average cash balances, partially offset by lower interest
yields on cash deposits. Interest Expense.Interest expense increased to $195,000 in 2004 from $121,000 in 2003. This
increase was primarily a result of the draw-down of a $7.0 million fixed-term loan by J.I.C. Income Taxes.Income tax expenses of $879,000 for 2004 compares to $399,000 for 2003. The
increase was primarily the result of not receiving full tax refunds for several of our PRC entities
for taxes paid in previous years that we have normally been eligible to receive full tax refunds in
the past as a result of the strict enforcement of certain regulations. Minority Interests.Minority interest increased to $6.0 million in 2004 from $1.1 million in
2003. The increase was primarily the result of the increase in minority shareholders share of
NTEEPs profit of approximately $4.9 million since its listing in April 2004. In addition, the
minority shareholders share of profits of the J.I.C. Group for 2004 increased to $254,000 from
$211,000 in 2003, and the minority shareholders share of profits of Namtek Software Development
Company Limited for 2004 increased to $472,000 from $296,000 in 2003. The minority
shareholders share of profits of Mate Fair for 2004 decreased to $405,000 from $560,000. Equity in Income (Loss) of Affiliated Companies.We recorded an equity in loss of $6.8 million
for 2004 of Alpha Star but recognized $0.5 million in equity in income for 2003. The amount in 2004
included an impairment charge of approximately $5.6 million upon careful assessment of various factors relevant to the affiliate,
including the competitive handset market in the PRC and $1.2 million share of loss of Alpha Star.
For additional information, see Note 8  Investment in Affiliated Companies, Equity Method 
Alpha Star to the Consolidated Statements of Income. 36




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##### Table of Contents



Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Net Sales.Our net sales increased significantly by 72.2% to $406.3 million for 2003 compared
to $236.0 million for 2002. The increase was primarily attributable to sales of the
telecommunication components assembly products of approximately $232.2 million in 2003 compared to
$103.8 million in 2002, an increase of $128.4 million. This increase was mainly as a result of an
increase in sales of telecom LCD and PCB modules and the launch of new products in 2003, like RF
modules, SKD handsets, front light panel assembly, and flash light for cellular phones. In addition, we also experienced increased sales in
consumer electronics and communication
products. Sales of consumer electronics and communication products amounted to approximately $128.8
million in 2003 compared to $94.0 million in 2002, an increase of $34.8 million. This increase was
mainly driven by the PC camera, which was first launched in 2003. Sales of LCD panels and transformers increased by 17.2% to $41.3 million for 2003 compared to
$35.3 million for 2002. The primary reason for the increase in sales of LCD panels and transformers
was the increase in the sales of LCD panels of approximately $35.0 million for 2003 compared to
$23.9 million for 2002, which was partially offset by a decrease in the sales of transformers due
to the disposal of the transformers operation in June 2003. Gross Profit.Our gross profit increased by 74.2% to $66.3 million for 2003 compared to $38.1
million for 2002. Our gross profit margin also increased slightly in 2003 to 16.3% from 16.1% in
2002. The primary reason for this increase
was the increase in sales as described above in
the explanation of fluctuation of Net Sales. We were also able to keep our product gross margin
relatively stable in 2003. The increase in gross profit margin was offset by the gain of a $2.0
million due to the recovery of inventory written down to cost of sales in 2002. In addition to these
specific factors, our gross profit margin increased in 2003 due to our ability to negotiate
advantageous price terms with certain of our suppliers and our focus on reducing overhead costs. In addition, the gross profit of the
LPT segment also increased. This increase was as a result of
increases in the sales proportion of high margin products and the disposal of the transformers
operation in June 2003. The impact of the discontinued operations of transformers on gross profit
contribution was insignificant as the margin of transformers products was low. Selling, General and Administrative
Expenses.SG&A expenses for 2003 increased by approximately
$6.9 million to $24.9 million, or 6.1% of net sales, from $18.0 million, or 7.6% of net sales, in
2002. This increase was primarily due to
an approximately $5.1 million increase in salaries and
benefits expenses, due to an increase in headcount, an approximately 10% increase in salary for
certain employees and a $3.9 million incentive bonus due to the implementation of a new incentive
bonus scheme in January 2003, which was calculated based on operating profit, as well as a $0.9
million increase in selling expenses, which was primarily due to more sales commissions paid as
sales increased. Our SG&A expenses include provisions for bad debt expenses, which decreased from $138,000 in
2002 to $91,000 in 2003. The decrease in allowance has been attributable to the implementation of
tighter credit controls. Research and Development
Expenses.Research and development expenses for 2003 increased to
$4.0 million, or 1.0% of net sales, from $2.7 million, or 1.1% of net sales, in 2002. The increase
was due to an increase in the number of staff related to the expansion of our production capacity and
the products we manufacture. Goodwill Impairment.In 2002, we determined that $339,000 of unamortized goodwill related to
our 1999 acquisition of a telecommunications company was impaired as the technology of the acquired
company had become obsolete. Other (Expenses)/Income,
Net.Other income, net, during 2003 was
$2.9 million. This amount included dividend income of $2.0 million from our indirect investment in
Huizhou TCL Mobile Communication Co., Ltd., dividend income of $1.7 million from TCL Corporation
and income of $0.5 million related to the recovery of a non-trade receivable which had been written
off previously. This income was partially offset by a $0.3 million bank charge during 2003. Gain on Partial Disposal of
Subsidiaries. Gain on partial disposal of subsidiaries in 2003 of $1.8 million
represented gain on partial disposal of interests in J.I.C. Technology while the amount in 2002 of
$17,000 represented the gain on disposal of a subsidiary, BPC (Shenzhen) Co. Ltd. Interest income. Interest
income decreased to $788,000 in 2003 from $799,000 in 2002 due
to lower average cash balances and lower interest yields on cash deposits. Interest Expense.Interest expense decreased to $121,000 for 2003 compared to $790,000 for
2002. The decrease in interest expenses is the result of the early repayment of a $12.9 million
bank loan in January 2003. 37




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##### Table of Contents



Income Taxes.Income tax expenses decreased to $399,000 for 2003 compared to $773,000 for the
prior year. The decrease is primarily the result of our receipt of tax refunds for several of our
PRC entities for taxes paid in previous years. Minority Interests.Minority
interests increased by $903,000, or 550.6%, to $1,067,000 in 2003 from
$164,000 in 2002. Minority interests in 2003 included $211,000 from the minority shareholders share
of profits of the J.I.C. Group for 2003, $560,000 from the minority
shareholders share of profits of Mate Fair for 2003 and $296,000 from
the minority shareholders share of profits of Namtek Software Development Company Ltd. for 2003. Equity in Income of Affiliated Companies.Equity in income of affiliated companies was $0.5
million in 2003 compared to $10.7 million in 2002. The income in 2003 represents our share of the net earnings of our proportional 25%
investment in Alpha Star Investments Limited for the twelve months ended December 31, 2003. The
income in 2002 represents our proportional share of the net earnings of our 25% investment in Mate
Fair. Discontinued Operation.Discontinued operation in 2003 represented $2.0 million gain on
disposal of our entire transformers operation, net of $0.1 million shared by minority interest. Liquidity and Capital Resources Liquidity We have financed our growth and cash needs to date primarily from internally generated funds,
proceeds from the sale of our strategic investments, sales of our common stock and bank debt. We
do not use off-balance sheet financing arrangements, such as securitization of receivables or
obtaining access to assets through special purpose entities, as sources of liquidity. Our primary
uses of cash have been to fund expansions and upgrades of our manufacturing facilities, to make
strategic investments in potential customers and suppliers and to fund increases in inventory and
accounts receivable resulting from increased sales. We had positive net working capital of $218.2 million at December 31, 2004 compared to
positive net working capital of $93.5 million at December 31, 2003. Our working capital
requirements and capital expenditures could continue to increase in order to support future
expansions of our operations through acquisition of land, construction of a new factory and
machinery purchases. It is possible that future expansions may be significant and may require the payment
of cash. Future liquidity needs will also depend on fluctuations in levels of inventory and
shipments, changes in customer order volumes and timing of expenditures for new equipment. We currently believe that during the next twelve months, our capital expenditures will be in
the range of $35 million to $55 million, principally for land, machinery and equipment, and
expansion in China. We believe that our level of resources, which include cash and cash
equivalents, marketable securities, accounts receivable and available borrowings under our credit
facilities, will be adequate to fund these capital expenditures and our working capital
requirements for the next twelve months. Should we desire to consummate significant additional
acquisition opportunities or undertake significant expansion activities, our capital needs would
increase and could possibly result in our need to increase available borrowings under our revolving
credit facilities or access public or private debt and equity markets. There can be no assurance,
however, that we would be successful in raising additional debt or equity on terms that we would
consider acceptable. The following table sets forth, for the
year ended December 31 2002, 2003 and 2004,
selected consolidated cash flow information (in thousands): Year Ended December 31,2002
    
    
    2003
    
    
    2004Net cash provided by operating activities
    
    $
    39,502
    
    
    $
    44,272
    
    
    $
    75,210Net cash (used in) provided by investing activities
    
    
    (33,760
    )
    
    
    (21,669
    )
    
    
    37,729Net cash provided by (used in) financing activities
    
    
    18,085
    
    
    
    (43,253
    )
    
    
    (14,117
    )Effect of foreign currencies on cash flows
    
    
    (26
    )
    
    
    
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    $
    23,801
    
    
    $
    (20,650
    )
    
    $
    98,822
 38




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##### Table of Contents



Net cash provided by operating activities for 2004 was $75.2 million. This
consisted primarily of $66.9 million of net income, $13.9 million of depreciation and amortization,
$58.3 million unrealized loss on marketable securities, $6.8 million equity in loss
of an affiliated company and $6.0 million in minority interests offset by $6.2 million in gain on partial
disposal of J.I.C., $71.1 million gain on partial disposal of NTEEP and $15.9 million in dividend
income. Our working capital related to operating activities increased, driven by an increase of
$33.9 million in accounts payable and $3.0 million in accrued expenses and others payables, a
decrease of $2.6 million in amount due from a related party, $3.9 million in inventories and $2.6
million in prepaid expenses and other receivables, offset by increases in accounts receivable of
$28.3 million. The increase in accounts receivable and accounts payable was due to increased levels
of business during 2004. Net cash provided by investing activities of $37.7 million for 2004 consisted primarily of
proceeds from partial disposal of subsidiaries and investments of $95.4 million and $5.6 million,
respectively, proceeds from disposal of property, plant and equipment of $4.5 million, offset by capital expenditures of $38.6 million and increase in deposits for property, plant and equipment of
$4.4 million and acquisition of marketable securities of TCL Communication of $25.1 million. Capital expenditure in 2004 mainly consisted of the construction of a new factory and purchases of machinery
and equipment which were used to expand our manufacturing capacity and to upgrade our equipment to
produce increasingly complex products. Net
cash used in financing activities of $14.1 million for 2004 resulted primarily from $19.4
million paid to shareholders as dividends, $5.4 million in repayment of bank loans, offset by proceeds
of bank loans of $10.6 million. Net cash provided by operating activities was $44.3 million in 2003. Cash provided by
operating activities in 2003 was primarily attributable to net income of $43.8 million plus
depreciation and amortization expense of $12.2 million, offset by the gain on disposal of
transformers operation, net of minority interests of $2.0 million and a gain on the partial disposal
of our J.I.C. Group for $1.8 million. Our working capital related to operating activities net of
the effect of the disposal of a subsidiary decreased, driven by an increase of $11.1 million in
accounts receivable, $3.0 million in prepaid expenses and other receivables, $2.7 million in the
amount due from a related party and $8.5 million in inventories, which was offset by increases in
accounts payable of $18.0 million, and accrued expenses and other payables of $1.2 million. Our inventories increased in 2003 as a result of our anticipation of increases in sales.
Accounts receivable increased due to an increase in sales in the fourth quarter relative to sales
in the prior year. Accounts payable increased due to increased inventory purchases. Accrued
expenses increased due to the provision of an incentive bonus in 2003. Net cash used in investing activities was $21.7 million in 2003. Cash used in investing
activities primarily related to our $10.0 million and $0.4 million strategic investments in Alpha
Star Investments Limited and iMagic Infomedia Technology Limited, respectively, and $5.3 million
prepayment for a long-term investment in Stepmind, as well as capital expenditures of $17.1 million
and an increase in deposits for property, plant and equipment of $3.1 million, offset by $2.6 million
proceeds on disposal of property, plant and equipment, $2.4 million proceeds on disposal of
transformers operation to a third party, $4.0 million proceeds on the partial disposal of our J.I.C.
Group, and $5.0 million proceeds on the disposal of convertible notes of TCL International Holdings
Ltd. Net cash used in financing activities was $43.3 million in 2003. Cash used in financing
activities for 2003 primarily resulted from $37.8 million paid to shareholders as dividends and
$14.0 million in bank loans repayment offset by $8.5 million received from the exercise of options. Except as discussed above, there are no material transactions, arrangements and relationships
with unconsolidated affiliated entities that are reasonably likely to affect liquidity. For the years ended December 31, 2003 and 2004, the Company has made guarantees for debt,
loans and credit facilities held by various wholly owned subsidiaries aggregating up to a maximum
guarantee of $49,756,000 and $49,205,000, respectively. The terms of the guarantees correspond with
the terms of the underlying debt, loan and credit facility agreements. Capital Resources As of December 31, 2004, we had $160.6 million in cash and cash equivalents, consisting of
cash and short-term deposits, compared to $61.8 million as of December 31, 2003. Our long-term bank
borrowing was $8.0 million and $2.8 million as of December 31, 2004 and December 31, 2003,
respectively. 39




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##### Table of Contents



As of December 31, 2004, we had in place general banking facilities with two financial
institutions aggregating $87.9 million. The maturity of these facilities is generally up to 90
days. These banking facilities are guaranteed by us and there is an undertaking not to pledge any
assets to any other banks without the prior consent of our bankers. However, these covenants do not
have any impact on our ability to undertake additional debt or equity financing. Interest rates are
generally based on the banks reference lending rates. Our facilities permit us to obtain
overdrafts, lines of credit for forward exchange contracts, letters of credit, import facilities,
trust receipt financing, shipping guarantees, working capital and revolving loans. No significant
commitment fees are required to be paid for the banking facilities. These facilities are subject to
annual review and approval. As of December 31, 2004, we had utilized approximately $3.4 million
under such general credit facilities and had available unused credit facilities of $84.5 million. As of December 31, 2004, we had two four-year term loans, which allowed us to borrow
up to a maximum amount of $4.5 million and $7.0 million.
The outstanding balance amounted to $8.1 million as of
December 31, 2004 and $2.8 million as of December 31, 2003. Here is an analysis of the term loans: Outstanding
    
    
    OutstandingDate of
    
    
    
    
    
    
    
    
    
    Amount
    
    
    
    
    
    
    
    
    
    
    balance at
    
    
    balance atdraw
    
    
    Amount
    
    
    No. of
    
    
    per
    
    
    Interest
    
    
    First
    
    
    December 31,
    
    
    December 31,down
    
    
    drawn
    
    
    installments
    
    
    installment
    
    
    rate
    
    
    repayment
    
    
    2004
    
    
    2003(in million)
    
    
    
    
    
    (in million)
    
    
    
    
    
    
    
    

    (in million)Term loan 1
    
    May 2002
    
    $
    4.5
    
    
    
    16
    
    
    $
    0.3
    
    
    1.5% over LIBOR, changed to 0.75% over LIBOR in August 2004
    
    August 2002
    
    $
    1.7
    
    
    $
    2.8Term loan 2April 2004
    
    $
    1.6
    
    
    
    16
    
    
    $
    0.1
    
    
    0.75% over LIBOR
    
    July 2004
    
    $
    1.4
    
    
    
    June 2004
    
    $
    3.6
    
    
    
    16
    
    
    $
    0.2
    
    
    0.75% over LIBOR
    
    September 2004
    
    $
    3.2
    
    
    
    December 2004
    
    $
    1.8
    
    
    
    16
    
    
    $
    0.1
    
    
    0.75% over LIBOR
    
    March 2005
    
    $
    1.8
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8.1
    
    
    $
    2.8
 Our contractual obligations for long-term debt arrangements and future minimum lease payments
under non-cancelable operating lease arrangements as of December 31, 2004 are summarized below. We
do not participate in, or secure financing for, any unconsolidated limited purpose entities.
Non-cancelable purchase commitments do not typically extend beyond the normal lead-time of several
weeks at most. Purchase orders beyond this time frame are typically cancelable. Payments due by period2010 andContractual obligation
    
    Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    thereafterLong-term bank
    
    $
    8,038,000
    
    
    $
    2,875,000
    
    
    $
    2,313,000
    
    
    $
    1,750,000
    
    
    $
    1,100,000
    
    
    $
    
    
    
    $
    borrowingOperating leases
    
    
    9,136,000
    
    
    
    1,243,000
    
    
    
    1,116,000
    
    
    
    1,169,000
    
    
    
    1,215,000
    
    
    
    1,215,000
    
    
    
    3,178,000Capital expenditures
    
    
    17,080,000
    
    
    
    17,080,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations
    
    
    115,136,000
    
    
    
    115,136,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    149,390,000
    
    
    $
    136,334,000
    
    
    $
    3,429,000
    
    
    $
    2,919,000
    
    
    $
    2,315,000
    
    
    $
    1,215,000
    
    
    
    3,178,000
 There are no material restrictions (including foreign exchange controls) on the
ability of our non-China subsidiaries to transfer funds to us in the form of cash dividends, loans,
advances or product or material purchases. With respect to our China subsidiaries, with the
exception of a requirement that 10% of profits be reserved for future developments, there are no
restrictions on the payment of dividends and the removal of dividends from China once all taxes are
paid and assessed and losses, if any, from previous years have been made good. In the event that
dividends are paid by our China subsidiaries, such dividends will reduce the amount of reinvested
profits and, accordingly, the refund of taxes paid will be reduced to the extent of tax applicable to
profits not reinvested. Impact of Inflation Inflation and deflation in China, Hong Kong and Macao has not had a material effect on our
past business. During times of inflation, we have generally been able to increase the price of its
products in order to keep pace with inflation. 40




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##### Table of Contents



Exchange Controls There are no exchange control restrictions on payments of dividends, interest, or other
payments to nonresident holders of our securities or on the conduct of our operations in Hong Kong
and Macao, where the offices of some of our subsidiaries are located, or in the British Virgin
Islands, where we are incorporated. Other jurisdictions in which we conduct operations may have
various exchange controls. With respect to our China subsidiaries, with the exception of a
requirement that 10% of profits be reserved for future developments, there are no restrictions on
the payment of dividends and the removal of dividends from China once all taxes are paid and
assessed and losses, if any, from previous years have been made good. We believe such restrictions
will not have a material effect on our liquidity or cash flows. Recent Changes in Accounting Standards In March 2004, the Emerging Issues Task Force, or EITF, reached a consensus in EITF 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. The
consensus was that certain quantitative and qualitative disclosures should be required for debt and
marketable equity securities classified as available-for-sale or held-to-maturity under SFAS Nos.
115 and 124, that are impaired at the balance sheet date but for which an other-than-temporary
impairment has not been recognized. This EITF consensus is effective for fiscal years ending after
December 15, 2003. Adoption of the EITF consensus did not result in an impact on the Companys
financial position, results of operations or cash flows. In November 2004, the FASB issued SFAS No. 151, Inventory Costs  an amendment of ARB No. 43,
Chapter 4. SFAS No. 151 clarifies the accounting that requires abnormal amounts of idle facility
expenses, freight, handling costs, and spoilage costs to be recognized as current-period charges.
It also requires that allocation of fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory
costs incurred on or after July 1, 2005. The Company is currently evaluating the impact of this
standard on its consolidated financial statements. In
December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment. This statement is a
revision to SFAS No. 123 and supercedes APB Opinion No. 25. This statement establishes standards
for the accounting for transactions in which an entity exchanges its equity instruments for goods
or services, primarily focusing on the accounting for transactions in which an entity obtains
employee services in share-based payment transactions. Entities will be required to measure the
cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exceptions). That cost will be recognized over
the period during which an employee is required to provide service, the requisite service period
(usually the vesting period), in exchange for the award. The grant-date fair value of employee
share options and similar instruments will be estimated using option pricing models. If an equity
award is modified after the grant date, incremental compensation cost will be recognized in an
amount equal to the excess of the fair value of the modified award over the fair value of the
original award immediately before the modification. This statement is effective as of the
beginning of the first interim or annual reporting period that begins after June 15, 2005. In
accordance with the standard, the Company will adopt SFAS No. 123R effective July 1, 2005. Upon adoption, the Company has two application methods to choose from: the
modified-prospective transition approach or the modified-retrospective transition approach. Under
the modified-prospective transition method, the Company would be required to recognize compensation
cost for share-based awards to employees based on their grant-date fair value from the beginning of
the fiscal period in which the recognition provisions are first applied, as well as compensation
cost for awards that were granted prior to, but not vested as of the date of adoption. Prior
periods remain unchanged and pro forma disclosures previously required by SFAS No. 123 continue to
be required. Under the modified-retrospective transition method, the Company would restate prior
periods by recognizing compensation cost in the amounts previously reported in the pro forma
footnote disclosure under SFAS No. 123. Under this method, the Company is permitted to apply this
presentation to all periods presented or to the start of the fiscal year in which SFAS No. 123R is
adopted. The Company would follow the same guidelines as in the modified-prospective transition
method for awards granted subsequent to adoption and those that were granted and not
yet vested. The Company has not yet determined which methodology it will adopt but believes that the impact
that the adoption of SFAS No. 123R will have on its financial position or results of operations
will approximate the magnitude of the stock-based employee
compensation cost disclosed in Note 2 (p) pursuant to the disclosure requirements of SFAS No. 148. 41




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##### Table of Contents



Research and Development Our
research and development expenditure mainly
comprised of salaries and benefits paid to our research and development personnel and is mainly for the
development of advanced manufacturing techniques to produce complex products on a mass scale and at a low
cost. We expense our research and development costs as incurred. For the years ended December 31,
2002, 2003 and 2004, we incurred research and development expenses of approximately $2.7 million,
$4.0 million and $5.0 million, respectively. Trend Information Currently, our operations consist
of three reportable segments, Consumer Electronics and Communication Products, Telecommunication Components
Assembly and LCD panels. We plan to continue to leverage on
our solid customer relationships and to expand our business. During 2004, we were able to expand our
product line to higher growth products and we were able to benefit from the increase in production
capacity from the commencement of operation of our new factory premises. For Consumer Electronics and
Communication Products, we will continue to focus on optical devices, educational products, cellular
phone accessories and home entertainment products. In 2004, we began delivering new products, like
Bluetooth wireless headset accessory for cellular phones and new home entertainment
products, in addition to the Eyetoy USB cameras for Playstation 2. Since June 2003, we have been able
to diversify our product range from finished products to component assemblies and began manufacturing
the high growth CMOS sensor modules for integration into various image capturing devices such as
cellular phones with built-in camera functions. For Telecom Component Assembly,
we will continue to focus on high-growth products which require advance technological production
know-how. In addition to high-end color LCD modules, we began manufacturing FPC sub-assemblies in
March 2003 for integration into various LCD modules and other products, like infotainment consumer
electronic products. We plan to seek opportunities to expand our product line and customer base
for these products. LCD panels are found in
numerous applications in electronics products, such as watches, clocks, calculators, pocket
games, PDAs and mobile and cordless telephones. We are a customized LCD panel manufacturer,
and we develop each product from design concept all the way to a high quality mass producible
product. The LCD panels segment moved to new premises, which are about 670,000 square feet
and are twice the size of the old factory premises. This new factory will provide room for future
expansion of production capacity. It has been our strategy to shift
our focus more to the business of key components sub-assembly. The key components sub-assembly business
generally accounts for relatively lower gross profit margin business. Nam Tai has been very successful in
shifting its focus to key components sub-assembly, which accounted for 59% of our sales in 2004. We
believe that the strong growth of this business will offset the impact of lower gross profit margins
and we can continue to achieve strong growth in our overall profits. In the long run, we expect to
achieve an overall gross profit margins of around 12%. Off-balance Sheet Arrangement For the year of 2004, the Company
did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or
future effect on the Companys financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources. 42




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##### Table of Contents



Item 6.Directors, Senior Management and Employees Directors and Senior Managers Our current directors and senior
management, and their ages as of February 28, 2005, are as
follows: Name
    
    Age
    
    Position with Nam TaiTadao Murakami
    
    
    61
    
    
    Chairman of the Board and member of the Board of DirectorsJoseph Li
    
    
    53
    
    
    Chief Executive Officer, President and Chief Financial OfficerKarene Wong
    
    
    41
    
    
    Chairman of the Board of Namtai Electronic and Electrical Products LimitedGuy Bindels
    
    
    44
    
    
    Chief Executive Officer of Namtai Electronic and Electrical Products LimitedJoseph Hsu
    
    
    40
    
    
    Chief Financial Officer of Namtai Electronic and Electrical Products LimitedChen Yee, William
    
    
    46
    
    
    Managing Director of Namtai Electronic (Shenzhen) Co., Ltd.Patinda Lei
    
    
    38
    
    
    Chairman of the Board of Zastron Precision-Tech LimitedBobby Hirasawa
    
    
    40
    
    
    Chief Financial Officer of Zastron Precision-Tech LimitedGeorge Shih
    
    
    48
    
    
    Managing Director of Zastron Electronic (Shenzhen) Co., Ltd.Seitaro Furukawa
    
    
    63
    
    
    Chairman of the Board of J.I.C. Technology Company LimitedIvan Chui
    
    
    46
    
    
    Chief Executive Officer of J.I.C. Technology Company LimitedColin Yeoh
    
    
    40
    
    
    Chief Financial Officer of J.I.C. Technology Company LimitedLap Kei Yuen
    
    
    40
    
    
    Managing Director of Jetup Electronic (Shenzhen) Co., Ltd.Kazuhiro Asano
    
    
    53
    
    
    Chairman of the Board of Namtek Software Development Company LimitedM. K. Koo
    
    
    60
    
    
    Member of the Board of DirectorsPeter R. Kellogg
    
    
    62
    
    
    Member of the Board of DirectorsStephen Seung
    
    
    58
    
    
    Member of the Board of Directors and SecretaryDr. Wing Yan
(William) Lo
    
    
    44
    
    
    Member of the Board of DirectorsCharles Chu
    
    
    48
    
    
    Member of the Board of DirectorsMark Waslen
    
    
    44
    
    
    Member of the Board of Directors
 Tadao Murakami.Mr. Murakami has served Nam Tai in various executive capacities since 1984. He
became our Secretary and a Director in November 1989. Since June 1989, he has been employed as the
President of our Hong Kong subsidiary. In July 1994, Mr. Murakami succeeded Mr. Koo as President
and, in June 1995, became our Chief Executive Officer until September 1998. Mr. Murakami assumed
the position of Vice-Chairman in January 1996, and Chairman from September 1998 until March 1, 2001
and again starting February 1, 2002. With effect from
January 1, 2005, Mr. Murakami became a
non-executive director of the Company but maintained his role as Chairman of the Board. Joseph Li.Mr. Li, co-founder of the J.I.C. Group, has served in various senior executive
positions since we acquired the J.I.C. Group in October 2000. Mr. Li assumed the position of Chief
Executive Officer in May 2002. Mr. Li has directed J.I.C. Groups business development since
founding J.I.C. group in 1980. Mr. Li resigned as a member of the Board of Directors in July 2003.
In April 2004, he resumed position of Chief Financial Officer of J.I.C. Technology Company Limited.
In January 2005, he resigned from the position of Chief Financial Officer of J.I.C. and assumed
the position of Chief Financial Officer of the Company. Karene Wong.Ms. Wong joined us in June 1989 and was promoted to Managing Director of our
subsidiary Nam Tai Electronic & Electrical Products Ltd. (Hong Kong) on January 1, 2001. She was
further promoted to Chairman of Nam Tai Electronic & Electrical
Products Limited (Cayman Islands) in October 2003. Before joining us,
Ms. Wong was Assistant to the Sales Manager at Wright Joint &
Co. Ltd. Ms. Wong is responsible for our sales and marketing operations and supporting employee
recruitment and training. Guy Bindels.Mr. Bindels joined the Nam Tai Group as Research and Development Director in
March 2003 and became a director of Nam Tai Electronic & Electrical Products Limited in March 2004.
He was promoted to Chief Executive Officer of Nam Tai Elecrtronic & Electrical Products Limited
since July 2004 and is responsible for the research and development activities of the group. Before
joining the Nam Tai Group, he worked with the research and development unit of Alcatel for 19
years. He graduated from Ecole Nationale d Ingenieur de Brest (Engineering School located in
Brest) in France in 1983. Joseph Hsu. Mr. Hsu is the Chief Financial Officer of Nam Tai Electronic & Electrical Products
Limited. He joined the Nam Tai Group in February 2004 and has nearly 11 years of investment
banking experience. Mr. Hsu worked in the corporate finance division of the Hongkong and Shanghai
Banking Corporation Limited from 1992 to 2003, where his last position was Corporate Finance
Director. Mr. Hsu is a qualified accountant and is an Associate Member of the Hong Kong Society of
Accountants and an Associate Member of the Institute of Chartered Accountants in England and Wales.
Mr. Hsu graduated with a Bachelors Degree in Economics and Accounting from Leeds University, UK
and an MSc degree in Management Science from the Imperial College of Science and Technology,
University of London, UK. Chen Yee, William.Mr. Chen assumed the post of Managing Director of Nam Tai Electronic
(Shenzhen) Co., Ltd. in September 2003. Before joining Nam Tai, he had 15 years of experience in
plant and production management with Jabil Circuits (China) Limited, Dongguan Nokia Mobile Phones
Limited, China and Marine Engine Rebuilders, Inc., Philippines. He obtained a Bachelors Degree in
Industrial Psychology from Far Eastern University in Philippines in 1982 and a Masters Degree in
Business Administration from University of Southern Queensland, Australia in 1999. 43




