##### Table of Contents



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 1934
 For the Fiscal Year Ended December 31, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 or
 o
    
    SHELL COMPANY 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)  Unit C, 17 Floor Edificio Comercial Rodrigues
599 da Avenida da,
Praia Grande, Macao  (Address of principal executive offices)
 Common Shares,
$0.01 par value per share
 NONE
 NONE
 As of December 31, 2006, there were 44,803,735* common shares of the registrant outstanding.
  o þ
  o þ
  þ o
  Large accelerated o
    
    Accelerated filer þ
    
    None-accelerated filer o
 Indicate by check mark which financial statement item the registrant has elected to follow:
    
    Item 17. o      Item 18. þ
  o þ




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##### 



TABLE OF CONTENTS
 FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
    
    
    3INTRODUCTION
    
    
    3PART I
    
    
    3Item 1. Identity of Directors, Senior Management and Advisors
    
    
    3Item 2. Offer Statistics and Expected Timetable
    
    
    3Item 3. Key Information
    
    
    3Item 4. Information on the Company
    
    
    21Item 4A. Unresolved Staff Comments
    
    
    39Item 5. Operating and Financial Review and Prospects
    
    
    39Item 6. Directors and Senior Management
    
    
    56Item 7. Major Shareholders and Related Party Transactions
    
    
    63Item 8. Financial Information
    
    
    64Item 9. The Listing
    
    
    70Item 10. Additional Information
    
    
    71Item 11. Quantitative and Qualitative Disclosure About Market Risk
    
    
    78Item 12. Description of Securities Other Than Equity Securities
    
    
    79PART II
    
    
    79Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    79Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    80Item 15. Controls and Procedures
    
    
    80Item 16. [Reserved]
    
    
    81Item 16 A. Audit Committee Financial Expert
    
    
    81Item 16 B. Code of Ethics
    
    
    81Item 16 C. Principal Accountant Fees and Services
    
    
    81Item 16 D. Exemptions from the Listing Standards for Audit Committees
    
    
    82Item 16 E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    82PART III
    
    
    83Item 17. Financial Statements
    
    
    83Item 18. Financial Statements
    
    
    83INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    83Item 19. Exhibits
    
    
    84SIGNATURES
    
    
    87EXHIBIT 4.7EXHIBIT 4.8.1EXHIBIT 4.8.2EXHIBIT 4.9EXHIBIT 4.10EXHIBIT 4.11EXHIBIT 4.12EXHIBIT 4.13EXHIBIT 4.14EXHIBIT 4.15EXHIBIT 4.16EXHIBIT 12.1EXHIBIT 12.2EXHIBIT 13.1EXHIBIT 25.1
    2




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FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
  
 INTRODUCTION
  
 
 
 
 
 
 Note with respect to our use of Bluetooth in this Report ®
 Note with respect to the number of Common Shares outstanding
 
 PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
   3




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Year ended December 31,2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006(in thousands)Consolidated statements of income data:Net sales  third parties
    
    $
    228,167
    
    
    $
    385,524
    
    
    $
    499,680
    
    
    $
    791,042
    
    
    $
    870,174Net sales  related party
    
    
    7,849
    
    
    
    20,782
    
    
    
    34,181
    
    
    
    6,195
    
    
    
    Total net sales
    
    
    236,016
    
    
    
    406,306
    
    
    
    533,861
    
    
    
    797,237
    
    
    
    870,174Cost of sales
    
    
    197,956
    
    
    
    340,016
    
    
    
    457,385
    
    
    
    704,314
    
    
    
    783,953Gross profit
    
    
    38,060
    
    
    
    66,290
    
    
    
    76,476
    
    
    
    92,923
    
    
    
    86,221Gain on disposal of asset held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,258Operating costs and expenses:Selling, general and administrative
    
    
    17,983
    
    
    
    24,866
    
    
    
    28,053
    
    
    
    33,057
    
    
    
    30,668Research and development
    
    
    2,686
    
    
    
    4,037
    
    
    
    5,045
    
    
    
    7,210
    
    
    
    7,866Losses arising from the judgment to reinstate
redeemed shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,465Impairment of goodwill
    
    
    339
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    21,008
    
    
    
    28,903
    
    
    
    33,098
    
    
    
    40,267
    
    
    
    52,999Income from operations
    
    
    17,052
    
    
    
    37,387
    
    
    
    43,378
    
    
    
    52,656
    
    
    
    42,480Other expenses  net
    
    
    (8,418
    )
    
    
    (815
    )
    
    
    (1,012
    )
    
    
    (125
    )
    
    
    (1,265
    )Dividend income received from marketable
securities and investment
    
    
    917
    
    
    
    3,714
    
    
    
    18,295
    
    
    
    579
    
    
    
    Gain on sale of subsidiaries shares
    
    
    17
    
    
    
    1,838
    
    
    
    77,320
    
    
    
    10,095
    
    
    
    Gain on disposal of an affiliated company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,631
    
    
    
    Gain (loss) on disposal of marketable securities
    
    
    642
    
    
    
    
    
    
    
    
    
    
    
    (3,686
    )
    
    
    Impairment loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    (58,316
    )
    
    
    (6,525
    )
    
    
    Loss on marketable securities arising from
split share structure reform
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,869
    )Interest income
    
    
    799
    
    
    
    788
    
    
    
    1,110
    
    
    
    3,948
    
    
    
    8,542Interest expense
    
    
    (790
    )
    
    
    (121
    )
    
    
    (195
    )
    
    
    (438
    )
    
    
    (602
    )Income before income taxes and minority
interests
    
    
    10,219
    
    
    
    42,791
    
    
    
    80,580
    
    
    
    60,135
    
    
    
    47,286Income taxes expenses
    
    
    (773
    )
    
    
    (399
    )
    
    
    (879
    )
    
    
    (651
    )
    
    
    (377
    )Income before minority interests and equity in
income (loss) of affiliated companies
    
    
    9,446
    
    
    
    42,392
    
    
    
    79,701
    
    
    
    59,484
    
    
    
    46,909Minority interests
    
    
    (164
    )
    
    
    (1,067
    )
    
    
    (6,010
    )
    
    
    (7,992
    )
    
    
    (6,153
    )Income after minority interests
    
    
    9,282
    
    
    
    41,325
    
    
    
    73,691
    
    
    
    51,492
    
    
    
    40,756Equity in income (loss) of affiliated companies
    
    
    10,741
    
    
    
    498
    
    
    
    (6,806
    )
    
    
    (186
    )
    
    
    Discontinued operation
    
    
    
    
    
    
    1,979
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    20,023
    
    
    $
    43,802
    
    
    $
    66,885
    
    
    $
    51,306
    
    
    $
    40,756Earnings per share:Basic
    
    $
    0.57
    
    
    $
    1.09
    
    
    $
    1.57
    
    
    $
    1.19
    
    
    $
    0.93Diluted
    
    $
    0.57
    
    
    $
    1.07
    
    
    $
    1.57
    
    
    $
    1.19
    
    
    $
    0.93Income from continuing operations per share:Basic
    
    $
    0.57
    
    
    $
    1.04
    
    
    $
    1.57
    
    
    $
    1.19
    
    
    $
    0.93Diluted
    
    $
    0.57
    
    
    $
    1.02
    
    
    $
    1.57
    
    
    $
    1.19
    
    
    $
    0.93Weighted average shares:Basic
    
    
    34,885
    
    
    
    40,336
    
    
    
    42,496
    
    
    
    42,945
    
    
    
    43,702Diluted
    
    
    35,430
    
    
    
    40,839
    
    
    
    42,548
    
    
    
    43,169
    
    
    
    43,858
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At December 31,2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006(in thousands, except per share data)Consolidated balance sheet data:Cash and cash equivalents
    
    $
    82,477
    
    
    $
    61,827
    
    
    $
    160,649
    
    
    $
    213,843
    
    
    $
    221,084Working capital
    
    
    87,184
    
    
    
    93,474
    
    
    
    218,243
    
    
    
    234,674
    
    
    
    238,105Land use right and property, plant and equipment, net
    
    
    75,914
    
    
    
    77,647
    
    
    
    97,441
    
    
    
    100,741
    
    
    
    105,394Total assets
    
    
    275,086
    
    
    
    297,695
    
    
    
    460,473
    
    
    
    520,011
    
    
    
    529,235Short-term debt, including current portion of
long-term debt
    
    
    14,970
    
    
    
    3,004
    
    
    
    4,955
    
    
    
    9,400
    
    
    
    6,266Long-term debt, less current portion
    
    
    2,812
    
    
    
    1,688
    
    
    
    5,163
    
    
    
    2,850
    
    
    
    1,100Total debt
    
    
    17,782
    
    
    
    4,692
    
    
    
    10,118
    
    
    
    12,250
    
    
    
    7,366Shareholders equity
    
    
    202,128
    
    
    
    217,118
    
    
    
    305,053
    
    
    
    310,391
    
    
    
    317,094Common shares
    
    
    360
    
    
    
    412
    
    
    
    426
    
    
    
    435
    
    
    
    438Total dividend per share
    
    
    0.49
    
    
    
    1.00
    
    
    
    0.48
    
    
    
    1.32
    
    
    
    1.52Total number of common shares issued
    
    
    39,665
    
    
    
    41,231
    
    
    
    42,665
    
    
    
    43,506
    
    
    
    43,787Total number of common shares to be issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,017
 
 Note:
    
    Working Capital represents the excess of current assets over current liabilities. Risk Factors
  We are dependent on a few large customers, the loss of any of which could substantially harm our
business and operating results.
  Our quarterly and annual operating results are subject to significant fluctuations as a result of a
wide variety of factors.
  
    
    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;
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
    
    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.
   We face increasing competition, which has had and may continue to have, an adverse effect on our
gross margins.
   
    
    15.4% in 2006, from 11.7% for 2005 to 9.9% for 2006,
    
    18.2% in 2005, from 14.3% for 2004 to 11.7% for 2005; and
    
    12.3% in 2004, from 16.3% for 2003 to 14.3% for 2004.
  We may not be able to compete successfully with our competitors, many of which have substantially
greater resources than we do. We will face intense competition when we begin large-scale production
of flexible printed circuit, or FPC, boards and FPC subassemblies.
  6




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Product/Service
    
    CompetitorEMS
    
    Celestica, Inc. § Flextronics International Ltd. § Hon Hai
Precision Industry Co., Ltd. § Jabil Circuit, Inc. §
Sanmina-SCI Corporation § Solectron CorporationImage capturing devices and their modules
    
    Lite-On Technology Corporation § Logitech International S.A.
§ The Primax GroupMobile phone accessories
    
    Balda-Thong Fook Solutions Sdn., Bhd. § Elcoteq Network
Corp. § WKK International (Holdings) Ltd.RF modules 

Liquid crystal display, or LCD, panels
    
    Wavecom SA § WKK International (Holdings) Ltd.

Elec & Eltek International Holdings Limited § Truly
International Holdings Ltd. § Varitronix International Ltd.Telecommunication subassemblies and components
    
    Philips § Samsung § Solectron § Varitronix International Ltd.Consumer electronic products (calculators,
personal organizers and linguistic products)
    
    Kinpo Electronics, Inc. § Inventec Co. Ltd.
   Our inability to utilize capacity at our facilities could materially and adversely affect our
business and operating results.
  Delays in constructing our new factories could adversely affect our operating results.
  7




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Cancellations or delays in orders could materially and adversely affect our gross margins and
operating results.
  We do not have long-term purchase commitments from our customers and the life cycles of their
products (and therefore ours) may be short, so our future revenues are difficult to predict.
  Our business has been characterized by a rapidly changing mix of products and customers.
  There may not be a sufficient market for new products that our customers or we develop.
  8




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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.
   
    
    utilization of advances in technology;
    
    development of new or improved manufacturing processes for our customers products;
    
    delivery of efficient and cost-effective services; and
    
    timely completion of the manufacture of new products.
 Our business is capital intensive and the failure to obtain capital could require that we curtail
capital expenditures.
  We generally have no written agreements with suppliers to obtain components and our margins and
operating results could suffer from increases in component prices.
  Our business and operating results would be materially and adversely affected if our suppliers of
needed components fail to meet our needs.
  9




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Factors affecting the electronics industry in general and our customers in particular could harm
our operations.
  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.
  Because our operations are international, we are subject to significant worldwide political,
economic, legal and other uncertainties.
  
    
    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.
  Our operating results could be negatively impacted by seasonality.
  10




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Our results could be adversely affected with intensifying environmental regulations.
  Future acquisitions or strategic investments may not be successful and may harm our operating
results.
  
 
 
 
 
 
 Our insurance coverage may not be sufficient to cover the risks related to our operations and
losses.
  We are a defendant in putative class action lawsuits and this litigation could adversely affect our
business regardless of the final outcome.
 Rocco vs. Nam Tai Electronics et al
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We have suffered material losses from litigation involving claims against Tele-Art Inc. and related
proceedings, and may suffer additional losses and be unable to succeed in recovering on our
judgments against Tele-Art Inc.
  
 
 
    12




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We could become involved in intellectual property disputes.
  We depend on our executive officers and skilled management personnel.
  Labor shortages in Southern China could adversely affect our gross margins or decrease revenue.
  We are subject to the risk of increased taxes.
  13




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We may not pay dividends in the future
  Payment of dividends by our subsidiaries in China to us is subject to restrictions under PRC law.
  If certain exemptions within the PRC regarding withholding taxes are removed, we may be required to
deduct Chinas corporate withholding taxes from any dividends that are paid to us by our PRC
subsidiaries, which will reduce the return on investment.
  Changes in the economic and political environment in China and policies adopted by the PRC
government to regulate its economy may adversely affect our business, operating results and
financial condition.
  14




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The PRC legal system has inherent uncertainties that could materially and adversely impact our
ability to enforce the agreements governing our factories and to do business.
  Controversies affecting Chinas trade with the United States could harm our operating results or
depress our stock price.
  A deterioration of relations between China and Japan may harm our business.
   The economy of China has been experiencing significant growth, leading to some inflation. If the
government tries to control inflation by traditional means of monetary policy or returns to planned
economic techniques, our business will suffer a reduction in sales growth and expansion
opportunities.
  15




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Changes to PRC tax laws and heightened efforts by the Chinas tax authorities to increase revenues
could subject us to greater taxes.
  Changes in foreign exchange regulations of China could adversely affect our operating results.
  Our financial results have been affected by changes in currency exchange rates. Changes in currency
rates involving the Japanese yen or renminbi could increase our expenses.
    16




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We have suffered losses from hedging against our currency exchange risk.
  Political and economic instability in Hong Kong could harm our operations.
  Power shortages in China could affect our business.
  The recurrence of SARS in China, the potential outbreak of avian flu in China, or similar adverse
public health developments, and concerns over the spread of these diseases in China and elsewhere,
may materially and adversely affect our business and operating results.
  17




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Our products are sold internationally and the effect of business, legal and political risks
associated with international operations could significantly harm us.
  
 
 
 
 
  We are exposed to general economic conditions. Any slowdown in the technology products industry may
affect our business and operating results adversely.
  We are exposed to impact of global business trends in the mobile phone industry, which could result
in even lower gross margins on the mobile phone components and subassemblies we manufacture.
  Actual or perceived health risks associated with the use of mobile phone handsets or other
communications equipment could negatively affect our business.
  18




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The market price of our shares will likely be subject to substantial price and volume fluctuations.
    Regulatory initiatives in the United States, higher insurance costs and new and potentially new
accounting pronouncements could adversely impact our future operating results and, in the case of
the Financial Accounting Standards Boards or FASBs, recent pronouncement regarding the expensing
of stock options, has adversely impacted, and will continue to, adversely impact, our financial
results.
  It may be difficult to serve us with legal process or enforce judgments against our management or
us.
  19




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
 
 
 
 
 
 
 
 
  
 
 
 
 
 
  20




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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 status as a foreign private issuer in the United States exempts us from certain of the
reporting requirements under the Securities Exchange Act of 1934 and corporate governance standards
of the New York Stock Exchange, or NYSE limiting the protections and information afforded to
investors.
  
 
 
 
   
 ITEM 4. INFORMATION ON THE COMPANY
 History and Development of Nam Tai
 Corporate Information
   21




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Historical Summary
  Major Events
    22




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23




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24




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Capital Expenditures
  2004
    
    
    2005
    
    
    2006Property, plant and equipment (net)
    
    $
    38,611,000
    
    
    $
    32,166,000
    
    
    $
    23,793,000
  
    
    $1.4 million for machinery used mainly for COG products;
    
    $7.2 million for machinery used mainly for production of LCD modules;
    
    $11.7 million for project of FPC board manufacturing in existing site; and
    
    $3.5 million for other capital equipment.
  
    
    $10.8 million for new factory expansion;
    
    $5.4 million for expansion of a LCD factory;
    
    $3.3 million for machinery used mainly for COG products;
    
    $4.9 million for machinery used mainly for FPC subassemblies; and
    
    $7.8 million for other capital equipment.
  
    
    $13.8 million for new factory expansion;
    
    $7.7 million for the expansion of LCD factory (which included $5.8 million paid as a
deposit for property, plant and equipment);
    
    $0.7 million for the expansion of our high-resolution color LCD module production capacity;
    
    $14.5 million for machinery used mainly for FPC subassemblies;
    
    $5.6 million for other capital equipment; and
    
    $2.1 million for construction work in relation to the electricity supply for Namtai
Electronic (Shenzhen) Co., Ltd.
 25




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
    
    $7.6 million for the expansion in LCD factory;
    
    $16.0 million for machinery used mainly for LCD modules production;
    
    $11.4 million for new factory construction in Wuxi;
    
    $7.9 million for the purchase of land and consultancy costs for Guangming project in
Shenzhen;
    
    $1.0 million for the project of FPC board unit manufacturing in existing site;
    
    $2.3 million for machinery in relation to surface mount technology; and
    
    $6.7 million for other capital equipments.
  Business Overview
  Our Customers
  Year ended December 31,2004

    
    2005

    
    2006Wuxi Sharp Electronic Components Co., Ltd.
    
    
    10.1
    %
    
    
    10.1
    %
    
    
    22.5
    %Sharp Corporation
    
    
    13.5
    %
    
    
    32.3
    %
    
    
    18.8
    %Sanyo Epson Imaging Devices (HK) Limited
(formerly known as Epson Precision (HK)
Ltd.)
    
    
    14.1
    %
    
    
    15.3
    %
    
    
    16.3
    %Motorola Inc.
    
    
    10.2
    %
    
    
    *
    
    
    
    *
 
 *
    
    Less than 10% of our total net sales. 26




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Customer
    
    ProductsHikari Alphax Co., Ltd.
    
    LCD modulesGN Netcom
    
    Headset accessory containing Bluetooth wireless technologySanyo Epson Imaging Devices (HK) Limited
(formerly known as Epson Precision (HK)
Ltd.)
    
    LCD modules for cellular
phones and FPC subassembliesSharp Corporation
    
    FPC subassemblies,
calculators, PDAs and
dictionariesSony Computer Entertainment Europe Ltd.
    
    Home entertainment productsSony Ericsson Mobile Communications AB
    
    Mobile phone digital camera
accessories, headset
accessory containing
Bluetooth wireless
technology and flashlight
for mobile phoneSumitronics Hong Kong Ltd.
    
    FPC subassembliesTexas Instruments Incorporated
    
    CalculatorsUniden HK Ltd.
    
    LCD panelsWuxi Sharp Electronic Components Co., Ltd.
    
    Telecom printed circuit board, or PCB, modules and FPC subassemblies
   Our Products
  Year ended December 31,2004
    
    
    2005
    
    
    2006Dollars
    
    
    Percent
    
    
    Dollars
    
    
    Percent
    
    
    Dollars
    
    
    PercentCECP
    
    $
    168,456
    
    
    
    32
    %
    
    $
    169,056
    
    
    
    21
    %
    
    $
    178,320
    
    
    
    21
    %TCA
    
    
    316,695
    
    
    
    59
    
    
    
    570,069
    
    
    
    72
    
    
    
    627,199
    
    
    
    72LCDP
    
    
    48,710
    
    
    
    9
    
    
    
    58,112
    
    
    
    7
    
    
    
    64,655
    
    
    
    7Total
    
    
    533,861
    
    
    
    100
    %
    
    
    797,237
    
    
    
    100
    %
    
    
    870,174
    
    
    
    100
    %
 27




---



##### Table of Contents



Consumer Electronic and Communication Products, or CECP
  
 
 
 
 
 Telecommunication Component Assembly, or TCA
  
 
 
 
 
 
 
 LCD Products, or LCDP
  Our Manufacturing and Assembly Capabilities
  Chip on Film, or COF
 28




---



##### Table of Contents



Chip On Glass, or COG
 Chip On Board, or COB,
 Outer Lead Bonding, or OLB
 Tape Automated Bonding with Anisotropic Conductive Film, or TAB with ACF
 Fine Pitch Heat Seal Technology, or FPHS technology
 Surface Mount Technology, or SMT
 29




---



##### Table of Contents



Super-Twisted Nematic LCDs, or STN, type LCDs
 LCD Back-End
  FPC boards and FPC Subassemblies
 Flexible Printed Circuit Subassemblies.
 Flexible Printed Circuits
  Quality Control
  30




---



##### Table of Contents



Our Suppliers
   
 
 
 
 
 
 
   31




---



##### Table of Contents



Production Scheduling
      32




---



##### Table of Contents



Sales and Marketing
   Seasonality
  Transportation
  Competition
  Product/Service
    
    CompetitorEMS
    
    Celestica, Inc. § Flextronics International Ltd. § Hon
Hai Precision Industry Co., Ltd. § Jabil Circuit, Inc. §
Sanmina-SCI Corporation § Solectron CorporationImage capturing devices and their modules
    
    Lite-On Technology Corporation § Logitech International
S.A. § The Primax GroupMobile phone accessories
    
    Balda-Thong Fook Solutions Sdn., Bhd. § Elcoteq Network
Corp. § WKK International (Holdings) Ltd.RF modules
    
    Wavecom SA § WKK International (Holdings) Ltd.LCD panels
    
    Elec & Eltek International Holdings Limited § Truly
International Holdings Ltd. § Varitronix International
Ltd.Telecommunication, subassemblies and components
    
    Philips§ Samsung§ Solectron §Varitronix International Ltd.Consumer electronic products (calculators,
personal organizers and linguistic products)
    
    §Kinpo Electronics§ Inc. § Inventec Co. Ltd.
   33




---



##### Table of Contents



Research and Development
   Patents, Licenses and Trademarks
  [ The remainder of this page left blank intentionally ]
 34




---



##### Table of Contents



Organizational Structure
  
 
  35




---



##### Table of Contents



NTEEP Group
    
    J.I.C Group
    
    Zastron GroupNam Tai Electronic &
Electrical Products
Limited (NTEEP)was
incorporated in June
2003 and is a holding
company for the
operating subsidiaries
shown in the chart above.
Shares of NTEEP has
been listed on the Hong
Kong Stock Exchange
since April 28, 2004.
    
    J.I.C. Technology
Company Limited, a
holding company for
the operating
subsidiaries shown in
the chart above, was formed
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. has
been listed on the
Hong Kong Stock
Exchange since June
2002.
    
    Zastron
Precision-Tech
Limited (ZPT) was
incorporated in June
2003 in the Cayman
Islands, and is the
holding company for
Nam Tais Zastron
group.Namtai Electronic
(Shenzhen) Co., Ltd.
(Namtai Shenzhen) was
established as Baoan
(Nam Tai) Electronic
Co. Ltd. in June 1989
as a contractual joint
venture company with
limited liability
pursuant to the laws of
China. Originally, the
equity of Baoan (Nam
Tai) Electronic Co.
Ltd. was 70% owned by
Nam Tai Electronic &
Electrical Products
Limited, a Hong Kong
subsidiary of Nam Tai,
and 30% owned by a PRC
company. In 1992, the
PRC company transferred
all of its equity
interest in the
contractual joint
venture to Nam Tai
Electronic & Electrical
Products Limited and Baoan (Nam
Tai) Electronic Co.
Ltd. changed its name
to Namtai Electronic
(Shenzhen) Co., Ltd. In
December 2003, the
equity interest in
Namtai Shenzhen was
transferred from Nam
Tai Electronic &
Electrical Products
Limited (Hong Kong) to
NTEEP and it became
NTEEPs wholly owned
subsidiary. NTEEP is
currently the principal
operating arm of the
NTEEP group.
    
    Jetup Electronic
(Shenzhen) Co. Ltd.
(Jetup) was
incorporated in 1993
in China and handles
the manufacturing and
processing production
of LCD panels and
modules through its
factories in Baoan
County, Shenzhen. It
is the principal
operating arm of the
J.I.C. group.
    
    Zastron Electronic
(Shenzhen) Co. Ltd.
(Zastron Shenzhen)
was organized as
Zastron Plastic &
Metal Products
(Shenzhen) Ltd. in
March 1992 as a
company with limited
liability company.
began producing
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 other
products. It also
became one of our
principal
manufacturing arms.Nam Tai Investments
Consultant (Macao
Commercial Offshore)
Company Limitedwas
established in August
2003 by the Company. In
March 2004, the Company
transferred the equity
interest to NTEEP and
this company then a
wholly owned subsidiary
of NTEEP. Its principal
business is to provide
consultancy,
administrative and data
processing services to
other companies in the
NTEEP group.
    
    J.I.C. (Macao
Commercial Offshore)
Company Limitedwas
incorporated in
November 2004 in
Macao, China and is a
wholly-owned
subsidiary of J.I.C.
Its principal
business is the
provision of
consultancy,
administrative and
data processing
services to other
companies within the
J.I.C. group.
    
    Zastron (Macao
Commercial Offshore)
Company Limited
(Zastron Macao) was
established in March
2004 in Macao, China
and is a wholly owned
subsidiary of ZPT.
Its principal
business is the
provision of
consultancy,
administrative and
data processing
services to other
companies within the
Zastron group.Shenzhen Namtek Co.,
Ltd (Shenzhen Namtek).
was organized in
December 1995.
Shenzhen Namtek
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. On December 30,
2005, the equity
interest in Shenzhen
Namtek was transferred
from Namtek Software to
NTEEP and Shenzhen
Namtek became NTEEPs
wholly owned
subsidiary.
    
    
    
    Zastron
Precision-Tech (Wuxi)
Co. Ltd. was
established in
November 2006 as a
wholly owned foreign
investment enterprise
with limited
liability and
pursuant to the
relevant laws of
China. The Company
will be engaged in
the manufacturing and
trading of LCD
modules and other products.
 36




---



##### Table of Contents



NTEEP Group
    
    J.I.C Group
    
    Zastron GroupNamtek Japan Company
Limitedwas
incorporated in June
2003 in Tokyo, Japan.
On December 23, 2005,
the equity interest in
this company was
transferred from Namtek
Software to NTEEP. This
company functions as a
representative office
of Shenzhen Namtek in
Japan.
    
    
    
    Zastron
Precision-Flex (Wuxi)
Co. Ltd.was
established in
November 2006 as a
wholly owned foreign
investment enterprise
with limited
liability and
pursuant to the
relevant laws of
China. The Company
will be engaged in
the manufacturing and
trading of FPC boards
and FPC
subassemblies.
 Property, Plant and Equipment
  Square
    
    
    
    
    Owned(1) or leaseLocation
    
    Footage
    
    
    Principal Use
    
    expiration dateHong Kong
    
    
    3,482
    
    
    Administration
    
    2008Macao
    
    
    2,479
    
    
    Administration
    
    2007557,835
    
    
    Principal manufacturing facilities
    
    2043/2049 (2)87,462
    
    
    Administration
    
    2043/2049 (2)Shenzhen, China
    
    
    266,168
    
    
    Dormitories
    
    2043/2049 (2)41,528
    
    
    Cafeteria
    
    204333,826
    
    
    Recreational
    
    2049Other existing facilities383,547
    
    
    Manufacturing LCD panels and modules
    
    201232,005
    
    
    AdministrationShenzhen, China
    
    
    221,666
    
    
    Dormitories22,259
    
    
    Cafeteria14,548
    
    
    RecreationalShekou, Shenzhen, China
    
    
    12,374
    
    
    Software development
    
    2007Tokyo, Japan
    
    
    904
    
    
    Software development and marketing
    
    2007Planned new manufacturing facilities(3
    )
    
    FPC boards and subassemblies
    
    2056Wuxi, Jiangsu Province, China
    
    
    (3
    )
    
    LCD modules and other products
    
    2056Guangming, Shenzhen, China
    
    
    (3
    )
    
    LCD modules and other products
    
    (4)
 
 (1)
    
    Only the PRC 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 PRC government that gives us the right to use the land for 50 years.
Similarly, the land which we have acquired in Wuxi, and will be acquiring the land in
Guangming Shenzhen, will be by 50-year land lease. 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. For our other facilities, we have entered into factory building lease agreements with
peasant collectives or other companies for 10 years or less.(2)
    
    Our principal manufacturing facilities occupy two pieces of land with 50-year land leases
that we acquired in 1993 and 1999, respectively.(3)
    
    Raw land.(4)
    
    Not yet acquired. 37




---



##### Table of Contents



Hong Kong
   Macao
  Shenzhen, China
 Principal Manufacturing Facilities
   38




---



##### Table of Contents



LCD Factory
  Software Development
  Future Expansion
   
 ITEM 4A. UNRESOLVED STAFF COMMENTS
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  39




---



##### Table of Contents



Operating Results
 Overview
 
  Net Sales and Cost of Sales
   Gross Margins
   40




---



##### Table of Contents



Income Taxes
       2004
    
    2005
    
    2006Applicable statutory tax rates
    
    
    15
    %
    
    
    15
    %
    
    
    15
    %Effect of loss / income for which no income tax benefit/expense is receivable/payable
    
    
    (10
    %)
    
    
    (8
    %)
    
    
    (5
    %)Valuation allowance
    
    
    1
    %
    
    
    
    
    
    
    Tax holidays and incentives
    
    
    (3
    %)
    
    
    (4
    %)
    
    
    (3
    %)Effect of China tax concessions, giving rise to no China tax liability
    
    
    (3
    %)
    
    
    (4
    %)
    
    
    (4
    %)Other items which are not deductible (assessable) for tax purposes
    
    
    1
    %
    
    
    2
    %
    
    
    (2
    %)Effective tax rates
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
 Strategic Investments
  Stepmind
 41




---



##### Table of Contents



Alpha Star/JCT
 TCL group .
     42




---



##### Table of Contents



Year ended December 31,2004
    
    2005
    
    2006(in thousands)Income (loss) from Investments Stated at Fair Value:Dividend income received from marketable securities and investment:TCL Corporation
    
    $
    926
    
    
    $
    579
    
    
    $
    Huizhou TCL Mobile Communication Co. Ltd.
    
    
    17,369
    
    
    
    
    
    
    
    $
    18,295
    
    
    $
    579
    
    
    $
    Loss on Disposal of Marketable Securities
    
    $
    
    
    
    $
    (3,686
    )
    
    $
    Impairment Loss on Marketable Securities
    
    
    (58,316
    )
    
    
    (6,525
    )Loss on marketable securities arising from split share structure reform
    
    
    
    
    
    
    
    
    
    
    (1,869
    )Gain on Disposal of an Affiliated Company
    
    
    
    
    
    
    3,631
    
    
    
    Equity in loss of an Affiliated Company
    
    $
    (6,806
    )
    
    $
    (186
    )
    
    $
    
 J.I.C. Group
  Critical Accounting Policies and Estimates
   Marketable Securities
   43




---



##### Table of Contents



Valuation of long-lived assets, including purchased intangible assets and valuation of goodwill
      Deferred income taxes
   Accruals and provisions for loss contingencies
  44




---



##### Table of Contents



Summary of Results
   Year Ended December 31,
    
    
    % increase/(decrease)2004
    
    
    2005
    
    
    2006
    
    
    2005 vs 2004
    
    
    2006 vs 2005Net sales
    
    $
    533,861
    
    
    $
    797,237
    
    
    $
    870,174
    
    
    
    49
    %
    
    
    9.1
    %Gross profit
    
    
    76,476
    
    
    
    92,923
    
    
    
    86,221
    
    
    
    22
    %
    
    
    (7.2
    )%Operating income
    
    
    43,378
    
    
    
    52,656
    
    
    
    42,480
    
    
    
    21
    %
    
    
    (19.3
    )%Net income
    
    
    66,885
    
    
    
    51,306
    
    
    
    40,756
    
    
    
    (23
    %)
    
    
    (20.6
    )%Basic earnings per share
    
    
    1.57
    
    
    
    1.19
    
    
    
    0.93
    
    
    
    (24
    %)
    
    
    (21.8
    )%Diluted earnings per share
    
    
    1.57
    
    
    
    1.19
    
    
    
    0.93
    
    
    
    (24
    %)
    
    
    (21.8
    )%
 Key Performance Indicators
  Three Months EndedDecember 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,2005
    
    
    2005
    
    
    2005
    
    
    2005Sales cycle (1)
    
    11 days
    
    19 days
    
    22 days
    
    18 daysInventory turnover (2)
    
    16 days
    
    20 days
    
    16 days
    
    14 daysDays in accounts receivable (3)
    
    58 days
    
    60 days
    
    50 days
    
    56 daysDays in accounts payable (4)
    
    63 days
    
    61 days
    
    44 days
    
    52 days
 2006
    
    
    2006
    
    
    2006
    
    
    2006Sales cycle (1)
    
    4 days
    
    5 days
    
    11 days
    
    10 daysInventory turnover (2)
    
    14 days
    
    15 days
    
    14 days
    
    13 daysDays in accounts receivable (3)
    
    49 days
    
    55 days
    
    49 days
    
    51 daysDays in accounts payable (4)
    
    59 days
    
    65 days
    
    52 days
    
    54 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 turnover is calculated as the ratio of inventory, net, at period end divided by
year to date of cost of sales.(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. Results of Operations
  45




---



##### Table of Contents



Year Ended December 31,2004
    
    
    2005
    
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    (85.7
    )
    
    
    (88.3
    )
    
    
    (90.1
    )Gross profit
    
    
    14.3
    
    
    
    11.7
    
    
    
    9.9Gain on disposal of asset held for sale
    
    
    
    
    
    
    
    
    
    
    1.1Selling, general and administrative expenses
    
    
    (5.2
    )
    
    
    (4.2
    )
    
    
    (3.5
    )Research and development expenses
    
    
    (1.0
    )
    
    
    (0.9
    )
    
    
    (0.9
    )Losses arising from judgment to reinstate redeemed shares
    
    
    
    
    
    
    
    
    
    
    (1.7
    )Income from operations
    
    
    8.1
    
    
    
    6.6
    
    
    
    4.9Other expenses, net
    
    
    (0.2
    )
    
    
    (0.0
    )
    
    
    (0.2
    )Dividend income from marketable securities and investments
    
    
    3.4
    
    
    
    0.1
    
    
    
    Gain on sale of subsidiaries shares
    
    
    14.5
    
    
    
    1.3
    
    
    
    Gain on disposal of investment in an affiliated company
    
    
    0
    
    
    
    0.4
    
    
    
    Impairment loss on marketable securities
    
    
    (10.9
    )
    
    
    (0.8
    )
    
    
    Realized loss on marketable securities
    
    
    
    
    
    
    (0.5
    )
    
    
    Loss on marketable securities arising from split share structure reform
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Interest income
    
    
    0.2
    
    
    
    0.5
    
    
    
    1.0Interest expense
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.1
    )Income before income taxes and minority interests
    
    
    15.1
    
    
    
    7.5
    
    
    
    5.4Income taxes
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    0.0Income before minority interests and equity in income of affiliated companies
    
    
    14.9
    
    
    
    7.4
    
    
    
    5.4Minority interests
    
    
    (1.1
    )
    
    
    (1.0
    )
    
    
    (0.7
    )Equity in loss of affiliated companies
    
    
    (1.3
    )
    
    
    
    
    
    
    Income after minority interests and equity in income (loss) of affiliated companies
    
    
    12.5
    
    
    
    6.4
    
    
    
    4.7Net income
    
    
    12.5
    %
    
    
    6.4
    %
    
    
    4.7
    %
 Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 Net Sales.
  Year ended December 31,2004
    
    
    2005
    
    
    2006Dollars
    
    
    Percent
    
    
    Dollars
    
    
    Percent
    
    
    Dollars
    
    
    PercentCECP
    
    $
    168,456
    
    
    
    32
    %
    
    $
    169,056
    
    
    
    21
    %
    
    $
    178,320
    
    
    
    21
    %TCA
    
    
    316,695
    
    
    