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##### Table of Contents



Patinda Lei.Ms. Lei joined Nam Tai Group in May 1990. In June 2002, she assumed the position
of Managing Director of our subsidiary Nam Tai Telecom (Hong Kong) Company Limited and in September
2003, became the Chairman of the Board of Zastron Precision-Tech Limited. Ms. Lei has worked with
Nam Tai Group for fourteen years specializing in promoting, generating and monitoring sales
revenues on various high-end electronics products. Ms. Lei graduated from the Faculty of
Engineering of Tokyo University of Science in Japan with a degree in management science. Bobby Hirasawa. Mr. Hirasawa is the Chief Financial Officer of Zastron Precision-Tech Limited.
He joined Nam Tai Group in July 2004 and has more than 15 years of experience in the financial
industry. He has previously worked at Nomura International (HK) Limited, Jardine Fleming
Securities, SG Securities and Kokusai Securities. He has worked in Tokyo, Shanghai and Hong Kong.
He graduated from Meiji Gakuin University in Japan. George Shih.Mr. Shih took up the post of Chief Operating Officer of the Nam Tai Group when he
joined us in June 2003 and was transferred to assume the position of Managing Director of Zastron
Electronic (Shenzhen) Co., Ltd. in May 2004. Before joining Nam Tai, he had 20 years of experience
in electronics manufacturing services in various management roles with Solectron Corporation. Mr.
Shih has obtained a Bachelors Degree in Materials Science and Engineering from National Tsing Hua
University, Taiwan in 1978. In 1980, he also obtained a Masters Degree in Industrial Engineering from
University of Texas, USA in 1980. He further obtained a Masters Degree in Electrical and Computer
Engineering from University of Texas, USA in 1983. Seitaro Furukawa.Mr. Furukawa assumed the position of Chairman of the Board of our subsidiary
J.I.C. Technology Company Limited in March 2002. He has extensive experience in international
operational management. He held management positions in the Japan offices of General Electric,
Admiral International Company and Thompson CSF. After joining the J.I.C. Group in 1992 as a
Managing Director, he assumed responsibility for production management and monitoring daily
operations of the LCD plant in Shenzhen. Mr. Furukawa received his Bachelors of English Literature
degree from Aoyama University in 1965 and his Bachelors of Technology and Metallurgy degree from
Kogakuin University in 1967. Ivan Chui.Mr. Chui is the co-founder and Chief Executive Officer of our subsidiary J.I.C.
Technology Company Limited. Mr. Chui has directed J.I.C. Groups marketing activities since
founding J.I.C. Group in 1980. He has over 20 years of experience in the LCD business and has
extensive experience in doing business with Japanese companies. Colin Yeoh.Mr. Yeoh joined J.I.C. Group in September 2003 and assumed the post of Managing
Director of Jetup Electronic (Shenzhen) Co., Ltd. in October 2004. In January 2005, he assumed the
position of Chief Financial Officer of the J.I.C. Group. Before joining the J.I.C. Group, he worked for Varitronix, a customised LCD manaufacturer, from 1994 to 2003, in the field of
operations. Prior to Varitronix, he worked in GEC Marconi Hirst Research (UK) from 1990 to 1994, in
the field of optical and display system research. Mr. Yeoh was awarded a PhD in Liquid Crystal
Devices in 1990 at Imperial College (London, UK), Master of Science in Microwaves and Modern Optics
in 1986 from University College London (UK) and Bachelor of Science in Electrical and Electronic
Engineering from University College London (UK). Lap Kei Yuen.Mr. Yuen is currently the Managing Director of Jetup Electronic (Shenzhen) Co.,
Ltd. He joined the J.I.C. Group in 1986. Prior to J.I.C., he served as a Production Manager in
Slexs Watch Co., Ltd. from 1984 to 1986. With his excellent performance, he was appointed as the
representative to study LC Injection technology in Japan in 1994 and has been a Vice Managing
Director of Jetup since 2000. He has 20 years of experience in the LCD industry. While in
charge of Jetups operations, he successfully established the LCD
front process, middle process and rear process production lines. He became the Managing Director
of Jetup on January 1, 2005. Kazuhiro Asano.Mr. Asano assumed the position of Chairman of the Board of our subsidiary
Namtek Software Development Company Limited in June 2002. Mr. Asano joined Nam Tai in 1995 as a
general manager and was promoted to Managing Director of Shenzhen Namtek Company Limited in 1997.
In his current position, he is responsible for the overall corporate management and business
development for our software business. Prior to joining Nam Tai, Mr. Asano was the general manager
of Seiko Instruments Inc., a private Japanese consumer electronics company, and was responsible for
its electronic dictionary division. Mr. Asano graduated from Tsuyama Government Industrial College,
Japan with a degree in electrical engineering in 1972. M.K. Koo.Mr. Koo has served as Chairman of the Board of Nam Tai and its predecessor companies
from inception until September 1998. He then became our Senior Executive Officer, responsible for
corporate strategy, finance and administration and also served as the Companys Chief Financial
Officer. Mr. Koo has resigned from the position of Chief Financial Officer on January 1, 2005 but
maintained his role as a non-executive director of the Company. Mr. Koo received his Bachelors of
Laws degree from National Taiwan University in 1970. Peter R. Kellogg.Mr. Kellogg was elected to our Board of Directors in June 2000. Mr. Kellogg
was a Senior Managing Director of Spear, Leeds & Kellogg, a registered broker-dealer in the United
States and a specialist firm on the New York Stock Exchange until the firm merged with Goldman
Sachs in 2000. Mr. Kellogg served on our Audit Committee until July 8, 2003. He currently serves on
our Compensation Committee and Nominating and Corporate Governance Committee. Mr. Kellogg is also a
member of the Board of the Ziegler Companies. 44




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##### Table of Contents



Stephen Seung.Mr. Seung was appointed a director of Nam Tai in 1995. Mr. Seung is an attorney
and a C.P.A. and has been engaged in the private practice of law in New York since 1981. Mr. Seung
received a B.S. degree in Engineering from the University of Minnesota in 1969, an M.S. degree in
Engineering from the University of California at Berkeley in 1971, an MBA degree from New York
University in 1973 and a J.D. degree from New York Law School in 1979. Mr. Seung acts as our
authorized agent in the United States. He served on our Audit Committee until October 2003. With
effect from October 15, 2003, Mr. Seung also assumed the role of Secretary of the Company. Dr. Wing Yan (William) Lo. Dr. Lo was elected to our Board of Directors at our annual meeting
of shareholders on July 8, 2003. Dr. Lo is currently the Executive Director and Vice President of
China Unicom Ltd., a telecommunications operator in China that is listed on both the Hong Kong and
New York Stock Exchanges. From 1998 to 1999, Dr. Lo was the chief executive officer of Citibanks
Global Consumer Banking business for Hong Kong. Dr. Lo was the founding Managing Director of
Hongkong Telecom IMS Ltd. Dr. Lo holds an M. Phil. degree in molecular pharmacology and a Ph.D.
degree in genetic engineering, both from Cambridge University, England. He is also an Adjunct
Professor of The School of Business, Hong Kong Baptist University as well as a Governor of a newly
established independent school, the ISF Academy. In 1998, Dr. Lo was appointed as a Justice of the
Peace of Hong Kong. In 2003, he was appointed as Committee Member of Shantou Peoples Political
Consultative Conference. Dr. Lo currently serves on the Nominating and Corporate Governance
Committee acting as the Chairman and also serves on our Audit Committee and Compensation Committee. Charles Chu.Mr. Chu originally served as a Director from November 1987 to September 1989. He
was reappointed a Director in November 1992. Since July 1988, Mr. Chu has been engaged in the
private practice of law in Hong Kong. Mr. Chu serves on the Compensation Committee acting as
Chairman. He also serves on our Audit Committee and Nominating and Corporate Governance Committee.
Mr. Chu received his Bachelors of Laws degree and Post-Graduate Certificate of Law from the
University of Hong Kong in 1980 and 1981, respectively. Mark Waslen. Mr. Waslen was appointed a director of Nam Tai at our annual meeting of
shareholders on July 8, 2003 and currently serves on the Audit Committee acting as Chairman. He
also serves on our Compensation Committee and Nominating and Corporate Governance Committee.
Previously, Mr. Waslen was employed with Nam Tai during the periods from 1990 to 1995 and from June
1998 to October 1999 in various capacities, including Financial Controller, Secretary and Treasurer.
Mr. Waslen has been employed with various accounting firms, including Peat Marwick Thorne, Deloitte
Touche Tohmatsu and is currently employed with BME + Partners Chartered Accountants. Mr. Waslen is
a C.F.A., C.A. and a C.P.A. and received a Bachelors of Commerce (Accounting Major) from
University of Saskatchewan in 1982. No family relationship exists among any of the named directors, executive officers or key
employees. No arrangement or understanding exists between any of our directors or executive
officers and any other person pursuant to which any director or executive officer was elected as a
director or executive officer of Nam Tai. Directors are elected each year at our 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. Compensation of Directors and Senior Managers The aggregate compensation we and our subsidiaries paid during the year ended December 31,
2004 to all directors and officers as a group for services in all capacities was approximately $4.2
million, including compensation in the form of housing in Hong Kong for our Chairman of the Board
and our Chief Executive Officer, President and our Chief Financial Officer. Directors who are not employees of Nam Tai nor any of its subsidiaries are paid $3,000 per
month for services as a director, $750 per meeting attended in person and $500 per meeting attended
by telephone. In addition, they are reimbursed for all reasonable expenses incurred in connection
with their services as a director. Members of our key staff are eligible for annual cash bonuses based on their performance and
that of the division in which they are assigned for the relevant period. Key staff members of a
division will be entitled to share up to 15% of the operating income from that division during the
year. Our executive officers in charge of the business unit recommend the participating staff
members and the amount, if any, to be allocated from the divisions profit pool to an eligible
individual. According to the relevant laws and regulations in China, we are required to contribute 8% to
9% of the stipulated salary set by the local government of Shenzhen, China, to the retirement
benefit schemes to fund the retirement benefits of our employees. Our principal obligation with
respect to these retirement benefit schemes is to make the required contributions under the scheme.
No forfeited contributions may be used by us to reduce the existing level of contributions. 45




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##### Table of Contents



Prior to December 2000, we maintained staff contributory retirement plans (defined
contribution pension plans), which covered certain of our employees in Hong Kong. From December
2000 onwards, we terminated our existing staff contributory retirement plans and enrolled all of
our eligible employees in Hong Kong into a Mandatory Provident Fund, or MPF, program. In August
2003, we set up our first subsidiary, Nam Tai Investments Consultant (Macao Commercial Offshore)
Company Limited, in Macao, China. We enrolled all of our eligible employees in Macao into a
retirement benefit scheme, or RBS. Both the MPF and RBS are available to all employees aged 18 to
64 and with at least 60 days of service under the employment of Nam Tai in Hong Kong and Macao.
Contributions are made by us at 5% based on the staffs relevant income. The maximum relevant income for
contribution purpose per employee is $3,000 per month. Staff members are entitled
to 100% of the Companys contributions, together with accrued returns, irrespective of their length
of service with us, but the benefits are required by law to be preserved until the retirement age
of 65 for employees in Hong Kong while the benefit can be withdrawn by the employees in Macao at
the end of employment contracts. The cost of our contribution to the staff retirement plans in Hong Kong, Macao and China
amounted to $617,000, $982,000 and $1,363,000 for the years ended December 31, 2002, 2003 and 2004,
respectively. In August 1990, we fixed compensation for loss of office at $500,000 for Mr. M.K. Koo and
$300,000 for Mr. Tadao Murakami. We also fixed the age of retirement for directors, including
Messrs. Koo and Murakami, at age 65 years. We have accrued the entire $800,000 on account of this
compensation for loss of office, which was paid out in 2005. Board Practices All directors hold office until our next annual meeting of shareholders, which generally is in
June of each calendar year, or until their respective successors are duly elected and qualified or
their positions are earlier vacated by resignation or otherwise. All executive officers are
appointed by the Board and serve at the pleasure of the Board. There are no director service
contracts providing for benefits upon termination of employment. Our Board of Directors decided,
effective December 31, 2002, to grant future options under our stock option plan only to our
non-employee directors. However, in July 2004, our Board of Directors decided to resume
granting options to management and key staff members as incentive based on their performance. Corporate Governance Guideline We have adopted a set of corporate governance guidelines, which are available on our website
at http://www.namtai.com/ corpgov/corpgov.htm. The contents of this website address, other
than the corporate governance guidelines, the code of ethics and committee charters, are not a part
of this Form 20-F. Stockholders also may request a free copy of our corporate governance
guidelines in print form from: Pan Pacific I.R. Ltd.
Attention: Investor Relations Office
Suite 1790 - 999 W. Hastings Street
Vancouver, BC
Canada V6C 2W2
Toll Free Telephone: 1-800-661-8831 Committee Charters The charters for our audit committee, compensation committee and nominating and corporate
governance committee are available on our website at
http://www.namtai.com/corpgov/corpgov.htm. The contents of this website address, other than
the corporate governance guidelines, the code of ethics and committee charteres, are not a part of
this Form 20-F. Stockholders may request a copy of each of these charters from the address and
phone number set forth above under Corporate Governance Guideline. Audit Committee Nam Tai has established an audit committee whose primary duties consist of reviewing, acting
on and reporting to the Board of Directors with respect to various auditing and accounting matters,
including the selection of auditors, the scope of the annual audits and the fees to
be paid to the
auditors and the performance of the independent auditors and accounting practices. The audit
committee currently consists of three independent non-executive directors, Messrs. Waslen, Chu and
Lo. Mr. Waslen, who was elected by the full Board of Directors, currently acts as the Chairman of
the audit committee. 46




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##### Table of Contents



In November 2003, the SEC approved the final NYSE corporate governance guidelines. Pursuant to
NYSE Section 303A, three committees, namely the audit committee, nominating and corporate
governance committee and compensation committee, are to be set up by all domestic filers and should
be composed entirely of independent directors. For purposes of keeping with the best practice, Nam
Tai established the compensation committee and the nominating and corporate governance committee on
July 30, 2004. The composition and primary duties of these committees are set forth as below. Pursuant to the requirements of NYSE
Section 303A.11, the Company has evaluated its corporate governance standards in light of the corporate governance standards required of
domestic companies under NYSE standards. Based on this evaluation, the Company has determined that there are no
significant ways in which its corporate governance standards differ from those required of
domestic companies by the NYSE. Compensation Committee Nam Tai has established a compensation committee whose primary duties consist of evaluating
and making recommendations to the Board of Directors regarding the compensation of the Companys
directors and equity-based and incentive compensation programs of the Company. The compensation
committee currently consists of four independent non-executive directors, Messrs. Chu, Lo, Waslen
and Kellogg. Mr. Chu, who was elected by the full Board of Directors, currently acts as the
Chairman of the compensation committee. Nominating and Corporate Governance Committee Nam Tai established a nominating and corporate governance committee on July 30, 2004, whose
primary duties consist of identifying and recommending to the Board of Directors individuals qualified to become
Board members and developing and recommending to the Board and administering the corporate
governance guidelines of the Company. The nominating and corporate governance committee currently consists of four independent
non-executive directors, Messrs. Lo, Chu, Waslen and Kellogg. Dr. Lo, who was elected by the full
Board of Directors, currently acts as the Chairman of the nominating and corporate governance
committee. Options of Directors and Senior Management The following table provides information concerning the options owned by our current Directors
and Senior Management as of February 28, 2005. All share numbers subject to options and exercise
price per share have been adjusted to give effect to a three-for-one stock split effective on June
30, 2003 and a ten-for-one stock dividend effective on November 7, 2003. Number ofcommon shares
    
    
    Exercisesubject to
    
    
    Price ($)
    
    
    ExpirationName
    
    options
    
    
    per share
    
    
    DateTadao Murakami
    
    
    180,000
    
    
    
    19.40
    
    
    
    7/30/2006350,000
    
    
    
    20.84
    
    
    
    2/4/2007Joseph Li
    
    
    30,000
    
    
    
    19.40
    
    
    
    7/30/200650,000
    
    
    
    20.84
    
    
    
    2/4/2007Karene Wong
    
    
    
    
    
    
    
    
    
    
    Guy Bindels
    
    
    
    
    
    
    
    
    
    
    Joseph Hsu
    
    
    
    
    
    
    
    
    
    
    Chen Yee, William
    
    
    
    
    
    
    
    
    
    
    Patinda Lei
    
    
    
    
    
    
    
    
    
    
    Bobby Hirasawa
    
    
    
    
    
    
    
    
    
    
    George Shih
    
    
    
    
    
    
    
    
    
    
    Seitaro Furukawa
    
    
    
    
    
    
    
    
    
    
    Ivan Chui
    
    
    
    
    
    
    
    
    
    
    Colin Yeoh
    
    
    
    
    
    
    
    
    
    
    Lap Kei Yuen
    
    
    
    
    
    
    
    
    
    
    Kazuhiro Asano
    
    
    
    
    
    
    
    
    
    
    M.K. Koo
    
    
    180,000
    
    
    
    19.40
    
    
    
    7/30/2006350,000
    
    
    
    20.84
    
    
    
    2/4/2007Charles Chu
    
    
    16,500
    
    
    
    16.82
    
    
    
    7/8/200615,000
    
    
    
    19.40
    
    
    
    7/30/2006Peter R. Kellogg
    
    
    16,500
    
    
    
    6.02
    
    
    
    4/30/200516,500
    
    
    
    16.82
    
    
    
    7/8/200615,000
    
    
    
    19.40
    
    
    
    7/30/2006Stephen Seung
    
    
    16,500
    
    
    
    16.82
    
    
    
    7/8/200615,000
    
    
    
    19.40
    
    
    
    7/30/2006Wing Yan (William) Lo
    
    
    16,500
    
    
    
    16.82
    
    
    
    7/8/200615,000
    
    
    
    19.40
    
    
    
    7/30/2006Mark Waslen
    
    
    15,000
    
    
    
    19.40
    
    
    
    7/30/2006
 47




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##### Table of Contents



Please
refer to page 49 of this Report, which sets forth the shareholding information
of each of the director and senior management of the Company. Employee Stock Option and Incentive Plan In July 2004, our Board of
Directors has decided to resume granting stock options under our
2001 stock option plan,which provides for the grant of stock options to directors, employees
(including officers), and
consultants. Pursuant to the amended 2001 stock option plan, the terms and conditions of
individual grants may vary subject to the following: (i) the exercise price of incentive stock
options may not normally be less than market value on the date of grant; (ii) the term of incentive
stock options may not exceed ten years from the date of grant; (iii) the exercise price of an
option cannot be altered once granted; and (iv) every non-employee director who is not our employee
shall, on an annual basis upon their election to the Board of Director at the Annual General
Meeting, be automatically granted 15,000 options, with an exercise price equal to 100% of the fair
market value of the common shares on the date of grant. At February 28, 2005, options to purchase
1,737,050 shares were outstanding under our amended 2001 stock option plan and 259,869 shares were
available for future grant under them. The full text of our amended 2001 stock option plan, amended
on July 30, 2004, we hereby file as Exhibit 4.18 with this Annual Report on Form 20-F for 2004. Our Board of Directors decided, effective December 31, 2002, to grant future options under our
stock option plans only to our non-employee directors. However, our Board of Directors decided to
resume granting options to management and key staff members as incentive based on their performance
in July 2004. Thereafter, incentive compensation paid to management and other key employees was in
the form of either cash bonuses and/or stock options. Employees As of December 31, 2004, we employed 5,636 persons on a full-time basis, of which 5,574 were
employed in China, 49 were employed in Hong Kong, 10 were employed in Macao, 2 were employed in
Japan and 1 was employed in the British Virgin Islands. Of these employees, approximately 4,131
were engaged in manufacturing, approximately 1505 were engaged in administrative, research and
development, quality control, engineering and marketing positions, and the balance in supporting
jobs such as security, janitorial, food and medical services. As of December 31, 2003, we employed 4,476 persons on a full-time basis, of which 4,385 were
employed in China, 62 were employed in Hong Kong, 24 were employed in Macao, 4 were employed in
Japan and 1 was employed in the British Virgin Islands. Of these employees, approximately 3,415
were engaged in manufacturing, approximately 1,061 were engaged in administrative, research and
development, quality control, engineering and marketing positions, and the balance in supporting
jobs such as security, janitorial, food and medical services. As of December 31, 2002, we employed 4,246 persons on a full-time basis, of which 4,173 were
employed in China and 73 were employed in Hong Kong. Of these employees, approximately 2,915 were
engaged in manufacturing, approximately 1,331 were engaged in administrative, research and
development, quality control, engineering and marketing positions, and the balance in supporting
jobs such as security, janitorial, food and medical services. We are not a party to any material labor contracts. The nature of our arrangement with our
manufacturing employees is such that we can increase or reduce staffing levels without significant
difficulty, cost or penalty. Although we have experienced no significant labor stoppages and
believe relations with our employees are satisfactory, this situation may not continue in the
future, and any labor difficulties could lead to increased costs and/or interruptions in our
production. It is the practice of one of our subsidiaries to enter into a collective agreement with its
trade union. The collective agreement usually sets out the minimum standard for the wages, working
hours and other benefits of the workers. The current collective agreement between our subsidiary
and its trade union expires on December 31, 2005 and will be renewed. 
 Item 7.Major Shareholders and Related Party Transactions The following table sets forth certain information known to us regarding the beneficial
ownership of our common shares as of February 28, 2005, by:  

    each person (or group within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934) known by us to own beneficially 5% or more of our common shares; and  

    each of our current directors and senior management. 48




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##### Table of Contents



We are not directly owned or controlled by another corporation or by any foreign government,
natural or legal person. Shares beneficially(1) ownedName
    
    Number(12)

    
    PercentM. K. Koo
    
    
    6,975,786
    (2)
    
    
    16.2Peter R. Kellogg
    
    
    5,679,680
    (3)
    
    
    13.3I.A.T. Reinsurance Syndicate Ltd.
    
    
    5,108,300
    (3)
    
    
    12.0Li & Chui Holdings (B.V.I.) Ltd.
    
    
    2,935,087
    
    
    
    6.9Joseph Li
    
    
    3,093,957
    (4)
    
    
    7.2Ivan Chui
    
    
    2,980,957
    (5)
    
    
    7.0Tadao Murakami
    
    
    2,379,225
    (6)
    
    
    5.5Karene Wong
    
    
    39,100
    
    
    
    *Guy Bindels
    
    
    1,000
    
    
    
    *Joseph Hsu
    
    
    2,000
    
    
    
    *Chen Yee, William
    
    
    
    
    
    
    Patinda Lei
    
    
    25,300
    
    
    
    *Bobby Hirasawa
    
    
    3,000
    
    
    
    *George Shih
    
    
    
    
    
    
    Seitaro Furukawa
    
    
    
    
    
    
    Colin Yeoh
    
    
    
    
    
    
    Lap Kei Yuen
    
    
    1,800
    
    
    
    *Kazuhiro Asano
    
    
    
    
    
    
    Charles Chu
    
    
    84,000
    (7)
    
    
    *Stephen Seung
    
    
    84,800
    (8)
    
    
    *Wing Yan (William) Lo
    
    
    31,500
    (9)
    
    
    *Mark Waslen
    
    
    25,000
    (10)
    
    
    *
   *
    Less than 1%.(1)
    Pursuant to the rules of the Securities and Exchange Commission, shares of common shares that an
individual or group has a right to acquire within 60 days pursuant to the exercise of options are
deemed to be outstanding for the purpose of computing the percentage ownership of such individual
or group, but are not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table. Percentage of ownership is based on 42,664,536
common shares outstanding as of February 28, 2005.(2)
    Includes options to purchase 530,000 common shares exercisable within 60 days of February 28, 2005.(3)
    Mr. Kellogg holds directly 523,380 common shares and options to purchase 48,000 common shares
exercisable within 60 days of February 28, 2005. Indirectly, through I.A.T. Reinsurance Syndicate
Ltd., Mr. Kellogg holds 5,108,300 common shares. I.A.T. Reinsurance Syndicate Ltd. is a Bermuda
corporation of which Mr. Kellogg is the sole holder of voting stock. Mr. Kellogg disclaims
beneficial ownership of these shares.(4)
    Includes shares held of record by Li & Chui Holdings (B.V.I.) Limited for which Mr. Li shares
investment and voting control with Mr. Chui. These are the same shares shown in the table for Ivan
Chui. Also, includes options to purchase 80,000 common shares exercisable within 60 days of
February 28, 2005.(5)
    Includes shares held of record by Li & Chui Holdings (B.V.I.) Limited for which Mr. Chui shares
investment and voting control with Mr. Li. These are the same shares shown in the table for Joseph
Li.(6)
    Includes options to purchase 530,000 common shares exercisable within 60 days of February 28, 2005(7)
    Includes options to purchase 31,500 common shares exercisable within 60 days of February 28, 2005.(8)
    Includes options to purchase 31,500 common shares exercisable within 60 days of February 28, 2005,
and 20,300 common shares that are registered to Violet Seung, Mr. Seungs wife, as to which Mr.
Seung disclaims beneficial ownership.(9)
    Consists of options to purchase common shares exercisable within 60 days of February 28, 2005.(10)
    Includes options to purchase 15,000 common shares exercisable within 60 days of February 28, 2005.(11)
    All the share numbers have been adjusted to give effect to a three-for-one stock split effective
on June 30, 2003 and a ten-for-one stock dividend effective on November 7, 2003.(12)
    These share numbers include options owned by these individuals and assume that these options
will be exercised. All of the holders of our common shares have equal voting rights with respect to the number of
common shares held. As of February 28, 2005, there were approximately 766 holders of record of our
common shares. According to information supplied by our transfer agent, 733 holders of 49




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##### Table of Contents



record with
addresses in the United States held 29,642,848 of our outstanding common shares. The following table reflects the percentage ownership of our common shares beneficially owned
by our major shareholders during the past three years: Percentage Ownership(1)March 31,
    
    March 1,
    
    February 28,2003
    
    2004
    
    2005M. K. Koo
    
    
    18.9
    
    
    
    12.9
    
    
    
    16.2Peter R. Kellogg
    
    
    12.2
    
    
    
    12.7
    
    
    
    13.3I.A.T. Reinsurance Syndicate Ltd.
    
    
    10.7
    
    
    
    11.3
    
    
    
    12.0Li & Chui Holdings (B.V.I.) Ltd.
    