    59
    
    
    
    570,069
    
    
    
    72
    
    
    
    627,199
    
    
    
    72LCDP
    
    
    48,710
    
    
    
    9
    
    
    
    58,112
    
    
    
    7
    
    
    
    64,655
    
    
    
    7Total
    
    
    533,861
    
    
    
    100
    %
    
    
    797,237
    
    
    
    100
    %
    
    
    870,174
    
    
    
    100
    %
   46




---



##### Table of Contents



Gross Profit.
 Selling, General and Administrative Expenses.
 Research and Development Expenses.
 Other Expenses Net.
 Gain on Sale of Subsidiaries Shares
 Loss on marketable securities arising from split share structure reform.
 Provision of losses arising from the judgment to reinstate the redeemed shares.
 Interest Income.
 Interest Expense
 47




---



##### Table of Contents



Income Taxes
 Minority Interests
 Equity in Loss of Affiliated Companies
 Net Income.
 Year
ended December 31,2004
    
    
    2005
    
    
    2006Dollars
    
    
    Percent
    
    
    Dollars
    
    
    Percent
    
    
    Dollars
    
    
    PercentCECP
    
    $
    20.5
    
    
    
    31
    %
    
    $
    16.8
    
    
    
    33
    %
    
    $
    12.3
    
    
    
    30
    %TCA
    
    
    21.6
    
    
    
    32
    
    
    
    35.2
    
    
    
    69
    
    
    
    31.4
    
    
    
    77LCDP
    
    
    2.1
    
    
    
    3
    
    
    
    3.2
    
    
    
    6
    
    
    
    2.6
    
    
    
    6Corporate
    
    
    22.7
    
    
    
    34
    
    
    
    (3.9
    )
    
    
    (8
    )
    
    
    (5.5
    )
    
    
    (13
    )Total
    
    $
    66.9
    
    
    
    100
    %
    
    $
    51.3
    
    
    
    100
    %
    
    $
    40.8
    
    
    
    100
    %
     Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
 Net Sales.
 48




---



##### Table of Contents



Gross Profit.
 Selling, General and Administrative Expenses.
 Research and Development Expenses.
 Other Expenses, Net.
 Dividend Income Received From Marketable Securities and Investment.
 Gain on Sale of Subsidiaries Shares
  Gain on Disposal of Investment in an Affiliated Company. .
 Impairment Loss of Marketable Securities and Realized Loss in Marketable Securities
 Interest Income
 Interest Expense.
 49




---



##### Table of Contents



Income Taxes.
 Minority Interests.
 Equity in Loss of Affiliated Companies.
 Net Income.
    Liquidity and Capital Resources
 Liquidity
     50




---



##### Table of Contents



Year Ended December 31,2004
    
    
    2005
    
    
    2006Net cash provided by operating activities
    
    $
    75,210
    
    
    $
    70,825
    
    
    $
    79,811Net cash provided by (used in) investing activities
    
    
    37,729
    
    
    
    18,740
    
    
    
    (8,430
    )Net cash used in financing activities
    
    
    (14,117
    )
    
    
    (36,165
    )
    
    
    (65,071
    )Net increase in cash and cash equivalents
    
    
    98,822
    
    
    
    53,400
    
    
    
    6,310
      51




---



##### Table of Contents



Privy Council Judgment/Bank of China Litigation
  
 
 
    52




---



##### Table of Contents



Capital Resources
    Outstandingbalance at
    
    Outstanding balanceOriginal amount
    
    
    
    
    
    Amount per
    
    
    
    
    
    
    
    
    
    December 31,
    
    at December 31,Date of draw
    
    drawn
    
    No. of
    
    installment
    
    
    
    
    
    First
    
    2005
    
    2006down
    
    (in millions)
    
    installments
    
    (in millions)
    
    Interest rate
    
    repayment
    
    (in millions)
    
    (in millions)1.5% over LIBOR, changed to 0.75% over LIBOR inTerm loan 1
    
    May 2002
    
    $
    4.5
    
    
    
    16
    
    
    $
    0.3
    
    
    August 2004
    
    August 2002
    
    $
    0.6
    
    
    $
    Term loan 2
    
    April 2004
    
    $
    1.6
    
    
    
    16
    
    
    $
    0.1
    
    
    0.75% over LIBOR
    
    July 2004
    
    $
    1.0
    
    
    $
    0.6June 2004
    
    $
    3.6
    
    
    
    16
    
    
    $
    0.2
    
    
    0.75% over LIBOR
    
    September 2004
    
    $
    2.2
    
    
    $
    1.4December 2004
    
    $
    1.8
    
    
    
    16
    
    
    $
    0.1
    
    
    0.75% over LIBOR
    
    March 2005
    
    $
    1.4
    
    
    $
    0.9Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5.2
    
    
    $
    2.9
  53




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##### Table of Contents



Payments (in thousands) due by period2011 andContractual Obligation
    
    Total
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    thereafterLong-term bank borrowing
    
    $
    2,850
    
    
    $
    1,750
    
    
    $
    1,100
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating leases
    
    
    7,810
    
    
    
    1,665
    
    
    
    1,522
    
    
    
    1,288
    
    
    
    1,331
    
    
    
    1,415
    
    
    
    589Capital expenditures
    
    
    14,701
    
    
    
    14,701
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations
    
    
    123,068
    
    
    
    123,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    148,429
    
    
    $
    141,184
    
    
    $
    2,622
    
    
    $
    1,288
    
    
    $
    1,331
    
    
    $
    1,415
    
    
    $
    589
  Impact of Inflation
  Exchange Controls
  Recent Changes in Accounting Standards
    54




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##### Table of Contents



Research and Development
  Trend Information
      55




---



##### Table of Contents



Off-balance Sheet Arrangement
  
 ITEM 6. DIRECTORS AND SENIOR MANAGEMENT
 Directors and Senior Managers
  Name
    
    Age
    
    Position with Nam Tai or its SubsidiariesM. K. Koo
    
    62
    
    Chairman of the BoardWarren Lee
    
    43
    
    Chief Executive OfficerPatinda Lei
    
    40
    
    Chief Financial Officer and Chairman of the Board of Zastron groupPatrick Lee
    
    42
    
    Chief Executive Officer of Zastron groupHorace Lai
    
    36
    
    Chief Financial Officer of Zastron groupKazuhiro Asano
    
    55
    
    Chairman of the Board of NTEEP groupKarene Wong
    
    43
    
    Chief Executive Officer of NTEEP groupConnie Sit
    
    43
    
    Chief Financial Officer of NTEEP groupIvan Chui
    
    48
    
    Chairman of the Board of J.I.C. groupColin Yeoh
    
    42
    
    Member of the Board and Chief Executive Officer of J.I.C. groupVincent Hoe
    
    44
    
    Chief Financial Officer of J.I.C. groupPeter R. Kellogg
    
    64
    
    Member of the Board of DirectorsSeitaro Furukawa
    
    65
    
    Member of the Board of DirectorsDr. Wing Yan (William) Lo
    
    46
    
    Member of the Board of DirectorsCharles Chu
    
    50
    
    Member of the Board of DirectorsMark Waslen
    
    46
    
    Member of the Board of DirectorsLorne Waldman
    
    40
    
    Corporate Secretary
 M.K. Koo.
 Warren Lee.
 56




---



##### Table of Contents



.
 Patinda Lei.
 Patrick Lee.
 Horace Lai.
 Kazuhiro Asano.
 Karene Wong.
 Connie Sit.
 Ivan Chui
 Colin Yeoh.
 57




---



##### Table of Contents



Vincent Hoe
 Peter R. Kellogg.
 Seitaro Furukawa.
 Dr. Wing Yan (William) Lo
 Charles Chu.
 Mark Waslen
 58




---



##### Table of Contents



Lorne Waldman.
  Compensation of Directors and Senior Management
        59




---



##### Table of Contents



Board Practices
  Corporate Governance Guidelines
  
 NYSE Listed Company Manual Disclosure
  Committee Charters and Independence
   Board Committees
 Audit Committee.
   60




---



##### Table of Contents



Compensation
Committee.
   Nominating / Corporate Governance Committee
   Stock Options of Directors and Senior Management
  Number of
    
    Exercisecommon shares
    
    PriceName
    
    subject to options
    
    per share($)
    
    Expiration DateM.K. Koo
    
    15,000
    
    22.25
    
    June 8, 2009Warren Lee
    
    
    
    
    
    Patinda Lei
    
    
    
    
    
    Patrick Lee
    
    
    
    
    
    Horace Lai
    
    
    
    
    
    Kazuhiro Asano
    
    
    
    
    
    Karene Wong
    
    
    
    
    
    Connie Sit
    
    
    
    
    
    Ivan Chui
    
    
    
    
    
    Colin Yeoh
    
    
    
    
    
    Vincent Hoe
    
    
    
    
    
    Peter R. Kellogg
    
    15,000
    
    21.62
    
    June 6, 200815,000
    
    22.25
    
    June 8, 2009Seitaro Furukawa
    
    
    
    
    
    Wing Yan (William) Lo
    
    15,000
    
    21.62
    
    June 6, 200815,000
    
    22.25
    
    June 8, 2009Charles Chu
    
    15,000
    
    21.62
    
    June 6, 200815,000
    
    22.25
    
    June 8, 2009Mark Waslen
    
    15,000
    
    21.62
    
    June 6, 200815,000
    
    22.25
    
    June 8, 2009Lorne Waldman
    
    
    
    
    
    
 61




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##### Table of Contents



Employee Stock Option Plans
     Employees
  At December 31,Geographic Location
    
    Main Category of Activity
    
    2004
    
    2005
    
    2006Shenzhen, PRC
    
    Manufacturing
    
    
    3,987
    
    
    
    4,800
    
    
    
    5,630Research and development
    
    
    297
    
    
    
    342
    
    
    
    316Quality control
    
    
    430
    
    
    
    471
    
    
    
    439Engineering
    
    
    210
    
    
    
    281
    
    
    
    305Administration
    
    
    335
    
    
    
    407
    
    
    
    417Marketing
    
    
    57
    
    
    
    75
    
    
    
    89Support*
    
    
    213
    
    
    
    258
    
    
    
    246Total Shenzhen
    
    
    
    
    5,529
    
    
    
    6,634
    
    
    
    7,442Hong Kong
    
    Administration
    
    
    49
    
    
    
    14
    
    
    
    10Marketing
    
    
    
    
    
    
    
    
    
    
    Support*
    
    
    
    
    
    
    
    
    
    
    Total Hong Kong
    
    
    
    
    49
    
    
    
    14
    
    
    
    10Macao
    
    Administration
    
    
    11
    
    
    
    12
    
    
    
    16Marketing
    
    
    
    
    
    
    
    
    
    
    Support*
    
    
    
    
    
    
    
    
    
    
    Total Macao
    
    
    
    
    11
    
    
    
    12
    
    
    
    16Japan
    
    Administration
    
    
    1
    
    
    
    1
    
    
    
    2Marketing
    
    
    1
    
    
    
    1
    
    
    
    1Research & Development
    
    
    
    
    
    
    
    
    
    
    1Support*
    
    
    
    
    
    
    
    
    
    
    Total Japan
    
    
    
    
    2
    
    
    
    2
    
    
    
    4British Virgin Islands**
    
    Administration
    
    
    1
    
    
    
    1
    
    
    
    1Total British Virgin Islands
    
    
    
    
    1
    
    
    
    1
    
    
    
    1Grand Total
    
    
    
    
    5,592
    
    
    
    6,663
    
    
    
    7,473
 62




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##### Table of Contents



*
    
    Employees categorized in support include personnel engaged in procurement, customs,
shipping and warehouse services.**
    
    We closed our BVI office on January 1, 2007.  
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 Shares and Options Ownership of Directors, Senior Management and Principal Shareholders
  Shares beneficially owned(1)Name
    
    Number
    
    
    PercentM. K. Koo
    
    
    5,705,786
    (2)
    
    
    12.7Peter R. Kellogg
    
    
    5,826,180
    (3)
    
    
    13.0I.A.T. Reinsurance Syndicate Ltd.
    
    
    5,224,800
    (3)
    
    
    11.7Ivan Chui
    
    
    1,045,80
    
    
    
    2.3Patinda Lei
    
    
    26,400
    
    
    
    *Patrick Lee
    
    
    
    
    
    
    Horace Lai
    
    
    
    
    
    
    Kazuhiro Asano
    
    
    
    
    
    
    Karene Wong
    
    
    37,100
    
    
    
    *Colin Yeoh
    
    
    10,000
    
    
    
    *Connie Sit
    
    
    
    
    
    
    Vincent Hoe
    
    
    
    
    
    
    Lorne Waldman
    
    
    1,050
    
    
    
    *Seitaro Furukawa
    
    
    20,000
    
    
    
    *Charles Chu
    
    
    32,500
    (4)
    
    
    *Wing Yan (William) Lo
    
    
    30,000
    (5)
    
    
    *Mark Waslen
    
    
    40,000
    (6)
    
    
    *
 
 *
    
    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 44,803,735 common shares outstanding as of March 1, 2007.(2)
    
    Mr. Koo beneficially owned 5,690,786 common shares jointly with Ms. Cho Siu Sin, Mr.
Koos wife. He also holds directly options to purchase 15,000 common shares exercisable within
60 days of March 1, 2007.(3)
    
    Mr. Kellogg holds directly 571,380 common shares and options to purchase 30,000 common
shares exercisable within 60 days of March 1, 2007. Indirectly, through I.A.T. Reinsurance
Syndicate Ltd., Mr. Kellogg holds 5,224,800 common shares. I.A.T. Reinsurance Syndicate Ltd.
is a Bermuda corporation of which Mr. Kellogg is the sole holder of its voting stock. Mr.
Kellogg disclaims beneficial ownership of these shares.(4)
    
    Includes 2,500 common shares and options to purchase 30,000 common shares exercisable
within 60 days of March 1, 2007.(5)
    
    Consists of options to purchase common shares exercisable within 60 days of March 1,
2007.(6)
    
    Includes 10,000 common shares and options to purchase 30,000 common shares exercisable
within 60 days of March 1, 2007.  63




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##### Table of Contents



Percentage Ownership(1)February 28,
    
    
    March 1,
    
    
    March 1,2005
    
    
    2006
    
    
    2007M. K. Koo
    
    
    16.2
    
    
    
    13.1
    
    
    
    12.7Peter R. Kellogg (2)
    
    
    13.3
    
    
    
    13.1
    
    
    
    13.0I.A.T. Reinsurance Syndicate Ltd.
    
    
    12.0
    
    
    
    11.7
    
    
    
    11.7
 
 (1)
    
    Based on 42,664,536, 43,505,586 and 44,803,735 common shares outstanding on February 28,
2005, March 1, 2006 and March 1, 2007, respectively.(2)
    
    Includes shares registered in the name of I.A.T. Reinsurance Syndicate Ltd., of which Mr.
Kellogg disclaims beneficial ownership.  Certain Relationships and Related Transactions
  
 ITEM 8. FINANCIAL INFORMATION
 Financial Statements
  Legal Proceedings
  Tele-Art Litigation
    64




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
 
 
  65




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66




---



##### Table of Contents



Accounting for
Contingencies,
   67




---



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68




---



##### Table of Contents



1.
    
    Subsequent to November 7, 2003, the number of shares was adjusted to 457,050 to reflect
the one-for-ten stock dividend effective on that date.2.
    
    Subsequent to November 7, 2003, the number of shares was adjusted to 560,099 to reflect
the one-for-ten stock dividend effective on that date.
 Putative Class Actions
 Rocco vs. Nam Tai Electronics et al.,
 Export Sales
  December 31,Geographic Areas
    
    2004
    
    2005
    
    2006China (excluding Hong Kong)
    
    
    25
    %
    
    
    19
    %
    
    
    31
    %Europe (excluding Estonia)
    
    
    18
    
    
    
    17
    
    
    
    15Japan
    
    
    6
    
    
    
    2
    
    
    
    2United States
    
    
    11
    
    
    
    4
    
    
    
    9Hong Kong
    
    
    30
    
    
    
    48
    
    
    
    30Estonia
    
    
    1
    
    
    
    
    
    
    
    North America (excluding United States)
    
    
    1
    
    
    
    
    
    
    
    Korea
    
    
    4
    
    
    
    7
    
    
    
    6Other
    
    
    4
    
    
    
    3
    
    
    
    7100
    %
    
    
    100
    %
    
    
    100
    %
 Dividends
  69




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##### Table of Contents



Year ended December 31,2002
    
    2003
    
    2004
    
    2005
    
    2006Total dividends declared (in thousands)
    
    $
    17,056
    
    
    $
    37,584
    
    
    $
    20,424
    
    
    $
    56,324
    
    
    $
    66,497Regular dividends per share
    
    $
    0.16
    
    
    $
    0.20
    
    
    $
    0.48
    
    
    $
    1.32
    
    
    $
    1.44Special dividends
    
    $
    0.33
    
    
    $
    0.80
    
    
    
    
    
    
    
    
    
    
    $
    0.08Total dividends per share
    
    $
    0.49
    
    
    $
    1.00
    
    
    $
    0.48
    
    
    $
    1.32
    
    
    $
    1.52
  
    
    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 Co., Ltd.;
    
    In 2003, in celebration of our fifteenth anniversary since our listing and initial public offering 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; and
    
    In 2006, in celebration of Companys thirtieth founding anniversary and its fifth consecutive quarter of record-breaking sales.
  
 ITEM 9. THE LISTING
   2004
    
    2005
    
    2006Average
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    AverageDaily
    
    
    
    
    
    
    
    
    
    Daily
    
    
    
    
    
    
    
    
    
    DailyTrading
    
    
    
    
    
    
    
    
    
    Trading
    
    
    
    
    
    
    
    
    
    TradingHigh
    
    Low
    
    Volume (1)
    
    High
    
    Low
    
    Volume (1)
    
    High
    
    Low
    
    Volume (1)First Quarter
    
    $
    34.24
    
    
    $
    22.30
    
    
    
    927,119
    
    
    $
    28.36
    
    
    $
    17.25
    
    
    
    376,920
    
    
    $
    24.27
    
    
    $
    21.31
    
    
    
    224,826Second Quarter
    
    
    28.00
    
    
    
    13.99
    
    
    
    509,173
    
    
    
    27.80
    
    
    
    19.70
    
    
    
    302,367
    
    
    
    23.10
    
    
    
    21.46
    
    
    
    173,659Third Quarter
    
    
    23.51
    
    
    
    16.10
    
    
    
    412,488
    
    
    
    26.65
    
    
    
    22.50
    
    
    
    219,858
    
    
    
    22.56
    
    
    
    11.43
    
    
    
    504,411Fourth Quarter
    
    
    23.14
    
    
    
    18.07
    
    
    
    283,030
    
    
    
    25.88
    
    
    
    21.27
    
    
    
    238,459
    
    
    
    16.95
    
    
    
    12.57
    
    
    
    317,697
 
 (1)
    
    Determined by dividing the sum of the reported daily volume for the quarter by the number of
trading days in the quarter.  70




---



##### Table of Contents



DailyTradingYear ended
    
    High
    
    Low
    
    Volume (1)December 31, 2006
    
    $
    24.27
    
    
    $
    11.43
    
    
    
    305,468December 31, 2005
    
    
    28.36
    
    
    
    17.25
    
    
    
    283,482December 31, 2004
    
    
    34.24
    
    
    
    13.99
    
    
    
    532,568December 31, 2003
    
    
    42.48
    
    
    
    6.94
    
    
    
    597,858December 31, 2002
    
    
    9.07
    
    
    
    5.15
    
    
    
    164,011
 
 (1)
    
    Determined by dividing the sum of the reported daily volume for the year by the number of
trading days in the year.  DailyTradingMonth ended
    
    High
    
    Low
    
    Volume (1)February 28, 2007
    
    
    14.40
    
    
    
    13.19
    
    
    
    261,295January 31, 2007
    
    
    15.28
    
    
    
    13.52
    
    
    
    234,495December 31, 2006
    
    
    16.18
    
    
    
    15.19
    
    
    
    285,300November 30, 2006
    
    
    16.95
    
    
    
    15.53
    
    
    
    300,710October 31, 2006
    
    
    15.59
    
    
    
    12.57
    
    
    
    363,364September 30, 2006
    
    
    12.81
    
    
    
    11.43
    
    
    
    784,240
 
 (1)
    
    Determined by dividing the sum of the reported daily volume for the month by the number of
trading days in the month. 
 ITEM 10. ADDITIONAL INFORMATION
 Share Capital
  Memorandum and Articles of Association
     71




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Transfer Agent
  Material Contracts
  72




---



##### Table of Contents




 
 
 
 
 
 
 
 
 
 
 
 73




---



##### Table of Contents




 
 
 
 Exchange Controls
  Taxation
 United States Federal Income Tax Consequences
  General
  
 
 74




---



##### Table of Contents




 
 
 
 
 
 
 
 
 U.S. Holders
 
 
 
 
 
 Distributions on Our Common Shares
   75




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##### Table of Contents



Sale, Exchange or Other Disposition of Our Common Shares
  
 o
    
    the amount realized on such sale, exchange or other taxable disposition ando
    
    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);
 
 
 
 PFIC
Considerations
  Non-U.S. Holders
  Distributions
on Our Common Shares
  
 
 76




---



##### Table of Contents



Sale,
Exchange or Other Disposition of Our Common Shares
  
 
  Backup Withholding and Information Reporting
  
 
  British Virgin Islands Tax Considerations
   Documents on Display
  77




---



##### Table of Contents



ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Currency Fluctuations and Foreign Exchange Risk
         78




---



##### Table of Contents



Equivalent U.S. Dollar holdings atDecember 31,Currencies included in cash and cash equivalents
    
    2005
    
    2006United States dollars
    
    
    153,604,000
    
    
    
    205,648,000Chinese renminbi
    
    
    29,257,000
    
    
    
    8,552,000Japanese yen
    
    
    4,532,000
    
    
    
    3,851,000Hong Kong dollar
    
    
    26,422,000
    
    
    
    3,026,000Macao Pataca
    
    
    28,000
    
    
    
    7,000
 Interest Rate Risk
 Short-term interest rate risk
   Long-term interest rate risk
   
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  
 PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  79




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##### Table of Contents



ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Report of Management on Internal Control Over Financial Reporting
   Current SEC Regulations
  Attestation Report of the Registered Public Accounting Firm
  Changes in internal control over financial reporting
  80




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##### Table of Contents



ITEM 16. [RESERVED]
 
 ITEM 16 A. AUDIT COMMITTEE FINANCIAL EXPERT
   
 ITEM 16 B. CODE OF ETHICS
  
 
 ITEM 16 C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
   2005
    
    
    2006(In thousands)Audit Fees (1)
    
    $
    476
    
    
    $
    1,116Audit-related Fees (2)
    
    
    541
    
    
    
    42Tax Fees (3)
    
    
    6
    
    
    
    23All Other Fees (4)
    
    
    4
    
    
    
    42Total
    
    $
    1,027
    
    
    $
    1,223
 
 (1)
    
    Audit Fees consist of fees billed for the annual audit of our consolidated financial
statements and the statutory financial statements of our subsidiaries. They also include fees
billed for other audit services, which are those services that only the independent registered
public accounting firm reasonably can provide, and include the provision of comfort letters
and consents, and attestation services relating to the review of documents filed with the SEC.(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 a business advisory service fee. 81




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##### Table of Contents



Audit Committee Pre-approval Policies and Procedures
     
 ITEM 16 D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16 E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
  82




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##### Table of Contents



PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
 
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    F-1Report of Independent Registered Public Accounting Firm
    
    F-2Consolidated Statements of Income for the years ended December 31, 2004, 2005 and 2006
    
    F-3Consolidated Balance Sheets as of December 31, 2005 and 2006
    
    F-4Consolidated Statements of Shareholders Equity and Comprehensive Income for the years ended December 31, 2004, 2005 and 2006
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006
    

   F-6 & F-7Notes to Consolidated Financial Statements
    
    F-8
  83




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  Internal Control  Integrated Framework
    Internal Control  Integrated Framework Internal Control  Integrated Framework
   
 F - 1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
     Internal
Control  Integrated Framework
  
 F - 2




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##### Table of Contents



NAM TAI ELECTRONICS, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
 (In thousands of US dollars, except per share data)
 Year ended December 31,2004
    
    
    2005
    
    
    2006Net sales  third parties
    
    $
    499,680
    
    
    $
    791,042
    
    
    $
    870,174Net sales  related party
    
    
    34,181
    
    
    
    6,195
    
    
    
    Total net sales
    
    
    533,861
    
    
    
    797,237
    
    
    
    870,174Cost of sales
    
    
    (457,385
    )
    
    
    (704,314
    )
    
    
    (783,953
    )Gross profit
    
    
    76,476
    
    
    
    92,923
    
    
    
    86,221Gain on disposal of asset held for sale
    
    
    
    
    
    
    
    
    
    
    9,258Selling, general and administrative expenses
    
    
    (28,053
    )
    
    
    (33,057
    )
    
    
    (30,668
    )Research and development expenses
    
    
    (5,045
    )
    
    
    (7,210
    )
    
    
    (7,866
    )Losses arising from the judgment to reinstate redeemed shares
    
    
    
    
    
    
    
    
    
    
    (14,465
    )Total operating expenses
    
    
    (33,098
    )
    
    
    (40,267
    )
    
    
    (43,741
    )Income from operations
    
    
    43,378
    
    
    
    52,656
    
    
    
    42,480Other expenses, net
    
    
    (1,012
    )
    
    
    (125
    )
    
    
    (1,265
    )Dividend income received from marketable securities and investment
    
    
    18,295
    
    
    
    579
    
    
    
    Gain on sales of subsidiaries shares
    
    
    77,320
    
    
    
    10,095
    
    
    
    Gain on disposal of an affiliated company
    
    
    
    
    
    
    3,631
    
    
    
    Loss on disposal of marketable securities
    
    
    
    
    
    
    (3,686
    )Loss on marketable securities arising from split share structure reform
    
    
    
    
    
    
    
    
    
    
    (1,869
    )Impairment loss on marketable securities
    
    
    (58,316
    )
    
    
    (6,525
    )
    
    
    Interest income
    
    
    1,110
    
    
    
    3,948
    
    
    
    8,542Interest expense
    
    
    (195
    )
    
    
    (438
    )
    
    
    (602
    )Income before income taxes and minority interests
    
    
    80,580
    
    
    
    60,135
    
    
    
    47,286Income taxes
    
    
    (879
    )
    
    
    (651
    )
    
    
    (377
    )Income before minority interests and equity in loss of an affiliated company
    
    
    79,701
    
    
    
    59,484
    
    
    
    46,909Minority interests
    
    
    (6,010
    )
    
    
    (7,992
    )
    
    
    (6,153
    )Equity in loss of an affiliated company
    
    
    (6,806
    )
    
    
    (186
    )
    
    
    Net income
    
    $
    66,885
    
    
    $
    51,306
    
    
    $
    40,756Basic earnings per share
    
    $
    1.57
    
    
    $
    1.19
    
    
    $
    0.93Diluted earnings per share
    
    $
    1.57
    
    
    $
    1.19
    
    
    $
    0.93
  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 31,2005
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    213,843
    
    
    $
    221,084Marketable securities
    
    
    13,330
    
    
    
    24,360Accounts receivable, less allowance for doubtful accounts of $494
and $152 at December 31, 2005 and 2006, respectively
    
    
    125,662
    
    
    
    117,561Inventories
    
    
    31,744
    
    
    
    30,894Prepaid expenses and other receivables
    
    
    1,490
    
    
    
    2,503Income taxes recoverable
    
    
    2,671
    
    
    
    4,316Asset held for sale
    
    
    10,912
    
    
    
    Total current assets
    
    
    399,652
    
    
    
    400,718Property, plant and equipment, net
    
    
    97,997
    
    
    
    102,721Land use right
    
    
    2,744
    
    
    
    2,673Deposits for property, plant and equipment
    
    
    1,250
    
    
    
    609Deposits for land use right
    
    
    
    
    
    
    2,880Goodwill
    
    
    17,068
    
    
    
    18,476Other assets
    
    
    1,300
    
    
    
    1,158Total assets
    
    $
    520,011
    
    
    
    529,235LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Notes payable
    
    $
    4,813
    
    
    $
    4,516Short term bank loans
    
    
    2,275
    
    
    
    Long term bank loans  current portion
    
    
    2,312
    
    
    
    1,750Accounts payable
    
    
    121,608
    
    
    
    125,893Accrued expenses and other payables
    
    
    19,447
    
    
    
    13,649Dividend payable
    
    
    14,357
    
    
    
    16,639Income taxes payable
    
    
    166
    
    
    
    166Total current liabilities
    
    
    164,978
    
    
    
    162,613Long tem bank loans  non-current portion
    
    
    2,850
    
    
    
    1,100Total liabilities
    
    
    167,828
    
    
    
    163,713Minority interests
    
    
    41,792
    
    
    
    48,428Commitments and contingencies (Note 18)
    
    
    
    
    
    
    Shareholders equity:Common shares ($0.01 par value  authorized 200,000,000 shares)
    
    
    435
    
    
    
    438Reinstatement of redeemed shares
    
    
    
    
    
    
    17,159Additional paid-in capital
    
    
    258,167
    
    
    
    264,393Retained earnings
    
    
    50,771
    
    
    
    25,030Accumulated other comprehensive income
    
    
    1,018
    
    
    
    10,074Total shareholders equity
    
    
    310,391
    
    
    
    317,094Total liabilities and shareholders equity
    
    $
    520,011
    
    
    $
    529,235
  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
    
    
    Reinstatement
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    Share-Shares
    
    
    Shares
    
    
    of Redeemed
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    holders
    
    
    ComprehensiveOutstanding
    
    
    Amount
    
    
    Shares
    
    
    Capital
    
    
    Earnings
    
    
    (Loss) Income
    
    
    Equity
    
    
    IncomeBalance at January 1, 2004
    
    
    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
    
    
    $
    305,053Shares issued on exercise of options
    
    
    841,050
    
    
    
    9
    
    
    
    
    
    
    
    16,411
    
    
    
    
    
    
    
    
    
    
    
    16,420Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,306
    
    
    
    
    
    
    
    51,306
    
    
    $
    51,306Unrealized loss of marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,352
    )
    
    
    (5,352
    )
    
    
    (5,352
    )Realization of loss upon disposals of
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250
    )
    
    
    (250
    )
    
    
    (250
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    73
    
    
    
    73Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    45,777Cash dividends ($1.32 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,859
    )
    
    
    
    
    
    
    (56,859
    )Balance at December 31, 2005
    
    
    43,505,586
    
    
    $
    435
    
    
    $
    
    
    
    $
    258,167
    
    
    $
    50,771
    
    
    $
    1,018
    
    
    $
    310,391Shares issued on exercise of options
    
    
    281,000
    
    
    
    3
    
    
    
    
    
    
    
    5,436
    
    
    
    
    
    
    
    
    
    
    
    5,439Equity-settled shares based payment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    790
    
    
    
    
    
    
    
    
    
    
    
    790Reinstatement of redeemed shares
(note 12(e))
    
    
    
    
    
    
    
    
    
    
    17,159
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,159Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,756
    
    
    
    
    
    
    
    40,756
    
    
    $
    40,756Unrealized gain of marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,983
    
    
    
    8,983
    
    
    
    8,983Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    73
    
    
    
    73Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    49,812Cash dividends ($1.52 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66,497
    )
    
    
    
    
    
    
    (66,497
    )Balance at December 31, 2006
    
    
    43,786,586
    
    
    $
    438
    
    
    $
    17,159
    
    
    $
    264,393
    
    
    $
    25,030
    
    
    $
    10,074
    
    
    $
    317,094
  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 31,2004
    
    
    2005
    
    
    2006Cash flows from operating activities:Net income
    
    $
    66,885
    
    
    $
    51,306
    
    
    $
    40,756Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization of property, plant and equipment
    
    
    13,924
    
    
    
    16,824
    
    
    
    19,024Amortization and impairment loss of intangible assets
    
    
    92
    
    
    
    459
    
    
    
    Loss (gain) on disposal of property, plant and equipment
    
    
    347
    
    
    
    (563
    )
    
    
    (317
    )Gain on disposal of assets held for sale
    
    
    
    
    
    
    
    
    
    
    (9,258
    )Loss on marketable securities arising from split share structure reform
    
    
    
    
    
    
    
    
    
    
    1,869Loss arising from the judgment to reinstate redeemed shares
    
    
    
    
    
    
    
    
    
    
    14,465Gain on disposal of other assets
    
    
    (19
    )
    
    
    
    
    
    
    Loss on disposal of investment
    
    
    67
    
    
    
    
    
    
    
    Impairment loss on marketable securities  TCL Communication
Technology Holdings Limited (TCL Communication)
    
    
    58,316
    
    
    
    6,525
    
    
    
    Loss on disposal of marketable securities
    
    
    
    
    
    
    3,686
    
    
    
    Gain on disposal of an affiliated company
    
    
    
    
    
    
    (3,631
    )
    
    
    Gain on sale of a subsidiarys shares  J.I.C. Technology Company
Limited (JIC Technology)
    
    
    (6,249
    )
    
    
    
    
    
    
    Gain on sale of a subsidiarys shares  Nam Tai Electronic & Electrical
Products Limited (NTEEP)
    
    
    (71,071
    )
    
    
    (8,165
    )
    
    
    Gain on sale of a subsidiarys shares  Namtek Software Development
Company Limited (Namtek Software)
    
    
    
    
    
    
    (1,930
    )
    
    
    Share-based compensation expenses
    
    
    
    
    
    
    
    
    
    
    873Equity in loss of an affiliated company less dividend received
    
    
    6,806
    
    
    
    186
    
    
    
    Others
    
    
    
    
    
    
    206
    
    
    
    (931
    )Dividend income
    
    
    (15,913
    )
    
    
    
    
    
    
    Deferred income taxes
    
    
    (78
    )
    
    
    
    
    
    
    Minority interests
    
    
    6,010
    
    
    
    7,992
    
    
    
    6,153Changes in current assets and liabilities:(Increase) decrease in accounts receivable
    
    
    (28,272
    )
    
    
    (35,300
    )
    
    
    8,101Decrease in amount due from a related party
    
    
    2,641
    
    
    
    66
    
    
    
    Decrease (increase) in inventories
    
    
    3,936
    
    
    
    (8,648
    )
    
    
    850Decrease (increase) in prepaid expenses and other receivables
    
    
    2,654
    
    
    
    377
    
    
    
    (1,013
    )(Increase) decrease in income taxes recoverable
    
    
    (1,644
    )
    
    
    3,895
    
    
    
    (1,645
    )Increase (decrease) in notes payable
    
    
    201
    
    
    
    2,733
    
    
    
    (297
    )Increase in accounts payable
    
    
    33,896
    
    
    
    32,038
    
    
    
    4,285Increase (decrease) in accrued expenses and other payables
    
    
    3,028
    
    
    
    2,786
    
    
    
    (3,104
    )Decrease in income taxes payable
    
    
    (347
    )
    
    
    (17
    )
    
    
    Total adjustments
    
    
    8,325
    
    
    
    19,519
    
    
    
    39,055Net cash provided by operating activities
    
    $
    75,210
    
    
    $
    70,825
    
    
    $
    79,811
 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 31,2004
    
    
    2005
    
    
    2006Cash flows from investing activities:Purchase of property, plant and equipment
    
    $
    (38,611
    )
    
    $
    (32,166
    )
    
    $
    (23,793
    )(Increase) decrease in deposits for property, plant and equipment
    
    
    (4,374
    )
    
    
    6,451
    
    
    
    641Increase in deposit for land use rights
    
    
    
    
    
    
    
    
    
    
    (2,880
    )Proceeds from disposal of assets held for sale
    
    
    
    
    
    
    
    
    
    
    20,170(Increase) decrease in other assets
    
    
    (37
    )
    
    
    (40
    )
    
    
    142Proceeds from disposal of an affiliated company  Alpha Star
Investments Limited (Alpha Star)
    
    
    
    
    
    
    6,494
    
    
    
    (Acquisition) proceeds from disposal of marketable securities  TCL
Communication
    
    
    (25,084
    )
    
    
    10,995
    
    
    
    Acquisition of additional shares in subsidiaries
    
    
    
    
    
    
    
    
    
    
    (3,130
    )Proceeds from partial disposal of subsidiaries  JIC Technology
and NTEEP
    
    
    95,449
    
    
    
    25,218
    
    
    
    Proceeds from disposal of property, plant and equipment
    
    
    4,546
    
    
    
    1,788
    
    
    
    420Proceeds from disposal of investment
    
    
    5,609
    
    
    
    
    
    
    
    Proceeds from disposal of other assets
    
    
    231
    
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    37,729
    
    
    
    18,740
    
    
    
    (8,430
    )Cash flows from financing activities:Cash dividends paid
    
    
    (19,414
    )
    
    
    (51,984
    )
    
    
    (65,923
    )Repayment of bank loans
    
    
    (5,375
    )
    
    
    (5,375
    )
    
    
    (8,067
    )Proceeds from bank loans
    
    
    10,600
    
    
    
    4,774
    
    
    
    3,480Proceeds from shares issued on exercise of options
    
    
    72
    
    
    
    16,420
    
    
    
    5,439Net cash used in financing activities
    
    
    (14,117
    )
    
    
    (36,165
    )
    
    
    (65,071
    )Net increase in cash and cash equivalents
    
    
    98,822
    
    
    
    53,400
    
    
    
    6,310Cash and cash equivalents at beginning of year
    
    
    61,827
    
    
    
    160,649
    
    
    
    213,843Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    (206
    )
    
    
    931Cash and cash equivalents at end of year
    
    $
    160,649
    
    
    $
    213,843
    
    
    $
    221,084Supplemental schedule of cash flow information:Interest paid
    
    $
    195
    
    
    $
    438
    
    
    $
    602Income taxes paid (received), net
    
    
    2,953
    
    
    
    (3,335
    )
    
    
    (1,904
    )
  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 operations, the Company
manufactures electronic components and sub-assemblies, including liquid crystal display
(LCD) panels, LCD modules, radio frequency modules, flexible printed circuit
sub-assemblies, digital audio broadcast modules, image sensors modules and printed circuit
board assembles for headsets containing Bluetooth wireless technology. These components are
used in numerous electronic products, including mobile phones, laptop computers, digital
cameras, electronic toys, handheld video game devices and entertainment devices. The
Company also manufactures finished products, including entertainment devices, mobile phone
accessories and educational products.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,
the 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, 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 Macao and
Hong Kong, which provide it access to Macaos and Hong Kongs infrastructure of
communication and banking facilities. 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.The Company operates primarily in three reportable segments consisting of consumer
electronics and communication products (CECP), telecommunication components assembly
(TCA) and LCD products (LCDP).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.(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.
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2.
    