    
    8.7
    
    
    
    7.1
    
    
    
    6.9Joseph Li
    
    
    9.1
    
    
    
    7.3
    
    
    
    7.2Ivan Chui
    
    
    9.0
    
    
    
    7.2
    
    
    
    7.0Tadao Murakami
    
    
    6.0
    
    
    
    4.5
    
    
    
    5.5
   (1)
    Based on 36,392,004, 41,231,272 and 42,664,536 common shares
outstanding on March 31, 2003, March 1, 2004 and February 28, 2005,
respectively. There are no arrangements that may, at a subsequent date, result in a change of control of the
Company. Certain Relationships and Related Transactions In January 2003, we invested $10.0 million for a 25% equity interest in Alpha Star Investments
Ltd., the ultimate parent of JCT. JCT is engaged in the design, development and marketing of
wireless communication terminals and wireless application software. In connection with our
investment, Mr. Koo was appointed as a director to Alpha Star Investment Ltd.s Board of Directors.
Mr. Koo resigned from the Board of Directors of Alpha Star Investment Ltd. on July 12, 2004. We
currently manufacture wireless communication terminals and related modules for JCT. As part of our
investment, Alpha Star Investment Ltd. agreed to have us manufacture the RF modules for at least 50
percent of the orders it, or any of its subsidiaries, receives for RF modules provided we perform
such manufacturing services at a price comparable to the market. As of December 31, 2004, we were owed
$66,000 from JCT. For the year ended December 31, 2004, we recognized net sales of $34.2 million to
JCT and purchased raw materials of approximately $12.4 million from JCT and its related companies. On February 16, 2004, by unanimous consent following resolutions without meeting, the Board of
Directors adopted a resolution for the sale of a residential property located in Hong Kong by a
wholly-owned subsidiary of the Company, Nam Tai Group Management Limited or NTGM, to Mr. Tadao Murakami,
Chairman of the Board of Directors, for consideration of approximately $1.8 million, which is close
to the original acquired cost and appraised market value of the property as of January 31, 2004.
The agreement for the sale of the property was entered into between Nam Tai Group Management
Limited and Mr. Tadao Murakami on March 10, 2004. On December 10, 2004, by unanimous consent, the Board of Directors of Nam Tai Group Management
Limited, adopted a resolution for assigning the beneficial interest of Nam Tai Group Management
Limited in 10 units of debentures of nominal value of approximately $1,603 each,
issued by The Clearwater Bay Golf & Country Club to Mr. Koo at the consideration of approximately
$231,000, which represented the book value of the debentures in the financial statements of Nam Tai
Group Management Limited. An agreement was entered between Nam Tai Group Management Limited and Mr.
Koo on December 10, 2004. 
 Item 8.Financial Information Financial Statements The Consolidated Financial Statements
have been appended to this Form 20-F (see pages F-1 to F-36). From year-end dated December 31, 2004 to our reporting date of
March 4, 2005, there has been no
significant changes on our consolidated Financial Statements. Change in Public Accountants In May 2002, upon consideration and to reduce our professional fees, our Board of
Directors, including our Audit Committee, recommended that HLB Hodgson Impey Cheng replace Deloitte
Touche Tohmatsu as our independent auditors. This change was included in our proxy statement and
approved by our shareholders at our annual meeting on June 14, 2002. Deloitte Touche Tohmatsu did
not resign or refuse to stand for re-election, and none of Deloitte Touche Tohmatsus reports on
the financial statements for either of the two years prior to the change and included in this
Report contained an adverse opinion, disclaimer, modification or qualification. 50




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##### Table of Contents



In November 2002, HLB advised us that they could not meet our audit requirements for the
agreed fees and on a cost-effective basis because the increasingly complex regulatory guidelines
for the auditing of public companies would require them to perform a significant portion of the
final audit work with personnel from a U.S. affiliate. HLB submitted their resignation accordingly.
There were no disagreements with HLB on any matter or accounting principle, practice, financial
statement disclosure, or auditing scope or procedure. In December 2002, in contemplation of our intention to list on the NYSE, we sought a
replacement firm with a strong U.S. and Asian presence and an ability to handle our audit
requirements. Accordingly, our Board of Directors appointed Grant Thornton as our independent
public accountants based on Grant Thorntons ranking among accounting firms in the U.S. and our
Boards belief that Grant Thornton would be acceptable to our shareholders. The appointment of
Grant Thornton was accepted by our shareholders at our annual meeting held on July 8, 2003.
Accordingly, Grant Thornton issued the audited account for 2002. In August 2003, we set up the PRCs headquarters in Macao, China, due to our continuous
increase in investment in PRC. Since Grant Thornton does not have an office in Macao and does not
have a licence to handle Macao statutory tax filings, Grant Thornton tendered its resignation as
our auditors. Deloitte Touche Tohmatsu, who had been our auditors from 1998-2001, was hired to
audit for both 2002 and 2003. Deloitte Touche Tohmatsu has been appointed as our auditors as of
October 24, 2003. Grant Thornton will, however, continue to provide tax advisory services to us,
other than with respect to Macao. Legal Proceedings We are not a party to any legal proceedings other than routine litigation incidental to our
business and there are no material legal proceedings pending with respect to our property, other
than as described below. Tele-Art Litigation In June 1997, Nam Tai filed a petition in the British Virgin Islands for the winding up of
Tele-Art, Inc. on account of an unpaid judgment debt owed to Nam Tai. The High Court of Justice
granted an order to wind up Tele-Art, Inc. in July 1998 and the Eastern Caribbean Court of Appeal
upheld the decision on January 25, 1999. On January 22, 1999, pursuant to our Articles of
Association, we redeemed and cancelled 415,500 (Note 1) shares of Nam Tai registered in the name of
Tele-Art, Inc. at a price of $3.73 per share to offset substantially all of the judgment debt of
$799,000 plus interest and legal costs totaling approximately $1.7 million, including dividends
that we had withheld and credited against the judgment debt. Following the completion of the redemption, we received notice that the liquidator had
obtained an ex-parte injunction preventing us from redeeming Nam Tai shares beneficially owned by
Tele-Art, Inc. On February 4, 1999, the liquidator of Tele-Art, Inc. filed a further summons in the
British Virgin Islands on its behalf seeking, among other matters:  
    A declaration as to the respective priorities of the debts of
Tele-Art, Inc. to the Bank of China, Nam Tai, and other creditors and
their respective rights to have their debts discharged out of the
proceeds of the Tele-Art, Inc.s Nam Tai shares;  
    An order setting aside the redemption of 415,500 (Note 1) shares, and
ordering delivery of all shares in our possession or control of to the
liquidator; and  
    Payment of all dividends in respect of Tele-Art, Inc.s Nam Tai shares. On March 26, 2001, we filed a summons seeking to remove the liquidator for failing to act
diligently in the performance of his duties and for knowingly misleading the court. On September 3,
2002, the liquidator submitted a letter of resignation prior to the scheduled removal hearing. A
new liquidator was appointed by the BVI court on July 11, 2003. On July 5, 2002, upon our application, the court ordered the removal of the liquidators
ex-parte injunction and ordered an inquiry into damages. Nam Tai filed its amended Points of Claim
of Defence on April 16, 2004. There are currently applications before the Court of Appeal in the
British Virgin Islands to determine the progress of this matter as Nam Tai has sought to enter
judgment against David Hague, the former liquidator, who has applied to strike out Nam Tais claim
for damages. On August 9, 2002, the court delivered a decision awarding us a judgment against
Tele-Art, Inc. for approximately $34.0 million. On August 12, 2002, we redeemed and cancelled,
pursuant to its Articles of Association, the remaining 509,181 (Note 2) shares beneficially owned
by Tele-Art, Inc. at a price of $6.14 per share. Including the
dividends which we had withheld and credited against the judgment, this offset a further $3.5 million, approximately, in
judgment debts owed to us by Tele-Art, Inc. We recorded the $3.3 million redemption net of expenses
as other income in 2002. 51




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##### Table of Contents



On January 21, 2003, judgment
was delivered on the liquidators February 4, 1999 summons
declaring that the redemption and set-off of dividends on the 415,500 (Note 1) shares be set aside
and that all Tele-Art, Inc. property withheld by us be delivered to Tele-Art, Inc. in liquidation.
The orders granted in the judgment were substantially different from the relief sought in the
February 4, 1999 application. On February 4, 2003, we filed an application for a stay of execution
and leave to appeal the decision listing eight grounds of appeal, which was granted on June 23,
2003. The case was heard on January 12, 2004 and judgment was delivered on April 26, 2004. It was
held that the redemption by Nam Tai of 415,500 (Note 1) Nam Tais shares owned by Tele-Art, Inc. was
proper, however, Nam Tai must return the redemption proceeds and dividends payable received to the
liquidator for distribution to the creditors. David Hague, the former liquidator of Tele-Art, Inc.
who filed the original application in 1999, has obtained leave to appeal to the Privy Council, the
final appellate court for the British Virgin Islands, that part of the Court of Appeal judgment
which upheld the redemption of the Tele Art shares by Nam Tai. It is not expected that this appeal
will be heard before 2006. The court also held that Bank of China was a secured creditor but the
court did not determine the amount owed by Tele-Art, Inc. to Bank of China. We dispute that
finding, and among other matters, have argued that the proof of debt by Bank of China was
incomplete and invalid. Bank of China has submitted that
it is a secured creditor. In this respect, the Banks position
is that as of December 6, 2004, the debt from Tele-Art Limited, a former wholly-owned subsidiary
of Tele-Art, Inc. (the loan was also guaranteed by Tele-Art, Inc.) was HK$21,985,970.16
(approximately US$2.8 million) with interest accruing at HK$4,264.7 (or US$547) daily. The
liquidator, however, took the view in his third liquidator report which was submitted to the Court
on October 13, 2004, that Bank of Chinas proof of debt was incomplete. The liquidator has
requested the Courts approval to take further action and demand that Bank of China provide further
information for his consideration. Nam Tai is of the view that the amount of debt owed by Tele-Art
Limited to Bank of China may not exceed $1.4 million. It should further be noted that apart from
Nam Tai, the liquidator admitted the proof of debts of two other unsecured creditors which together
amounted to approximately $33,000. David Hague, the former liquidator, has submitted a claim for
$381,860 in respect of fees and expenses for work done while acting as liquidator of Tele Art, Inc.
These fees however are subject to the approval of the court and as such are still pending as they
have not yet been approved. The Liquidator filed a Summons for the approval of his third report on
October 13, 2004 and this was heard on December 14, 2004. The Court inter alia ordered that the
Liquidator continue the administration of the liquidation of Tele-Art,
Inc. substantially in accordance
with his proposals contained in said report as well as the second report. As of December 31, 2002, due to the uncertainty of the final outcome of the litigation and in
accordance with SFAS No. 5, Accounting for Contingencies, we have recorded a provision for $5.2
million as a component of accrued expenses pending a final determination of this matter by the
courts. This represented the then-best estimate of the net monetary expense we would incur if our
appeal is unsuccessful and the two judgment debts in the total amount of $38.0 million (including
interest, costs, and related expenses) is determined as having the lowest priorities in recovering
from the estate of Tele-Art, Inc. As of November 7, 2003, apart from Nam Tai, a total of three other
creditors of Tele-Art, Inc., including Bank of China, had submitted their proof of debt to the
liquidator. These claims, together with the claim by David Hague, the former liquidator of the
Company for outstanding fees and expenses, amounted to approximately $3.4 million. As a result,
the 2002 provision for $5.2 million was reduced to $3.9 million in the fourth quarter of 2003. With the two judgment debts as
well as the several costs orders in favour of Nam Tai, Nam Tai
is the major unsecured creditor of Tele-Art, Inc. holding approximately 99.9% outstanding debts of
Tele-Art, Inc. Pursuant to the judgment of April 26 2004, we are in negotiations with the liquidator
on the distribution of the redemption proceeds among the unsecured creditors. If our proposal is
accepted by the liquidator and approved by the court, as well as all the legal matters related to
Tele-Art, Inc. finalized, including the final determination of the creditors position of Bank of
China, then the remaining portion of $3.9 million provision will also be reversed into income for
the related period. However, the actual amount of the recovery, if any, is uncertain, and is dependent on a number
of factors including the final determination of Bank of Chinas position. We plan to continue to
pursue vigorously all legal alternatives available to seek to recover the maximum amount of the
outstanding debt from Tele-Art, Inc. as well as to pursue other parties that may have assisted in
any transfers of the assets from Tele-Art, Inc. In furtherance of this objective, Nam Tai commenced
proceedings in 2002 against David Hague, the former liquidator of Tele-Art, Inc., and
PriceWaterhouseCoopers for, inter alia, negligence and breach of statutory duty in their conduct of
the liquidation. This matter is still in its initial stages as the Defendants are seeking leave to
appeal against the dismissal of their challenge to the jurisdication of the BVI courts in this
matter. We may incur substantial additional costs in pursuing our recovery and such costs may not
be recoverable. Note  1.
    Subsequent to November 7, 2003, the number of shares was adjusted to
457,050 to reflect the ten-for-one stock dividend.2.
    Subsequent to November 7, 2003, the number of shares was adjusted to
560,099 to reflect the ten-for-one stock dividend. Putative Class Actions On March 11, 2003, we were served with a complaint in an action captioned Michael Rocco v. Nam
Tai, et al., 03 Civ. 1148 (S.D.N.Y.), or the Rocco Action. In addition to Nam Tai, certain
directors are named as defendants. On or about April 9, 2003, a second complaint was filed in an
action captioned A.J. & Celine Steigler v. Nam Tai, et al., 03 Civ. 2462 (S.D.N.Y.), or the
Steigler Action, and together with the Rocco 52




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##### Table of Contents



Action, the Actions. The Actions have been
consolidated since July 2003 and purports to represent a putative class of persons who purchased
the common stock of Nam Tai from July 29, 2002 through February 18, 2003. Plaintiffs in the Actions
assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and allege that
misrepresentations and/or omissions were made during the alleged class period concerning the
partial reversal of an inventory provision and a charge to goodwill related to Nam Tais LPT
segment. Our motion to dismiss was denied on September 27, 2004. The putative class action has not
been certified as a class action by the court but we expect plaintiffs to seek such certification
in the near future. The court has set May 23, 2005 to hear the certification motion. Nam Tai
believes it has meritorious defenses and intends to defend the case vigorously. Export Sales Geographic Markets Approximate percentages of net sales to customers by geographic area based upon location of
product delivery are set forth below for the periods indicated: Year ended December 31,Geographic Areas
    
    2002
    
    2003
    
    2004China (excluding Hong Kong)
    
    
    12
    %
    
    
    25
    %
    
    
    25
    %Europe (excluding Estonia)
    
    
    18
    
    
    
    21
    
    
    
    18Japan
    
    
    11
    
    
    
    17
    
    
    
    6United States
    
    
    14
    
    
    
    14
    
    
    
    11Hong Kong
    
    
    24
    
    
    
    9
    
    
    
    30Estonia
    
    
    8
    
    
    
    5
    
    
    
    1North America (excluding United States)
    
    
    3
    
    
    
    
    
    
    
    1Korea
    
    
    7
    
    
    
    6
    
    
    
    4Other
    
    
    3
    
    
    
    3
    
    
    
    4100
    %
    
    
    100
    %
    
    
    100
    %
 Dividends We have paid an annual dividend for the last eleven consecutive years. On February 7, 2005, we
announced that we were increasing our regular annual dividend to $1.32 per share to be declared and
paid quarterly commencing with the first quarter 2005 dividend of $0.33 per share. The following
table sets forth the total cash dividends and dividends per share we have declared for each of the
five years in the period ended December 31, 2004, adjusted to give effect to a three-for-one stock
split effective on June 30, 2003. Year ended December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Total dividends declared (in thousands)
    
    $
    12,190
    
    
    $
    4,134
    
    
    $
    17,056
    
    
    $
    37,584
    
    
    $
    20,424Regular dividends per share
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.16
    
    
    $
    0.20
    
    
    $
    0.48Special dividends
    
    
    0.33
    
    
    
    
    
    
    
    0.33
    
    
    
    0.80
    
    
    
    Total dividends per share
    
    $
    0.45
    
    
    $
    0.13
    
    
    $
    0.49
    
    
    $
    1.00
    
    
    $
    0.48
 It is our general policy to determine the actual annual amount of future dividends, if any,
based upon our growth during the preceding year. Future dividends, if any, will be in the form of
cash or stock or a combination of both. We may not be able to pay dividends in the future or may
decide not to declare them in any event. We will determine the amounts of the dividends when they
are declared and even if dividends are declared in the future we may not continue them in any
future period. We declared special dividends in 2002 and 2003 for the reasons described below:  

    In 2002, primarily as a result of a realized gain we made from our
sale of approximately one-third of our direct investment in Huizhou
TCL Mobile Communication Company Ltd.; and  

    In 2003, in celebration of our fifteenth anniversary since our listing
and IPO in 1988, our fifteenth consecutive year of profitability, and
the transfer of our shares from the NASDAQ National Market to the NYSE
in January 2003. 53




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Item 9.The Listing Our common shares are traded in the United States on the NYSE. On January 23, 2003, our common
shares were listed on the NYSE under the symbol NTE. Prior to that, our common shares were quoted
on the Nasdaq National Market under the symbol NTAI. The following table sets forth the
high and low closing sales prices for our common shares for
the quarters in the three-year period ended December 31, 2004, adjusted to give effect to a
three-for-one stock split effective on June 30, 2003: 2002
    
    
    2003
    


    
    2004Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    AverageDaily
    
    
    
    
    
    
    
    
    
    
    Daily
    
    
    
    
    
    
    
    
    
    
    DailyTrading
    
    
    
    
    
    
    
    
    
    
    Trading
    
    
    
    
    
    
    
    
    
    
    TradingHigh
    
    
    Low
    
    
    Volume(1)
    
    
    High
    
    
    Low
    
    
    Volume(1)
    
    
    High
    
    
    Low
    
    
    Volume(1)First Quarter
    
    $
    6.35
    
    
    $
    5.15
    
    
    
    153,210
    
    
    $
    11.30
    
    
    $
    7.92
    
    
    
    363,270
    
    
    $
    34.24
    
    
    $
    22.30
    
    
    
    927,119Second Quarter
    
    
    7.73
    
    
    
    6.10
    
    
    
    143,827
    
    
    
    14.13
    
    
    
    6.94
    
    
    
    288,459
    
    
    
    28.00
    
    
    
    13.99
    
    
    
    509,173Third Quarter
    
    
    6.86
    
    
    
    5.33
    
    
    
    54,983
    
    
    
    32.90
    
    
    
    12.87
    
    
    
    734,330
    
    
    
    23.51

    
    
    
    16.10
    
    
    
    412,488Fourth Quarter
    
    
    9.07
    
    
    
    6.17
    
    
    
    303,351
    
    
    
    42.48
    
    
    
    26.25
    
    
    
    1,393,722
    
    
    
    23.14
    
    
    
    18.07
    
    
    
    283,030
   (1)
    Determined by dividing the sum of the reported daily volume for the quarter by the number of trading days in the quarter. The following table sets forth the high and low closing sale prices for each of the last five
years ended December 31, adjusted to give effect to a three-for-one stock split effective on June
30, 2003: DailyTradingYear ended
    
    High
    
    
    Low
    
    
    Volume(1)December 31, 2004
    
    $
    34.24
    
    
    $
    13.99
    
    
    
    532,568December 31, 2003
    
    
    42.48
    
    
    
    6.94
    
    
    
    597,858December 31, 2002
    
    
    9.07
    
    
    
    5.15
    
    
    
    164,011December 31, 2001
    
    
    6.38
    
    
    
    3.77
    
    
    
    81,656December 31, 2000
    
    
    6.88
    
    
    
    4.31
    
    
    
    113,644
   (1)
    Determined by dividing the sum of the reported daily volume for the year by the number of trading days in the year. The following table sets forth the high and low closing sale prices during each of the most
recent six months: DailyTradingMonth ended
    
    High
    
    Low
    
    
    Volume(1)February 28, 2005
    
    $
    24.35
    
    
    
    18.80
    
    
    
    503,174January 31, 2005
    
    
    19.49
    
    
    
    17.25
    
    
    
    253,252December 31, 2004
    
    
    19.82
    
    
    
    18.07
    
    
    
    242,014November 30, 2004
    
    
    20.00
    
    
    
    18.28
    
    
    
    335,390October 31, 2004
    
    
    23.14
    
    
    
    19.50
    
    
    
    271,686September 30, 2004
    
    
    22.85
    
    
    
    18.75
    
    
    
    318,162
   (1)
    Determined by dividing the sum of the reported daily volume for the month by the number of trading days in the month. On
March 11, 2005, the last reported sale price of our common
shares on the NYSE was $27.12 per share. As of February 28, 2005, there were 766 holders of record of our common shares. 54




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##### Table of Contents



Item 10.Additional Information Share Capital Our authorized capital consists of 200,000,000 common shares, $0.01 par value per share. On
June 20, 2003, we announced a three-for-one stock split effective on June 30, 2003 and a
ten-for-one stock dividend effective November 7, 2003. As of February 28, 2005, 42,664,536 common
shares were outstanding. Memorandum and Articles of Association Holders of our common shares are entitled to one vote for each whole share on all matters to
be voted upon by shareholders, including the election of directors. Holders of our common shares do
not have cumulative voting rights in the election of directors. All of our common shares are equal
to each other with respect to liquidation and dividend rights. Holders of our common shares are
entitled to receive dividends if and when declared by our Board of Directors out of funds legally
available under British Virgin Islands law. In the event of our liquidation, all assets available
for distribution to the holders of our common shares are distributable among them according to
their respective holdings. Holders of our common shares have no preemptive rights to purchase any
additional, unissued common shares. All of our outstanding common shares are duly authorized,
validly issued and nonassessable. All of our outstanding common shares are in registered form and
we do not have any outstanding bearer shares. Pursuant to our Memorandum and Articles of Association and pursuant to the laws of the British
Virgin Islands, our Board of Directors without shareholder approval may amend our Memorandum and
Articles of Association. This includes amendments to increase or reduce our authorized capital
stock. Our ability to amend our Memorandum and Articles of Association without shareholder approval
could have the effect of delaying, deterring or preventing a change in control of Nam Tai,
including a tender offer to purchase our common shares at a premium over the then-current market
price. We have never had any class of stock outstanding other than our common shares nor have we ever
changed the voting rights with respect to our common shares. Our registered office is at P.O. Box 3342, Road Town, Tortola, British Virgin Islands and we
have been assigned company number 3805. Our object or purpose is to engage in any act or activity
that is not prohibited under British Virgin Islands law as set forth in Clause 4 of our Memorandum
of Association. As an International Business Company, and as set forth in Clause 6, we are
prohibited from doing business with persons resident in the British Virgin Islands, owning real
estate in the British Virgin Islands, or accepting banking deposits or contracts of insurance. We
do not believe these restrictions materially affect our operations. Paragraph 60 of our Amended Articles of Association, or Articles, provides that a director may
be counted as one of a quorum in respect of any contract or arrangement in which the director is
materially interested or makes with the Company; however, if the agreement or transaction cannot be
approved by a resolution of directors without counting the vote or consent of any interested
director, the agreement or transaction may only be validated by approval or ratification by a
resolution of the shareholders, who are referred under the law of the British Virgin Islands as
members. Paragraph 53 of the Articles allows the directors to vote compensation to themselves in
respect of services rendered to us. Paragraph 69 of the Articles provides that the directors may by
resolution exercise all the powers on our behalf to borrow money and to mortgage or charge our
undertakings and property or any part thereof, to issue debentures, debenture stock and other
securities whenever we borrow money or as security for any of our debts, liabilities or obligations
or those of any third party. These borrowing powers can be altered by an amendment to the Articles.
There is no provision in the Articles for the mandatory retirement of directors; however, we have
fixed 65 as the mandatory age of retirement for our directors. Directors are not required to own
our shares in order to serve as directors. Paragraph 85 of the Articles allows us to deduct from any shareholders dividends amounts
owing to us by that shareholder. Paragraph 13.1 provides that we can redeem shares at fair market
value from any shareholder against whom we have a judgment debt. Paragraph 12 of the Articles provides that without prejudice to any special rights previously
conferred on the holders of any existing shares, any of our shares may be issued with such
preferred, deferred or other special rights or such restrictions, whether in regard to dividends,
voting, return of capital or otherwise as the directors may from time to time determine. Paragraph 14 of the Articles provides that if at any time the authorized share capital is
divided into different classes or series of shares, the rights attached to any class or series may
be varied with the consent in writing of the holders of not less than three-fourths of the issued
shares of any other class or series of shares which may be affected by such variation. Provisions in respect of the holding of general meetings and extraordinary general meetings
are set out in Paragraphs 27 to 46 of the Articles and under the International Business Companies
Act. The directors may convene meetings of our shareholders at such times and in such manner and
places as the directors consider necessary or desirable, and they shall convene such a meeting upon
the written request of shareholders holding more than 30 percent of the votes of our outstanding
voting shares. Other than providing, if requested, reasonable proof of a holders
status as a holder of our shares as of the applicable record date, there is no condition to the
admission of a shareholder or his or her proxy holder to our meetings of shareholders. 55




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British Virgin Islands law and our Memorandum and Articles of Association impose no
limitations on the right of nonresident or foreign owners to hold or vote our securities. There are no provisions in our Memorandum of Association or Articles of Association governing
the ownership threshold above which shareholder ownership must be disclosed. As a result of the issuance of additional common shares in 2003 pursuant to the three-for-one
stock split and increase in the number of Common Shares reserved for issuance under the Companys
1993 Stock Option Plan and 2001 Stock Option Plan, the authorized share capital of the Company was
enlarged from $200,000 to $2,000,000 and number of shares was increased from 20,000,000 to
200,000,000. The full text of our Amended Articles and Memorandum, amended on June 26, 2003, had
been filed as Exhibit 1.1 with the Annual Report on Form 20-F for 2003. Transfer Agent Registrar and Transfer Agent Company, 10 Commerce Drive, Cranford, New Jersey 07016-3572,
U.S.A., is the United States transfer agent and registrar for our common shares. Material Contracts The following summarizes each material contract, other than contracts entered into in the
ordinary course of business, to which Nam Tai or any subsidiary of Nam Tai is a party, for the two
years immediately preceding the filing of this report:  
    An Agreement was entered into between J.I.C. Technology Company
Limited and Glory Gate Enterprises Limited on June 28, 2003 for the
disposal of transformers operation to Glory Gate Enterprises Limited.  
    On July 3, 2003, a Sale and Purchase Agreement was entered into between Nam Tai
Electronic & Electrical Products Limited (Hong Kong) and Nam Tai Electronic & Electrical Products
Limited (Cayman Islands) regarding the purchase of the entire 100% interest in Nam Tai Electronic (Shenzhen) Co.,
Ltd. by Nam Tai Electronic & Electrical Products Limited (Cayman Islands).  
    On August 22, 2003, we entered into a Purchase Agreement with
Citigroup Global Markets Limited for the sale of 3% convertible notes
of TCL International Holdings Ltd. at an aggregate price of
HK$39,555,068.49 (approximately $5.03 million).  
    On October 28, 2003, a Construction Agreement, with commencement date
of September 23, 2003, was entered into between Namtai Electronic
(Shenzhen) Co., Ltd. and Takasago Thermal Engineering (Hong Kong) Co.,
Ltd. for the construction of new factory premises. The construction
was completed by the end of the fourth quarter in 2004.  
    On December 9, 2003, an Investment Agreement and Shareholders
Agreement was entered into among Mr. André Jolivet, Mr. Alain Jolivet,
Remote Reward SAS, AGF Private Equity, Mighty Wealth Group Limited and
Nam Tai Electronics, Inc. for acquiring an 11.33% equity interest in
Stepmind with a consideration of approximately $5.3 million.  
    On January 2, 2004, a Supplemental Agreement was entered into among
Mr. André Jolivet, Mr. Alain Jolivet, Remote Reward SAS, AGF Private
Equity, Mighty Wealth Group Limited and Nam Tai Electronics, Inc. for
consenting to release the second phrase of payment and increase
capital investment in Stepmind should Stepmind fulfill certain
conditions.  
    On March 10, 2004, an Agreement was entered into between Nam Tai Group
Management Limited and Frontier Profit Inc. for selling Flat A, 22nd
Floor, Tower 2 and Car Parking Space No. A86, The Leighton Hill, 2B
Broadwood Road, Happy Valley, Hong Kong to Frontier Profit Inc. with a
consideration of approximately $1.8 million.  
    On March 26, 2004, a Memorandum of Understanding was signed by Namtai
Electronic (Shenzhen) Co., Ltd. and Nam Tai Electronic & Electrical
Products Limited (Hong Kong) to confirm the respective rights and
liabilities of Nam Tai Electronic & Electrical Products Limited (Hong
Kong) and Namtai Electronic (Shenzhen) Co., Ltd. under an internal
restructuring.  
    On March 31, 2004, a Sale and Purchase Agreement was entered into
between Nam Tai Electronics, Inc. and Mr. Wong Toe Yeung regarding
purchasing the entire issued share capital of Jasper Ace Limited from
Mr. Wong Toe Yeung with the consideration of disposal of a 72.2% interest
in Mate Fair Group Limited, cash of $25 million and 2,389,974 shares
issued by Nam Tai Electronics, Inc.  
    On April 8, 2004, a Trademark License Agreement was entered into
between Nam Tai Electronics, Inc. and Nam Tai Electronic & Electrical
Products Limited for the use of certain Namtai trademarks. 56




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
    On April 15, 2004, a Deed of Indemnity was entered into between Nam
Tai Electronics, Inc., and Nam Tai Electronic & Electrical Products
Limited in favour of Nam Tai Electronic & Electrical Products Limited
regarding the Global Offering of 200,000,000 shares of HK$0.01 each of
Nam Tai Electronic & Electrical Products Limited.  
    On April 15, 2004, an Underwriting Agreement was entered into among
Nam Tai Electronics, Inc. as the selling shareholder and the Hongkong
and Shanghai Banking Corporation Limited, BNP Paribas Peregrine
Capital Limited, Nomura International (Hong Kong) Limited, Cazenove
Asia Limited, DBS Asia Capital Limited and VC CEF Capital Limited as
public offer underwriters regarding the public offering of 20,000,000
shares of HK$0.01 each of Nam Tai Electronic & Electrical Products
Limited.  
    On April 21, 2004, a Supplemental Agreement was entered into between
Nam Tai Electronics, Inc., and Mr. Wong Toe Yeung regarding to adjust
the consideration for purchasing entire issued share capital of Jasper
Ace Limited by canceling 973,210 common shares of Nam Tai Electronics,
Inc., issued to Top Scale Company Limited on April 21, 2004.  
    On April 22, 2004, an Underwriting Agreement was entered into among
Nam Tai Electronics, Inc. as the selling shareholder and the Hongkong
and Shanghai Banking Corporation Limited, BNP Paribas Peregrine
Capital Limited, Nomura International (Hong Kong) Limited, Cazenove
Asia Limited, DBS Asia Capital Limited and VC CEF Capital Limited as
international placing underwriters regarding the international placing
of 180,000,000 shares of HK$0.01 each of Nam Tai Electronic &
Electrical Products Limited.  
    On April 22, 2004, a Pricing Determination Agreement was entered into
among Nam Tai Electronics, Inc., Nam Tai Electronic & Electrical
Products Limited and the Hongkong and Shanghai Banking Corporation
Limited for determining the offering price of the shares of Nam Tai
Electronic & Electrical Products Limited to be HK$3.88 per share.  
    On April 22, 2004, a Stock Borrowing Agreement was entered into between
Nam Tai Electronics, Inc. and the Hongkong and Shanghai Banking
Corporation Limited regarding the Global Offering of 200,000,000
shares of HK$0.01 each of Nam Tai Electronic & Electrical Products
Limited.  
    On August 4, 2004, an Accession Agreement was entered into between
Welcome Success Technology Ltd. and Mr. Alain Jolivet in relation to
the transfer of entire interest in Stepmind to Remote Reward SAS and
became a party to the Shareholders Agreement entered into among
Nam Tai Electronics, Inc., AGF Innovation 3, AGF Innovation 4, AGF
Innovation 5, Mighty Wealth Group Limited, Remote Reward SAS, Mr.
Alain Jolivet and Mr. Andre Jolivet executed on November 28, 2003,
December 9, 2003 and December 10, 2003.  
    On August 18, 2004, an Escrow Agreement was entered into among Nam Tai
Electronics, Inc., Welcome Success Technology Ltd., Remote Reward SAS,
Johnson Stokes & Master, Mr. Andre Jolivet and Mr. Alain Jolivet in
relation to the disposal of 1,457,720 shares in Stepmind to Remote
Reward SAS with a consideration of Euros 4,253,301.98.  
    On August 19, 2004, a Subscription Agreement was entered into among
TCL Industries Holdings (HK) Limited, TCL International Holdings
Limited, Cheerful Asset Investments Limited, Jasper Ace Limited, Mate
Fair Group Limited, and TCL Communication Technology Holdings Limited
for subscribing 254,474,910 shares in TCL Communication Technology
Holdings Limited in a consideration of RMB131,283,020.  
    On September 20, 2004, a Deed of Assignment of Trademarks was entered
into between Nam Tai Electronics, Inc. and Namtai Electronic
(Shenzhen) Co., Ltd. for assigning Namtai & device trademarks to Nam
Tai Electronics, Inc.  
    Banking Facilities Letter from the Hongkong and Shanghai Banking
Corporation Limited to Nam Tai Group Management Limited on September
24, 2004 regarding the renewal of Overdraft Facility of HK$500,000,
Treasury Facilities of US$30,000,000 and Corporate Card of
HK$1,100,000.  
    On October 15, 2004, a Share Transfer Agreement was entered into
between J.I.C. Enterprises (Hong Kong) Limited and J.I.C. Technology
Company Limited for the disposal of the entire issued share capital of
Jetup Electronic (Shenzhen) Co., Ltd. to J.I.C. Technology Company
Limited for a consideration of HK$105,878,396. Exchange Controls There are no exchange control restrictions on payments of dividends, interest, or other
payments to nonresident holders of Nam Tais securities or on the conduct of our operations in Hong
Kong and Macao or where our principal executive offices are located in the British Virgin Islands,
where Nam Tai is incorporated. Other jurisdictions in which we conduct operations may have various
exchange controls. With respect to our China subsidiaries, with the exception of a requirement that
10% of profits be reserved for future developments, there are no restrictions on the payment of
dividends and the removal of dividends from China once all taxes are paid and assessed and losses,
if any, from previous years have been made good. We believe such restrictions will not have a
material effect on our liquidity or cash flow. 57