    Summary of Significant Accounting Policies  continued
 (c)
    
    Marketable securitiesMarketable securities 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 products that are 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 remains 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 equipment and land use rightProperty, plant and equipment and land use right are recorded at cost and include
interest on funds borrowed to finance construction, if applicable. No interest was
capitalized for the years ended December 31, 2004, 2005 and 2006. 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 property, plant and equipment and
land use right are included in income.The majority of the land in Hong Kong is owned by the government of Hong Kong which
leases the land at public auction to 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 classified as land use right. They 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
    
    50 yearsLeasehold 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
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2.
    
    Summary of Significant Accounting Policies  continued
 (f)
    
    Goodwill and intangible assetsThe excess of the purchase price over the fair value of net assets acquired is
recorded on the consolidated balance sheet as goodwill.Goodwill is not amortized, but is tested for impairment at the reporting unit level
on at least an annual basis at the balance sheet date. 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 assessment of impairment loss, the Company will measure fair
value based either on internal models or independent valuations. No impairment loss
of goodwill was identified in 2004, 2005 and 2006.Costs incurred in the acquisition of licenses are classified as intangible assets.
They are capitalized and amortized to expense on a straight-line basis over the
shorter of the license period or 5 to 7 years.(g)
    
    Impairment or disposal of long-lived assetsLong-lived assets are included in impairment evaluations when events and
circumstances exist that indicate the carrying amount of these assets may not be
recoverable. The Company reviews its long-lived assets for potential impairment
based on a review of projected undiscounted cash flows associated with these assets.
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.
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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, 2004, 2005, and 2006, shipping and handling costs
classified as costs of sales were $536, $561 and $593, respectively. During the
years ended December 31, 2004, 2005 and 2006, shipping and handing costs classified
as selling expenses were $767, $847 and $910, 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 $265,
$377 and $127 for the years ended December 31, 2004, 2005 and 2006, 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
definite 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
or the Hong Kong dollar. The financial statements of all subsidiaries with
functional currencies other than the U.S. dollar, the reporting currency, are
translated in accordance with Statement of Financial Accounting Standard (SFAS) No.
52, Foreign Currency Translation. All assets and liabilities are translated at the
rates of exchange ruling at the balance sheet date and all income and expense items
are translated at the average rates of exchange over the year. All exchange
differences arising from the translation of subsidiaries financial statements are
recorded as a component of comprehensive income.The exchange rates between the Hong Kong dollar and the U.S. dollar were
approximately 7.7732, 7.7546 and 7.7747 as of December 31, 2004, 2005 and 2006,
respectively.
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2.
    
    Summary of Significant Accounting Policies  continued
 (o)
    
    Earnings per shareBasic 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 share that would
have been outstanding if the dilutive potential common shares had been issued.(p)
    
    Stock optionsThe Company has a stock-based employee compensation plan, as more fully described in
note 12(b). Prior to year 2006, the Company did 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. Prior to 2006, the Company accounted
for stock-based compensation arrangements under Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employeesand provided additional
financial statement disclosure in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation. However, the Company would recognize 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 12.The following table illustrates the effect on net income and earnings per share as if
the Company had applied the fair value recognition in year 2004 and 2005
 Year ended December 31,
    
    
    
    2004
    
    
    2005Net income, as reported
    
    
    $
    66,885
    
    
    $
    51,306Less: Stock-based compensation costs
under fair value based method for all awards
    
    
    (4,476
    )
    
    
    (7,500
    )Net income, pro forma
    
    
    $
    62,409
    
    
    $
    43,806Basic earnings per share
    As reported
    
    $
    1.57
    
    
    $
    1.19Pro forma
    
    $
    1.47
    
    
    $
    1.02Diluted earnings per share
    As reported
    
    $
    1.57
    
    
    $
    1.19Pro forma
    
    $
    1.47
    
    
    $
    1.01
 The Company has adopted SFAS No. 123 (revised 2004), Share-Based Payment(SFAS No.
123R) in 2006. 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 are 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 are to 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.Upon adoption, the Company applied the modified-prospective 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.
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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, short-term bank loans, 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 September 2005, Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board (FASB) reached a final consensus on Issue 04-13, Accounting for
Purchases and Sales of Inventory with the Same Counterparty". EITF 04-13 requires
that two or more legally separate exchange transactions with the same counterparty be
combined and considered a single arrangement for purposes of applying APB Opinion No.
29, Accounting for Nonmonetary Transactions", when the transactions are entered into
in contemplation of one another. EITF 04-13 is effective for new arrangements
entered into, or modifications or renewals of existing arrangements, in interim or
annual periods beginning after March 15, 2006. The effect of the adoption of EITF
04-13 did not have a material impact on the Companys financial position, results of
operations or cash flows.In February 2006, the FASB issued SFAS No. 155, , Accounting for Certain Hybrid
Financial Instruments  an amendment of FASB Statements No. 133 and 140. This
statement is effective for all financial instruments acquired, issued, or subject to
a remeasurement (new basis) event occurring after the beginning of an entitys first
fiscal year that begins after September 15, 2006. The Company will adopt SFAS No.155
in the first quarter of 2007. The Company has not determined the impact, if any, of
SFAS No.155 on its financial position, results of operations and cash flows.In June 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes". It is an interpretation of SFAS No. 109, Accounting
for Income Taxes". FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with SFAS No. 109.
FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure,
and transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is evaluating the effect of the adoption of the FIN 48. It is not
expected to have a material impact on the Companys financial position, results of
operations or cash flows.In September 2006, the FASB issued SFAS No.157, Fair Value Measurement. SFAS No.
157 addresses standardizing the measurement of fair value for companies who are
required to use a fair value measure for recognition or disclosure purposes. The
FASB defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the
measurement date. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. The Company is evaluating the impact, if any, of the adoption of SFAS
No.157. It is not expected to have a material impact on the Companys financial
position, results of operations and cash flows.
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2.
    
    Summary of Significant Accounting Policies  continued
 (t)
    
    Recent changes in accounting standards  continuedIn September 2006, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108
provides interpretive guidance on how the effects of the carryover or reversal of
prior year misstatements should be considered in quantifying a current year
misstatement. The SEC staff believes that registrants should quantify errors using
both a balance sheet and an income statement approach and evaluate whether either
approach results in quantifying a misstatement that, when all relevant quantitative
and qualitative factors are considered, is material. SAB 108 is effective for fiscal
years ending after November 15, 2006. The effect of the adoption of SAB 108 did not
have a material impact on the Companys financial position, result of operations or
cash flows.
 3.
    
    Investment in Subsidiaries
 (a)
    
    Subsidiaries
 Percentage of ownershipPlace of
    
    Principal
    
    as at December 31,incorporation
    
    activity
    
    2005
    
    
    2006Consolidated principal subsidiaries:Jasper Ace Limited (Jasper Ace)
    
    BVI
    
    Note
    
    
    100
    %
    
    NoteJ.I.C. Technology Company
    
    Cayman Islands
    
    Investment holding
    
    
    71.63
    %
    
    
    74.94
    %LimitedJ.I.C Enterprises (Hong Kong)
    
    Hong Kong
    
    Inactive
    
    
    71.63
    %
    
    
    74.94
    %LimitedJetup Electronic (Shenzhen)
    
    PRC
    
    Manufacturing and
    
    
    71.63
    %
    
    
    74.94
    %Co., Ltd. (Jetup)
    
    
    
    tradingJ.I.C. (Macao Commercial
    
    Macao
    
    Provision of
    
    
    71.63
    %
    
    
    74.94
    %Offshore) Company Limited
    
    
    
    consultancy,administrative anddata processingservicesNam Tai Electronic & Electrical
    
    Cayman Islands
    
    Investment holding
    
    
    69.5
    %
    
    
    70.31
    %Products LimitedNam Tai Group Management
    
    Hong Kong
    
    Inactive
    
    
    100
    %
    
    
    100
    %LimitedNam Tai Investments Consultant
    
    Macao
    
    Provision of
    
    
    69.5
    %
    
    
    70.31
    %(Macao Commercial Offshore)
    
    
    
    consultancy,Company Limited
    
    
    
    administrative anddata processingservicesNam Tai Telecom (Hong Kong)
    
    Hong Kong
    
    Inactive
    
    
    100
    %
    
    
    100
    %Company LimitedNam Tai Trading Company
    
    Hong Kong
    
    Inactive
    
    
    100
    %
    
    
    100
    %Limited (NTTC)Namtai Electronic (Shenzhen)
    
    PRC
    
    Manufacturing and
    
    
    69.5
    %
    
    
    70.31
    %Co., Ltd.
    
    
    
    tradingNamtek Japan Company Limited
    
    Japan
    
    Provision of sales
    
    
    69.5
    %
    
    
    70.31
    %co-ordination andmarketing servicesNamtek Software Development
    
    Cayman Islands
    
    Note
    
    
    69.5
    %
    
    NoteCompany LimitedShenzhen Namtek Co., Ltd.
    
    PRC
    
    Software development
    
    
    69.5
    %
    
    
    70.31
    %Zastron Electronic (Shenzhen)
    
    PRC
    
    Manufacturing and
    
    
    100
    %
    
    
    100
    %Co. Ltd.
    
    
    
    tradingZastron Precision-Tech
    
    Cayman Islands
    
    Investment holding
    
    
    100
    %
    
    
    100
    %Limited (ZPTL)Zastron (Macao Commercial
    
    Macao
    
    Provision of
    
    
    100
    %
    
    
    100
    %Offshore) Company Limited
    
    
    
    consultancy,administrative anddata processingservicesZastron Precision-Tech (Wuxi)
    
    PRC
    
    Manufacturing and
    
    
    
    
    
    
    100
    %Co., Ltd.
    
    
    
    tradingZastron Precision-Flex (Wuxi)
    
    PRC
    
    Manufacturing and
    
    
    
    
    
    
    100
    %Co., Ltd.
    
    
    
    trading
 
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3.
    
    Investment in Subsidiaries  continued
 (b)
    
    Significant transactions
 (i)
    
    In November and December 2004, the Company disposed of a total of
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 goodwill of $3,518. The
Company also converted all outstanding preference shares into 410,990,290
ordinary shares of JIC Technology resulting in 71.63% equity interest held in
JIC Technology as of December 31, 2004.In March 2006, the Company acquired a total of 25,290,000 ordinary shares of
JIC Technology for cash consideration of $2,120 resulting in 74.94% equity
interest held in JIC Technology as of December 31, 2006.(ii)
    
    In May 2005, the Company and Asano Company Limited (Asano
Company), a company owned by the management of Namtek Software, transferred 80%
and 20%, respectively, of their interest in Namtek Software to NTEEP for a total
consideration of $26,700. Please also see note 3(b)(iii) for further details.(iii)
    
    In April 2004, one of the then wholly owned subsidiaries of the
Company, NTEEP, completed public offering of its common stock on the Stock
Exchange of Hong Kong Limited (SEHK) in which the Company disposed of a 25%
interest in this subsidiary resulting in a gain on partial disposal of $71,071.In March 2005, the Company disposed of a total of 30,000,000 ordinary shares
of NTEEP for cash considerations of approximately $9,836, resulting in a gain
on partial disposal of a subsidiary of approximately $5,870.In May 2005, through a series of linked transactions, the Companys
shareholding in NTEEP increased from 71.25% to 72.06% while the effective
shareholding in Namtek Software decreased from 80% to 72.06% upon completion
of the partial disposal of Namtek Software when the Company and Asano Company
transferred 80% and 20%, respectively, of their interest in Namtek Software to
NTEEP for a total consideration of $26,700. The consideration was satisfied
by the issuance of 81,670,588 new shares of NTEEP to the Company and Asano
Company at approximately $0.327 per share. These transactions resulted in a
goodwill of $1,277 arising from the additional interest in NTEEP exchanged and
a net gain on partial disposal of interest in Namtek Software of $1,930.In August 2005, the Company further disposed of a total of 22,574,000 ordinary
shares of NTEEP for cash considerations of approximately $5,163. The disposal
resulted in a net gain on partial disposal of a subsidiary of approximately
$2,295 after deducting the releasing of goodwill of $45.In August and September 2006, the Company acquired a total of 7,152,000
ordinary shares of NTEEP for cash consideration of $1,010 resulting in 70.31%
equity interest held in NTEEP as of December 31, 2006.
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3.
    
    Investment in Subsidiaries  continued
 (c)
    
    Establishment of subsidiaries
 (i)
    
    In November 2004, JIC 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 was trading of
electronic components, and the provision of consultancy, administrative and
data processing. In 2005, it ceased to carry out the trading of electronic
components and focused on the consultancy, administrative and data processing
services only.(ii)
    
    In November 2006, ZPTL established two subsidiaries namely
Zastron Precision-Tech (Wuxi) Co. Ltd. and Zastron Precision-Flex (Wuxi) Co.
Ltd., in Wuxi, Jiangsu Province, the PRC. Their principal activities are
manufacturing and trading of LCD modules, FPC units and FPC sub-assemblies.
 (d)
    
    Retained earningsThe Companys retained earnings are not restricted as to the payment of dividends
except to the extent dictated by prudent business practices. The Company believes
that there are no material restrictions, including foreign exchange controls, on the
ability of its non-PRC subsidiaries to transfer surplus funds to the Company in the
form of cash dividends, loans, advances or purchases. With respect to the Companys
PRC subsidiaries, there are restrictions on the 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. In addition, pursuant to the relevant 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
$7,489 and $8,685 as of December 31, 2005 and 2006 respectively. However, the
Company believes that such restrictions will not have a material effect on the
Companys liquidity or cash flows.
 4.
    
    InventoriesInventories consist of the following:
 At December 31,
    
    2005
    
    
    2006Raw materials
    
    $
    24,023
    
    
    $
    24,800Work-in-progress
    
    
    4,003
    
    
    
    4,753Finished goods
    
    
    3,718
    
    
    
    1,341$
    31,744
    
    
    $
    30,894
 5.
    
    Property, Plant and Equipment, netProperty, plant and equipment, net consist of the following:
 At December 31,
    
    2005
    
    
    2006At cost:Leasehold land and buildings
    
    $
    46,393
    
    
    $
    49,929Machinery and equipment
    
    
    94,952
    
    
    
    106,120Leasehold improvements
    
    
    22,215
    
    
    
    23,798Furniture and fixtures
    
    
    1,907
    
    
    
    2,095Automobiles
    
    
    1,766
    
    
    
    1,274Tools and molds
    
    
    279
    
    
    
    145Total
    
    
    167,512
    
    
    
    183,361Less: accumulated depreciation and amortization
    
    
    (72,548
    )
    
    
    (88,399
    )Construction in progress
    
    
    3,033
    
    
    
    7,759Net book value
    
    $
    97,997
    
    
    $
    102,721
 As at December 31, 2006, the Company has entered into commitments for capital expenditure
for property, plant and equipment of approximately $14,701, which are expected to be
disbursed during the year ending December 31, 2007.In 2005, the Company reclassified certain of the leasehold land and building located in Hong
Kong as asset held for sale (note 8).
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6.
    
    GoodwillGoodwill consists of the following:
 CECP
    
    
    LCDPreporting
    
    
    reportingunit
    
    
    unit
    
    
    TotalBalance at January 1, 2005
    
    $
    
    
    
    $
    15,831
    
    
    $
    15,831Exchange difference
    
    
    
    
    
    
    5
    
    
    
    5Goodwill upon acquisition of additional 0.81% interest
in NTEEP
    
    
    1,277
    
    
    
    
    
    
    
    1,277Goodwill release related to disposition of 2.56% interest
in NTEEP
    
    
    (45
    )
    
    
    
    
    
    
    (45
    )Balance at December 31, 2005
    
    $
    1,232
    
    
    $
    15,836
    
    
    $
    17,068Exchange difference
Goodwill upon acquisition of additional 3.31% interest
in JIC Technology
    
    
    
    
    
    
    1,408
    
    
    
    1,408Balance at December 31, 2006
    
    $
    1,232
    
    
    $
    17,244
    
    
    $
    18,476
 No impairment loss was identified in 2005 and 2006.7.
    
    Intangible Assets, netIntangible assets, net consist of the following:
 At December 31,
    
    2005
    
    2006Licenses
    
    $
    643
    
    
    $
    Accumulated amortization
    
    
    (245
    )
    
    
    Impairment loss recognized (Note 9)
    
    
    (398
    )
    
    
    Net carrying amount
    
    $
    
    
    
    $
    
 Amortization expense charged to income from operations for the year ended December 31, 2004,
2005 and 2006 was $92, $61 and nil, respectively.8.
    
    Asset Held for SaleIn 2005, the management of the Company has committed to a plan to sell certain of its
leasehold land and buildings located in Hong Kong. Accordingly, the leasehold land and
building was reclassified as asset held for sale and ceased to record depreciation expense
since then. In April 2006, the Company disposed this asset held for sale for a
consideration of $20,170 and recognized a gain of $9,258 accordingly.9.
    
    Investment in Affiliated Companies, Equity MethodAlpha StarIn 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 Jiang Cheug Tang Wireless Technology 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.
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9.
    
    Investment in Affiliated Companies, Equity Method  continuedThe Company initially recorded goodwill of approximately $5,596 as a result of the
acquisition of Alpha Star. The Company recorded an equity in loss of Alpha Star $1,210 and
$186 for 2004 and 2005, respectively. In the third quarter of 2004, based on an analysis of
the estimated fair value of Alpha Star prepared by management, the Company recorded an
other-than-temporary impairment charge of approximately $5,596 to write down its investment
in Alpha Star upon its unsatisfactory operating results and the continued weakness in market
operated by Alpha Star.In August 2005, the Company disposed of its entire interest in Alpha Star to the majority
shareholders of Alpha Star for a cash consideration of $6,500. As a result, a gain of
$3,631 was recorded. Due to the cessation of relationship with Alpha Star, the Company
evaluated the viability of the related purchase arrangement as aforesaid and fully wrote off
its then carrying value of $398 (included in selling, general and administrative expenses)
as the intangible asset was no longer expected to recover its carrying value through future
cash flows.For the years ended December 31, 2004 and 2005, the Company recognized net sales of $34,181
and $6,195 to JCT and purchased raw materials of $12,398 and $5,766 from JCT and its related
companies, respectively.The Company did not make any loans or guarantees or had any contingent liabilities with
Alpha Star or any of its subsidiaries.10.
    
    InvestmentsInvestments in TCLThe Company had various investments in TCL Group of companies in the form of available for
sale marketable securities. 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, 2004, 2005 and 2006.
 (a)
    
    Investments, at cost/available for sale investment securities
 (i)
    
    TCL CorporationIn 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.
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10.
    
    Investments  continued
 (a)
    
    Investments, at cost/available for sale investment securities  continued
 (i)
    
    TCL Corporation  continuedAs these promoters shares have a restriction on their sale prior to April
2005, the Company, based on a comparable companies analysis and taking into
account of a liquidity discount, determined the fair value of these shares
as of December 31, 2004 and 2005 and recognized an unrealized gain of $6,549
and $947, respectively, based on the Companys cost of $11,968 and an
estimated fair value of $20,700 and $13,330.In April 2006, pursuant to the Split Share Structure Reform (SSR) of TCL
Corporation, the Companys interest in TCL Corporation has been changed from
95,516,112 promoter shares to 80,600,173 A-shares diluting its interest from
3.69% to 3.12%. As a result of the reduction in the number of shares in TCL
Corporation, the Company recorded a loss of $1.3 million ($1.9 million
before sharing with minority interests). The A-shares will be tradable on
the Shenzhen Stock Exchange after the expiration of 12 months from April 20,
2006, which was the first trading day after the SSR was formally
implemented. As at December 31, 2006, investment in TCL corporation was
valued at market price with an estimated fair value of $24,360.(ii)
    
    Huizhou TCLThe Company had a 9% direct interest in Huizhou TCL Mobile Communication
Co., Ltd. (Huizhou TCL). In August 2004, as part of the preparation for
TCL Communication Technology Holdings Limited (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 impairment loss of $58,316
based on the Companys cost of $79,522 and a fair value of $21,206. At June
30, 2005, the Company further recognized an impairment loss of $6,525 based
on the fair value of $14,681. In the fourth quarter of 2005, the Company
disposed of its entire stake in TCL Communication and recorded a loss of
$3,686.
 Investment in StepmindIn 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.
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11.
    
    Bank Loans and Banking FacilitiesThe Company has credit facilities with various banks representing notes payable, trade
acceptances, import facilities, revolving loans and overdrafts. At December 31, 2005 and
2006, these facilities totaled $117,345 and $36,161, of which $110,246 and $31,645 were
unused at December 31, 2005 and 2006, respectively. The maturity of these facilities is
generally up to 120 days. Interest rates are generally based on the banks usual lending
rates in Hong Kong or the PRC and the credit lines are normally subject to annual review.
The banking facilities are secured by guarantees given by Nam Tai and certain subsidiaries.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,
    
    2005
    
    
    2006Outstanding letters of credit
    
    $
    11
    
    
    $
    Trust receipts
    
    
    4,813
    
    
    
    4,514Usance bills pending maturity
    
    
    
    
    
    
    2Short term bank loans
    
    
    2,275
    
    
    
    Total banking facilities utilized
    
    
    7,099
    
    
    
    4,516Less: Outstanding letters of credit
    
    
    (11
    )
    
    
    Notes payable and short term bank loans
    
    $
    7,088
    
    
    $
    4,516
 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
(LIBOR), 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 LIBOR in 2005. 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 LIBOR, repayable in 16 quarterly instalments of $438
beginning in July 2004. At December 31, 2006, the loans had outstanding balances of $2,850.
There are no restrictive financial covenants associated with these term loans.The long term bank loans at December 31, 2006 are repayable as follows for the years ending
December 31
 - 2007
    
    $
    1,750- 2008
    
    
    1,100$
    2,850
 12.
    
    Shareholders Equity
 (a)
    
    The Company has only one class of common shares authorized, issued and
outstanding.(b)
    
    Stock OptionsIn May 2001 (and amended in July 2004), the Board of Directors approved a 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 3,300,000 shares. The options granted under this plan vest immediately
and generally have a term of two to three years, subject to the discretion of the
Board of Directors, but cannot exceed ten years.In February 2006, the Board of Directors approved another stock option plan, and
subsequently approved by the shareholders at the 2006 annual general meeting of
shareholders, with the same term and conditions. However, the maximum number of shares to be issued pursuant to exercise of options granted was 2,000,000 shares.
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12.
    
    Shareholders Equity  continued
 (b)
    
    Stock Options  continuedA summary of stock option activity during the three years ended December 31, 2006 is
as follows:
 Number of
    
    
    Weighted averageoptions
    
    
    option price per shareOutstanding at January 1, 2004
    
    
    108,550
    
    
    $
    12.35Granted
    
    
    645,000
    
    
    $
    6.94Exercised
    
    
    (16,500
    )
    
    $
    4.39Outstanding at December 31, 2004
    
    
    737,050
    
    
    $
    6.83Granted
    
    
    1,105,000
    
    
    $
    6.79Exercised
    
    
    (841,050
    )
    
    $
    6.74Outstanding at December 31, 2005
    
    
    1,001,000
    
    
    $
    6.86Granted
    
    
    90,000
    
    
    $
    6.64Exercised
    
    
    (281,000
    )
    
    $
    7.01Expired
    
    
    (30,000
    )
    
    $
    6.94Outstanding at December 31, 2006
    
    
    780,000
    
    
    $
    6.78
 Details of the options granted by the Company in 2004, 2005 and 2006 are as follows:
 Number of
    
    Exerciseoptions granted
    
    price
    
    Exercisable periodIn 2004645,000
    
    $
    19.40
    
    
    July 30, 2004 to July 30, 2006In 20051,000,000
    
    $
    20.84
    
    
    February 4, 2005 to February 4, 2007105,000
    
    $
    21.62
    
    
    June 6, 2005 to June 6, 2008In 200690,000
    
    $
    22.25
    
    
    June 9, 2006 to June 8, 2009
 The following summarizes information about stock options outstanding at December 31, 2006.
All stock options are exercisable as of December 31, 2006.
 Weighted averageNumber
    
    
    remaining contractualExercise prices
    
    of options
    
    
    life in months$20.84
    
    
    600,000
    
    
    
    1.1$21.62
    
    
    90,000
    
    
    
    17.2$22.25
    
    
    90,000
    
    
    
    29.3780,000
    
    
    
    6.2
 The weighted average remaining contractual life of the stock options outstanding at
December 31, 2004, 2005 and 2006 was approximately 18, 13 and 6 months, respectively. The
weighted average fair value of options granted during 2004, 2005 and 2006 was $6.94, $6.79
and $6.64, respectively, using the Black-Scholes option-pricing model based on the
following assumptions:
 Year ended December 31,
    
    2004
    
    2005
    
    2006Risk-free interest rate
    
    2.75%
    
    3.56% to 3.59%
    
    4.96%Expected life
    
    2 years
    
    2 to 3 years
    
    3 yearsExpected volatility
    
    68.62%
    
    62.62% to 71.14%
    
    57.71%Expected dividend per quarter
    
    $0.12
    
    $0.33
    
    $0.38
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12.
    
    Shareholders Equity  continued
 (c)
    
    Share Buy  backNo shares were repurchased during the years ended December 31, 2004, 2005 and 2006.(d)
    
    Share RedemptionsOn 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 Inc. (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 have been redeemed since August 12, 2002.On November 20, 2006, judgment was rendered by the Lords of the Judicial Committee
of the Privy Council of the United Kingdom (the Privy Council), declaring that the
redemptions by the Company of its common shares beneficially owned by Tele-Art on
January 22, 1999 and August 12, 2002 were nullities and that the register of members
of the Company (i.e. the Companys shareholders register) should be rectified to
reinstate the redeemed shares together with any other shares which have since
accrued by way of exchange or dividend.(e)
    
    Reinstatement of redeemed sharesFollowing the November 20, 2006 judgment, the Company received the order from the
Privy Council on January 9, 2007 to rectify the share register of Nam Tai by
registering such 1,017,149 (after adjustment of the 1 for 10 stock dividend on
November 7, 2003) shares (the Redeemed Shares) in the name of Bank of China (Hong
Kong) Limited (Bank of China). Since the court judgment was determined in 2006,
the Company accounted for the obligation to reinstate the Redeemed Shares at their
fair value (i.e. market closing price) on November 20, 2006, the date of the
judgment. (see note 18(b)).
 13.
    
    Earnings Per ShareThe calculations of basic earnings per share and diluted earnings per share are computed as
follows:
 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
 Not all options and warrants to purchase shares of common stock were included in the
computation of 2004 diluted earnings per share as the exercise prices of certain options
were higher than the average market price of the common stock.
 
 *
    
    Adjusted for 3 for 1 stock split and 1 for 10 stock dividend. F-22




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13.
    
    Earnings Per Share  continued
 Weightedaverage number
    
    Per shareYear ended December 31, 2005
    
    Income
    
    of shares
    
    amountBasic earnings per share
    
    $
    51,306
    
    
    
    42,944,682
    
    
    $
    1.19Effect of dilutive securities
 Stock options
    
    
    
    
    
    
    223,859
    
    
    
    Diluted earnings per share
    
    $
    51,306
    
    
    
    43,168,541
    
    
    $
    1.19
 All options and warrants to purchase shares of common stock were included in the computation
of 2005 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, 2006
    
    Income
    
    of shares
    
    amountBasic earnings per share
    
    $
    40,756
    
    
    
    43,702,135
    
    
    $
    0.93Effect of dilutive securities 
Stock options
    
    
    
    
    
    
    39,364
    
    
    
    Effect of reinstatement of
redeemed shares
    
    
    
    
    
    
    116,088
    
    
    
    Diluted earnings per share
    
    $
    40,756
    
    
    
    43,857,587
    
    
    $
    0.93
 Not all options to purchase shares of common stock were included in the computation of 2006
diluted earnings per share as the exercise prices of certain options were higher than the
average market price of the common stock.14.
    
    Staff Retirement PlansThe Company operates a retirement benefit scheme (RBS) for all qualifying employees in
Macao and a Mandatory Provident Fund (MPF) scheme for all qualifying employees in Hong
Kong. The RBS and MPF are defined contribution schemes and the assets of the schemes are
managed by the trustees independent to the Company.Both the RBS and MPF are available to all employees aged 18 to 64 and with at least 60 days
of service under the employment of the Company in Macao and Hong Kong. Contributions are
made by the Company at 5% based on the staffs relevant income. The maximum relevant income
for contribution purpose per employee is $3 per month. Staff members are entitled to 100%
of the Companys contributions together with accrued returns irrespective of their length of
service with the Company, but the benefit can be withdrawn by the employees in Macao at the
end of employment contracts while the benefits are required by law to be preserved until the
retirement age of 65 for employees in Hong Kong.According to the applicable laws and regulations in the PRC, prior to July 2006, the Company
was 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. With effect from July 2006, the applicable percentages were adjusted to
10% to 11%. 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 Macao, Hong Kong and
PRC amounted to $1,190, $1,510 and $1,534 for the years ended December 31, 2004, 2005 and
2006, respectively.
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15.
    
    Income TaxesThe components of income before income taxes and minority interest are as follows:
 Year ended December 31,
    
    2004
    
    
    2005
    
    
    2006PRC, excluding Hong Kong and Macao
    
    $
    37,546
    
    
    $
    36,138
    
    
    $
    23,372Hong Kong, Macao and other jurisdictions
    
    
    43,034
    
    
    
    23,997
    
    
    
    23,914$
    80,580
    
    
    $
    60,135
    
    
    $
    47,286
 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
subsidiaries operating in Macao are exempted from income taxes. Under the current Cayman
Islands law, ZPTL, NTEEP and JIC Technology 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 17.5% 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 17.5%,
being the effective Hong Kong statutory income tax rate applicable to the ensuing financial
year, on the difference between the financial statement and income tax bases of measuring
assets and liabilities.The basic corporate tax rate for Foreign Investment Enterprises (FIEs) in the PRC, such as
Namtai Electronic (Shenzhen) Co., Ltd. (NTSZ), Zastron Electronic (Shenzhen) Co., Ltd.
(Zastron), Shenzhen Namtek Co., Ltd (Shenzhen Namtek) and Jetup (collectively the
Shenzhen PRC subsidiaries) is currently 33% (30% state tax and 3% local tax). However,
because all the above 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.
In 2006, two new FIEs, namely Zastron Precision-Tech (Wuxi) Co. Ltd. and Zastron
Precision-Flex (Wuxi) Co. Ltd., were established. They are located in Wuxi, Jiangsu
Province, the PRC and will involve in production operations in year 2008 or after. They are
also qualified for tax incentive as the subsidiaries in Shenzhen.Since the Shenzhen 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 Shenzhen
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 Shenzhen PRC subsidiaries:
 
    
    In 2004, NTSZ received a tax refund of $821 from reinvestment of profits for 2004
and a refund of $399 for being an export-oriented enterprise in 2003. In 2005, NTSZ
received a tax refund of $1,815 from reinvestment of profit for 2003. Besides, NTSZ
further paid $738 and subsequently received a tax refund of $1,726 from reinvestment of
profit for year 2004 and a refund of $971 for being an export-oriented enterprise. In
2006, NTSZ paid $1,566 and received a tax refund of $746 for being an export-oriented
enterprises for the year 2005.
    
    On May 13, 2005, 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 2005. In 2004, Zastron also received a refund of $243 from
reinvestment of profits for 1999 to 2003 and a refund of $793 for being an
export-oriented enterprise in 2003. In 2005, Zastron received a refund of $1,398 from
reinvestment of profit for year 2000 to 2003. Besides, Zastron further paid $170 and
subsequently received a tax refund of $874 from reinvestment of profit for year 2004.
In year 2006, Zastron has applied and is waiting for tax refund for year 2005.
    
    In 2004, 2005 and 2006, Shenzhen Namtek is entitled to a 5% tax refund for being an
export-oriented enterprise in 2005.
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15.
    
    Income Taxes  continued
 
    
    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 of 7.5% for 3
years from 2002 to 2004. During 2005, Jetup received a refund of $233 and $346 from
reinvestment of profit for 2003 and 2004, respectively. In 2006, Jetup received a tax
refund of $211 for being an export-oriented enterprises for the year 2005.
 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 NTSZ, Zastron and Jetup 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, 2005 and 2006, taxes recoverable under such arrangements were $2,624 and
$4,104, respectively, which are included in income taxes recoverable and expected to be
received during 2006 and 2007, respectively.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
of US$567 for the fiscal year 1997 and such tax payable can be held over on condition that a
tax reserve certificate is purchased. The subsidiary requested for an unconditional
hold-over of such assessment without purchasing tax reserve certificate but 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 in relation to the purchase of the tax reserve certificate.
The judgment was delivered on December 7, 2005 dismissing the Companys application. The
Company had filed an appeal on January 10, 2006 but the Court of Appeal disallowed the
appeal on July 25, 2006. The Company then pursued the matter further before the Court of
Final Appeal but the Court of Appeal adjourned the application. The adjourned hearing has
now been fixed
to be heard on May 23, 2007. Management is of the view that they will obtain favorable
judgment and hence, no material tax adjustment is expected.The current and deferred components of the income tax expense appearing in the consolidated
statements of income are as follows:
 Year ended December 31,
    
    2004
    
    
    2005
    
    
    2006Current tax
    
    $
    (957
    )
    
    $
    (651
    )
    
    $
    (377
    )Deferred tax
    
    
    78
    
    
    
    
    
    
    
    $
    (879
    )
    
    $
    (651
    )
    
    $
    (377
    )
 The Companys deferred tax assets and liabilities as of
December 31, 2005 and 2006 are attributable to the
following:
 December 31,
    
    2005
    
    
    2006Net operating losses
    
    $
    8,914
    
    
    $
    9,410Valuation allowance
    
    
    (8,914
    )
    
    
    (9,410
    )$
    
    
    
    $
    
 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, 2005
and 2006.
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15.
    