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Taxation United States Federal Income Tax Consequences The discussion below is for general information only and is not, and should not be interpreted
to be, tax advice to any holder of our common shares. Each holder or a prospective holder of our
common shares is urged to consult his, her or its own tax advisor. General This section is a general summary of the material United States federal income tax
consequences to U.S. Holders, as defined below, of the ownership and disposition of our common
shares as of the date of this report. This summary is based on the provisions of the Internal
Revenue Code of 1986, as amended, or the Code, the applicable Treasury regulations promulgated and
proposed thereunder, judicial decisions and current administrative rulings and practice, all of
which are subject to change, possibly on a retroactive basis. The summary applies to you only if
you hold our common shares as a capital asset within the meaning of Section 1221 of the Code. The
United States Internal Revenue Service, or the IRS, may challenge the tax consequences described
below, and we have not requested, nor will we request, a ruling from the IRS or an opinion of
counsel with respect to the United States federal income tax consequences of acquiring, holding or
disposing of our common shares. This summary does not purport to be a comprehensive description of
all the tax considerations that may be relevant to the ownership of our common shares. In
particular, the discussion below does not cover tax consequences that depend upon your particular
tax circumstances nor does it cover any state, local or foreign law, or the possible application of
United States federal estate or gift tax. You are urged to consult your own tax advisors
regarding the application of the United States federal income tax laws to your particular situation
as well as any state, local, foreign and the United States federal estate and gift tax consequences
of the ownership and disposition of the common shares. In addition, this summary does not take into
account any special United States federal income tax rules that apply to a particular holder of our
common shares, including, without limitation, the following:  
    a dealer in securities or currencies;  
    a trader in securities that elects to use a market-to-market method of accounting for its securities holdings;  
    a financial institution or a bank;  
    an insurance company;  
    a tax-exempt organization;  
    a person that holds our common shares in a hedging transaction or as part of a straddle or a conversion transaction;  
    a person whose functional currency for United States federal income tax purposes is not the U.S. dollar;  
    a person liable for alternative minimum tax;  
    a person that owns, or is treated as owning, 10% or more, by voting power or value, of our common shares; or  
    a person who receives our shares pursuant to the exercise of employee stock options or otherwise as compensation. For purposes of the discussion below, you are a U.S. Holder if you are a beneficial owner of
our common shares who or which is:  
    an individual United States citizen or resident alien of the United States (as specifically
defined for United States federal income tax purposes);  
    a corporation, or other entity treated as a corporation for United States federal income tax
purposes, created or organized in or under the laws of the United States or any State or
political subdivision thereof;  
    an estate whose income is subject to United States federal income tax regardless of its source; or  
    a trust (x) if a United States court can exercise primary supervision over the trusts
administration and one or more United States persons are authorized to control all substantial
decisions of the trust or (y) if it was in existence on August 20, 1996, was treated as a United
States person prior to that date and has a valid election in effect under applicable Treasury
regulations to be treated as a United States person. 58




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Distributions on Our Common Shares Subject to the passive foreign investment company, or PFIC, considerations discussed below,
the gross amount of any cash distribution or the fair market value of any property distributed that
you receive with respect to our common shares generally will be subject to tax as ordinary dividend
income to the extent such distribution does not exceed our current or accumulated earnings and
profits, or E&P, as calculated for United States federal income tax purposes. Such income will be
includable in your gross income on the date of receipt. Subject to certain limitations, dividends
paid to noncorporate U.S. Holders, including individuals, may be eligible for a reduced rate of
taxation if we are a qualified foreign corporation for U.S. federal income tax purposes. A
qualified foreign corporation includes (i) a foreign corporation that is eligible for the benefits
of a comprehensive income tax treaty with the United States that includes an exchange of
information program, and (ii) a foreign corporation if its stock with respect to which a dividend
is paid is readily tradable on an established securities market within the United States, but does
not include an otherwise qualified corporation that is a PFIC. We believe that we will be a
qualified foreign corporation for so long as we are not a PFIC and our common shares are considered
to be readily tradable on an established securities market within the United States. No assurances
can be made that our Companys status as a qualified foreign corporation will not change. To the
extent any distribution exceeds our E&P, such distribution will first be treated as a tax-free
return of capital to the extent of your adjusted tax basis in our common shares and will be applied
against and reduce such basis on a dollar-for-dollar basis (thereby increasing the amount of gain
and decreasing the amount of loss recognized on a subsequent disposition of such shares). To the
extent that such distribution exceeds your adjusted tax basis in our common shares, the distribution will be treated as capital gain. Because we are not a
United States corporation, no dividends-received deduction will be allowed to corporations with
respect to dividends paid by us. For United States foreign tax credit limitation purposes, dividends received on our common
shares will be treated as foreign source income and generally will be passive income, or in the
case of certain holders, financial services income. For taxable years beginning after December
31, 2006, dividends generally will be passive category income, or in the case of certain holders,
general category income. You may be eligible, subject to a number of complex limitations, to
claim a foreign tax credit in respect of foreign withholding taxes, if any, imposed on dividends
received on our common shares. The rules governing United States foreign tax credits are complex,
and we recommend that you consult your tax advisor regarding the applicability of such rules to
you. Sale, Exchange or Other Disposition of Our Common Shares Subject to the PFIC considerations discussed below, generally, in connection with the sale,
exchange or other taxable disposition of our common shares:  
    you will recognize capital gain or loss equal to the difference (if any) between:  
    the amount realized on such sale, exchange or other taxable disposition and
    your adjusted tax basis in such common shares (your adjusted tax basis in
the shares you hold generally will equal your U.S. dollar cost of such
 shares);  
    such gain or loss will be long-term capital gain or loss if your holding period for our common shares is more than
one year at the time of such sale or other disposition;
    such gain or loss will generally be treated as United States source for United States foreign tax credit purposes; and
    your ability to deduct capital losses is subject to limitations. PFIC Considerations A foreign corporation will be treated as a PFIC for United States federal income tax purposes
if, after applying relevant look-through rules with respect to the income and assets of
subsidiaries, 75% or more of its gross income consists of certain types of passive income or 50% or
more of the gross value of its assets is attributable to assets that produce passive income or are
held for the production of passive income. For this purpose, passive income generally includes
dividends, interest, royalties, rents (other that rents and royalties derived in the active conduct
of a trade or business), annuities and gains from assets that produce passive income. We presently
believe that we are not a PFIC and do not anticipate becoming a PFIC. This is, however, a factual
determination made on an annual basis and is subject to change. If we were to be classified as a
PFIC in any taxable year, (i) U.S. Holders would generally be required to treat any gain on sales
of our shares held by them as ordinary income and to pay an interest charge on the value of the
deferral of their United States federal income tax attributable to such gain and (ii) distributions
paid by us to our U.S. Holders could also be subject to an interest charge. In addition, we would
not provide information to our U.S. Holders that would enable them to make a qualified electing
fund election under which, generally, in lieu of the foregoing treatment, our earnings would be
currently included in their United States federal income. 59




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Backup Withholding and Information Reporting Payments, including dividends and proceeds of sales, in respect of our common shares that are
made in the United States or by a United States related financial intermediary will be subject to
United States information reporting rules. In addition, such payments may be subject to United
States federal backup withholding tax. You will not be subject to backup withholding provided that:  
    you are a corporation or other exempt recipient, or
    you provide your correct United States federal taxpayer identification
number and certify, under penalties of perjury, that you are not
subject to backup withholding. Amounts withheld under the backup withholding rules may be credited against your United States
federal income tax, and you may obtain a refund of any excess amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the IRS in a timely manner. BRITISH VIRGIN ISLANDS TAX CONSIDERATIONS Under the International Business Companies Act of the British Virgin Islands as currently in
effect, a holder of common equity, such as our common shares, who is not a resident of the British
Virgin Islands is exempt from British Virgin Islands income tax on dividends paid with respect to
the common equity and is not liable to the British Virgin Islands for income tax on gains realized
on sale or disposal of such shares. Furthermore, there are no capital gains, gift or inheritance
taxes levied by the British Virgin Islands on persons who are not residents of the British Virgin
Islands. The British Virgin Islands does not impose a withholding tax on dividends paid by a
company incorporated under the International Business Companies Act. Our common shares are not subject to transfer taxes, stamp duties or similar charges. There is
no income tax treaty or convention currently in effect between the United States and the British
Virgin Islands. Documents on Display Nam Tai Electronics, Inc. is subject to the information requirements of the Securities and
Exchange Act of 1934, and, in accordance with the Securities Exchange Act of 1934, Nam Tai
Electronics, Inc. files annual reports on Form 20-F within six months of its fiscal year end, and
submit other reports and information under cover of Form 6-K with the SEC. You may read and copy
this information at the SECs public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. Recent filings and reports are also available free of charge though the EDGAR electronic
filing system at www.sec.gov. You can also request copies of the documents, upon payment of a
duplicating fee, by writing to the public reference section of the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference room or accessing
documents through EDGAR. As a foreign private issuer, Nam Tai Electronics, Inc. is exempt from the
rules under the Securities Exchange Act of 1934 prescribing the furnishing and content of proxy
statements to shareholders. 
 Item 11.Quantitative and Qualitative Disclosure About Market Risk Currency Fluctuations We sell a majority of our products in
US dollars and pay for our material components in
Japanese yen, U.S. dollars, Hong Kong dollars, and Chinese renminbi. We pay labor costs and
overhead expenses in Chinese renminbi, the currency of China (the basic unit of which is the yuan),
Hong Kong dollars and Japanese yen. The exchange rate of the Hong Kong dollar to the U.S. dollar
has been fixed by the Hong Kong government since 1983 at approximately HK$7.80 to US$1.00, through
the currency-issuing banks in Hong Kong and, accordingly, has not in the past presented a currency
exchange risk. This could change in the future if those in Hong Kong arguing for a floating
currency system prevail in the ongoing debate over whether to continue to peg the Hong Kong dollar
to the US dollar. We believe our most significant foreign exchange risk results from material purchases made in
Japanese yen. Approximately 8%, 16% and 6%, respectively, of our material costs have been in
Japanese yen during the years ended December 31, 2002, 2003, and 2004. Sales made in Japanese yen
account for less than 11% of sales for the years ended December 31, 2002, 2003 and 2004. Our
business and operating results could be materially and adversely affected in the event of a severe
increase in the value of the Japanese yen to the US dollar at a time when our sales made in
Japanese yen are insufficient to cover our material purchases in Japanese yen. Beginning on December 1, 1996, the Chinese renminbi became fully convertible under the current
accounts. There are no restrictions on trade-related foreign exchange receipts and disbursements in
China. Capital account foreign exchange receipts and disbursements are subject to control, and
organizations in China are restricted in foreign currency transactions that must take place through
designated banks. 60




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We may elect to hedge our currency
exchange risk when we judge that such action may be required. In
an attempt to lower the costs of expenditures in foreign currencies, we may enter into forward
contracts or option contracts to buy or sell foreign currency(ies) against the U.S. dollar through
one of our banks. As a result, we may suffer losses resulting from the fluctuation between the buy
forward exchange rate and the sell forward exchange rate, or from the price of the option premium. As of December 31, 2004, we held no option or future contracts and during the year we did not
purchase or sell any commodity or currency options. We are continuing to review our hedging
strategy and there can be no assurance that we will not suffer losses in the future as a result of
hedging activities. Foreign Currency Risk As of December 31, 2004, we had no open forward contracts or option contracts to purchase or
sell foreign currencies. Cash on hand at December 31, 2004 of $160,649,000 was held in the following currencies. EquivalentU.S. DollarHoldingsDecember 31, 2004Japanese yen
    
    
    5,554,000United States dollars
    
    
    131,561,000Hong Kong dollar
    
    
    5,823,000Chinese renminbi
    
    
    17,700,000Macao Pataca
    
    
    11,000
 Interest Rate Risk Short-term interest rate risk Our interest expenses and income are sensitive to changes in interest rates. All of our cash
reserves and short-term borrowings are subject to interest rate changes. Cash on hand of $160.6
million as of December 31, 2004 was invested in short-term interest-bearing investments having a
maturity of three months or less. As such, interest income will fluctuate with changes in short-term interest
rates. In 2004, we had $1.1 million in interest income and $195,000 in interest
expense. As of December 31, 2004, we had utilized approximately $3.4 million of our credit facilities,
including $2.1 million in short-term notes payable resulting in minimal interest rate risk. Long-term interest rate risk As of December 31, 2004, we had
$8.0 million in long-term bank borrowing, including the current
portion of $2.9 million. Our long-term bank borrowing consisted
of a $4.5 million term loan obtained in May 2002, has a
term of four years and bear interest at a rate of 1.5% and subsequently changed to 0.75% effective
August 2004 over three months LIBOR repayable in 16 quarterly installments of $281,250 beginning
August 2002. The outstanding balance as of December 31, 2004 was $1.7 million. A $1.6 million term
loan obtained in April 2004 has a term of four years and bears interest at a rate of 0.75% over
three months LIBOR repayable in 16 quarterly installments of $100,000 beginning July 2004. The
outstanding balance as of December 31, 2004 was $1.4 million. A $3.6 million term loan obtained
in June 2004 has a term of four years and bears interest at a rate of 0.75% over three months LIBOR
repayable in 16 quarterly installments of $225,000 beginning September, 2004. The outstanding
balance as of December 31, 2004 was $3.2 million. A $1.8 million term loan obtained in December
2004 has a term of four years and bears interest at a rate of 0.75% over three months LIBOR
repayable in 16 quarterly installments of $112,500 beginning March 2005. We obtained a seven-year $15.0 million term loan in the fourth quarter of 2001 with a fixed
rate of interest of 5.05% for the first four years and 1% over the SIBOR rate for the last three
years. The term loan had an outstanding balance of $12.9 million as of December 31, 2002. We repaid
this term loan on January 3, 2003. 
 Item 12.Description of Securities Other Than Equity Securities Not applicable 61




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PART II 
 Item 13.Defaults, Dividend Arrearages and Delinquencies Not applicable 
 Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds Not applicable 
 Item 15.Controls and Procedures Evaluation of Disclosure Controls and Procedures As required by Rule 13a-14 under the Securities Exchange Act of 1934, as of December 31, 2004,
the Company carried out an evaluation of the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the
Securities Exchange Act of 1934). This evaluation was carried out under the supervision and with
the participation of the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer. Based upon that evaluation, the Companys controls and procedures were
designed and provided reasonable assurance of preventing errors and irregularities. Disclosure controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in the Companys reports filed or submitted under
the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls
and procedures include controls and procedures designed to ensure that information required to be
disclosed in Company reports filed under the Exchange Act is accumulated and communicated to
management, including the Companys Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding disclosures. The Companys management have
evaluated the effectiveness of the Companys disclosure controls and procedures as of the end of
the period covered by this report and have concluded that the Companys disclosure controls and
procedures were effective. The Company has confidence in its internal controls and procedures and has expanded its
efforts to develop and improve its controls. Nevertheless, the Companys management, including the
Chief Executive Officer and Chief Financial Officer, does not expect that the Companys disclosure
procedures and controls, or its internal controls, will necessarily prevent all error or
intentional fraud. An internal control system, no matter how well-conceived and operated, can
provide only reasonable, but not absolute, assurance that the objectives of such internal controls
are met. Further, the design of an internal control system must reflect the fact that the Company
is subject to resource constraints, and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all internal control systems, no evaluation of
controls can provide absolute assurance that all internal control issues or instances of fraud, if
any, within the Company be detected. Changes in Internal Controls There have been no significant changes in the Companys internal controls or in other factors
that could significantly affect internal controls subsequent to the date the Company carried out
this evaluation. 
 Item 16.[Reserved] 
 Item 16 A. Audit Committee Financial Expert The Companys Board of Directors has determined that one member of the Audit Committee, Mark
Waslen, qualifies as an audit committee financial expert as defined by Item 401(h) of Regulation
S-K, adopted pursuant to the Securities Exchange Act of 1934. Mr. Waslen has a degree in Accounting
and is a C.F.A., C.A. and a C.P.A. In addition to serving in various financial positions, including
Nam Tai Group Financial Controller from 1990 to 1995 and Treasurer from 1998 to 1999, at Nam Tai,
Mr. Waslen has worked at Peat Marwick Thorne, Deloitte Touche Tohmatsu and BME+ Partners Chartered
Accountants. All three members of the audit committee, Messrs. Waslen, Chu and Lo, are independent
non-executive directors. 62




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##### Table of Contents



Item 16 B. Code of Ethics The Company has adopted a Code of Ethics for the Chief Executive Officer and Chief Financial
Officer, which applies to the Companys principal executive officers and to its principal financial
and accounting officers. In July 2004, the Code of Ethics was revised to apply to all employees.
A copy of the revised Code of Ethics is attached as Exhibit 14.1 to this Annual Report on Form
20-F. These codes have been posted on our website, which is located at
http://www.namtai.com/corpgov/corpgov.htm. The contents of this website address, other
than the corporate governance guidelines, the code of ethics and committee charters, are not a part
of this Form 20-F. Stockholders may request a free copy in print form from: Pan Pacific I.R. Ltd.
Attention : Investor Relations Office
Suite 1790 - 999 W. Hastings Street
Vancouver, BC
Canada V6C 2W2
Toll Free Telephone : 1-800-661-8831 
 Item 16 C. Principal Accountant Fees and Services Deloitte Touche Tohmatsu has served as our independent public accountant for each of the
fiscal years in the three-year period ended December 31, 2004, for which audited financial
statements appear in this annual report on Form 20-F. The auditor is elected annually at the Annual
General Meeting. The Audit Committee will propose to the Annual General Meeting convening on June
6, 2005 that Deloitte Touche Tohmatsu be elected as the auditor for
2005. The following table presents the aggregate fees for professional services and other services
rendered by Deloitte Touche Tohmatsu to us in 2004 and 2003. 2004
    
    
    2003US$000
    
    
    US$000Audit Fees(1)
    
    
    702
    
    
    
    271Audit-related Fees(2)
    
    
    21
    
    
    
    1Tax Fees(3)
    
    
    3
    
    
    
    11All Other Fees(4)
    
    
    15
    
    
    
    8Total
    
    
    741
    
    
    
    291
    (2) Audit-related Fees consist of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of our financial statements or that
are traditionally performed by the external auditor. (3) Tax Fees include fees billed for tax compliance services, including the preparation of
original and amended tax returns and claims for refund; tax consultations, such as assistance and
representation in connection with tax audits and appeals, tax advice related to mergers and
acquisitions, transfer pricing, and requests for rulings or technical advice from tax authorities;
tax planning services; and expatriate tax compliance, consultation and planning services. (4) All Other Fees includes business advisory service fee. 63




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Audit Committee Pre-approval Policies and Procedures The Audit Committee of our Board of Directors is responsible, among other matters, for the
oversight of the external auditor subject to the relevant regulations of the SEC and NYSE. The
Audit Committee has adopted a policy, or the Policy, regarding pre-approval of audit and
permissible non-audit services provided by our independent auditors. Under the Policy, the Chairman of the Audit Committee is delegated the authority to grant
pre-approvals in respect of all auditing services including non-audit service, but excluding those
services stipulated in Section 201 Service Outsider the Scope of Practice of Auditors. Moreover,
if the Audit Committee approves an audit service within the scope of the engagement of the audit
service, such audit service shall be deemed to have been pre-approved. The decisions of the
Chairman of the Audit Committee made under delegation authority to pre-approve an activity shall be
presented to the Audit Committee at each of its scheduled meetings. Requests or applications to provide services that require specific approval by the Audit
Committee are submitted to the Audit Committee by both the external auditor and the Chief Financial
Officer. During 2003 and 2004, services provided to us by Deloitte Touche Tohmatsu representing less
than 49.6% and 0.0%, respectively, of the total non-audit service fees were approved by the Audit Committee pursuant to the de
minima exception to the pre-approval requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01
of Regulation S-X. 
 Item 16 D. Purchases of Equity Securities by the Issuer and Affiliated Purchasers Not applicable 
 PART III 
 Item 17.Financial Statements Not Applicable 
 Item 18.Financial Statements INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors Reports
    
    F-2Consolidated Statements of Income for the years ended December 31, 2002, 2003 and 2004
    
    F-3Consolidated Balance Sheets as of December 31, 2003 and 2004
    
    F-4Consolidated
Statements of Shareholders Equity and Comprehensive Income for the years ended December 31, 2002, 2003 and 2004
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004
    
    F-6  F-7Notes to Consolidated Financial Statements
    
    F-8  F-36
 The information required within the schedules for which provisions are made in the applicable
accounting regulations of the Securities and Exchange Commission is either not applicable or is
included in the notes to the Consolidated Financial Statements. 64




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##### Table of Contents



Item 19Exhibits. The following exhibits are filed as part of this annual report: ExhibitNumber
    
    DESCRIPTION1.1
    
    Memorandum and Articles of Association, as amended on June 26, 2003.*4.1
    
    Purchase Agreement entered into between Citigroup Global Markets
Limited and Nam Tai Electronics, Inc. on August 22, 2003 for the
sale of 3% convertible notes of TCL International Holdings Ltd. at
an aggregate price of HK$39,555,068.49 (approximately $5.03
million).*4.2
    
    Agreement entered into between J.I.C. Technology Company Limited and
Glory Gate Enterprises Limited on June 28, 2003 for the disposal of
transformers operation to Glory Gate Enterprises Limited for
approximately $2.4 million.*4.3
    
    Equity Interest Transfer Agreement between Nam Tai Electronic &
Electrical Products Limited HK and Nam Tai Electronic & Electrical
Products Limited July 3, 2003.4.4
    
    Construction Agreement, with commencement date of September 23, 2003, entered into between Namtai Electronic (Shenzhen)
Co. Ltd. and Takasago Thermal Engineering (Hong Kong) Co. Ltd. on October 28, 2003 for the construction of new factory
premises.*4.5
    
    An Investment Agreement and Shareholders Agreement entered into among Mr. André Jolivet, Mr. Alain Jolivet, Remote
Reward SAS, AGF Private Equity, Mighty Wealth Group Limited and Nam Tai Electronics, Inc. on December 9, 2003 for
acquiring an 11.33% equity interest in Stepmind with a consideration of approximately $5.3 million.*4.6
    
    A Supplemental Agreement entered into among Mr. André Jolivet, Mr. Alain Jolivet, Remote Reward SAS, AGF Private
Equity, Mighty Wealth Group Limited and Nam Tai Electronics, Inc. on January 2, 2004 for consenting to the release of
the second phase of payment and increasing capital investment in Stepmind should Stepmind fulfill certain conditions.*4.7
    
    Land Title Rights Issued by Shenzhen Municipal Bureau of Planning and Land Resources February 16, 2004.4.8
    
    An Agreement entered into between Nam Tai Group Management limited and Frontier Profit Inc. on March 10, 2004 for
selling Flat A, 22nd Floor, Tower 2 and Car Parking Space No. A86, The Leighton Hill, 28 Broadwood Road, Happy Valley,
Hong Kong to Frontier Profit Inc.*4.9
    
    A Memorandum of Understanding
signed by Namtai Electronic (Shenzhen) Co., Ltd. and Nam Tai Electronic & Electrical
Products Limited (Hong Kong) on March 26, 2004 to confirm the respective rights and liabilities of Nam Tai Electronic &
Electrical Products Limited (Hong Kong) and Namtai Electronic
(Shenzhen) Co., Ltd. under an internal restructuring.4.10
    
    A Sale and Purchaser Agreement entered into between Nam Tai Electronics, Inc. and Mr. Wong Toe Yeung on March 31, 2004
regarding purchasing the entire issued share capital of Jasper Ace Limited from Mr. Wong Toe Yeung with the
consideration of disposal 72.2% interest in Mate Fair Group Limited, cash of $25 million and 2,389,974 shares issued by
Nam Tai Electronics, Inc.4.11
    
    A Trademark License Agreement entered into between Nam Tai Electronics, Inc. and Nam Tai Electronic & Electrical
Products Limited on April 8, 2004 for the use of certain Namtai trademarks.4.12
    
    A Deed of Indemnity entered into between Nam Tai Electronics, Inc, and Nam Tai Electronic & Electrical Products Limited
on April 15, 2004 in favour of Nam Tai Electronic & Electrical Products Limited regarding the Global Offering of
200,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products Limited.4.13
    
    An Underwriting Agreement entered into among Nam Tai Electronics, Inc. as the selling shareholders and the Hongkong and
Shanghai Banking Corporation Limited, BNP Paribas Peregrine Capital Limited, Nomura International (Hong Kong) Limited,
Cazenove Asia Limited, BDS Asia Capital Limited and VC CEF Capital Limited as public offer underwriters on April 15,
2004 regarding the public offering of 20,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products
Limited.4.14
    
    A Supplemental Agreement entered into between Nam Tai Electronics, Inc, and Mr. Wong Toe Yeung on July 27, 2004
to adjust the consideration for purchasing the entire issued share capital of Jasper Ace Limited by canceling
973,210 common shares of Nam Tai Electronics, Inc, issued to Top Scale Company Limited on April 21, 2004.4.15
    
    An Underwriting Agreement entered into among Nam Tai Electronics, Inc. as the selling shareholders and the Hongkong and
Shanghai Banking Corporation Limited, BNP Paribas Peregrine Capital Limited, Nomura International (Hong Kong) Limited,
Cazenove Asia Limited, BDS Asia Capital Limited and VC CEF Capital Limited as international placement underwriters on
April 22, 2004 regarding the international placing of 180,000,000 shares of HK$0.01 each of Nam Tai Electronic &
Electrical Products Limited.4.16
    
    A Pricing Determination Agreement entered into among Nam Tai Electronics, Inc., Nam Tai Electronic & Electrical
Products Limited and the Hongkong and Shanghai Banking Corporation Limited on April 22, 2004 for determining the
offering price of the shares of Nam Tai Electronic & Electrical Products Limited to be HK$3.88 per share.4.17
    
    A Stock Borrowing Agreement entered into between Nam Tai Electronics, Inc. and the Hongkong and Shanghai Banking
Corporation Limited on April 22, 2004 regarding the Global Offering of 200,000,000 shares of HK$0.01 each of Nam Tai
Electronic & Electrical Products Limited.




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ExhibitNumber
    
    DESCRIPTION4.18
    
    Amended 2001 Option Plan July 30, 20044.19
    
    An Accession Agreement entered into between Welcome Success Technology Ltd. and Mr. Alain Jolivet on August 4, 2004 in
relation to the transfer of entire interest in Stepmind to Remote Reward SAS and who became a party to the Shareholders
Agreement which entered into among Nam Tai Electronics, Inc. , AGF Innovation 3, AGF Innovation 4, AGF Innovation 5,
Mighty Wealth Group Limited, Remote Reward SAS, Mr. Alain Jolivet and Mr. Andre Jolivet executed on November 278, 2003,
December 9, 2003 and December 10, 2003.4.20
    
    An Escrow Agreement entered into among Nam Tai Electronics, Inc., Welcome Success Technology Limited, Remote Reward
SAS, Johnson Stokes & Master, Mr. Andre Jolivet and Mr. Alain Jolivet on August 18, 2004 in relation to the disposal of
1,457,720 shares in Stepmind to Remote Reward SAS with a consideration of Euros 4,253,301.98.4.21
    
    A subscription Agreement entered into among TCL Industries Holdings (HK) Limited, TCL International holdings Limited,
Cheerful Asset Investments Limited, Jasper Ace Limited, Mate Fair Group Limited, and TCL Communication Technology
Holdings Limited on August 19, 2004 for subscribing 254,474,910 shares in TCL Communication Technology Holdings Limited
in a consideration of RMB131,283,020.4.22
    
    A Deed of Assignment of Trademarks entered into between Nam Tai Electronics, Inc. and Namtai Electronic (Shenzhen) Co.
Ltd. on September 20, 2004 for assigning Namtai & device trademarks to Nam Tai Electronics, Inc.4.23
    
    A Banking Facilities Letter from the Hongkong and Shanghai Banking Corporation Limited to Nam Tai Group Management
Limited on September 24, 2004 regarding the renewal of Overdraft Facility of HK$500,000, Treasury Facilities of
US$30,000,000 and Corporate Card of HK$1,100,000.4.24
    
    A Share Transfer Agreement entered into between J.I.C. Enterprises (Hong Kong) Limited and J.I.C. Technology Company
Limited on October 15, 2004 for the disposal of the entire issued share capital of Jetup Electronic (Shenzhen) Co. Ltd.
to J.I.C. Technology Company Limited for a consideration of HK$105,878,396.8.1
    
    Diagram of Companys
subsidiaries. See Page 24 of this report.10.1
    
    Letter from MCW. Todman & Co. dated February 10, 2003. **10.2
    
    Letter from MCW. Todman & Co. dated February 17, 2003. **12.1
    
    Certification pursuant to Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.12.2
    
    Certification pursuant to Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.14.1
    
    Code of Ethics.23.1
    
    Consent of Deloitte Touche Tohmatsu.99.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Previously filed with the registrants Form 20-F filed with the SEC on March 10, 2004.**
    
    Previously filed with the registrants Form 20-F filed with the SEC on February 28, 2003.