    Income Taxes  continuedFor the years ended December 31, 2004, 2005 and 2006, the Company had net operating losses
of $5,863, $3,051 and $496, respectively, 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,
    
    2004
    
    
    2005
    
    
    2006Income before income taxes and minority interests
    
    $
    80,580
    
    
    $
    60,135
    
    
    $
    47,286PRC tax rate
    
    
    15
    %
    
    
    15
    %
    
    
    15
    %Income tax expense at PRC tax rate on income before
income tax
    
    $
    (12,087
    )
    
    $
    (9,020
    )
    
    $
    (7,093
    )Effect of difference between Hong Kong and PRC tax
rates applied to Hong Kong income
    
    
    205
    
    
    
    196
    
    
    
    (149
    )Effect of income for which no income tax expense is payable, net
    
    
    7,660
    
    
    
    4,813
    
    
    
    2,709Tax holidays and tax incentives
    
    
    2,220
    
    
    
    2,103
    
    
    
    1,381Effect of PRC tax concessions, giving rise to no PRC tax
liability
    
    
    2,774
    
    
    
    2,667
    
    
    
    1,794Valuation allowance
    
    
    (1,026
    )
    
    
    (534
    )
    
    
    (87
    )Tax benefit (expense) arising from items which are not
assessable (deductible) for tax purposes:Gain on disposal of land in Hong Kong
    
    
    
    
    
    
    82
    
    
    
    Gain on disposal of asset held for sale
    
    
    
    
    
    
    
    
    
    
    1,620Exempted interest income
    
    
    24
    
    
    
    17
    
    
    
    52Non-deductible legal and professional fees
    
    
    (282
    )
    
    
    (317
    )
    
    
    (75
    )Non-deductible and non-taxable other items
    
    
    17
    
    
    
    (744
    )
    
    
    (470
    )Underprovision of income tax expense in prior years
    
    
    (268
    )
    
    
    (41
    )
    
    
    (67
    )Other
    
    
    (116
    )
    
    
    127
    
    
    
    8$
    (879
    )
    
    $
    (651
    )
    
    $
    (377
    )
 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 $4,994, $4,770 and $3,175 in the years ended December 31, 2004, 2005 and
2006, respectively
(representing a decrease in the basic earnings and diluted earnings per share of $0.12,
$0.11 and $0.07 in the years ended December 31, 2004, 2005 and 2006, respectively).16.
    
    Related Party Balance and TransactionsFor the years ended December 31, 2004 and 2005, the Company recognized net sales of $34,181
and $6,195 and purchased raw materials of $12,398 and $5,766 from JCT and its related
companies, respectively. There were no sales to or purchases from JCT and its related
companies in the year ended December 31, 2006.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.
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17.
    
    Financial InstrumentsThe Companys financial instruments that are exposed to concentrations of credit risk
consist primarily of its cash and 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 $494 and $152 as of December 31, 2005 and 2006, respectively. There were
no other movements in the allowance 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 term nature of these instruments. The Companys financial instruments reported as
non-current liabilities, such as its long term bank loans, approximate their fair values due
to the variable nature of the interest calculations.18.
    
    Commitments and Contingencies
 (a)
    
    Lease commitmentsThe 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 $975, $1,546 and $1,855 in the years ended December 2004, 2005
and 2006, respectively.At December 31, 2006, the Company was obligated under operating leases, which relate
to land and buildings, requiring minimum rentals as follows:
 Year ending December 31,- 2007
    
    $
    1,665- 2008
    
    
    1,522- 2009
    
    
    1,288- 2010
    
    
    1,331- 2011
    
    
    1,415- 2012 and thereafter
    
    
    589$
    7,810
 (b)
    
    Significant legal proceedingsTele-ArtIn 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. Tele-Art appealed to the Court
of Appeal against the winding up order. This appeal was heard on January 13, 1999
by the Court of Appeal and was dismissed 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 totaling $1,673. The Company had also previously withheld dividends on shares beneficially owned by Tele-Art which were applied towards the partial
satisfaction of the said judgment debts costs and interest.
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18.
    
    Commitments and Contingencies continued
 (b)
    
    Significant legal proceedings continuedTele-Art continuedIn September 1999, the High Court heard the application by the Company dated March
22, 1994 for an inquiry into damage suffered by the Company (the First Inquiry) as
a result of the ex-part injunction granted to Tele-Art against the Company on
September 29, 1993 which prohibited the Company from proceeding with a rights
offering in September 1993.Following the completion of the first redemption on January 22, 1999, the Company
received notice that David Hague, the then liquidator of Tele-Art, had obtained an
ex-parte injunction from the High Court preventing the Company from redeeming the
Company 415,500 shares *.On July 5, 2002, upon the Companys application, the High Court ordered the removal
of the David Hagues ex-parte injunction and ordered an inquiry into damages
suffered by the Company as a result of the injunction (the Second Inquiry).On August 9, 2002, the High Court delivered its decision on the First Inquiry and
awarded the Company damages of 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 we 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.In accordance with the directions given by the High Court in respect of the Second
Inquiry on March 28, 2003, the Company filed its points of claim on April 3, 2003
and subsequently filed amended points of claim on April 16, 2003. In breach of the
courts directions, David Hague failed to file his points of defense on June 20,
2003 as ordered but instead he filed an application in the High Court, inter alia,
to strike out the Companys points of claim and for summary judgment on the inquiry
into damages on June 20, 2003. The Company thereupon applied to the High Court on
August 19, 2003 for judgment against David Hague in default of defense on the basis
that David Hague had not complied with the directions of the court for the filing of
his points of defense to the Companys points of claim.Both applications were heard by the High Court on May 12, 2004. At the hearing, the
court allowed David Hague to file his points of defense on May 12, 2004. The
Company filed an application for leave to appeal against this ruling on May 24,
2004. The High Court dismissed David Hagues strike out application on December 14,
2004 and David Hague applied for leave to appeal against the order dismissing his
application on December 28, 2004. The Companys appeal and David Hagues appeal
were heard by the Court of Appeal from September 19 to 21, 2005 and the court
delivered its judgment on January 16, 2006. In this judgment, the Court of Appeal
reversed the High Court s ruling on David Hagues application and struck out the
Companys points of claim on the inquiry into damages on the ground that the Company
had no realistic process of succeeding on same. The court also ordered costs
against the Company to be assessed on a prescribed costs basis. The court further
expressed the view that, in light of its dismissal of the Companys points of claim,
it was not necessary to rule on the Companys appeal against the dismissal of its
application for judgment in default since the point was now academic with the
dismissal of the Companys points of claim.The Company filed an application for leave to appeal the decision of the Court of
Appeal to the Privy Council, the final appellate court in the BVI, on February 3,
2006. The application for leave to appeal was heard by the Court of Appeal on May
8, 2006. The Court delivered its judgment on May 9, 2006 dismissing Nam Tais
application for leave on the ground that the matter was not one of great public
importance and therefore did not merit the consideration of the Privy Council. Nam
Tai was ordered to pay Mr. Hagues costs of the application, such costs were to be
assessed in default of an agreement.Nam Tai being dissatisfied with the judgment of the Court of Appeal denying them
leave to apply appeal directly to the Privy Council on November 3, 2006 for special
leave to appeal to the Privy Council. This application has been set down for
hearing in the Privy Council in London on March 29, 2007.
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18.
    
    Commitments and Contingencies continued
 (b)
    
    Significant legal proceedings continuedTele-Art- continuedPreviously, on February 4, 1999, David Hague, the then liquidator of Tele-Art filed
a summons (the Priority 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, the Company, 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 the Company to the
liquidator; and
    
    Payment of all dividends in respect of Tele-Arts Nam Tai shares.
 The Priority Summons was heard by the High Court on July 29 and 30, 2002 and the
High Court delivered its judgment on January 21, 2003 declaring that the redemption
and set-off of dividends on the 415,500 shares * should be set aside and that all
Tele-Arts property withheld by the Company be delivered to Tele-Art in liquidation.
On February 4, 2003, the Company filed an application for a stay of execution and
leave to appeal the decision. The appeal was heard on January 12, 2004 and judgment
was delivered on April 26, 2004. The Court of Appeal held that the redemption by
the Company of 415,500 * of the Companys shares was proper and efficacious.
However, the Company was ordered to return the redemption proceeds and dividends
payable on the redeemed shares to the liquidator. David Hague obtained leave to
appeal to the Privy Council on September 21, 2004 the Court of Appeal finding that
the redemption by the Company was efficacious.The Bank of China, which had been involved in the proceedings in the High Court and
Court of Appeal with respect to the Priority Summons, applied on December 12, 2005
for special leave to intervene and to be joined as a respondent to the Privy Council
appeal of David Hague, firstly so as to be in a position to support David Hagues
appeal and secondly, to appeal against that part of the Court of Appeal order that
declared that the redemption price for the sale of the Companys shares owned by
Tele-Art and redeemed by Nam Tai and all withheld dividends to be paid to the
liquidator of Tele-Art rather than the Bank of China despite a finding by the BVI
court that the Bank
of China was a secured creditor of Tele-Art. The Bank of Chinas application for
special leave was heard by the Privy Council on February 6, 2006 which granted the
Bank of China special leave to intervene on the ground that the matter raised
important points of law.The Privy Council heard David Hagues Appeal on October 9, 2006 and judgment was
delivered on November 20, 2006 (the Judgment). In the Judgment, the Privy Council
allowed Mr. Hagues appeal and declared that Nam Tais redemptions of Tele-Arts Nam
Tai shares of January 22, 1999 and August 12, 2002 were
nullities and ordered the Company to rectify its register of members, i.e. shareholders registry, to reinstate the
shares it had redeemed, together with any other shares which have accrued by way of
exchange or dividend since the redemptions. It also declared in the Judgment that
the Bank of China be registered as owner of the reinstated shares. In addition, the
Company was ordered to pay the costs incurred by Mr. Hague and the Bank of China in
the appeal to the Privy Council. Under the terms of the Judgment, the Bank of China
is entitled to have Tele-Arts debt to Bank of China and its associated expenses in
relation to the Privy Council proceedings paid from proceeds of the sale of the
Companys reinstated shares.The Privy Council is the final appellate court under the British Virgin Islands
judicial system and as such, there is no further legal recourse by way of appeal or
otherwise. The Company is therefore obligated to comply with the terms of the
Judgment.On January 8, 2007, the Bank of China wrote to the
Company demanding that it comply with
the Privy Council Order by (a) rectifying its share register to reflect the fact
that the Bank of China is the owner of 1,017,149 shares; (b) issuing to the Bank of
China a share certificate for the shares effective as of the dates they were
redeemed and the dates of issue for shares attributable to the redeemed shares as a
consequence of Nam Tais three-for-one stock split of June 30, 2003 and one-for-ten
stock dividend of November 7, 2003; and (c) sending the share certificates to the
Bank of Chinas address stated in the Order. The Bank of China also demanded
payment of dividends on the redeemed shares which the Bank of China calculated at
$5,595, such demand being on the basis that as Bank of China as the registered owner
of the shares was entitled to the payment of these dividends.
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The Company responded on January 23, 2007 confirming that it intended to take all
necessary steps to comply with the Judgment and to this end, was in the process of
finalizing advice from its U.S. Securities lawyers on the proper method of
reinstating the shares to the Bank of China. Nam Tai however disputed the Bank of
Chinas claim for payment of the dividends on the ground that this was contrary to
what the Bank of China had argued in the Privy Council and in any event was not part
of the Judgment.The Company has not paid dividends on the redeemed shares since 1997 and at March 1,
2007, the amount that would have accrued on the Redeemed Shares had such shares not
been redeemed totaled approximately $5,595. Although the Privy Council did not
address the issue of entitlement to post redemption dividends in the Judgment,
following the Judgment, the Bank of China has made claim to such dividends, a claim
that the Company has denied. Litigation may ensue over the Bank of Chinas or the
liquidator of Tele-Arts right to the dividends. The Company believes it has
meritorious defenses and intends to continue to defend the actions vigorously.The Bank of China responded on January 30, 2007 demanding confirmation of the
rectification of the share register within 14 days and receipt by the Bank of China
of the share certificates for the shares. The Bank of China asserted the payment of
dividends on the shares to be reinstated was a direct consequence of the Privy
Council Order and that Nam Tai was obligated to pay to the Bank of China.The Companys common shares are listed on the New York Stock Exchange (NYSE) and
accordingly has applied to the NYSE to list on
the NYSE the 1,017,149 shares to be reinstated
and delivered to the Bank of China in accordance with the Judgment. The Company recently received notice from the NYSE that the Companys listing application
for such shares had been approved for listing subject to official notice of
reinstatement. Nam Tai is in the process of preparing instructions to its transfer
agent to reinstate these shares and to register them in the name of the Bank of
China.The amount of Tele-Arts obligations to the Bank of China that are subject to the
Bank of Chinas security interest in the shares to be reinstated has not yet been
established; however, the liquidator of Tele-Art has estimated that as of December
31, 2006 it was approximately $3,345 on that date. Additionally, the Bank of China
is entitled under its share charge to recover its reasonable costs and expenses
incurred in recovering on Tele-Arts debt and interest continues to accrue. The
Company may contest any or all of the amounts claimed by the Bank of China as
underlying the share charge and may assert claims against the Bank of China
concerning the Bank of Chinas conduct in and outside of the liquidation
proceedings.On August 25, 2005, the liquidator filed his summons in the High Court for the
approval of his fourth liquidator report. The report sought the courts approval of
his recommendation of the amount of debt owed by Tele-Art to the Company of
approximately $38,900, two other unsecured creditors of approximately $221 and the
fee to David Hague of approximately $382. The report also sought the courts
approval of the Companys proposal on the distribution of the redemption proceeds
among the unsecured creditors and direction of court on whether Bank of China was
eligible to claim any amounts against Tele-Art and, if eligible, the quantum of such
debt. This liquidators summons was due to be heard on February 20, 2006 but had
been adjourned to a date
to be fixed by the Registrar of the High Court. It is expected that in light of the
Judgment of November 20, 2006, the liquidator may seek to have the issues raised in
its summons adjudicated by the BVI court, but up to March 16, 2007, the Company have
not received any information to that effect or otherwise and the status of this
proceeding remained unchanged.On April 11, 2005, Bank of China also filed a summons to the BVI Court seeking
orders to force Nam Tai to pay the redemption price and dividends ordered by the
Court of Appeal on the appeal of the Priority Summons to Bank of China. Nam Tai
filed an affidavit of evidence in response on July 19, 2005. A determination by the
court of this proceeding has now been rendered moot by the Judgment and although we
expect that the Bank of China will now withdraw or abandon its prosecution. As of
March 16, 2007, the Company has not received any information to that effect or
otherwise.As of December 31, 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 to the judgment in
relation to the Priority Summons on January 21, 2003 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
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18.
    
    Commitments and Contingencies continued
 (b)
    
    Significant legal proceedings continuedTele-Art continuedfrom the Company, 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.The losses the Company incurred of $14,465 at and through the Companys year ended
December 31, 2006 arising from the Judgment ordering reinstatement of the redeemed shares were determined by taking into account the fair value (i.e. market closing
price) of the Companys shares on November 20, 2006 (the date of the Judgment); the
estimated costs and expenses of the Bank of China and David Hague that the Company
expects will be claimed in connection with the Privy Council litigation proceedings;
and a reversal of the $3,890 provision previously made by the Company in 2003 with
respect to these proceedings. The Company may incur additional losses in the future
as a result of its reinstatement of the redeemed shares to the extent that the costs
and expenses of the Bank of China and David Hague increase beyond the aggregate
losses the Company has estimated at December 31, 2006 for the purposes of
determining the $14,465 losses.Based on the proceedings with respect to the liquidation of Tele-Art, any proceeds
from sales of the shares by the Bank of China after the deduction of its valid
claims and other costs and expenses of the liquidation of Tele-Art, together with
any of the Redeemed Shares remaining after the Bank of Chinas sales of that
collateral, are to be shared among the Company and two other unsecured creditors on
a pro-rata basis up to the amount of their valid claims against Tele-Art. Once the
debt of Bank of China has been satisfied, the Company believes that it and the other
unsecured creditors of Tele-Art would be entitled to payment of their debt from the
balance of the proceeds from the sale of the redeemed shares. The Company has been
advised that of the unsecured claims against Tele-Art in the liquidation,
approximately 95% consist of the Companys judgment against Tele-Art that the High
Court of Justice in the BVI awarded to the Company in the amount of $34,000, plus
interest, that resulted from damages the Company suffered from a 1993 injunction
obtained by Tele-Art. The remainder of the unsecured claims against Tele-Art in the
liquidation consist of the Companys claims for other amounts owed to it by
Tele-Art, which aggregate to approximately 4% of the total unsecured claims in the
liquidation, with the remainder
of the aggregate unsecured claims consisting of those of the two other unsecured
creditors.The amount actually recoverable, if any, by the Company on its judgments against
Tele-Art and other claims will depend on the price realized by the liquidator when
the Companys shares are sold to satisfy creditors claims against Tele-Art and thus
is dependent on the market price at the time of sale as well as the actual amounts
of the claims of the Bank of China and the other creditors against Tele-Art and
ultimate expenses of the liquidator. Because of uncertainties
relating to the timing
of Bank of Chinas actions with respect to the disposition of the Redeemed Shares
delivered to it pursuant to the Judgment, including the timing of any sales and the
amount of proceeds to be realized, the actual amount of Bank of Chinas claims,
including interest, costs and expenses, whether Bank of China actually remits any
excess proceeds or shares to the liquidator for the benefit of Tele-Arts unsecured
creditors, the uncertain effect of any claims that the Company may assert against
the Bank of China, the possibility that the Company will be forced to seek further
recourse from the courts in an effort to protect its position and the
timing, and cost
and uncertain success of such recourse, the Company has determined not to record any
value to a potential recovery on its unsecured claims against Tele-Arts estate in
liquidation in its consolidated financial statements until the prospects of
recovery, if any, becomes reasonably certain to the Company. The Company may incur
substantial additional costs in pursuing our recovery, and neither the amount of our
judgments against Tele-Art, nor such costs may be recoverable.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 as well
as to pursue other parties that may have assisted in any transfers of the assets
from Tele-Art.
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18.
    