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NAM TAI ELECTRONICS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS  
 Page(s)Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Income for the years ended
December 31, 2002, 2003 and 2004
    
    
    F-3Consolidated Balance Sheets as of December 31, 2003 and 2004
    
    
    F-4Consolidated Statements of Shareholders Equity and Comprehensive Income for the years ended
December 31, 2002, 2003 and 2004
    
    
    F-5Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2003 and 2004
    
    
    F-6  F-7Notes to Consolidated Financial Statements
    
    
    F-8  F-36
  F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Nam Tai Electronics, Inc.: We have audited the accompanying consolidated balance sheets of Nam Tai Electronics, Inc.
and subsidiaries as of December 31, 2003 and 2004, and the related consolidated statements
of income, shareholders equity and comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2004. 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit includes consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. Accordingly, we express no such
opinion. Our audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Nam Tai Electronics, Inc. and subsidiaries
at December 31, 2003 and 2004, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America. DELOITTE TOUCHE TOHMATSU
Certified Public Accountants
Hong Kong
March 4, 2005 F-2




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NAM TAI ELECTRONICS, INC. 
 CONSOLIDATED STATEMENTS OF INCOME
(In thousands of US dollars, except per share data) Year ended December 31,2002
    
    
    2003
    
    
    2004Net sales - third parties
    
    $
    228,167
    
    
    $
    385,524
    
    
    $
    499,680Net sales - related party
    
    
    7,849
    
    
    
    20,782
    
    
    
    34,181Total net sales
    
    
    236,016
    
    
    
    406,306
    
    
    
    533,861Cost of sales
    
    
    197,956
    
    
    
    340,016
    
    
    
    457,385Gross profit
    
    
    38,060
    
    
    
    66,290
    
    
    
    76,476Selling, general and administrative expenses
    
    
    17,983
    
    
    
    24,866
    
    
    
    28,053Research and development expenses
    
    
    2,686
    
    
    
    4,037
    
    
    
    5,045Impairment of goodwill
    
    
    339
    
    
    
    
    
    
    
    Total operating expenses
    
    
    21,008
    
    
    
    28,903
    
    
    
    33,098Income from operations
    
    
    17,052
    
    
    
    37,387
    
    
    
    43,378Other (expenses) income, net
    
    
    (6,859
    )
    
    
    2,899
    
    
    
    17,283Gain on partial disposal of subsidiaries
    
    
    17
    
    
    
    1,838
    
    
    
    77,320Unrealized loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    (58,316
    )Interest income
    
    
    799
    
    
    
    788
    
    
    
    1,110Interest expense
    
    
    (790
    )
    
    
    (121
    )
    
    
    (195
    )Income before income taxes and minority interests
    
    
    10,219
    
    
    
    42,791
    
    
    
    80,580Income taxes
    
    
    (773
    )
    
    
    (399
    )
    
    
    (879
    )Income
before minority interests and equity in income (loss) of affiliated
companies
    
    
    9,446
    
    
    
    42,392
    
    
    
    79,701Minority interests
    
    
    (164
    )
    
    
    (1,067
    )
    
    
    (6,010
    )Equity in income (loss) of affiliated companies
    
    
    10,741
    
    
    
    498
    
    
    
    (6,806
    )Income after
minority interests and equity in income (loss) of affiliated
companies
    
    
    20,023
    
    
    
    41,823
    
    
    
    66,885Discontinued operation
    
    
    
    
    
    
    1,979
    
    
    
    Net income
    
    $
    20,023
    
    
    $
    43,802
    
    
    $
    66,885Basic earnings per share
    
    $
    0.57
    
    
    $
    1.09
    
    
    $
    1.57Diluted earnings per share
    
    $
    0.57
    
    
    $
    1.07
    
    
    $
    1.57
 See accompanying notes to consolidated financial statements. F-3




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##### Table of Contents



NAM TAI ELECTRONICS, INC. 
 CONSOLIDATED BALANCE SHEETS
(In thousands of US dollars, except share data) December 31,2003
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    61,827
    
    
    $
    160,649Marketable securities
    
    
    
    
    
    
    41,906Accounts receivable, less allowance for doubtful accounts of $119
and $157 at December 31, 2003 and 2004, respectively
    
    
    62,090
    
    
    
    90,362Amount due from a related party
    
    
    2,707
    
    
    
    66Inventories
    
    
    27,032
    
    
    
    23,096Prepaid expenses and other receivables
    
    
    9,799
    
    
    
    12,087Income taxes recoverable
    
    
    4,922
    
    
    
    6,566Total current assets
    
    
    168,377
    
    
    
    334,732Investment in an affiliated company
    
    
    9,855
    
    
    
    3,049Investments, at cost
    
    
    16,366
    
    
    
    Property, plant and equipment, net
    
    
    77,647
    
    
    
    97,441Deposits for property, plant and equipment
    
    
    3,327
    
    
    
    7,701Goodwill, net
    
    
    20,137
    
    
    
    15,831Intangible assets, net
    
    
    551
    
    
    
    459Other assets
    
    
    1,435
    
    
    
    1,260Total assets
    
    $
    297,695
    
    
    $
    460,473LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Notes payable
    
    $
    1,879
    
    
    $
    2,080Long term
bank loans - current portion
    
    
    1,125
    
    
    
    2,875Accounts payable
    
    
    55,674
    
    
    
    89,570Accrued expenses and other payables
    
    
    13,633
    
    
    
    16,661Dividend payable
    
    
    2,062
    
    
    
    5,120Income taxes payable
    
    
    530
    
    
    
    183Total current liabilities
    
    
    74,903
    
    
    
    116,489Deferred income taxes
    
    
    78
    
    
    
    Long term
bank loans - non-current portion
    
    
    1,688
    
    
    
    5,163Total liabilities
    
    
    76,669
    
    
    
    121,652Minority interests
    
    
    3,908
    
    
    
    33,768Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common
shares (2004: $0.01 par value - authorized 200,000,000 shares)
    
    
    412
    
    
    
    426Additional paid-in capital
    
    
    206,845
    
    
    
    241,756Retained earnings
    
    
    9,863
    
    
    
    56,324Accumulated other comprehensive (loss) income
    
    
    (2
    )
    
    
    6,547Total shareholders equity
    
    
    217,118
    
    
    
    305,053Total liabilities and shareholders equity
    
    $
    297,695
    
    
    $
    460,473
 See accompanying notes to consolidated financial statements. F-4




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##### Table of Contents



NAM TAI ELECTRONICS, INC. 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
(In thousands of US dollars, except share and per share data) Accumulated
    
    
    TotalCommon
    
    
    Common
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    Share-Shares
    
    
    Shares
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    holders
    
    
    ComprehensiveOutstanding
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income (loss)
    
    
    Equity
    
    
    Income (loss)Balance at January 1, 2002
    
    
    31,205,820
    
    
    $
    312
    
    
    $
    111,333
    
    
    $
    57,691
    
    
    $
    15
    
    
    $
    169,351Share buy-back program
    
    
    (592,800
    )
    
    
    (6
    )
    
    
    
    
    
    
    (3,522
    )
    
    
    
    
    
    
    (3,528
    )Share redemption
    
    
    (509,181
    )
    
    
    (5
    )
    
    
    
    
    
    
    (3,120
    )
    
    
    
    
    
    
    (3,125
    )Shares issued on exercise of public warrants
    
    
    4,381,965
    
    
    
    44
    
    
    
    29,753
    
    
    
    
    
    
    
    
    
    
    
    29,797Shares issued on exercise of options
    
    
    1,573,200
    
    
    
    15
    
    
    
    6,658
    
    
    
    
    
    
    
    
    
    
    
    6,673Advisors options (note 11b)
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,023
    
    
    
    
    
    
    
    20,023
    
    
    $
    20,023Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    (17
    )
    
    
    (17
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    20,006Cash dividends ($0.49 per share, including
special dividend of $0.33 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,056
    )
    
    
    
    
    
    
    (17,056
    )Balance at December 31, 2002
    
    
    36,059,004
    
    
    
    360
    
    
    
    147,754
    
    
    
    54,016
    
    
    
    (2
    )
    
    
    202,128Shares issued on exercise of options
    
    
    1,425,600
    
    
    
    14
    
    
    
    8,494
    
    
    
    
    
    
    
    
    
    
    
    8,508Issue of stock dividend
    
    
    3,746,668
    
    
    
    38
    
    
    
    50,333
    
    
    
    (50,371
    )
    
    
    
    
    
    
    Compensation expense (note 3(b)(iv))
    
    
    
    
    
    
    
    
    
    
    264
    
    
    
    
    
    
    
    
    
    
    
    264Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,802
    
    
    
    
    
    
    
    43,802
    
    
    $
    43,802Cash dividends ($1.00 per share, including
special dividend of $0.80 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,584
    )
    
    
    
    
    
    
    (37,584
    )Balance at December 31, 2003
    
    
    41,231,272
    
    
    
    412
    
    
    
    206,845
    
    
    
    9,863
    
    
    
    (2
    )
    
    
    217,118Shares issued on exercise of options
    
    
    16,500
    
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    72Shares issued on acquisition of a subsidiary
    
    
    2,389,974
    
    
    
    24
    
    
    
    58,769
    
    
    
    
    
    
    
    
    
    
    
    58,793Cancellation of shares issued on acquisition
of a subsidiary
    
    
    (973,210
    )
    
    
    (10
    )
    
    
    (23,930
    )
    
    
    
    
    
    
    
    
    
    
    (23,940
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,885
    
    
    
    
    
    
    
    66,885
    
    
    $
    66,885Unrealized gain of marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,549
    
    
    
    6,549
    
    
    
    6,549Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    73,434Cash dividends ($0.48 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,424
    )
    
    
    
    
    
    
    (20,424
    )Balance at December 31, 2004
    
    
    42,664,536
    
    
    $
    426
    
    
    $
    241,756
    
    
    $
    56,324
    
    
    $
    6,547
    
    
    $
    305,053
 See accompanying notes to consolidated financial statements. F-5




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##### Table of Contents



NAM TAI ELECTRONICS, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands of US dollars) Year ended December 31,2002
    
    
    2003
    
    
    2004Cash flows from operating activities:Net income
    
    $
    20,023
    
    
    $
    43,802
    
    
    $
    66,885Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization of property, plant and equipment
    
    
    10,397
    
    
    
    12,172
    
    
    
    13,924Amortization of intangible assets
    
    
    222
    
    
    
    92
    
    
    
    92Loss (gain) on disposal of property, plant and equipment
    
    
    977
    
    
    
    (6
    )
    
    
    347Loss (gain) on disposal of other assets
    
    
    21
    
    
    
    
    
    
    
    (19
    )Loss on disposal of convertible notes
    
    
    
    
    
    
    102
    
    
    
    Loss on disposal of investment
    
    
    
    
    
    
    
    
    
    
    67Realized gain on marketable securities - trading
    
    
    (642
    )
    
    
    
    
    
    
    Impairment of goodwill - business acquired from Micro Business Systems
Industries Company Limited (MBS)
    
    
    339
    
    
    
    
    
    
    
    Unrealised loss on marketable securities TCL
Communication Technology Holdings Limited (TCL Communication)
    
    
    
    
    
    
    
    
    
    
    58,316Release of unamortized goodwill of an affiliated company -
Mate Fair Group Limited (Mate Fair)
    
    
    520
    
    
    
    
    
    
    
    Gain on disposal of a subsidiary and related intangible assets -
BPC (Shenzhen) Co. Ltd (BPC)
    
    
    (77
    )
    
    
    
    
    
    
    Gain on disposal of a subsidiary - Jieyao Electronics (Shenzhen) Co., Ltd.
(Jieyao)
    
    
    
    
    
    
    (1,979
    )
    
    
    Gain on partial disposal of a subsidiary - J.I.C. Technology Company
Limited (JIC Technology)
    
    
    
    
    
    
    (1,838
    )
    
    
    (6,249
    )Gain on partial disposal of a subsidiary - Nam Tai Electronic & Electrical
Products Limited (NTEEP)
    
    
    
    
    
    
    
    
    
    
    (71,071
    )Loss on reverse merger of subsidiaries - J.I.C. Group (B.V.I.) Limited
and its subsidiaries (JIC Group)
    
    
    2,655
    
    
    
    
    
    
    
    Compensation cost on transfer of interest in a subsidiary - Namtek
Software Development Company Limited (Namtek Software)
    
    
    
    
    
    
    509
    
    
    
    Amortization of advisors warrants and options
    
    
    10
    
    
    
    
    
    
    
    Share redemption and dividend withheld in settlement of a receivable
- Tele-Art, Inc. (Tele-Art)
    
    
    (3,519
    )
    
    
    
    
    
    
    Equity in (income) loss of affiliated companies less dividend received
    
    
    (285
    )
    
    
    (498
    )
    
    
    6,806Dividend income
    
    
    
    
    
    
    
    
    
    
    (15,913
    )Deferred income taxes
    
    
    (39
    )
    
    
    (34
    )
    
    
    (78
    )Minority interests
    
    
    164
    
    
    
    1,067
    
    
    
    6,010Changes in current assets and liabilities (net of effects of acquisitions
and disposals):Proceeds from marketable securities - trading
    
    
    10,147
    
    
    
    
    
    
    
    Increase in accounts receivable
    
    
    (8,531
    )
    
    
    (11,146
    )
    
    
    (28,272
    )(Increase) decrease in amount due from a related party
    
    
    
    
    
    
    (2,707
    )
    
    
    2,641(Increase) decrease in inventories
    
    
    (7,625
    )
    
    
    (8,554
    )
    
    
    3,936Decrease (increase) in prepaid expenses and other receivables
    
    
    496
    
    
    
    (3,027
    )
    
    
    2,654Decrease (increase) in income taxes recoverable
    
    
    498
    
    
    
    (4,067
    )
    
    
    (1,644
    )(Decrease) increase in notes payable
    
    
    (562
    )
    
    
    894
    
    
    
    201Increase in accounts payable
    
    
    10,816
    
    
    
    17,971
    
    
    
    33,896Increase in accrued expenses and other payables
    
    
    6,151
    
    
    
    1,189
    
    
    
    3,028Increase (decrease) in income taxes payable
    
    
    112
    
    
    
    330
    
    
    
    (347
    )Decrease in amount due to a related party
    
    
    (2,766
    )
    
    
    
    
    
    
    Total adjustments
    
    
    19,479
    
    
    
    470
    
    
    
    8,325Net cash provided by operating activities
    
    $
    39,502
    
    
    $
    44,272
    
    
    $
    75,210
 F-6




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##### Table of Contents



NAM TAI ELECTRONICS. INC. CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands of US dollars) Year ended December 31,2002
    
    
    2003
    
    
    2004Cash flows from investing activities:Purchase of property, plant and equipment
    
    $
    (18,485
    )
    
    $
    (17,053
    )
    
    $
    (38,611
    )Increase in deposits for property, plant and equipment
    
    
    
    
    
    
    (3,103
    )
    
    
    (4,374
    )Prepayment for long term investment
    
    
    
    
    
    
    (5,277
    )
    
    
    Increase in other assets
    
    
    (25
    )
    
    
    (24
    )
    
    
    (37
    )Acquisition of an affiliated company - Alpha Star
    
    
    
    
    
    
    (10,000
    )
    
    
    Acquisition of long term investments - TCL Corporation/
iMagic Infomedia Technology Limited
    
    
    (11,968
    )
    
    
    (384
    )
    
    
    (Acquisition) proceeds from disposal of convertible notes - TCL
International Holdings Limited
    
    
    (5,128
    )
    
    
    5,026
    
    
    
    Acquisition of additional shares in subsidiaries, net of cash acquired
- JIC Group and Mate Fair
    
    
    (436
    )
    
    
    
    
    
    
    Acquisition of marketable securities - TCL Communication
    
    
    
    
    
    
    
    
    
    
    (25,084
    )Proceeds from partial disposal of subsidiaries - JIC Technology and
Namtek Software/JIC Technology and NTEEP
    
    
    
    
    
    
    4,165
    
    
    
    95,449Proceeds from disposal of property, plant and equipment
    
    
    628
    
    
    
    2,595
    
    
    
    4,546Proceeds from disposal of investment
    
    
    
    
    
    
    
    
    
    
    5,609Proceeds from disposal of other assets
    
    
    
    
    
    
    
    
    
    
    231Proceeds from disposal of a subsidiary, net of cash disposal of - Jieyao
    
    
    
    
    
    
    2,386
    
    
    
    Proceeds from disposal of a subsidiary and related intangible assets,
net of cash disposal of  BPC
    
    
    1,654
    
    
    
    
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (33,760
    )
    
    
    (21,669
    )
    
    
    37,729Cash flows from financing activities:Cash dividends paid
    
    
    (16,654
    )
    
    
    (37,777
    )
    
    
    (19,414
    )Share buy-back program
    
    
    (3,528
    )
    
    
    
    
    
    
    Repayment of bank loans
    
    
    (2,703
    )
    
    
    (13,984
    )
    
    
    (5,375
    )Proceeds from bank loans
    
    
    4,500
    
    
    
    
    
    
    
    10,600Proceeds from shares issued on exercise of options and warrants
    
    
    36,470
    
    
    
    8,508
    
    
    
    72Net cash provided by (used in) financing activities
    
    
    18,085
    
    
    
    (43,253
    )
    
    
    (14,117
    )Effect of foreign currencies on cash flows
    
    
    (26
    )
    
    
    
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    23,801
    
    
    
    (20,650
    )
    
    
    98,822Cash and cash equivalents at beginning of year
    
    
    58,676
    
    
    
    82,477
    
    
    
    61,827Cash and cash equivalents at end of year
    
    $
    82,477
    
    
    $
    61,827
    
    
    $
    160,649Supplemental schedule of cash flow information:Interest paid
    
    $
    790
    
    
    $
    121
    
    
    $
    195Income taxes paid, net
    
    
    227
    
    
    
    4,183
    
    
    
    2,953Non-cash financing transactions:Share redemption and dividend withheld in settlement of
a receivable - Tele-Art
    
    $
    3,519
    
    
    $
    
    
    
    $
    
 See accompanying notes to consolidated financial statements. F-7




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##### Table of Contents



NAM TAI ELECTRONICS, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands of US dollars, except share and per share data)  1.
    Company InformationNam Tai Electronics, Inc. and subsidiaries (the Company or Nam Tai) is an electronics
manufacturing and design services provider to a selected group of the worlds leading
original equipment manufacturers, or OEMs, of telecommunication and consumer electronic
products. Through its electronics manufacturing services, or EMS, operations, the Company
manufactures electronic components and subassemblies, including liquid crystal display, or
LCD, panels, LCD modules, radio frequency, or RF, modules, flexible printed circuit
subassemblies and image sensors modules. These components are used in numerous electronic products,
including cellular phones, laptop computers, digital cameras, copiers, fax machines,
electronic toys, handheld video game devices and microwave ovens. The Company also
manufactures finished products, including cellular phones, palm-sized PCs, personal digital
assistants, electronic dictionaries, calculators, digital camera
accessories and Bluetooth wireless headset accessory for use with
cellular phones.The Company was founded in 1975 and moved its manufacturing facilities to the Peoples
Republic of China (the PRC) in 1980 to take advantage of lower overhead costs, lower
material costs and competitive labor rates available and subsequently relocated to Shenzhen,
PRC in order to capitalize on opportunities offered in Southern China. The Company was
reincorporated as a limited liability International Business Company under the laws of the
British Virgin Islands (BVI) in August 1987. The Companys principal manufacturing and
design operations are based in Shenzhen, the PRC, approximately 30 miles from the Hong Kong
Special Administrative Region (Hong Kong). Its PRC headquarters are located in the Macao
Special Administrative Region (Macao). Some of the subsidiaries offices are located in
Hong Kong and Macao, which provides it access to Hong Kongs and
Macaos infrastructure of communication and
banking and facilitates management of its PRC operations. The Companys principal manufacturing operations
are conducted in the PRC. The PRC resumed sovereignty over Hong Kong and Macao effective
July 1, 1997 and December 20, 1999, respectively, and politically Hong Kong and Macao are
integral parts of China. However, for simplicity and as a matter of definition only, our
references to PRC in these consolidated financial statements means the PRC and all of its
territories excluding Hong Kong and Macao.In 2004, Nam Tais operations were re-organized into three reportable segments consisting of
consumer electronics and communication products (CECP), telecommunication components
assembly (TCA) and LCD panels (LCDP). In 2003, CECP and TCA were classified as a single
reportable segment as consumer electronic products (CEP) while LCDP also comprised the
transformers operations and collectively referred to as LCD panels and transformers (LPT).
Through the disposal of a subsidiary in 2003, the Company discontinued its transformers
operations, details of which are set out in note 3(b)(iii).2.
    Summary of Significant Accounting Policies  (a)
    Principles of consolidationThe consolidated financial statements include the financial statements of the Company
and all its subsidiaries. The Company consolidates companies in which it has
controlling interest of over 50%. All significant intercompany accounts,
transactions and cash flows have been eliminated on consolidation.The equity method of accounting is used when the Company has the ability to exercise
significant influence over the operating and financial policies of an investee, which
is normally indicated by a 20% to 50% interest in other entities. Under the equity
method, original investments are recorded at cost and adjusted by the Companys share
of undistributed earnings or losses of these entities and distributions received, if
any.Non-marketable investments in which the Company has less than 20% interest and in
which does not have the ability to exercise significant influence over the investee
are initially recorded at cost and periodically reviewed for impairment.(b)
    Cash and cash equivalentsCash and cash equivalents include all cash balances and certificates of deposit
having a maturity date of three months or less upon acquisition. F-8




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##### Table of Contents



2.
    Summary of Significant Accounting Policies - continued  (c)
    Marketable securitiesMarketable securities at December 31, 2004 are principally equity securities and are
classified as available-for-sale. Securities classified as available-for-sale are
stated at fair value with unrealized gains and losses recorded as a separate
component of accumulated other comprehensive income (loss). Realized gains and
losses on the sale of the available-for-sale securities are determined using the
specific-identification method and are reflected in other income (expenses).(d)
    InventoriesInventories are stated at the lower of cost or market value. Cost is determined on
the first-in, first-out basis. Write down of potentially obsolete or slow-moving
inventory are recorded based on managements analysis of inventory levels.For the Companys CECP and TCA reporting units, the Company orders inventory from its
suppliers based on firm customer orders for product that is unique to each customer.
The inventory is utilized in production as soon as all the necessary components are
received. The only reason that inventory would not be utilized within six months is
if a specific customer deferred or cancelled an order. As the inventory is typically
unique to each customers products, it is unusual for the Company to be able to
utilize the inventory for other customers products. Therefore, the Companys policy
is to negotiate with the customer for the disposal of such inventory that remained
unused for six months. The Company does not generally write down its inventories as
usually, the customers are held to their purchase commitments. However, there are
cases where customers are contractually obligated to purchase the unused inventory
from the Company, but the Company may elect not to immediately enforce such
contractual right for business reasons. In this connection, the Company will
consider writing down these inventory items which remained unused for over six months
at the Companys own cost. Prior to writing down, management would determine if the
inventory can be utilized in other products.For the Companys LCDP segment, due to the nature of the business, LCDP customers do
not always place orders advance enough to enable the Company to order inventory from
suppliers based on firm customer orders. Nonetheless, management reviews its
inventory balance on a regular basis and writes down all inventory over six months
old if it is determined that the relevant inventory can not be utilized in the
foreseeable future.(e)
    Property, plant and equipmentProperty, plant and equipment are recorded at cost and include interest on funds
borrowed to finance construction. No interest was capitalized for the years ended
December 31, 2002, 2003 and 2004. The cost of major improvements and betterments is
capitalized whereas the cost of maintenance and repairs is expensed in the year
incurred. Assets under construction are not depreciated until construction is
completed and the assets are ready for their intended use. Gains and losses for the
disposal of leasehold land are included in other income (expenses) while gains and
losses from the disposal of other property, plant and equipment are included in
income from operations.The majority of the land in Hong Kong is owned by the government of Hong Kong which
leases the land at public auction to non-governmental entities. All of the Companys
leasehold land in Hong Kong have leases of not more than 50 years from the respective
balance sheet dates. The cost of such leasehold land is amortized on a straight-line
basis over the respective terms of the leases.All land in other regions of the PRC is owned by the PRC government. The government
in the PRC, according to PRC law, may sell the right to use the land for a specified
period of time. Thus all of the Companys land purchases in the PRC are considered
to be leasehold land and are amortized on a straight-line basis over the respective
term of the right to use the land.Depreciation rates computed using the straight-line method are as follows: Classification
    
    YearsLand use right, leasehold land and buildings
    
    20 to 50 yearsMachinery and equipment
    
    4 to 12 yearsLeasehold improvements
    
    3 to 7 yearsFurniture and fixtures
    
    4 to 8 yearsAutomobiles
    
    4 to 6 yearsTools and molds
    
    4 to 6 years
 F-9




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##### Table of Contents



2.
    Summary of Significant Accounting Policies - continued  (f)
    Goodwill and licensesThe excess of the purchase price over the fair value of net assets acquired is
recorded on the consolidated balance sheet as goodwill. Prior to January 1, 2002,
goodwill was amortized to expense on a straight-line basis over various periods
ranging from 4 years to 15 years. Costs incurred in the acquisition of licenses are
capitalized and amortized to expense on a straight-line basis over the shorter of the
license period or 5 to 7 years.With effect from January 1, 2002, the Group adopted Statement of Financial Accounting
Standard (SFAS) No. 142, Goodwill and Other Intangible Assets. Under this
statement goodwill and other intangible assets with indefinite lives will not be
amortized, but will be tested for impairment at the reporting unit level on at least
an annual basis. A reporting unit is an operating segment or one level below an
operating segment (i.e. a component) as defined in SFAS No. 131 Disclosures about
Segments of an Enterprise and Related Information. A component of an operating
segment is a reporting unit if the component constitutes a business for which
discrete financial information is available and segment management regularly reviews
the operating results of that component. Through May 2002, the Company operated in
two reporting units, which were its then operating segments of CEP and LPT.
Beginning in June 2002, the Company segregated its then LPT segment into two
reporting units: LCD panels and transformers. In June 2003, the Company disposed of
its transformers operation through the disposal of a subsidiary, details of which are
set out in note 3(b)(iii). Effective April 2004, the Company operated in three
reporting units which were its reportable segments of CECP, TCA and LCDP.The evaluation of goodwill for impairment involves two steps: (1) the identification
of potential impairment by comparing the fair value of a reporting unit with its
carrying amount, including goodwill and (2) the measurement of the amount of goodwill
loss by comparing the implied fair value of the reporting unit goodwill with the
carrying amount of that goodwill and recognizing a loss by the excess of the latter
over the former. For future impairment tests, the Company will measure fair value
based either on internal models or independent valuations.(g)
    Impairment or disposal of long-lived assetsThe Company reviews its long-lived assets for potential impairment based on a review
of projected undiscounted cash flows associated with these assets. Long-lived assets
are included in impairment evaluations when events and circumstances exist that
indicate the carrying amount of these assets may not be recoverable. Measurement of
impairment losses for long-lived assets that the Company expects to hold and use is
based on the estimated fair value of the assets.Long-lived assets to be disposed of are stated at the lower of fair value or carrying
amount. Expected future operating losses from discontinued operations are recorded
in the periods in which the losses are incurred.(h)
    Revenue recognitionThe Company recognizes revenue when all of the following conditions are met:  
    Persuasive evidence of an arrangement exists,
    Delivery has occurred or services have been rendered,
    Price to the customer is fixed or determinable, and
    Collectibility is reasonably assured.  Revenue from sales of products is recognized when the title is passed to customers
upon shipment and when collectibility is assured. The Company does not provide its
customers with the right of return (except for quality), price protection, rebates or
discounts. There are no customer acceptance provisions associated with the Companys
products, except for quality. All sales are based on firm customer orders with fixed
terms and conditions, which generally cannot be modified. F-10




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2.
    Summary of Significant Accounting Policies - continued  (i)
    Shipping and handling costsShipping and handling costs are classified as to cost of sales for material purchased
and selling expenses for those costs incurred in the delivery of finished products.
During the years ended December 31, 2002, 2003, and 2004, shipping and handling costs
classified as costs of sales were $536, $466 and $536, respectively. During the
years ended December 31, 2002, 2003 and 2004, shipping and handing costs classified
as selling expenses were $808, $870 and $767, respectively.(j)
    Research and development costsResearch and development costs are incurred in the development of new products and
processes, including significant improvements and refinements to existing products
and are expensed as incurred.(k)
    Advertising expensesThe Company expenses advertising costs as incurred. Advertising expenses were $528,
$261 and $265 for the years ended December 31, 2002, 2003 and 2004, respectively.(l)
    Staff retirement plan costsThe Companys costs related to the staff retirement plans (see note 14) are charged
to the consolidated statement of income as incurred.(m)
    Income taxesPRC tax paid by subsidiaries operating in the PRC during the year is recorded as an
amount recoverable at the balance sheet date when management has filed or has the
intention to file an application for reinvestment of profits and a refund is expected
unless there is an indication from the PRC tax authority that the refund, or a
portion of which, will be refused.Deferred income taxes are provided using the asset and liability method. Under this
method, deferred income taxes are recognized for all significant temporary
differences and classified as current or non-current based upon the classification of
the related asset or liability in the financial statements. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is considered more likely
than not that some portion of, or all, the deferred tax asset will not be realized.(n)
    Foreign currency transactions and translationsAll transactions in currencies other than functional currencies during the year are
translated at the exchange rates prevailing on the respective transaction dates.
Monetary assets and liabilities existing at the balance sheet date denominated in
currencies other than functional currencies are remeasured at the exchange rates
existing on that date. Exchange differences are recorded in the consolidated
statement of income.The functional currencies of the Company and its subsidiaries include the U.S.
dollar, Hong Kong dollar or the Chinese Renminbi. The financial statements of all
subsidiaries with functional currencies other than the U.S. dollar, the reporting
currency, are translated in accordance with SFAS No. 52, Foreign Currency
Translation. All assets and liabilities are translated at the rates of exchange
ruling at the balance sheet date and all income and expense items are translated at
the average rates of exchange over the year. All exchange differences arising from
the translation of subsidiaries financial statements are recorded as a component of
comprehensive income.The exchange rate between the Hong Kong dollar and the U.S. dollar were approximately
7.7989,7.7643 and 7.7732 as of December 31, 2002, 2003 and 2004, respectively. The
exchange rate between the Chinese Renminbi and the U.S. dollar is based on the
applicable rate of exchange quoted by the Peoples Bank of China prevailing at the
balance sheet date and were approximately 8.2773, 8.2767 and 8.2765 as of December
31, 2002, 2003 and 2004, respectively. F-11




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2.
    Summary of Significant Accounting Policies - continued  (o)
    Earnings per shareOn June 20, 2003, the Companys board of directors declared a 1 for 3 stock split of
its outstanding common shares. Each shareholder of record on June 30, 2003 received
two additional shares for each common share held at that date. In addition, the
Company retained the current par value of $0.01 per share. Accordingly, all
references to numbers of common shares, per share data and stock option data in the
accompanying financial statements have been restated to reflect the stock split on a
retroactive basis.On October 24, 2003, the Companys board of directors declared an issuance of stock
dividend to shareholders at the ratio of one dividend share for every ten shares held
by the shareholders of record on November 7, 2003. For the purposes of earnings per
share calculation, all references to numbers of common shares and per share data have
been restated to reflect this stock dividend.Basic earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding during the year.Diluted earnings per share gives effect to all dilutive potential common shares
outstanding during the year. The weighted average number of common shares
outstanding is adjusted to include the number of additional common shares that would
have been outstanding if the dilutive potential common shares had been issued.(p)
    Stock optionsThe Company does not recognize compensation expense for employee stock-based
compensation if the strike-price is equal to or greater than the market price of the
stock at the date of grant. The Companys policy is to generally grant stock-based
compensation to employees with a stock price equal to the market price of the stock
on the date of grant. The Company continues to account for stock-based compensation
arrangements under Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employeesand provides additional financial statement disclosure
in accordance with SFAS No. 123, Accounting for Stock-Based Compensation". The
Company recognizes compensation expense for all stock-based compensation granted to
non-employees by estimating the fair value of the stock-based compensation utilizing
the Black-Scholes option-pricing model. See note 11.The Company has two stock-based employee compensation plans, as more fully described
in note 11(b). Stock-based employee compensation costs are not reflected in net
income when options granted under the plan had an exercise price equal to the market
value of the underlying common stock on the date of grant.The following table illustrates the effect on net income and earnings per share as if
the Company had applied the fair value recognition. Year ended December 31,
    
    
    
    2002
    
    
    2003
    
    
    2004Net income, as reported
    
    $
    20,023
    
    
    $
    43,802
    
    
    $
    66,885Less: Stock based compensation costs under
fair value based method for all awards
    
    
    (1,491
    )
    
    
    (582
    )
    
    
    (4,476
    )Net income, pro forma
    
    
    
    $
    18,532
    
    
    $
    43,220
    
    
    $
    62,409Basic earnings per share
    
    As reported
    
    $
    0.57
    
    
    $
    1.09
    
    
    $
    1.57Pro forma
    
    $
    0.53
    
    
    $
    1.07
    
    
    $
    1,47Diluted earnings per share
    
    As reported
    
    $
    0.57
    
    
    $
    1.07
    
    
    $
    1.57Pro forma
    
    $
    0.52
    
    
    $
    1.06
    
    
    $
    1.47
  In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No.123R, Share-Based Payment. This statement is a revision to SFAS 123 and
supersedes APB Opinion No. 25 (see note 2(t)). F-12




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2.
    Summary of Significant Accounting Policies - continued  (q)
    Use of estimatesThe preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.(r)
    Comprehensive incomeAccumulated other comprehensive income (loss) represents unrealized gains on
marketable securities and foreign currency translation adjustments and is included in
the consolidated statement of shareholders equity.(s)
    Fair value disclosuresThe carrying amounts of cash and cash equivalents, accounts receivable, other
receivables, income taxes recoverable, notes payable, accounts payable, accrued
expenses and other payables approximate their fair values due to the short term
nature of these instruments. The carrying amount of long term debt also approximates
fair value due to the variable nature of the interest calculations.(t)
    Recent changes in accounting standardsIn March 2004, the Emerging Issues Task Force (EITF) reached a consensus in EITF
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. The consensus was that certain quantitative and qualitative
disclosures should be required for debt and marketable equity securities classified
as available-for-sale or held-to-maturity under SFAS Nos. 115 and 124, that are
impaired at the balance sheet date but for which an other-than-temporary impairment
has not been recognized. This EITF consensus is effective for fiscal years ending
after December 15, 2003. Adoption of the EITF consensus did not result in an impact
on the Companys financial position, results of operations or cash flows.In November 2004, the FASB issued SFAS No. 151,
Inventory Costs - an amendment of
ARB No. 43, Chapter 4.SFAS No. 151 clarifies the accounting that requires abnormal
amounts of idle facility expenses, freight, handling costs, and spoilage costs to be
recognized as current-period charges. It also requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity of
the production facilities. SFAS No. 151 will be effective for inventory costs
incurred on or after July 1, 2005. The Company is currently evaluating the impact of
this standard on its consolidated financial statements.In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment. This
statement is a revision to SFAS No. 123 and supercedes APB Opinion No. 25. This
statement establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services, primarily focusing on
the accounting for transactions in which an entity obtains employee services in
share-based payment transactions. Entities will be required to measure the cost of
employee services received in exchange for an award of equity instruments based on
the grant-date fair value of the award (with limited exceptions). That cost will be
recognized over the period during which an employee is required to provide service,
the requisite service period (usually the vesting period), in exchange for the award.
The grant-date fair value of employee share options and similar instruments will be
estimated using option-pricing models. If an equity award is modified after the
grant date, incremental compensation cost will be recognized in an amount equal to
the excess of the fair value of the modified award over the fair value of the
original award immediately before the modification. This statement is effective as
of the beginning of the first interim or annual reporting period that begins after
June 15, 2005. In accordance with the standard, the Company will adopt SFAS No. 123R
effective July 1, 2005.Upon adoption, the Company has two application methods to choose from: the
modified-prospective transition approach or the modified-retrospective transition
approach. Under the modified-prospective transition method the Company would be
required to recognize compensation cost for share-based awards to employees based on
their grant-date fair value from the beginning of the fiscal period in which the
recognition provisions are first applied as well as compensation cost for awards that
were granted prior to, but not vested as of the date of adoption. Prior periods
remain unchanged and pro forma disclosures previously required by SFAS No. 123
continue to be required. Under the modified-retrospective transition method, the
Company would restate prior periods by recognizing compensation cost in the amounts
previously reported in the pro forma footnote disclosure under SFAS No. 123. Under
this method, the Company is permitted to apply this presentation to all periods

presented or to the start of the fiscal year in which SFAS No. 123R is adopted. The
Company would follow the same guidelines as in the modified-prospective transition
method for awards granted subsequent to adoption and those that were granted and not
yet vested. The Company has not yet determined which methodology it will adopt but
believes that the impact that the adoption of SFAS No. 123R will have on its
financial position or results of operations will approximate the magnitude of the
stock-based employee compensation cost disclosed in Note 2 (p) pursuant to the
disclosure requirements of SFAS No. 148. F-13




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##### Table of Contents



3.
    Investment in Subsidiaries  (a)
    Subsidiaries Percentage of ownershipPlace of
    
    Principal
    
    as at December 31incorporation
    
    activity
    
    2003
    
    2004Consolidated principal subsidiaries:Jasper Ace Limited (Jasper Ace)
    
    BVI
    
    Investment holding
    
    
    
    
    
    
    100
    %J.I.C. Technology Company
Limited (JIC Technology)
    
    Cayman Islands
    
    Investment holding
    
    
    74.86
    %*
    
    
    71.63
    %J.I.C Enterprises (Hong Kong)
Limited
    
    Hong Kong
    
    Manufacturing and
trading**
    
    
    74.86
    %*
    
    
    71.63
    %Jetup Electronic (Shenzhen)
Co., Limited (Jetup)
    
    PRC
    
    Manufacturing
    
    
    74.86
    %*
    
    
    71.63
    %J.I.C. (Macao Commercial
Offshore) Company Limited
    
    Macao
    
    Trading of electronic
components and the
provision of marketing,
management and
technical consultancy
services
    
    
    -
    
    
    
    71.63
    %Nam Tai Electronic & Electrical
Products Limited (NTEEP)
    
    Cayman Islands
    
    Investment holding
    
    
    100
    %
    
    
    75
    %Nam Tai Group Management
Limited
    
    Hong Kong
    
    Provision of management
services
    
    
    100
    %
    
    
    100
    %Nam Tai Investments Consultant
(Macao Commercial Offshore)
Company Limited
    
    Macao
    
    Provision of management
and sales co-ordination
and marketing services
    
    
    100
    %
    
    
    75
    %Nam Tai Telecom (Hong Kong)
Company Limited
    
    Hong Kong
    
    Inactive
    
    
    100
    %
    
    
    100
    %Nam Tai Trading Company
Limited (NTTC, formerly
known as Nam Tai Electronic &
Electrical Products Limited)
    
    Hong Kong
    
    Inactive
    
    
    100
    %
    
    
    100
    %Namtai Electronic (Shenzhen)
Co., Ltd.
    
    PRC
    
    Manufacturing and
trading
    
    
    100
    %
    
    
    75
    %Namtek Japan Company Limited
    
    Japan
    
    Provision of sales
co-ordination and
marketing services
    
    
    80
    %
    
    
    80
    %Namtek Software Development
Company Limited (Namtek
Software)
    
    Cayman Islands
    
    Investment holding
    
    
    80
    %
    
    
    80
    %Shenzhen Namtek Company Ltd.
    
    PRC
    
    Software development
    
    
    80
    %
    
    
    80
    %Zastron Electronic (Shenzhen)
Co. Ltd.
    
    PRC
    
    Manufacturing and
trading
    
    
    100
    %
    
    
    100
    %Zastron Precision-Tech
Limited (ZPTL, formerly
known as Nam Tai Telecom
(Cayman) Company Limited)
    
    Cayman Islands
    
    Investment holding
    
    
    100
    %
    
    
    100
    %Zastron (Macao Commercial
Offshore) Company Limited
    
    Macao
    
    Provision of sales
co-ordination and
marketing services
    
    
    -
    
    
    
    100
    %Mate Fair Group Limited
    
    BVI
    
    Investment holding
    
    
    72.22
    %
    
    
   *
    
    Upon full conversion of the preference shares held by the
Company, the Company would have an effective interest of 88.39% in these
subsidiaries as of December 31, 2003 (see note 3(b)(ii)).**
    
    Business ceased subsequent to December 31, 2004. F-14




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##### Table of Contents



3. Investment
in Subsidiaries - continued  (b)
    Significant transactions  (i)
    In March 2000, NTTC, a wholly-owned subsidiary of the Company,
together with Toshiba Battery Co., Ltd. (TBCL), established BPC, a wholly
foreign owned enterprise in Shenzhen, PRC. NTTC had a 86.67% interest in BPC
and the investment cost of $1,300 was contributed in cash. BPC was located
within the Companys manufacturing complex where it produced and sold high-end,
environmentally friendly, rechargeable lithium ion battery packs. Effective
April 30, 2002, the Company sold its 86.67% joint venture interest in BPC to a
TBCL related company for $2,131 resulting in a gain of $17. During the period
from January 1, 2002 through April 30, 2002, the Company recognized net sales of
$7,849 from TBCL and its related companies.(ii)
    In June 2002, through a reverse merger, the Company arranged for
the listing of JIC Group (B.V.I.) Limited and its subsidiaries (the JIC Group)
on The Stock Exchange of Hong Kong Limited (the SEHK). To effect the listing,
the Company entered an agreement with the liquidators of Albatronics (Far East)
Company Limited (Albatronics), whose shares had been listed on the SEHK and
which was placed into voluntary liquidation in August 1999. The Company owned
slightly more than 50% of the outstanding capital stock of Albatronics. Under
the agreement, the Company agreed to transfer the JIC Group into JIC Technology,
a new company, for a controlling interest in JIC Technology. Prior to it being
placed into voluntary liquidation, Albatronics and its subsidiaries were engaged
in the trading of electronic components and manufacturing of consumer
electronics products. Due to the troubled financial condition of Albatronics at
December 31, 1998, it was probable that the Company would never be in a position
to exercise control over Albatronics as such control would rest with the
creditors of Albatronics. Accordingly, the Company did not consolidate
Albatronics financial statements at December 31, 1998, for the year then ended
or for any subsequent period. As of December 31, 1999 the investment was written
off. On February 1, 2000, the Company received an invitation soliciting offers
for the rescue or restructuring of Albatronics from Albatronics liquidators.
In June 2002, Albatronics listing status on the SEHK was withdrawn and JIC
Technology was listed on the SEHK free from the liabilities of Albatronics. For
the Companys contribution to JIC Technology, the Company received a combination
of ordinary and preference shares, which are analogous to common stock and
convertible preferred stock, respectively, of companies organized under U.S.
law. The Company, the creditors of Albatronics and the Hong Kong public who
held shares of Albatronics received ordinary shares of JIC Technology equal to
approximately 70.4%, 24.1% and 5.5%, respectively, of the outstanding
ordinary shares of JIC Technology. The Company also received preference shares of JIC
Technology, which upon their full conversion, would result in the Company, the
creditors and the Hong Kong public owning approximately 92.9%, 5.8% and 1.3%,
respectively, of the outstanding ordinary shares of JIC Technology. On June 4,
2002, the reverse merger was completed and all the shares of Albatronics were
transferred to the liquidators for a nominal consideration. The then preference
shares were non-redeemable, non-voting shares that ranked pari passu with
ordinary shares of JIC Technology on the payment of dividends or other
distribution other than on a winding-up. No holder of preference shares
(including the Company) may convert them if such conversion would result in the
minimum public float of 25% that is required under the Hong Kong Stock Exchange
listing rules not being met.Due to the reverse merger, the Companys effective interest in the JIC Group
reduced from 100% to 92.9%. As a result of this reduction in interest during
2002, the Company has released unamortized goodwill of $1,483, representing
7.1% of the goodwill that had previously been recorded upon purchasing the JIC
Group in October 2000. The release of unamortized goodwill is included as
part of the loss on reverse merger of the JIC Group of $2,655. F-15




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3.
    Investment in Subsidiaries - continued  (b)
    Significant transactions - continued(ii)- continued  In August 2002, the Company acquired an additional 7,984,000
ordinary shares of JIC Technology for a cash consideration of $437,
resulting in additional goodwill of $253. As of December 31,
2002, the Company held 93.97% effective interest in
J.I.C. Group, which represented 74.78% of the existing ordinary
shares and 93.97% of the outstanding ordinary shares upon full
conversion of the preference shares.During the period from June to November 2003, the Company disposed of totally
42,600,000 ordinary shares of JIC Technology for cash considerations of
$4,005. The disposal resulted in a net gain on partial disposal of a
subsidiary of $1,838 after deducting the releasing of unamortized goodwill of
$1,171. In November 2003, the Company converted 175,100,000 preference shares
into 170,000,000 ordinary shares of JIC Technology. As at December 31, 2003,
the Company held 263,900,688 ordinary shares of JIC Technology, equivalent to
74.86% of issued ordinary shares, and 423,320,000 preference shares. Upon
full conversion of the preference shares owned, the Company would have held
approximately 88.39% of JIC Technology as of December 31, 2003.In November and December 2004, the Company disposed of totally 128,000,000
ordinary shares of JIC Technology for cash considerations of $12,902. The
disposal resulted in a net gain on partial disposal of a subsidiary of $6,249
after deducting the releasing of unamortized goodwill of $3,518. The Company
also converted all outstanding preference shares into 313,902,912 ordinary
shares of JIC Technology resulting in 71.63% equity interest held in JIC
Technology as of December 31, 2004.(iii)
    In order to concentrate its effort on its LCD panels reporting
unit, in June 2003, JIC Technology disposed its transformers reporting unit to a
third party for a cash consideration of $2,426. Sales of the transformers
reporting unit for the years ended December 31, 2002 and 2003 were $11,324 and
$6,284, respectively, and were insignificant comparing to the sales of the
Company as a whole. The income from operations of the transformers reporting
unit was less than 3% and 1% of the Companys income from operations for the
years ended December 31, 2002 and 2003, respectively. The transformers
reporting unit had no non-operating income or expenses for the years ended
December 31, 2002 and 2003.The proceeds from the disposal exceeded the carrying value of the net assets
of the transformers reporting unit, resulting in a gain from discontinued
operation, net of minority interests, in 2003 of $1,979.The carrying amounts of the assets and liabilities of the transformers
reporting unit at the date of disposal were as follows: Net assets disposed of:  Property, plant and equipment
    
    $
    559Cash
    
    
    40Other assets
    
    
    870Liabilities
    
    
    (1,176
    )Total
    
    $
    293
  (iv)
    In January 2003, the Company disposed of 20% of its equity
interest in Namtek Software to a company which is owned by the management of
Namtek Software for a cash consideration of $160. As of the date of disposal,
Namtek Software was fair valued at $3,347. Accordingly, a charge to
compensation expense of $509 and a credit to additional paid-in capital of $264
(being the difference between the net asset value and fair value of Namtek
Software disposed) resulted. F-16




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##### Table of Contents



3.
    Investment in Subsidiaries - continued  (b)
    Significant transactions - continued  (v)
    In September 2000, the Company acquired a 5% indirect
shareholding in both Huizhou TCL Mobile Communication Co., Ltd. (Huizhou TCL)
and TCL Mobile Communication (HK) Co., Ltd. (collectively TCL Mobile) through
the acquisition of 25% of the outstanding shares of Mate Fair, a privately held
investment holding company incorporated in the BVI with a 20% shareholding
interest in TCL Mobile. TCL Mobile is engaged in manufacturing, distributing
and trading of digital mobile phones and accessories in the PRC as well as
overseas markets. The acquisition in Mate Fair was satisfied by cash
consideration of approximately $2,036. The 25% share of the net book value of
Mate Fair on that date was approximately $511. Goodwill of approximately $1,525
was recorded by the Company and was initially being amortized on a straight-line
basis over 10 years starting in September 2000.In May 2002, due to the increase of capital in Huizhou TCL, Mate Fairs direct
interest in Huizhou TCL was diluted from 20% to 18% and accordingly, the
Companys 5% indirect interest in Huizhou TCL was diluted to 4.5%. As a
result of the dilution, the Company recognized the release of unamortized
goodwill of approximately $132 and the share of Mate Fairs loss on deemed
disposal of Huizhou TCL of approximately $336 as part of the equity in income
of affiliated companies. Mate Fair ceased the equity method of accounting for
Huizhou TCL since it no longer held at least a 20% interest in Huizhou TCL.
In late 2002, TCL Mobile Communications (HK) Co., Ltd. was acquired by Huizhou
TCL.On November 11, 2002, through a series of linked transactions, the Company
effectively exchanged its 4.5% indirect interest in Huizhou TCL for a 3.033%
direct interest plus cash consideration. This was accomplished by Mate Fair
selling a 13.8% equity interest in Huizhou TCL for $10,424, which resulted in
a gain of $9,022 that was included in equity in income of affiliated
companies. Also, as part of these linked transactions, the Company increased
its shareholding in Mate Fair from 25% to 72.22% for $3 by the subscription of
additional 3,028 shares in Mate Fair, and recognized an additional release of
unamortized goodwill of approximately $388. The Company invested $5,128 of the
proceeds in TCL International Holdings Limited 3% convertible notes (see note
9(a)).In April 2004, the Company increased its equity interest in Huizhou TCL to 9%
through exchange of its existing 72.2% interest in Mate Fair, which had a
3.033% equity interest in Huizhou TCL, and acquiring the entire issued share
capital of Jasper Ace, a holding company with no operations, which directly
holds 9% equity interest in Huizhou TCL. The acquisition was satisfied by the
exchange of the Companys 72.2% equity interest in Mate Fair, cash of $25,000,
and 1,416,764 new shares in the Company upon a pricing adjustment in July 2004
resulting in the cancellation of 973,210 shares of the Company previously
issued as part of the purchase consideration.(vi)
    In April 2004, one of the then wholly owned subsidiaries of the
Company, NTEEP, completed public offering of its common stock on the SEHK in
which the Company disposed of a 25% interest in this subsidiary resulting in a
gain on partial disposal of US$71,071. F-17




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##### Table of Contents



3.
    Investment in Subsidiaries - continued  (c)
    Establishment of subsidiaries  (i)
    In June 2003, Namtek Software established Namtek Japan Company
Limited, a subsidiary incorporated in Japan, at an investment cost of $85. Its
principal activity is sales co-ordination and marketing of software.(ii)
    In June 2003, the Company established two wholly-owned
subsidiaries, namely ZPTL and NTEEP, incorporated in the Cayman Islands. Their
principal activity is to act as investment holding companies.(iii)
    In August 2003, the Company established Nam Tai Investments
Consultant (Macao Commercial Offshore) Company Limited, a wholly-owned
subsidiary incorporated in Macao, at an investment cost of $13. Its principal
activity is provision of consultancy services to other group companies, and to
act as the Companys PRC headquarters due to the continuous increase in
investment in China.(iv)
    In March 2004, the ZPTL established Zastron (Macao Commercial
Offshore) Company Limited, a subsidiary incorporated in Macao, at an investment
cost of $13. Its principal activity is provision of sales co-ordination and
marketing activities to group companies.(v)
    In November 2004, J.I.C. Technology established J.I.C. (Macao
Commercial Offshore) Company Limited, a wholly owned subsidiary incorporated in
Macao, at an investment cost of $13. Its principal activity is trading of
electronic components, and the provision of marketing, management and technical
consultancy services.  (d)
    Retained earningsRetained 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 payment of dividends and the removal of dividends from the PRC. In the event
that dividends are paid by the Companys PRC subsidiaries, such dividends will reduce
the amount of reinvested profits and accordingly, the refund of taxes paid will be
reduced to the extent of tax applicable to profits not reinvested. However, the
Company believes that such restrictions will not have a material effect on the
Companys liquidity or cash flows. In addition, pursuant to the
PRC regulations, a certain portion of the profits made by these
subsidiaries must be set aside for future capital investment and are
not distributable, and amounted to $400 and $6,164 as of
December 31, 2003 and 2004 respectively.  4.
    InventoriesInventories consist of the following: At December 31,
    
    2003
    
    
    2004Raw materials
    
    $
    17,448
    
    
    $
    19,815Work-in-progress
    
    
    4,534
    
    
    
    1,578Finished goods
    
    
    5,050
    
    
    
    1,703$
    27,032
    
    
    $
    23,096
  5.
    Property, Plant and Equipment, netProperty, plant and equipment, net consist of the following: At December 31,
    
    2003
    
    
    2004At costLand use right, leasehold land and buildings
    
    $
    47,777
    
    
    $
    45,499Machinery and equipment
    
    
    61,417
    
    
    
    80,479Leasehold improvements
    
    
    12,506
    
    
    
    15,226Furniture and fixtures
    
    
    1,967
    
    
    
    2,026Automobiles
    
    
    1,432
    
    
    
    1,427Tools and molds
    
    
    132
    
    
    
    196Total
    
    
    125,231
    
    
    
    144,853Less: accumulated depreciation and amortization
    
    
    (50,283
    )
    
    
    (60,706
    )Construction in progress
    
    
    2,699
    
    
    
    13,294Net book value
    
    $
    77,647
    
    
    $
    97,441
  As at December 31, 2004, the Company has entered into commitments for capital expenditure
for property, plant and equipment of approximately $17,080, which are expected to be
disbursed during the year ending December 31, 2005. F-18




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##### Table of Contents



6.
    GoodwillGoodwill consists of the following: CECP
    
    
    LCDPSegment
    
    
    Segment(reporting
    
    
    (reportingunit)
    
    
    unit)
    
    
    TotalBalance at January 1, 2003
    
    $
    788
    
    
    $
    20,520
    
    
    $
    21,308Goodwill release related to disposition of 5.58% interest
in JIC Technology (see note 3(b)(ii))
    
    
    
    
    
    
    (1,171
    )
    
    
    (1,171
    )Balance at December 31, 2003
    
    $
    788
    
    
    $
    19,349
    
    
    $
    20,137Goodwill release related to disposition of 16.76%
interest in JIC Technology
    
    
    
    
    
    
    (3,518
    )
    
    
    (3,518
    )Goodwill release related to disposition of 72.22%
interest in Mate Fair
    
    
    (788
    )
    
    
    
    
    
    
    (788
    )Balance at December 31, 2004
    
    $
    
    
    
    $
    15,831
    
    
    $
    15,831
  No goodwill has been assigned to the transformer reporting unit of the previous LPT
Segment as the Companys purchase of the JIC Group was exclusively for the LCD panel
reporting unit.The Company acquired certain net assets from MBS, a telecommunication business including the
design, research and development, and marketing of telecommunication products. The excess
of the purchase consideration over the fair value of the assets acquired was $776 and was
recorded as goodwill which was being amortized on a straight-line basis over 4 years. In
2002, the Company determined that the previously acquired technology had become obsolete.
Therefore, the Company recorded an impairment for the remaining goodwill of $339 and
accelerated the amortization of the license fees (included in intangible assets) by $173.7.
    Intangible Assets, netAmortized intangible assets, net consist of the following: At December 31,
    
    2003
    
    
    2004Gross carrying amount of licenses
    
    $
    643
    
    
    $
    643Accumulated amortization
    
    
    (92
    )
    
    
    (184
    )Net carrying amount
    
    $
    551
    
    
    $
    459
  Amortization expense charged to income from
operations for the year ended December 31, 2002, 2003
and 2004 was $222, $92 and $92, respectively.
Amortization expense on intangible assets for each of
the next five years is as follows: Year ending December 31,- 2005
    
    $
    92- 2006
    
    
    92- 2007
    
    
    92- 2008
    
    
    92- 2009
    
    
    91Total
    
    $
    459
 F-19




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##### Table of Contents



8. Investment in Affiliated Companies, Equity Method The Companys investments accounted for under the equity method are disclosed below. The
Company has not made any loans or guarantees or has any contingent liabilities with these
companies. Mate Fair Mate Fair was accounted as an affiliated company until November 11, 2002. Details of the
investment in Mate Fair are set out in note 3(b)(v). Alpha Star In January 2003, the Company further expanded its business to include wireless communication
technology and related products. The Company made a strategic investment of $10,000 by
subscribing for a 25% shareholding in Alpha Star, a BVI company, which is the ultimate
holding company of JCT Wireless Technology Company Limited (JCT), a company engaged in the
design, development and marketing of wireless communication terminals and wireless
application software. The Company also manufactures wireless communication terminals and
related modules for JCT. As part of the agreement, Alpha Star agreed to purchase from the
Company at least 50 percent of the orders it, or any of its subsidiaries, receives for RF
modules provided the Company performs such manufacturing services at a price comparable to
the market. The fair value of this arrangement was estimated to be $643 and is included in
the consolidated balance sheet as an intangible asset (note 7). The Company had one
representative on Alpha Stars board of directors until his resignation in July 2004. The Company initially recorded goodwill of approximately $5,596 as a result of the
acquisition of Alpha Star. The Company recorded $498 on equity in earning of Alpha Star for
2003 but recognized an equity in loss of $1,210 for 2004. In the third quarter of 2004, the
Company recorded an other-than-temporary cash impairment charge of approximately $5,596
to write-down its investment in Alpha Star upon careful assessment of various factors relevant to
the affiliate, including the competitive handset market in the PRC. As of December 31, 2003 and 2004, JCT owed the Company $2,707 and $66. For the year ended
December 31, 2003 and 2004, the Company recognized net sales of $20,782 and $34,181 to JCT
and purchased raw materials of $5,456 and $12,398 from JCT and its related companies,
respectively. 9. Investments Investments in TCL The Company had various investments in TCL Group of companies in the form of convertible
notes, and available for sale marketable securities. During the year ended December 31,
2003, the Company disposed of the convertible notes. During the year ended December 31,
2004, the investments at cost became marketable securities upon the listing of these
investments on public stock exchanges. The Company has not incurred any material operating
revenue or expenses from the TCL Group of companies, for the years ended December 31, 2002,
2003 and 2004.  (a)
    Convertible Notes On November 11, 2002, in connection with its disposal of 1.467% indirect interest in
Huizhou TCL (see note 3(b)(v)) for approximately $10,424, the Company purchased
$5,128 in 3% convertible notes (CB Note) due in November 2005 of TCL International
Holdings Limited, a company publicly listed on the SEHK. In August 2003, the CB Note
was disposed of by the Company for a consideration of $5,026, resulting in a loss of
$102. F-20




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##### Table of Contents



9. Investments  continued  (b)
    Investments, at cost/available for sale investment securities  (i)
    TCL Corporation In January 2002, the Company acquired a 6% equity interest in TCL Holdings
Corporation Ltd., now known as TCL Corporation, for a consideration of
$11,968. TCL Corporation, an enterprise established in the PRC, is the parent
company of the TCL Group of companies. TCL Corporations scope of business
includes the import and export of raw materials, the design, manufacturing and
sales and marketing of telephones, VCD players, color television sets, mobile
phones and other consumer electronic products. TCL Corporation changed from a
limited liability company to a company limited by shares in April 2002 (the
Establishment Date). In January 2004, TCL Corporation listed its A-shares on the Shenzhen Stock
Exchange at RMB4.26 (equivalent to US$0.52) per A-share. The Companys
interest in TCL Corporation has then been diluted to 3.69% and represents
95.52 million promoters shares of TCL Corporation after its initial public
offering. According to Article 147 of the Company Law of the PRC, the Company
is restricted to transfer its promoters shares within three years from the
Establishment Date. The Company is, however, entitled to dividend and other rights similar to the holders of A-shares. As these promoters shares have a restriction on their sale prior to April
2005, the Company hired a third party valuation firm to determine the fair
value of these shares as of December 31, 2004 and recognized an unrealized
gain of $6,549 based on the Companys cost of $11,968 and an estimated fair
value of $20,700.  (ii)
    Huizhou TCL The Company had a 3.033% direct interest in Huizhou TCL. As described in note
3(b)(v), the Company increased its equity interest in Huizhou TCL to 9%. In
August 2004, as part of the preparation for TCL Communications public
offering on SEHK, the shares in Huizhou TCL were exchanged for the shares in
TCL Communication. In September 2004, TCL Communications public offering was
completed. At December 31, 2004, the Companys investment in TCL
Communication is stated at fair value based on the traded market price of TCL
Communications shares and recognized an unrealized loss of $58,316 based on
the Companys cost of $79,522 and a fair value of $21,206.  Investment
in Stepmind  In December 2003, the Company paid approximately $5,277 (Euros
4,250) into an escrow account for an investment in Stepmind, which was included
in prepaid expenses and other receivables at December 31, 2003. Approximately
$2,646 (Euros 2,122) was released from the escrow account in January 2004 for
the Companys first phase of investment and was included in investments. In
August 2004, the remaining balance in the escrow account was released. In the
same month, the Company disposed of its entire interest in Stepmind to one of
the shareholders of Stepmind at the original subscription price. As a result, a
loss of $67, representing the legal and administrative costs incurred, was
noted. F-21




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##### Table of Contents



10. Bank Loans and Banking Facilities The Company has credit facilities with various banks representing notes payable, trade
acceptances, import facilities and overdrafts. At December 31, 2003 and 2004, these
facilities totaled $62,256 and $87,923, of which $53,947 and $84,495 were unused at December
31, 2003 and 2004, respectively. The maturity of these facilities is generally up to 90
days. Interest rates are generally based on the banks usual lending rates in Hong Kong and
the credit lines are normally subject to annual review. The banking facilities are secured
by guarantees given by Nam Tai and certain subsidiaries and restrict the pledge of assets to any other banks without the prior consent of the Companys bankers. The notes payable, which include trust receipts and shipping guarantees, may not agree to
utilized banking facilities due to a timing difference between the Company receiving the
goods and the bank issuing the trust receipt to cover financing of the purchase. The
Company recognizes the outstanding letter of credit as a note payable when the goods are
received, even though the bank may not have issued the trust receipt. However, this will
not affect the total bank facility utilization, as an addition to the trust receipts will be
offset by a reduction in the same amount of outstanding letters of credit. At December 31,
    
    2003
    
    
    2004Outstanding letters of credit
    
    $
    6,430
    
    
    $
    1,348Trust receipts
    
    
    1,531
    
    
    
    1,257Usance bills pending maturity
    
    
    348
    
    
    
    823Total banking facilities utilized
    
    
    8,309
    
    
    
    3,428Less: Outstanding letters of credit
    
    
    (6,430
    )
    
    
    (1,348
    )Notes payable
    
    $
    1,879
    
    
    $
    2,080
 A subsidiary of the Company has an unsecured four-year term loan with borrowings in May 2002
totaling $4,500 at a rate of 1.5% p.a. over three months London Interbank Offered Rate,
repayable in 16 quarterly instalments of approximately $281 beginning August 31, 2002. The
interest rate was reduced to 0.75% p.a. over three months London Interbank Offered Rate in
2004. During the year 2004, it has obtained another unsecured four-year term loan totaling
$7,000 at a rate of 0.75% p.a. over three months London Interbank Offered Rate, repayable in
16 quarterly instalments of $438 beginning in July 2004. At December 31, 2004, the loans
had outstanding balances of $8,038. There are no restrictive financial covenants associated
with these term loans. The long term debts are repayable as follows for the years ending December 31 - 2005
    
    $
    2,875- 2006
    
    
    2,313- 2007
    
    
    1,750- 2008
    
    
    1,100$
    8,038
 11. Shareholders Equity  (a)
    The Company has only one class of common shares authorized, issued and
outstanding.(b)
    Stock options In August 1993, the Board of Directors approved a stock option plan which authorized
the issuance of 900,000 vested options to key employees, consultants or advisors of
the Company or any of its subsidiaries. In December 1993, January 1996 and April
1999, the option plan was amended and the maximum number of shares to be issued
pursuant to the exercise of options granted was increased to 1,950,000 and 3,000,000
and 4,275,000, respectively. The options granted under this plan vest immediately
and generally have a term of three years, but cannot exceed ten years. The options
are granted to employees based on past performance and/or expected contribution to
the Company. In May 2001, the Board of Directors approved another stock option plan which would
grant 15,000 options to each non-employee director of the Company elected at each
annual general meeting of shareholders, and might grant options to key employees,
consultants or advisors of the Company or any of its subsidiaries to subscribe for
its shares in accordance with the terms of this stock option plan
based on past performance and/or expected contributions to the Company. The maximum
number of shares to be issued pursuant to the exercise of options granted was
3,000,000 shares. The options granted under this plan vest immediately and generally
have a term of three years, subject to the discretion of the board of directors but cannot exceed ten years. F-22




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##### Table of Contents



11. Shareholders Equity  continued  (b)
    Stock options  continued In 2003, the Company suspended issuing options to management and employees except for
the non-employee directors and approved an incentive bonus program to reward
management and employees with a cash bonus instead; however, in 2004, the Company had
decided to resume issuing stock options to employees in addition to giving cash
bonuses. A summary of stock option activity during the three years ended December 31, 2004 is
as follows: Number of
    
    
    Weighted averageoptions
    
    
    option price per shareOutstanding at January 1, 2002
    
    
    2,122,200
    
    
    $
    4.32Granted
    
    
    900,000
    
    
    $
    6.62Exercised
    
    
    (1,573,200
    )
    
    $
    4.24Outstanding at December 31, 2002
    
    
    1,449,000
    
    
    $
    5.84Granted
    
    
    75,000
    
    
    $
    18.50Exercised prior to 10 for 1 stock
dividend
    
    
    (1,422,500
    )
    
    $
    5.97Effect of 10 for 1 stock dividend on
stock option
    
    
    10,150Exercised after 10 for 1 stock dividend
    
    
    (3,100
    )
    
    $
    6.02Outstanding at December 31, 2003
    
    
    108,550
    
    
    $
    12.34Granted
    
    
    645,000
    
    
    $
    19.40Exercised
    
    
    (16,500
    )
    
    $
    4.39Outstanding at December 31, 2004
    
    
    737,050
    
    
    $
    18.70
 During 2002, 6,000 advisors options with an exercise price of $6.62 exercisable
from April 30, 2002 and expiring on April 30, 2005 were granted to an advisor and all
were exercised during 2003. The Company recorded compensation expense of $10 for the
2002 advisors options based on the Black-Scholes option-pricing model. No advisors
options were granted during 2003 and 2004. Details of the options granted by the Company in 2002, 2003 and 2004 are as follows: Number of
    
    Exerciseoptions granted
    
    price
    
    
    Exercisable periodIn 2002900,000
    
    $
    6.02
    *
    
    April 30, 2002 to April 30, 2005In 200375,000
    
    $
    16.82
    *
    
    July 8, 2003 to July 8, 2006In 2004645,000
    
    $
    19.40
    
    
    July 30, 2004 to July 30, 2006
 The following summarizes information about stock options
outstanding at December 31, 2004. All stock options are
exercisable as of December 31, 2004. Weighted averageNumber
    
    
    remaining contractualExercise prices
    
    of options
    
    
    life in months$  6.02*
    
    
    26,050
    
    
    
    4.0$16.82*
    
    
    66,000
    
    
    
    18.3$19.40
    
    
    645,000
    
    
    
    19.0737,050
    
    
    
    18.4
   *
    Subsequent to November 7, 2003, the exercise price has been
adjusted to reflect the 10 for 1 stock dividend effect. F-23




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##### Table of Contents



11. Shareholders Equity  continued  (b)
    Stock options  continued The weighted average remaining contractual life of the stock options outstanding at
December 31, 2002, 2003 and 2004 was 22, 23 and 18 months, respectively. The
weighted average fair value of options granted during 2002, 2003 and 2004 was $1.66,
$7.76 and $6.94, respectively, using the Black-Scholes option-pricing model based on
the following assumptions: Year ended December, 31
    
    2002
    
    
    2003
    
    
    2004Risk-free interest rate
    
    
    4.5
    %
    
    
    2.56
    %
    
    
    2.75
    %Expected life
    
    3 years
    
    3 years
    
    2 yearsExpected volatility
    
    
    36.0
    %
    
    
    64.24
    %
    
    
    68.62
    %Expected dividend per quarter
    
    $
    0.04
    
    
    $
    0.05
    
    
    $
    0.12
  (c)
    Public warrants On October 10, 1997, the Company distributed to each holder of its common shares
nontransferable rights (the Rights) to subscribe for one unit for every three
common shares owned at that date (referred to as the Rights Offering). The
subscription price was $5.67 per unit. Each unit consisted of one common share and
one redeemable common share purchase warrant. Each warrant is exercisable to
purchase one common share at a price of $6.80 per share at any time from the date of
their issuance until November 24, 2000. The common shares and the warrants included
in the units will be separately transferable immediately on issuance of the common
 shares. The warrants are redeemable by the Company at any time at $0.02 per warrant
if the average closing sale price of the common shares for 20 consecutive trading
days within the 30-day period preceding the date the notice is given equals or
exceeds $8.50 per share. The terms of the Rights Offering include an over
subscription privilege available to shareholders subject to certain conditions and a
Standby Purchase Commitment made by the Standby Underwriters to the Rights Offering,
subject to the terms and conditions of a Standby Underwriting Agreement made between
the Company and the Standby Underwriters, and which includes purchase by the Standby
Underwriters of units not subscribed for by shareholders of the Company. Pursuant to
the Rights Offering, 9,000,000 units were offered with a subscription expiry date of
November 24, 1997. During the period of the Rights Offering, shareholders of the Company exercised
Rights to purchase a total of 6,803,751 units at $5.67 per unit and the Standby
Underwriters purchased a total of 2,187,636 units at a price of $5.58, being the
lower of the subscription price per unit and the closing bid price per common share
as reported on the Nasdaq on the subscription expiry date, as provided for under the
Standby Underwriting Agreement. The gross proceeds raised amounted to $50,769 and
the net proceeds raised after deduction of expenses associated with the Rights
Offering amounted to $47,700. On April 1, 2000, the Company amended the terms of the warrant by extending the
expiry date of the warrants from November 24, 2000 to November 24, 2002. The
extending of the expiry date of the warrants created a new measurement date for the
warrants, however, the resulting amount was immaterial. During 2002, 4,381,965
warrants were exercised. On November 24, 2002, all of the remaining warrants
expired.  (d)
    Advisors warrants On December 2, 1997, the Company issued 390,000 units to its advisors and 30,000
remained outstanding in 2002. These advisors warrants expired on November 24, 2002. The 174,090 warrants issued pursuant to the exercise of advisors warrants bear the
same rights as public warrants.  (e)
    Share buy  back program The Company repurchased shares under its buy-back program as follows. All shares
were purchased at the prevailing market price at the date of the buy back and were
settled out of the Companys retained earnings. Year
    
    Shares repurchased
    
    
    Average purchase price2002
    
    
    592,800
    
    
    $
    5.95
 No shares were repurchased during the year ended December 31, 2003 and 2004. F-24




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##### Table of Contents



11. Shareholders Equity  continued  (f)
    Share redemptions On January 22, 1999, pursuant to its Articles of Association, the Company redeemed
and canceled 415,500 shares of the Company registered in the name of Tele-Art at a
price of $3.73 per share for $1,549 (see note 18(b)). On August 12, 2002, pursuant to its Articles of Association, the Company redeemed and
cancelled an additional 509,181 shares of the Company beneficially owned by Tele-Art
at a price of $6.14 per share for $3,125 (see note 18(b)). No shares were redeemed during the year ended December 31, 2003 and 2004. 12. Earnings Per Share The calculations of basic earnings per share and diluted earnings per share are computed as
follows: Weightedaverage number
    
    
    Per shareYear ended December 31, 2002
    
    Income
    
    
    of shares *
    
    
    amountBasic earnings per share
    
    $
    20,023
    
    
    
    34,885,366
    
    
    $
    0.57Effect of dilutive securities- Stock options
    
    
    
    
    
    
    476,837- Warrants
    
    
    
    
    
    
    67,914Diluted earnings per share
    
    $
    20,023
    
    
    
    35,430,117
    
    
    $
    0.57
 All options and warrants to purchase shares of common stock were included in the computation
of 2002 diluted earnings per share as the exercise prices were less than the average market
price of the common stock. Weightedaverage number
    
    
    Per shareYear ended December 31, 2003
    
    Income
    
    
    of shares *
    
    
    amountContinuing operationsBasic earnings per share
    
    $
    41,823
    
    
    
    40,336,439
    
    
    $
    1.04Effect of dilutive securities- Stock options
    
    
    
    
    
    
    502,701Diluted earnings per share
    
    $
    41,823
    
    
    
    40,839,140
    
    
    $
    1.02Discontinued operationBasic earnings per share
    
    $
    1,979
    
    
    
    40,336,439
    
    
    $
    0.05Effect of dilutive securities- Stock options
    
    
    
    
    
    
    502,701Diluted earnings per share
    
    $
    1,979
    
    
    
    40,839,140
    
    
    $
    0.05Net incomeBasic earnings per share
    
    $
    43,802
    
    
    
    40,336,439
    
    
    $
    1.09Effect of dilutive securities- Stock options
    
    
    
    
    
    
    502,701Diluted earnings per share
    
    $
    43,802
    
    
    
    40,839,140
    
    
    $
    1.07
 All options and warrants to purchase shares of common stock were included in the computation
of 2003 diluted earnings per share as the exercise prices were less than the average market
price of the common stock. F-25




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##### Table of Contents



12. Earnings Per Share  continued Weightedaverage number
    
    
    Per shareYear ended December 31, 2004
    
    Income
    
    
    of shares
    
    
    amountBasic earnings per share
    
    $
    66,885
    
    
    
    42,496,122
    
    
    $
    1.57Effect of dilutive securities- Stock options
    
    
    
    
    
    
    52,123
    
    
    
    Diluted earnings per share
    
    $
    66,885
    
    
    
    42,548,245
    
    
    $
    1.57
 All options to purchase shares of common stock were included in the computation of 2004
diluted earnings per share as the exercise prices were less than the average market price of
the common stock. * Adjusted for 1 for 3 stock split and 10 for 1 stock dividend. 13. Other (Expenses) Income  Net Other (expenses) income  net consists of: Year ended December 31,
    
    2002
    
    
    2003
    
    
    2004Miscellaneous expense
    
    $
    (771
    )
    
    $
    (886
    )
    
    $
    (947
    )Non-trade receivable recovered
    
    
    
    
    
    
    500
    
    
    
    Foreign exchange (loss) gain
    
    
    (345
    )
    
    
    (62
    )
    
    
    189Bank charges
    
    
    (307
    )
    
    
    (274
    )
    
    
    (206
    )Finance charge on early repayment of a bank loan
    
    
    (610
    )
    
    
    
    
    
    
    Release of unamortized goodwill of an affiliated company- Mate Fair (see note 3(b)(v))
    
    
    (520
    )
    
    
    
    
    
    
    Realized gain on disposal of marketable securities
    
    
    642
    
    
    
    
    
    
    
    Dividend income received from marketable securities and investment
    
    
    917
    
    
    
    3,714
    
    
    
    18,295Gain on disposal of intangible asset (see note 16)
    
    
    60
    
    
    
    
    
    
    
    Gain on disposal of other assets
    
    
    
    
    
    
    
    
    
    
    19Gain on disposal of land
    
    
    
    
    
    
    9
    
    
    
    Loss on disposal of investment
    
    
    
    
    
    
    
    
    
    
    (67
    )Loss on disposal of convertible notes (see note 9 (a))
    
    
    
    
    
    
    (102
    )
    
    
    Redemption of shares in legal settlement, net of expenses- Tele Art case (see note 18(b))
    
    
    3,333
    
    
    
    
    
    
    
    Provision for loss on Tele-Art Case for 1999 and 2002
share redemptions (see note 18(b))
    
    
    (5,192
    )
    
    
    
    
    
    
    Loss on reverse merger of JIC Group, including release of
unamortized goodwill of $1,483 (see note 3(b)(ii))
    
    
    (2,655
    )
    
    
    
    
    
    
    Legal expense related to reverse merger of JIC Group
    
    
    (1,411
    )
    
    
    
    
    
    
    $
    (6,859
    )
    
    $
    2,899
    
    
    $
    17,283
 F-26




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##### Table of Contents



14. Staff Retirement Plans The Company operates a Mandatory Provident Fund (MPF) scheme for all qualifying employees
in Hong Kong and a retirement benefit scheme (RBS) for all qualifying employees in Macao.
The MPF and RBS are defined contribution schemes and the assets of the schemes are managed
by the trustees independent to the Company. Both the MPF and RBS are available to all employees aged 18 to 64 and with at least 60 days
of service under the employment of the Company in Hong Kong and Macao. Contributions are
made by the Company at 5% based on the staffs relevant income. The maximum relevant income
for contribution purpose per employee is $3 per month. Staff members are entitled to 100%
of the Companys contributions together with accrued returns irrespective of their length of
service with the Company, but the benefits are required by law to be preserved until the
retirement age of 65 for employees in Hong Kong while the benefit can be withdrawn by the
employees in Macao at the end of employment contracts. According to the relevant laws and regulations in the PRC, the Company is required to
contribute 8% to 9% of the stipulated salary set by the local government of Shenzhen, the
PRC, to the retirement benefit schemes to fund the retirement benefits of their employees.
The principal obligation of the Company with respect to these retirement benefit schemes is
to make the required contributions under the scheme. No forfeited contributions may be used
by the employer to reduce the existing level of contributions. The cost of the Companys contribution to the staff retirement plans in Hong Kong, Macao and
PRC amounted to $617, $982 and $1,190 for the years ended December 31, 2002, 2003 and 2004,
respectively. 15. Income Taxes The components of income before income taxes and minority interest are as follows: Year ended December 31,
    
    2002
    
    
    2003
    
    
    2004PRC, excluding Hong Kong and Macao
    
    $
    18,823
    
    
    $
    39,778
    
    
    $
    37,546Hong Kong, Macao and other jurisdictions
    
    
    (8,604
    )
    
    
    3,013
    
    
    
    43,034$
    10,219
    
    
    $
    42,791
    
    
    $
    80,580
 Under the current BVI law, the Companys income is not subject to taxation. Subsidiaries
operating in Hong Kong and the PRC are subject to income taxes as described below, and the
subsidiary operating in Macao is exempted from income taxes. Under the current Cayman Islands law,
ZPTL, NTEEP, JIC Technology and Namtek Software are not subject to profit tax in the Cayman Islands as they have
no business operations in the Cayman Islands. However, they may be subject to Hong Kong
income taxes as described below if they are registered in Hong Kong 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% for 2002 and 17.5% for 2003 and
2004 to the estimated taxable income earned in or derived from Hong Kong during the period,
if applicable. Deferred tax, where applicable, is provided under the liability method at the rate of 16%
for 2002 and 17.5% for 2003, and 2004, being the effective Hong Kong statutory income tax
rate applicable to the ensuing financial year, on the difference between the financial
statement and income tax bases of measuring assets and liabilities. The basic corporate tax rate for Foreign Investment Enterprises (FIEs) in the PRC, such as
Namtai Electronic (Shenzhen) Co., Ltd. (NTSZ), Zastron Electronic (Shenzhen) Co., Ltd.
(Zastron), Shenzhen Namtek Company Limited (Shenzhen Namtek) and Jetup (collectively the
PRC subsidiaries) is currently 33% (30% state tax and 3% local tax). However, because all
the PRC subsidiaries are located in 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 Shenzhen are not currently assessing any local tax. F-27




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##### Table of Contents



15. Income Taxes  continued Since the PRC subsidiaries have agreed to operate for a minimum of 10 years in the PRC, a
two-year tax holiday from the first profit making year is available, following which in the
third through fifth years there is a 50% reduction to 7.5%. In any event, for FIEs such as
NTSZ, Zastron and Namtek which export 70% or more of the production value of their products,
a reduction in the tax rate is available; in all cases apart from the years in which a tax
holiday and tax incentive is available, there is an overall minimum tax rate of 10%. The
following details the tax concessions received for the Companys PRC subsidiaries:  
    On January 8, 1999, NTSZ received the recognition of High and New Technology
Enterprise which entitles it to various tax benefits including a lower income tax rate
of 7.5% until 2003. In July 2002, the Shenzhen local tax authority issued a notice to
shorten the tax incentive period from 5 years to 3 years expiring in 2001.
Nevertheless NTSZ was advised by the Shenzhen local tax authority that it would
continue to provide a rebate of corporate tax paid for 2 years for 2002 and 2003.
During 2003, NTSZ received $110 rebate of corporate tax paid for 2002, a tax refund of
$122 from reinvestment of profits for 1999 to 2001 and a refund of $441 for being an
export-oriented enterprise in 2002. In 2004, NTSZ received a tax refund of $821 from
reinvestment of profits for 2002 and a refund of $399 for being an export-oriented
enterprise in 2003.
    In 2003 Zastron received a refund of $56 from reinvestment of profits for 1999 and a
refund of $124 for being an export-oriented enterprise in 2002. On May 13, 2004,
Zastron received the recognition of High and New Technology Enterprise and was
entitled to enjoy a reduced corporate tax rate of 7.5% for three years commencing 2004.
In 2004 Zastron received a refund of $243 from reinvestment of profits for 1999 to
2002 and a refund of $793 for being an export-oriented enterprise in 2003.
    For the years ended December 31, 2002, the income tax of Jieda Electronics
(Shenzhen) Co., Ltd. (Jieda), a then wholly owned subsidiary of JIC Technology, was
payable at the rate of 15% on the assessable profit. During 2003, Jieda merged with
Jetup.
    In February 2001, Shenzhen Namtek received the recognition of Advanced Technology
Enterprise which entitles it to various tax benefits including a lower income tax rate
of 7.5% until 2003. In 2003, Shenzhen Namtek received a refund of $27 from the
reinvestment of profits for 1998 to 2000. In 2004, Shenzhen Namtek is entitled to a 5%
tax refund for being an export-oriented enterprise in 2004.
    The Shenzhen local tax authority has granted Jetup the status of High and New
Technology Enterprise and allowed it to enjoy a lower income tax rate to 7.5% for 3
years from 2002 to 2004. During 2003, Jetup received a refund of $175 from
reinvestment of profit for 2002.
    Income tax of Jieyao Electronics (Shenzhen) Co., Ltd. (Jieyao), a then wholly
owned subsidiary of JIC Technology was payable at the rate of 7.5% on the assessable
profit for the years ended December 31, 2002 to 2003. During 2003, Jieyao was disposed
of to a third party (see note 3(b)(iii)).
    For the years ended December 31, 2002, BPC qualified for a tax holiday. During
2002, BPC was disposed of to TBCL (see note 3(b)(i)). A FIE whose foreign investor directly reinvests by way of capital injection its share of
profits obtained from that FIE or another FIE owned by the same foreign investor in
establishing or expanding an export-oriented or technologically advanced enterprise in the
PRC for a minimum period of five years may obtain a refund of the taxes already paid on
those profits. The PRC subsidiaries qualified for such refunds of taxes as a result of
reinvesting their profit earned in previous years by their respective holding companies. As
a result, the Company recorded tax expense net of the benefit related to the refunds. At
December 31, 2003 and 2004, taxes recoverable under such arrangements were $4,889 and
$6,520, respectively, which are included in income taxes recoverable and expected to be
received during 2004 and 2005, respectively. However, during 2003 the Shenzhen government
did not refund approximately $13 in taxes the Company paid in 1998 to 2000. Therefore, the
Company reversed the related receivable into current tax expense in 2003. In accordance with its normal practice, the Hong Kong tax authorities selected the Company
and one of its wholly owned subsidiaries for a tax audit. In March 2003, in relation to
fiscal year 1996, the Hong Kong tax authorities have made certain estimated assessments for
public revenue protection purposes to prevent the assessments, if any, from becoming time
barred. The Hong Kong tax authorities have not provided concrete grounds for the
assessments. The Company and the subsidiary concerned have objected to these estimated
assessments. The outcome of the objection is uncertain at this stage as the Hong Kong tax
authorities are still reviewing the Companys and its subsidiarys Hong Kong tax position.
At the time, it is not possible to estimate the outcome of the tax audit, the amount that
may have to be paid, if any, or the impact that the results of the 1996 tax audit will have
to subsequent tax years. However, management is of the view that there will be no material
tax adjustment as a result of the tax audit. In March 2004, this wholly owned subsidiary
received a tax demand note from the Hong Kong tax authorities for additional tax assessment
for the fiscal year 1997. The subsidiary requested for an unconditional hold-over of such
assessment and was denied by the Hong Kong tax authorities. In June 2004, this subsidiary
applied to the High Court of Hong Kong for a judicial review and the hearing is scheduled to
be held on April 25 and 26, 2005. Management is of the view that they will obtain favorable
judgment and hence, no material tax adjustment is expected. F-28




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##### Table of Contents



15. Income Taxes  continued The current and deferred components of the income tax expense appearing in the consolidated
statements of income are as follows: Year ended December 31,
    
    2002
    
    
    2003
    
    
    2004Current tax
    
    $
    (812
    )
    
    $
    (433
    )
    
    $
    (957
    )Deferred tax
    
    
    39
    
    
    
    34
    
    
    
    78$
    (773
    )
    
    $
    (399
    )
    
    $
    (879
    )
 The Companys deferred tax assets and liabilities as of December
31, 2003 and 2004 are attributable to the following: December 31,
    
    2003
    
    
    2004Property, plant and equipment
    
    $
    (78
    )
    
    $
    Net operating losses
    
    
    
    
    
    
    5,863(78
    )
    
    
    5,863Valuation allowance
    
    
    
    
    
    
    (5,863
    )$
    (78
    )
    
    $
    
 The realization of the recorded deferred tax assets is dependent on generating sufficient
taxable income prior to the expiration of net operating loss carryforwards. As the
management does not believe that it is more likely than not that all of the deferred tax
asset will be realized, a full valuation allowance has been established at December 31,
2004. At December 31, 2002 and 2003, the Company did not have any net operating loss
carryforwards. At December 31, 2004, the Company had net operating losses of $5,863 which
may be carried forward indefinitely. A reconciliation of the income tax expense to the amount computed by applying the current
tax rate to the income before income taxes in the consolidated statements of income is as
follows: YEAR ENDED DECEMBER 31,
    
    2002
    
    
    2003
    
    
    2004Income before income taxes and minority interests
    
    $
    10,219
    
    
    $
    42,791
    
    
    $
    80,580PRC tax rate
    
    
    15
    %
    
    
    15
    %
    
    
    15
    %Income tax expense at PRC tax rate on income before
income tax
    
    $
    (1,533
    )
    
    $
    (6,419
    )
    
    $
    (12,087
    )Effect of
difference between Hong Kong and PRC tax rates applied to Hong Kong income
    
    
    42
    
    
    
    72
    
    
    
    205Effect of (loss) income for which no income tax benefit/
expense is receivable/payable
    
    
    (661
    )
    
    
    796
    
    
    
    7,660Tax holidays and tax incentives
    
    
    542
    
    
    
    2,122
    
    
    
    2,220Effect of PRC tax concessions, giving rise to no PRC tax
liability
    
    
    2,153
    
    
    
    3,435
    
    
    
    2,774Tax losses not recognised
    
    
    
    
    
    
    
    
    
    
    (1,026
    )Tax benefit (expense) arising from items which are not
assessable (deductible) for tax purposes:Gain on disposal of land in Hong Kong
    
    
    
    
    
    
    1
    
    
    
    Exempted interest income
    
    
    12
    
    
    
    16
    
    
    
    24Non-deductible legal and professional fees
    
    
    (234
    )
    
    
    (301
    )
    
    
    (282
    )Non-deductible and non-taxable other items
    
    
    (466
    )
    
    
    (105
    )
    
    
    17Overprovision for income tax expense in prior year
    
    
    
    
    
    
    103
    
    
    
    Underprovision of income tax expense in prior years
    
    
    (501
    )
    
    
    
    
    
    
    (268
    )Other
    
    
    (127
    )
    
    
    (119
    )
    
    
    (116
    )$
    (773
    )
    
    $
    (399
    )
    
    $
    (879
    )
 No income tax arose in the United States of America in any of the periods presented. Tax that would otherwise have been payable without tax holidays and tax concessions amounts
to approximately $2,695, $5,557 and $4,994 in the years ended December 31, 2002, 2003 and
2004, respectively (representing a decrease in the basic earnings and diluted earnings per
share of $0.08, $0.14 and $0.12 in the years ended December 31, 2002, 2003 and 2004,
respectively). F-29




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##### Table of Contents



16. Related Party Balance and Transactions For the period from January 1, 2002 though April 2002, the Company recognized net sales of
$7,849 and purchased raw materials of $7,751 from TBCL, a minority shareholder of BPC, and
its related companies. In addition, the Company had paid $1,000 to TBCL for acquisition of
a license during the year ended December 31, 1999, which was disposed of during 2002 for a
consideration of $800 together with the disposal of interest in BPC, plus the foreign
exchange gain of $9, resulting in a gain of $60. As of December 31, 2003 and 2004, the balance due from a related party represented the
balance due from JCT, a subsidiary of Alpha Star. For the years ended December 31, 2003 and
2004, the Company recognized net sales of $20,782 and $34,181 and purchased raw materials of
$5,456 and $12,398 from JCT and its related companies, respectively. During the year ended December 31, 2004, the Company disposed of certain other assets to a
director of the Company at a consideration of $231, which represented the then carrying
value of the assets. No significant gain or loss arose from such transaction. 17. Financial Instruments The Companys financial instruments that are exposed to concentrations of credit risk
consist primarily of its cash equivalents and trade receivables. The Companys cash and cash equivalents are high-quality deposits placed with banking
 institutions with high credit ratings. This investment policy limits the Companys exposure
to concentrations of credit risk. The trade receivable balances largely represent amounts due from the Companys principal
customers who are generally international organizations with high credit ratings. Letters of
credit are the principal security obtained to support lines of credit or negotiated contracts
from a customer. As a consequence, concentrations of credit risk are limited. Allowance for
doubtful debts was $119 and $157 in 2003 and 2004, respectively. There were no other
movements in the provision for doubtful accounts. The Companys financial instruments reported in current assets or current liabilities in the
consolidated balance sheet at carrying amounts approximate their fair values due to the
short maturity of these instruments. The Companys financial instruments reported as
non-current liabilities, such as its long term debt, approximate their fair value due to
the variable nature of the interest calculations. 18. Commitments and Contingencies  (a)
    Lease commitments The Company leases premises under various operating leases, certain of which contain
contingent escalation clauses whereby the percentage increase is subject to periodic
review and agreement between the Company and the lessor. Rental expense under
operating leases was $909, $617 and $975 in the years ended December 2002, 2003 and
2004, respectively. At December 31, 2004, the Company was obligated under operating leases, which relate
to land and buildings, requiring minimum rentals as follows: Year ending December 31, - 2005
    
    $
    1,243- 2006
    
    
    1,116- 2007
    
    
    1,169- 2008
    
    
    1,215- 2009
    
    
    1,215- 2010 and thereafter
    
    
    3,178$
    9,136
 F-30




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##### Table of Contents



18. Commitments and Contingencies- continued  (b)
    Significant legal proceedings In June 1997, the Company filed a petition in BVI for the winding up of Tele-Art on
account of an unpaid judgment debt owing to the Company. The High Court of Justice
granted an order to wind up Tele-Art in July 1998 and the Eastern Caribbean Court of
Appeal upheld the decision on January 25, 1999. On January 22, 1999, pursuant to its
Articles of Association, the Company redeemed and cancelled 415,500 shares * of the
Company registered in the name of Tele-Art at a price of $3.73 per share to offset
substantially all of the judgment debt of $799, plus interest and legal costs
totalling $1,673, including dividends that the Company had withheld and credited
against the judgment debt. Following the completion of the redemption, the Company received notice that the
liquidator had obtained an ex-parte injunction preventing the Company from redeeming
Nam Tai shares beneficially owned by Tele-Art. On February 4, 1999, the liquidator
of Tele-Art filed a further summons in the BVI on its behalf seeking, among other
matters:  
    A declaration as to the respective priorities of the debts of Tele-Art to the
Bank of China, Nam Tai, and other creditors and their respective rights to have
their debts discharged out of the proceeds of the Tele-Arts Nam Tai shares;
    An order setting aside the redemption of 415,500 shares, and ordering
delivery of all shares in possession or control of Nam Tai to the liquidator;
and
    Payment of all dividends in respect of Tele-Arts Nam Tai shares. On March 26, 2001, the Company filed a summons seeking to remove the liquidator,
David Hague, for failing to act diligently in the performance of his duties and for
knowingly misleading the court. On September 3, 2002, David Hague submitted a letter
of resignation prior to the scheduled removal hearing. A new liquidator was
subsequently appointed in July 2003. On July 5, 2002, upon application by the Company, the court ordered the removal of
the liquidators ex-parte injunction and ordered an inquiry into damages. On April 16,
2004, the Company filed its amended points of claim of defense. There are currently
applications before the Court of Appeal in the British Virgin Islands to determine
the progress of this matter as the Company has sought to enter judgment against David
Hague who has applied to strike out the Companys claim for damages. On August 9,
2002, the court delivered a decision awarding the Company a judgment against Tele-Art
for approximately $34,000. On August 12, 2002, the Company redeemed and cancelled,
pursuant to its Articles of Association, the remaining 509,181 ** shares beneficially
owned by Tele-Art at a price of $6.14 per share. Including the dividends which the
Company had withheld and credited against the judgment, this offset a further $3,519
in judgment debts owed to the Company by Tele-Art. The Company recorded the $3,333
redemption, net of expenses, as other income in 2002. On January 21, 2003, a judgment was delivered on the liquidators February 4, 1999
summons declaring that the redemption and set off of dividends on the 415,500 shares
be set aside and that all Tele-Art property withheld by Nam Tai be delivered to
Tele-Art in liquidation. The orders granted in the judgment were substantially
different from the relief sought in the February 4, 1999 application. On February 4,
2003, the Company filed an application for a stay of execution and leave to appeal
the decision listing eight grounds of appeal, which was granted on June 23, 2003.
The case was heard on January 12, 2004 and the judgment was delivered on April 26,
2004. It was held that the redemption of 415,500 shares by the Company was proper
and efficacious. However, the Company must return the redemption proceeds and
dividends payable received to the liquidator for distribution to creditors. David
Hague, who filed the original application in 1999, has obtained leave to appeal to
the Privy Council, the final court of appeal, against the decision of the Court of
Appeal. It is not expected that this appeal will be heard before 2006. The court
also found that Bank of China to be a secured creditor but the court did not
determine the amount owed by Tele-Art, Inc. to Bank of China. We dispute that finding,
and among other matters, have argued that the proof of debt by Bank of China was
incomplete and invalid. F-31




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##### Table of Contents



18. Commitments and Contingencies- continued  (b)
    Significant legal proceedings- continued The Bank of China is claiming to be a secured creditor. Bank of China claims that as
of December 6, 2004, the debt from Tele-Art Limited, a former wholly-owned subsidiary
of Tele-Art, Inc., that is guaranteed by Tele-Art, Inc. was $2,819 with interest
accruing daily. However, pursuant to the third liquidator report of October 13,
2004, the liquidator took the view that Bank of Chinas proof of debt was incomplete.
The liquidator has requested the Courts approval to take further action and demand
that Bank of China provide further information for his consideration. The Company is
of the view that the amount of debt owed by Tele-Art Limited to Bank of China may not
exceed $1.4 million. Pursuant to the same liquidator report, apart from Nam Tai, the
liquidator admitted the proof of debts of two other unsecured creditors with the
total amount to approximately $33. David Hague is claiming to have incurred $382
in costs for work as the liquidator. These costs, however, are subject to the approval of the Court
and as such are still pending as they have not yet been approved. The liquidator filed a summons for
the approval of its third report on October 13, 2004 and this was heard on December 14, 2004. The
Court, inter alia, ordered that the liquidator continue the administration of the liquidation of
Tele-Art, Inc. substantially in accordance with his proposals contained in the third report as well
as the second report. In 2002, due to the uncertainty of the final outcome of the litigation as a result of
the January 21, 2003 judgment and in accordance with SFAS No. 5, Accounting for
Contingencies", the Company recorded a provision for $5,192 as a component of accrued
expenses as of December 31, 2002, pending a final determination of this matter by the
courts, represented the then best estimate of the net monetary expense the Company
would have if its appeal was unsuccessful and its two judgment debts in the total
amount of $38,000 (including interest, costs, and related expenses) was determined as
having the lowest priorities in recovering from the estate of Tele-Art. According to
the information provided by the liquidator on November 7, 2003, apart from Nam Tai, a
total of 3 other creditors of Tele-Art, including the Bank of China, submitted their
proof of debt to the liquidator for a total claim of approximately $3,390. Together
with the outstanding legal charge as at December 31, 2003, the total potential
obligation to the Company was estimated to be approximately $3,890, and accordingly,
the 2002 provision for $5,192 had been reduced to $3,890 in the fourth quarter of
2003. As a result of the April 26, 2004 judgment, the Company is in negotiations
with the liquidator on the distribution of the redemption proceeds among the
unsecured creditors. If the Companys proposal is accepted by the liquidator and
approved by the court, and all legal matters related to Tele-Art, Inc. are finalized,
including the final determination of the position of the Bank of China, then any
remaining portion of the $3,890 provision will be reversed into income in the related
period. However, the
actual amount of the recovery, if any, is uncertain, and is dependent
on a number of factors including the final determination of the Bank
of Chinas position. The Company plans to continue to pursue
vigorously all legal alternatives available to seek to recover the
maximum amount of the outstanding debt from Tele-Art, Inc. as well as
to pursue other parties that may have assisted in any transfers of
the assets from Tele-Art, Inc. In furtherance of this objective, the
Company commenced proceedings in 2002 against David Hague and
PriceWaterhouseCoopers for, inter alia, negligence and breach of
statutory duty in their conduct of the liquidation. This matter is
still in its initial stages as the defendants are seeking leave to
appeal against the dismissal of their challenge to the jurisdiction
of the BVI courts in this matter. The Company may incur substantial
additional costs in pursuing its recovery and such costs may not be
recoverable. (* Subsequent to November 7, 2003, the number of shares has been
adjusted to 457,050 to reflect the 10 for 1 stock dividend effect.) (** Subsequent to November 7, 2003, the number of shares has been
adjusted to 560,099 to reflect the 10 for 1 stock dividend effect.) Shareholders Class Actions On March 11, 2003, the Company were served with a complaint in an action captioned
Michael Rocco v. Nam Tai, et al., 03 Civ. 1148 (S.D.N.Y.), or the Rocco Action. In
addition to Nam Tai, certain directors are named as defendants. On or about April 9,
2003, a second complaint was filed in an action captioned A.J. & Celine Steigler v.
Nam Tai, et al., 03 Civ. 2462 (S.D.N.Y.), or the Steigler Action, and together with
the Rocco Action, the Actions. The Actions have been consolidated since July 2003
and purports to represent a putative class of persons who purchased the common stock
of Nam Tai from July 29, 2002 through February 18, 2003. Plaintiffs in the Actions
assert claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and allege
that misrepresentations and/or omissions were made during the alleged class periods
concerning the recovery of an inventory write-down and a charge to goodwill related
to Nam Tais LPT segment. The Company has filed a motion to dismiss the lawsuit was
denied on September 27, 2004. The putative class action has not been certified as a
class action by the court but we expect the plaintiffs to seek such certification in
the near future. The court has set May 23, 2005 to near the certification motion.
Nam Tai believes it has meritorious defenses and intends to defend the case
vigorously. F-32




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##### Table of Contents



19. Segment Information The Company operates in three segments: CECP, TCA and LCDP. In 2002 and 2003, LCDP also
comprised the transformers operations. These segments are operated and managed as strategic
business units. The chief operating decision maker evaluates the net income of each segment
in assessing performance and allocating resources between segments. The following table provides operating financial information for the three reportable
segments. Year ended December 31, 2002 CECP
    
    
    TCA
    
    
    LCDP
    
    
    TotalNet sales  third parties
    
    $
    94,032
    
    
    $
    98,874
    
    
    $
    35,261
    
    
    $
    228,167Net sales  related parties
    
    
    
    
    
    
    7,849
    
    
    
    
    
    
    
    7,849Total net sales
    
    
    94,032
    
    
    
    106,723
    
    
    
    35,261
    
    
    
    236,016Cost of sales
    
    
    (75,746
    )
    
    
    (91,694
    )
    
    
    (30,516
    )
    
    
    (197,956
    )Gross profit
    
    
    18,286
    
    
    
    15,029
    
    
    
    4,745
    
    
    
    38,060Selling, general and administrative expenses
    
    
    (8,727
    )
    
    
    (6,213
    )
    
    
    (3,043
    )
    
    
    (17,983
    )Research and development expenses
    
    
    (1,215
    )
    
    
    (947
    )
    
    
    (524
    )
    
    
    (2,686
    )Impairment of goodwill
    
    
    
    
    
    
    (339
    )
    
    
    
    
    
    
    (339
    )Other income (expenses), net
    
    
    1,780
    
    
    
    (7,464
    )
    
    
    (1,175
    )
    
    
    (6,859
    )Gain on
partial disposal of subsidiaries
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    17Interest income
    
    
    4
    
    
    
    784
    
    
    
    11
    
    
    
    799Interest expense
    
    
    (1
    )
    
    
    (704
    )
    
    
    (85
    )
    
    
    (790
    )Income (loss) before income taxes and minority interests
    
    
    10,127
    
    
    
    163
    
    
    
    (71
    )
    
    
    10,219Income taxes expense
    
    
    (345
    )
    
    
    (365
    )
    
    
    (63
    )
    
    
    (773
    )Income before minority interests and equity in income of
affiliated companies
    
    
    9,782
    
    
    
    (202
    )
    
    
    (134
    )
    
    
    9,446Minority interests
    
    
    
    
    
    
    (107
    )
    
    
    (57
    )
    
    
    (164
    )Equity in income of affiliated companies
    
    
    
    
    
    
    10,741
    
    
    
    
    
    
    
    10,741Net income (loss)
    
    $
    9,782
    
    
    $
    10,432
    
    
    $
    (191
    )
    
    $
    20,023
 Year ended December 31, 2003 CECP
    
    
    TCA
    
    
    LCDP
    
    
    TotalNet sales  third parties
    
    $
    128,778
    
    
    $
    215,422
    
    
    $
    41,324
    
    
    $
    385,524Net sales  related parties
    
    
    
    
    
    
    20,782
    
    
    
    
    
    
    
    20,782Total net sales
    
    
    128,778
    
    
    
    236,204
    
    
    
    41,324
    
    
    
    406,306Cost of sales
    
    
    (97,693
    )
    
    
    (207,733
    )
    
    
    (34,590
    )
    
    
    (340,016
    )Gross profit
    
    
    31,085
    
    
    
    28,471
    
    
    
    6,734
    
    
    
    66,290Selling, general and administrative expenses
    
    
    (8,157
    )
    
    
    (12,751
    )
    
    
    (3,958
    )
    
    
    (24,866
    )Research and development expenses
    
    
    (1,963
    )
    
    
    (1,584
    )
    
    
    (490
    )
    
    
    (4,037
    )Other income (expenses), net
    
    
    1,907
    
    
    
    4,070
    
    
    
    (3,078
    )
    
    
    2,899Gain on
partial disposal of subsidiaries
    
    
    
    
    
    
    
    
    
    
    1,838
    
    
    
    1,838Interest income
    
    
    5
    
    
    
    777
    
    
    
    6
    
    
    
    788Interest expense
    
    
    
    
    
    
    (5
    )
    
    
    (116
    )
    
    
    (121
    )Income before income taxes and minority interests
    
    
    22,877
    
    
    
    18,978
    
    
    
    936
    
    
    
    42,791Income taxes expense
    
    
    (29
    )
    
    
    (366
    )
    
    
    (4
    )
    
    
    (399
    )Income before minority interests and equity in income
of affiliated companies
    
    
    22,848
    
    
    
    18,612
    
    
    
    932
    
    
    
    42,392Minority interests
    
    
    
    
    
    
    (856
    )
    
    
    (211
    )
    
    
    (1,067
    )Equity in income of affiliated companies
    
    
    
    
    
    
    498
    
    
    
    
    
    
    
    498Income after minority interests and equity in income
of affiliated companies
    
    $
    22,848
    
    
    $
    18,254
    
    
    $
    721
    
    
    $
    41,823Discontinued operation
    
    
    
    
    
    
    
    
    
    
    1,979
    
    
    
    1,979Net income
    
    $
    22,848
    
    
    $
    18,254
    
    
    $
    2,700
    
    
    $
    43,802
 F-33




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##### Table of Contents



19. Segment Information  continued Year ended December 31, 2004 CECP
    
    
    TCA
    
    
    LCDP
    
    
    TotalNet sales  third parties
    
    $
    163,584
    
    
    $
    287,386
    
    
    $
    48,710
    
    
    $
    499,680Net sales  related parties
    
    
    
    
    
    
    34,181
    
    
    
    
    
    
    
    34,181Total net sales
    
    
    163,584
    
    
    
    321,567
    
    
    
    48,710
    
    
    
    533,861Cost of sales
    
    
    (130,140
    )
    
    
    (287,229
    )
    
    
    (40,016
    )
    
    
    (457,385
    )Gross profit
    
    
    33,444
    
    
    
    34,338
    
    
    
    8,694
    
    
    
    76,476Selling, general and administrative expenses
    
    
    (9,222
    )
    
    
    (13,619
    )
    
    
    (5,212
    )
    
    
    (28,053
    )Research and development expenses
    
    
    (2,212
    )
    
    
    (1,884
    )
    
    
    (949
    )
    
    
    (5,045
    )Other income (expenses), net
    
    
    1,698
    
    
    
    15,546
    
    
    
    39
    
    
    
    17,283Gain on
partial disposal of subsidiaries
    
    
    
    
    
    
    77,320
    
    
    
    
    
    
    
    77,320Interest income
    
    
    138
    
    
    
    954
    
    
    
    18
    
    
    
    1,110Interest expense
    
    
    (1
    )
    
    
    (23
    )
    
    
    (171
    )
    
    
    (195
    )Unrealised loss on marketable
securities
    
    
    
    
    
    
    (58,316
    )
    
    
    
    
    
    
    (58,316
    )Income before income taxes and
minority interests
    
    
    23,845
    
    
    
    54,316
    
    
    
    2,419
    
    
    
    80,580Income taxes expense
    
    
    (405
    )
    
    
    (407
    )
    
    
    (67
    )
    
    
    (879
    )Income before minority interests and equity
in loss of affiliated companies
    
    
    23,440
    
    
    
    53,909
    
    
    
    2,352
    
    
    
    79,701Minority interests
    
    
    (4,879
    )
    
    
    (877
    )
    
    
    (254
    )
    
    
    (6,010
    )Equity in loss of affiliated companies
    
    
    
    
    
    
    (6,806
    )
    
    
    
    
    
    
    (6,806
    )Net income
    
    $
    18,561
    
    
    $
    46,226
    
    
    $
    2,098
    
    
    $
    66,885
 Year ended December 31, 2002 CECP
    
    
    TCA
    
    
    LCDP
    
    
    TotalDepreciation and amortization
    
    $
    2,982
    
    
    $
    5,757
    
    
    $
    1,880
    
    
    $
    10,619Capital expenditures
    
    $
    4,597
    
    
    $
    1,365
    
    
    $
    12,523
    
    
    $
    18,485Identifiable assets
    
    $
    77,360
    
    
    $
    148,394
    
    
    $
    49,332
    
    
    $
    275,086
 Year ended December 31, 2003 CECP
    
    
    TCA
    
    
    LCDP
    
    
    TotalDepreciation and amortization
    
    $
    4,154
    
    
    $
    5,479
    
    
    $
    2,631
    
    
    $
    12,264Capital expenditures
    
    $
    5,243
    
    
    $
    11,341
    
    
    $
    469
    
    
    $
    17,053Identifiable assets
    
    $
    85,799
    
    
    $
    162,366
    
    
    $
    49,530
    
    
    $
    297,695
 Year ended December 31, 2004 CECP
    
    
    TCA
    
    
    LCDP
    
    
    TotalDepreciation and amortization
    
    $
    4,441
    
    
    $
    7,121
    
    
    $
    2,454
    
    
    $
    14,016Capital expenditures
    
    $
    21,493
    
    
    $
    14,891
    
    
    $
    2,227
    
    
    $
    38,611Identifiable assets
    
    $
    134,473
    
    
    $
    274,664
    
    
    $
    51,336
    
    
    $
    460,473
 There were no material inter-segment sales for the years ended December 31, 2002, 2003 and
2004. Property, plant and equipment with a net book value of $312 was transferred from the
TCA segment to the LCDP segment during 2002. The Company charges 100% of its corporate
level related expenses to its reportable segments as management fees. F-34




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##### Table of Contents



19. Segment Information  continued A summary sets forth the percentage of net sales of each of the Companys product lines of
each segment for the years ended December 31, 2002, 2003 and 2004, is as follows: Year ended December 31,
    
    2002
    
    
    2003
    
    
    2004Product lineCECP:- Assembling- Consumer electronics and communication products
    
    
    40
    %
    
    
    32
    %
    
    
    31
    %TCA:- Assembling- Telecom components assembly
    
    
    44
    %
    
    
    57
    %
    
    
    59
    %- Software development services
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %45
    %
    
    
    58
    %
    
    
    60
    %LCDP:- Parts and components- LCD panels
    
    
    10
    %
    
    
    9
    %
    
    
    9
    %- Transformers
    
    
    5
    %
    
    
    1
    %
    
    
    0
    %15
    %
    
    
    10
    %
    
    
    9
    %100
    %
    
    
    100
    %
    
    
    100
    %
 A summary of net sales, net income and long-lived assets by geographic areas is as follows: By geographical area: Year ended December 31,
    
    2002
    
    
    2003
    
    
    2004Net sales from operations within:- Hong Kong and Macao:Unaffiliated customers
    
    $
    223,709
    
    
    $
    295,113
    
    
    $
    48,710Related party
    
    
    
    
    
    
    14,770
    
    
    
    Intercompany sales
    
    
    979
    
    
    
    404
    
    
    
    563224,688
    
    
    
    310,287
    
    
    
    49,273- PRC, excluding Hong Kong and Macao:Unaffiliated customers
    
    
    4,458
    
    
    
    90,411
    
    
    
    450,970Related parties
    
    
    7,849
    
    
    
    6,012
    
    
    
    34,181Intercompany sales
    
    
    179,411
    
    
    
    263,971
    
    
    
    4,393191,718
    
    
    
    360,394
    
    
    
    489,544- Intercompany eliminations
    
    
    (180,390
    )
    
    
    (264,375
    )
    
    
    (4,956
    )Total net sales
    
    $
    236,016
    
    
    $
    406,306
    
    
    $
    533,861Net income within:- PRC, excluding Hong Kong and Macao
    
    $
    17,930
    
    
    $
    38,627
    
    
    $
    30,981- Hong Kong and Macao
    
    
    2,093
    
    
    
    5,175
    
    
    
    35,904Total net income
    
    $
    20,023
    
    
    $
    43,802
    
    
    $
    66,885
 F-35




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##### Table of Contents



19. Segment Information  continued Year ended December 31,
    
    2002
    
    
    2003
    
    
    2004Net sales to customers by geographical area:- Hong Kong
    
    $
    57,157
    
    
    $
    36,433
    
    
    $
    160,959- Europe (excluding Estonia)
    
    
    42,943
    
    
    
    84,954
    
    
    
    96,304- United States
    
    
    33,054
    
    
    
    55,543
    
    
    
    58,696- PRC (excluding Hong Kong)
    
    
    28,518
    
    
    
    101,211
    
    
    
    132,603- Japan
    
    
    25,276
    
    
    
    68,498
    
    
    
    33,880- Estonia
    
    
    19,660
    
    
    
    20,474
    
    
    
    3,106- North America (excluding United States)
    
    
    6,640
    
    
    
    347
    
    
    
    5,352- Korea
    
    
    17,390
    
    
    
    24,499
    
    
    
    21,520- Other
    
    
    5,378
    
    
    
    14,347
    
    
    
    21,441Total net sales
    
    $
    236,016
    
    
    $
    406,306
    
    
    $
    533,861
 As at December 31,
    
    2002
    
    
    2003
    
    
    2004Long-lived assets by geographic area:- PRC, excluding Hong Kong and Macao
    
    $
    54,481
    
    
    $
    59,399
    
    
    $
    84,453- Hong Kong and Macao
    
    
    21,433
    
    
    
    18,248
    
    
    
    12,988Total long-lived assets
    
    $
    75,914
    
    
    $
    77,647
    
    
    $
    97,441
 Intercompany sales arise from the transfer of finished goods between subsidiaries operating
in different areas. These sales are generally at prices consistent with what the Company
would charge third parties for similar goods. The Companys sales to customers which accounted for 10% or more of its sales are as follows: Year ended December 31,
    
    2002
    
    
    2003
    
    
    2004A
    
    $
    N/A
    
    
    $
    N/A
    
    
    $
    128,623B
    
    
    75,965
    
    
    
    100,541
    
    
    
    75,426C
    
    
    N/A
    
    
    
    N/A
    
    
    
    54,635D
    
    
    39,854
    
    
    
    46,057
    
    
    
    N/AE
    
    
    26,217
    
    
    
    N/A
    
    
    
    N/AF
    
    
    N/A
    
    
    
    43,233
    
    
    
    N/A$
    142,036
    
    
    $
    189,831
    
    
    $
    258,684
 F-36




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##### Table of Contents








SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has
duly caused and authorized the undersigned to sign this annual report on its behalf.

NAM TAI ELECTRONICS, INC.By:
    
    /s/ JOSEPH LI
Joseph Li
Chief Executive OfficerDate:
March 15, 2005






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##### Table of Contents



EXHIBIT INDEX

ExhibitNumber
    
    DESCRIPTION1.1
    
    Memorandum and Articles of Association, as amended on June 26, 2003.*4.1
    
    Purchase Agreement entered into between Citigroup Global Markets
Limited and Nam Tai Electronics, Inc. on August 22, 2003 for the
sale of 3% convertible notes of TCL International Holdings Ltd. at
an aggregate price of HK$39,555,068.49 (approximately $5.03
million).*4.2
    
    Agreement entered into between J.I.C. Technology Company Limited and
Glory Gate Enterprises Limited on June 28, 2003 for the disposal of
transformers operation to Glory Gate Enterprises Limited for
approximately $2.4 million.*4.3
    
    Equity Interest Transfer Agreement between Nam Tai Electronic &
Electrical Products Limited HK and Nam Tai Electronic & Electrical
Products Limited July 3, 2003.4.4
    
    Construction Agreement, with commencement date of September 23, 2003, entered into between Namtai Electronic (Shenzhen)
Co. Ltd. and Takasago Thermal Engineering (Hong Kong) Co. Ltd. on October 28, 2003 for the construction of new factory
premises.*4.5
    
    An Investment Agreement and Shareholders Agreement entered into among Mr. André Jolivet, Mr. Alain Jolivet, Remote
Reward SAS, AGF Private Equity, Mighty Wealth Group Limited and Nam Tai Electronics, Inc. on December 9, 2003 for
acquiring an 11.33% equity interest in Stepmind with a consideration of approximately $5.3 million.*4.6
    
    A Supplemental Agreement entered into among Mr. André Jolivet, Mr. Alain Jolivet, Remote Reward SAS, AGF Private
Equity, Mighty Wealth Group Limited and Nam Tai Electronics, Inc. on January 2, 2004 for consenting to the release of
the second phase of payment and increasing capital investment in Stepmind should Stepmind fulfill certain conditions.*4.7
    
    Land Title Rights Issued by Shenzhen Municipal Bureau of Planning and Land Resources February 16, 2004.4.8
    
    An Agreement entered into between Nam Tai Group Management limited and Frontier Profit Inc. on March 10, 2004 for
selling Flat A, 22nd Floor, Tower 2 and Car Parking Space No. A86, The Leighton Hill, 28 Broadwood Road, Happy Valley,
Hong Kong to Frontier Profit Inc.*4.9
    
    A Memorandum of Understanding
signed by Namtai Electronic (Shenzhen) Co., Ltd. and Nam Tai Electronic & Electrical
Products Limited (Hong Kong) on March 26, 2004 to confirm the respective rights and liabilities of Nam Tai Electronic &
Electrical Products Limited (Hong Kong) and Namtai Electronic
(Shenzhen) Co., Ltd. under an internal restructuring.4.10
    
    A Sale and Purchaser Agreement entered into between Nam Tai Electronics, Inc. and Mr. Wong Toe Yeung on March 31, 2004
regarding purchasing the entire issued share capital of Jasper Ace Limited from Mr. Wong Toe Yeung with the
consideration of disposal 72.2% interest in Mate Fair Group Limited, cash of $25 million and 2,389,974 shares issued by
Nam Tai Electronics, Inc.4.11
    
    A Trademark License Agreement entered into between Nam Tai Electronics, Inc. and Nam Tai Electronic & Electrical
Products Limited on April 8, 2004 for the use of certain Namtai trademarks.4.12
    
    A Deed of Indemnity entered into between Nam Tai Electronics, Inc, and Nam Tai Electronic & Electrical Products Limited
on April 15, 2004 in favour of Nam Tai Electronic & Electrical Products Limited regarding the Global Offering of
200,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products Limited.4.13
    
    An Underwriting Agreement entered into among Nam Tai Electronics, Inc. as the selling shareholders and the Hongkong and
Shanghai Banking Corporation Limited, BNP Paribas Peregrine Capital Limited, Nomura International (Hong Kong) Limited,
Cazenove Asia Limited, BDS Asia Capital Limited and VC CEF Capital Limited as public offer underwriters on April 15,
2004 regarding the public offering of 20,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products
Limited.4.14
    
    A Supplemental Agreement entered into between Nam Tai Electronics,
Inc, and Mr. Wong Toe Yeung on July 27, 2004
to adjust the consideration for purchasing the entire issued share capital of Jasper Ace Limited
by canceling
973,210 common shares of Nam Tai Electronics, Inc, issued to Top Scale Company Limited on April 21, 2004.4.15
    
    An Underwriting Agreement entered into among Nam Tai Electronics, Inc.
as the selling shareholders and the Hongkong and
Shanghai Banking Corporation Limited, BNP Paribas Peregrine Capital Limited, Nomura International
(Hong Kong) Limited,
Cazenove Asia Limited, BDS Asia Capital Limited and VC CEF Capital Limited as international placement
underwriters on
April 22, 2004 regarding the international placing of 180,000,000 shares of HK$0.01 each of Nam
Tai Electronic &
Electrical Products Limited.4.16
    
    A Pricing Determination Agreement entered into among Nam Tai Electronics, Inc., Nam Tai Electronic & Electrical
Products Limited and the Hongkong and Shanghai Banking Corporation Limited on April 22, 2004 for determining the
offering price of the shares of Nam Tai Electronic & Electrical Products Limited to be HK$3.88 per share.4.17
    
    A Stock Borrowing Agreement entered into between Nam Tai Electronics, Inc. and the Hongkong and Shanghai Banking
Corporation Limited on April 22, 2004 regarding the Global Offering of 200,000,000 shares of HK$0.01 each of Nam Tai
Electronic & Electrical Products Limited.4.18
    
    Amended 2001 Option Plan July 30, 20044.19
    
    An Accession Agreement entered into between Welcome Success Technology
Ltd. and Mr. Alain Jolivet on August 4, 2004 in
relation to the transfer of entire interest in Stepmind to Remote Reward SAS and who became a party to the
Shareholders
Agreement which entered into among Nam Tai Electronics, Inc., AGF Innovation 3, AGF
Innovation 4, AGF Innovation 5,
Mighty Wealth Group Limited, Remote Reward SAS, Mr. Alain Jolivet and Mr. Andre Jolivet executed on November 278, 2003,
December 9, 2003 and December 10, 2003.4.20
    
    An Escrow Agreement entered into among Nam Tai Electronics, Inc., Welcome Success Technology Limited, Remote Reward
SAS, Johnson Stokes & Master, Mr. Andre Jolivet and Mr. Alain Jolivet on August 18, 2004 in relation to the disposal of
1,457,720 shares in Stepmind to Remote Reward SAS with a consideration of Euros 4,253,301.98.4.21
    
    A subscription Agreement entered into among TCL Industries Holdings
(HK) Limited, TCL International holdings Limited,
Cheerful Asset Investments Limited, Jasper Ace Limited, Mate Fair Group Limited, and TCL
Communication Technology
Holdings Limited on August 19, 2004 for subscribing 254,474,910 shares in TCL Communication
Technology Holdings Limited
in a consideration of RMB131,283,020.4.22
    
    A Deed of Assignment of Trademarks entered into between Nam
Tai Electronics, Inc. and Namtai Electronic (Shenzhen) Co.
Ltd. on September 20, 2004 for assigning Namtai & device trademarks to
Nam Tai Electronics, Inc.4.23
    
    A Banking Facilities Letter from the Hongkong and Shanghai Banking Corporation Limited to Nam Tai Group Management
Limited on September 24, 2004 regarding the renewal of Overdraft Facility of HK$500,000, Treasury Facilities of
US$30,000,000 and Corporate Card of HK$1,100,000.4.24
    
    A Share Transfer Agreement entered into between J.I.C. Enterprises (Hong Kong) Limited and J.I.C. Technology Company
Limited on October 15, 2004 for the disposal of the entire issued share capital of Jetup Electronic (Shenzhen) Co. Ltd.
to J.I.C. Technology Company Limited for a consideration of HK$105,878,396.8.1
    
    Diagram of Companys
subsidiaries. See Page 24 of this report.10.1
    
    Letter from MCW. Todman & Co. dated February 10, 2003. **10.2
    
    Letter from MCW. Todman & Co. dated February 17, 2003. **12.1
    
    Certification pursuant to Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.12.2
    
    Certification pursuant to Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.14.1
    
    Code of Ethics.23.1
    
    Consent of Deloitte Touche Tohmatsu.99.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




---

|*  |  | Previously filed with the registrants Form 20-F filed with the SEC on March 10, 2004.   
|-- |  | -----------------------------------------------------------------------------------------
|  
|** |  | Previously filed with the registrants Form 20-F filed with the SEC on February 28, 2003.