    Commitments and Contingencies continued
 (b)
    
    Significant legal proceedings continuedIn 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. David Hague had submitted a
letter of resignation from the post of liquidator of Tele-Art on September 3, 2002
to the High Court and his resignation was approved by the High Court on December 17,
2002. A new liquidator, Mr. Glenn Harrigan, was then appointed by the BVI court on
July 11, 2003.David Hague and PricewaterhouseCoopers applied to the High Court of the BVI on
December 24, 2002 challenge the service of these proceedings on them to Hong Kong
and jurisdiction of the BVI courts to determine the claim by the Company. The
application was heard by the High Court on May 11 and 12, 2004 and dismissed in its
judgment on October 29, 2004. David Hague and PricewaterhouseCoopers obtained leave
to appeal this judgment in March 2005 and the appeal was heard by the Court of
Appeal on September 19 to 21, 2005. The Court of Appeal delivered its judgment
dismissing the appeal and awarding costs to the Company. David Hague and
PricewaterhouseCoopers made an application on February 6, 2006 for leave to appeal
this judgment to the Privy Council. The Company has cross-applied for leave on
February 3, 2006 to appeal to the Privy Council against the costs awarded to the
Company in the Court of Appeal on the basis that such costs were determined by the
application of incorrect legal principles and were in any event too low and
inconsistent with cost orders made against the Company in other appeal proceedings
involving David Hague.Both Nam Tai and the David Hagues application for leave to Appeal were heard by the
Court of Appeal on May 9, 2006. The Court granted David Hagues application for
leave to appeal but dismissed Nam Tais application with costs on the ground that
the matter was not one of great public importance but merely concerned the private
matter of a party to litigation being aggrieved by the costs awarded to it by the
Court. Nam Tai being dissatisfied with this decision applied for special leave to
appeal direct to the Privy Council on November 4, 2006. This application has been
listed for hearing in London before the Privy Council on March 29, 2007. No date
has however been fixed for the hearing of the David Hagues substantive appeal but
it is expected that same will come on for hearing sometime in the middle of the
year.The Company has also instituted proceedings in the BVI against UBS Painewebber, or
UBS, on June 20, 2005, for breach of trust with respect to UBSs role as brokers in
carrying out the terms of
the September 1997 BVI court order for the sale of Tele-Arts Nam Tai shares in
sufficient quantities to pay the debts of the Bank of China and Nam Tai. UBS
subsequently filed an application challenging the jurisdiction of the Court. On
July 25, 2006 however, the Court upon the application of PaineWebber made an Order
staying the BVI court proceedings pending the outcome of the New York Court
proceedings which in effect dealt with almost identical matters as the BVI
proceedings. This stay remains in place and awaits the outcome of the New York
matter which we understand continues to proceed to trial.(* Subsequent to November 7, 2003, the number of shares has been adjusted to 457,050
to reflect the 1 for 10 stock dividend effective on that date.)(** Subsequent to November 7, 2003, the number of shares has been adjusted to
560,099 to reflect the 1 for 10 stock dividend effective on that date.)Shareholders ActionsThe Company and certain of its directors are defendants in consolidated [class]
actions entitled Rocco vs. Nam Tai Electronics et al.,Lead Case No.
03-cv-01148-JES, originally commenced on February 20, 2003 and pending in the United
States District Court in the Southern District of New York. The named plaintiffs
purport to represent a putative class of persons who purchased our common shares
from July 29, 2002 through February 18, 2003. The plaintiffs have asserted 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 the Companys LCDP segment. The Company has filed an answer to the
amended and consolidated complaint and oral argument on the plaintiffs most recent
motion for class certification was held on February 1, 2007. The Court reserved
judgment on the motion at the conclusion of the oral argument and had not rendered a
ruling as the close of business on March 16, 2007. The Company believes it has
meritorious defenses and intends to continue to defend the actions vigorously.
 F-32




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##### Table of Contents



19.
    
    Segment InformationThe Company operates in three segments: CECP, TCA and LCDP. 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.
 CECP
    
    TCA
    
    LCDP
    
    Corporate
    
    TotalYear ended December 31, 2004Net sales  third parties
    
    $
    168,456
    
    
    $
    282,514
    
    
    $
    48,710
    
    
    $
    
    
    
    $
    499,680Net sales  related parties
    
    
    
    
    
    
    34,181
    
    
    
    
    
    
    
    
    
    
    
    34,181Total net sales
    
    
    168,456
    
    
    
    316,695
    
    
    
    48,710
    
    
    
    
    
    
    
    533,861Cost of sales
    
    
    (131,163
    )
    
    
    (286,206
    )
    
    
    (40,016
    )
    
    
    
    
    
    
    (457,385
    )Gross profit
    
    
    37,293
    
    
    
    30,489
    
    
    
    8,694
    
    
    
    
    
    
    
    76,476Selling, general and administrative expenses
    
    
    (10,268
    )

    
    
    (6,940
    )
    
    
    (5,212
    )
    
    
    (5,633
    )
    
    
    (28,053
    )Research and development expenses
    
    
    (2,348
    )
    
    
    (1,748
    )
    
    
    (949
    )
    
    
    
    
    
    
    (5,045
    )Other income (expenses), net
    
    
    777
    
    
    
    (72
    )
    
    
    39
    
    
    
    (1,756
    )
    
    
    (1,012
    )Dividend income received from marketable
securities and investment
    
    
    926
    
    
    
    
    
    
    
    
    
    
    
    17,369
    
    
    
    18,295Gain on partial disposal of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,320
    
    
    
    77,320Impairment loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58,316
    )
    
    
    (58,316
    )Interest income
    
    
    164
    
    
    
    105
    
    
    
    18
    
    
    
    823
    
    
    
    1,110Interest expense
    
    
    (1
    )
    
    
    (23
    )
    
    
    (171
    )
    
    
    
    
    
    
    (195
    )Income before income taxes and
minority interests
    
    
    26,543
    
    
    
    21,811
    
    
    
    2,419
    
    
    
    29,807
    
    
    
    80,580Income taxes
    
    
    (689
    )
    
    
    (180
    )
    
    
    (67
    )
    
    
    57
    
    
    
    (879
    )Income before minority interests and equity
in loss of an affiliated company
    
    
    25,854
    
    
    
    21,631
    
    
    
    2,352
    
    
    
    29,864
    
    
    
    79,701Minority interests
    
    
    (5,351
    )
    
    
    
    
    
    
    (254
    )
    
    
    (405
    )
    
    
    (6,010
    )Equity in loss of an affiliated company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,806
    )
    
    
    (6,806
    )Net income
    
    $
    20,503
    
    
    $
    21,631
    
    
    $
    2,098
    
    
    $
    22,653
    
    
    $
    66,885Year ended December 31, 2005Net sales  third parties
    
    $
    169,056
    
    
    $
    563,874
    
    
    $
    58,112
    
    
    $
    
    
    
    $
    791,042Net sales  related parties
    
    
    
    
    
    
    6,195
    
    
    
    
    
    
    
    
    
    
    
    6,195Total net sales
    
    
    169,056
    
    
    
    570,069
    
    
    
    58,112
    
    
    
    
    
    
    
    797,237Cost of sales
    
    
    (134,002
    )
    
    
    (523,869
    )
    
    
    (46,443
    )
    
    
    
    
    
    
    (704,314
    )Gross profit
    
    
    35,054
    
    
    
    46,200
    
    
    
    11,669
    
    
    
    
    
    
    
    92,923Selling, general and administrative
expenses
    
    
    (11,166
    )
    
    
    (10,364
    )
    
    
    (6,224
    )
    
    
    (5,303
    )
    
    
    (33,057
    )Research and development expenses
    
    
    (3,500
    )
    
    
    (2,546
    )
    
    
    (1,164
    )
    
    
    
    
    
    
    (7,210
    )Other income (expenses), net
    
    
    2,508
    
    
    
    1,276
    
    
    
    740
    
    
    
    (4,649
    )
    
    
    (125
    )Dividend income received from
marketable securities
    
    
    579
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    579Gain on partial disposal of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,095
    
    
    
    10,095Gain on disposal of an affiliated company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,631
    
    
    
    3,631Loss on disposal of marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,686
    )
    
    
    (3,686
    )Impairment loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,525
    )
    
    
    (6,525
    )Interest income
    
    
    514
    
    
    
    728
    
    
    
    47
    
    
    
    2,659
    
    
    
    3,948Interest expense
    
    
    
    
    
    
    
    
    
    
    (438
    )
    
    
    
    
    
    
    (438
    )Income (loss) before income taxes
and minority interests
    
    
    23,989
    
    
    
    35,294
    
    
    
    4,630
    
    
    
    (3,778
    )
    
    
    60,135Income taxes
    
    
    (498
    )
    
    
    (78
    )
    
    
    (75
    )
    
    
    
    
    
    
    (651
    )Income (loss) before minority interests and
equity in loss of an affiliated company
    
    
    23,491
    
    
    
    35,216
    
    
    
    4,555
    
    
    
    (3,778
    )
    
    
    59,484Minority interests
    
    
    (6,661
    )
    
    
    
    
    
    
    (1,331
    )
    
    
    
    
    
    
    (7,992
    )Equity in loss of an affiliated company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (186
    )
    
    
    (186
    )Net income (loss)
    
    $
    16,830
    
    
    $
    35,216
    
    
    $
    3,224
    
    
    $
    (3,964
    )
    
    $
    51,306
 F-33




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##### Table of Contents



19.
    
    Segment Information  continued
 Year ended December 31, 2006
    
    CECP
    
    TCA
    
    LCDP
    
    Corporate
    
    TotalNet sales  third parties
    
    $
    178,320
    
    
    $
    627,199
    
    
    $
    64,655
    
    
    $
    
    
    
    $
    870,174Cost of sales
    
    
    148,013
    
    
    
    582,052
    
    
    
    53,888
    
    
    
    
    
    
    
    783,953Gross profit
    
    
    30,307
    
    
    
    45,147
    
    
    
    10,767
    
    
    
    
    
    
    
    86,221Gain on disposal of asset held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,258
    
    
    
    9,258Selling, general and administrative
expenses
    
    
    (10,026
    )
    
    
    (11,960
    )
    
    
    (5,167
    )
    
    
    (3,515
    )
    
    
    (30,668
    )Research and development expenses
    
    
    (3,285
    )
    
    
    (3,064
    )
    
    
    (1,517
    )
    
    
    
    
    
    
    (7,866
    )Losses arising from the judgment to
reinstate redeemed shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,465
    )
    
    
    (14,465
    )Loss on marketable securities arising
from split share structure reform
    
    
    (1,869
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,869
    )Other income (expenses), net
    
    
    954
    
    
    
    577
    
    
    
    
    
    
    
    (2,796
    )
    
    
    (1,265
    )Interest income
    
    
    1,638
    
    
    
    809
    
    
    
    84
    
    
    
    6,011
    
    
    
    8,542Interest expense
    
    
    
    
    
    
    
    
    
    
    (602
    )
    
    
    
    
    
    
    (602
    )Income (loss) before income taxes
and minority interests
    
    
    17,719
    
    
    
    31,509
    
    
    
    3,565
    
    
    
    (5,507
    )
    
    
    47,286Income taxes
    
    
    (214
    )
    
    
    (85
    )
    
    
    (78
    )
    
    
    
    
    
    
    (377
    )Income (loss) before minority interests and
equity in loss of an affiliated company
    
    
    17,505
    
    
    
    31,424
    
    
    
    3,487
    
    
    
    (5,507
    )
    
    
    46,909Minority interests
    
    
    (5,251
    )
    
    
    
    
    
    
    (904
    )
    
    
    2
    
    
    
    (6,153
    )Equity in (loss) profit of an
affiliated company
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    8
    
    
    
    Net income (loss)
    
    $
    12,254
    
    
    $
    31,424
    
    
    $
    2,575
    
    
    $
    (5,497
    )
    
    $
    40,756
 Year ended December 31, 2004
    
    CECP
    
    TCA
    
    LCDP
    
    Corporate
    
    TotalDepreciation and amortization
    
    $
    4,527
    
    
    $
    6,030
    
    
    $
    2,454
    
    
    $
    1,005
    
    
    $
    14,016Capital expenditures
    
    $
    21,605
    
    
    $
    14,628
    
    
    $
    2,227
    
    
    $
    151
    
    
    $
    38,611Identifiable assets
    
    $
    138,691
    
    
    $
    127,261
    
    
    $
    51,336
    
    
    $
    143,185
    
    
    $
    460,473
 Year ended December 31, 2005
    
    CECP
    
    TCA
    
    LCDP
    
    Corporate
    
    TotalDepreciation and amortization
    
    $
    5,132
    
    
    $
    7,140
    
    
    $
    3,508
    
    
    $
    1,044
    
    
    $
    16,824Capital expenditures
    
    $
    13,498
    
    
    $
    8,402
    
    
    $
    10,222
    
    
    $
    44
    
    
    $
    32,166Identifiable assets
    
    $
    148,173
    
    
    $
    170,624
    
    
    $
    57,736
    
    
    $
    143,478
    
    
    $
    520,011
 Year ended December 31, 2006
    
    CECP
    
    TCA
    
    LCDP
    
    Corporate
    
    TotalDepreciation and amortization
    
    $
    6,484
    
    
    $
    8,488
    
    
    $
    4,052
    
    
    $
    
    
    
    $
    19,024Capital expenditures
    
    $
    1,991
    
    
    $
    19,864
    
    
    $
    1,937
    
    
    $
    
    
    
    $
    23,792Identifiable assets
    
    $
    181,634
    
    
    $
    170,129
    
    
    $
    58,172
    
    
    $
    119,300
    
    
    $
    529,235
 There were no material inter-segment sales for the years ended December 31, 2004, 2005 and
2006. Sales in relation to software development services of Namtek Software was included in
the product segment of CECP after internal restructuring in 2005 and the comparative figures
have been restated. The Company charges 100% of its corporate level related expenses to its
reportable segments.
 F-34




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##### Table of Contents



19.
    
    Segment Information  continuedA 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,
2004, 2005 and 2006, is as follows:
 Year ended December 31,
    
    2004
    
    
    2005
    
    
    2006Product lineCECP:- Assembling- Consumer electronics and communication products
    
    
    31
    %
    
    
    20
    %
    
    
    20
    %- Software development services
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %32
    %
    
    
    21
    %
    
    
    21
    %TCA
    
    
    59
    %
    
    
    72
    %
    
    
    72
    %LCDP:- Parts and components- LCD products
    
    
    9
    %
    
    
    7
    %
    
    
    7
    %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,
    
    2004
    
    
    2005
    
    
    2006Net sales from operations within:- Hong Kong and Macao:Unaffiliated customers
    
    $
    48,710
    
    
    $
    58,112
    
    
    $
    Intercompany sales
    
    
    563
    
    
    
    670
    
    
    
    49,273
    
    
    
    58,782
    
    
    
    - PRC, excluding Hong Kong and Macao:Unaffiliated customers
    
    
    450,970
    
    
    
    732,930
    
    
    
    870,174Related parties
    
    
    34,181
    
    
    
    6,195
    
    
    
    Intercompany sales
    
    
    4,393
    
    
    
    
    
    
    
    418489,544
    
    
    
    739,125
    
    
    
    870,592- Intercompany eliminations
    
    
    (4,956
    )
    
    
    (670
    )
    
    
    (418
    )Total net sales
    
    $
    533,861
    
    
    $
    797,237
    
    
    $
    870,174Net income within:- PRC, excluding Hong Kong and Macao
    
    $
    30,981
    
    
    $
    31,354
    
    
    $
    18,743- Hong Kong and Macao
    
    
    35,904
    
    
    
    19,952
    
    
    
    22,013Total net income
    
    $
    66,885
    
    
    $
    51,306
    
    
    $
    40,756
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##### Table of Contents



19.
    
    Segment Information  continued
 Year ended December 31,
    
    2004
    
    
    2005
    
    
    2006Net sales to customers by geographical area:- Hong Kong
    
    $
    160,959
    
    
    $
    383,138
    
    
    $
    258,774- Europe (excluding Estonia)
    
    
    96,304
    
    
    
    138,974
    
    
    
    131,763- United States
    
    
    58,696
    
    
    
    33,259
    
    
    
    76,620- PRC (excluding Hong Kong)
    
    
    132,603
    
    
    
    151,788
    
    
    
    272,916- Japan
    
    
    33,880
    
    
    
    14,858
    
    
    
    19,259- Estonia
    
    
    3,106
    
    
    
    
    
    
    
    - North America (excluding United States)
    
    
    5,352
    
    
    
    492
    
    
    
    1,999- Korea
    
    
    21,520
    
    
    
    53,979
    
    
    
    49,434- Other
    
    
    21,441
    
    
    
    20,749
    
    
    
    59,409Total net sales
    
    $
    533,861
    
    
    $
    797,237
    
    
    $
    870,174
 As of December 31,
    
    2004
    
    
    2005
    
    
    2006Long-lived assets by geographical area:- PRC, excluding Hong Kong and Macao
    
    $
    84,453
    
    
    $
    100,372
    
    
    $
    105,123- Hong Kong and Macao
    
    
    12,988
    
    
    
    369
    
    
    
    271Total long-lived assets
    
    $
    97,441
    
    
    $
    100,741
    
    
    $
    105,394
 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,
    
    2004
    
    
    2005
    
    
    2006A
    
    $
    72,235
    
    
    $
    257,595
    
    
    $
    195,476B
    
    
    75,426
    
    
    
    121,369
    
    
    
    163,712C
    
    
    54,023
    
    
    
    80,354
    
    
    
    141,977D
    
    
    54,635
    
    
    
    N/A
    
    
    
    N/A$
    256,319
    
    
    $
    459,318
    
    
    $
    501,165
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##### Table of Contents



ITEM 19. EXHIBITS
  ExhibitNumber
    
    Description1.1
    
    Memorandum and Articles of Association, as amended on June 26,
2003 (incorporated by reference to Exhibit 1.1 to the registrants
Form 20-F for the year ended December 31, 2003 filed with the
Securities and Exchange Commission (SEC) on March 10, 2004).4.1
    
    Loan Agreement date February 3, 2005 between Zastron Electronic
(Shenzhen) Co. Ltd. and Zastron Precision Tech-Limited for a loan
of $36,000,000 granted from Zastron Precision-Tech Limited to
Zastron Electronic (Shenzhen) Co. Ltd. (incorporated by reference
to Exhibit 4.17 to the Companys Form 20-F for the year ended
December 31, 2005 filed with the Securities and Exchange
Commission (SEC) on March 15, 2006).4.2
    
    Agreement dated April 8, 2005, between Nam Tai Electronics, Inc.,
Asano Company Limited and Nam Tai Electronic & Electrical Products
Limited in relation to the sale and purchase of the entire issued
share capital of Namtek Software Technology Limited regarding an
allotment and issuance of 65,336,470 and 16,334,118 of shares of
Nam Tai Electronic & Electrical Products Limited to Nam Tai
Electronics, Inc. and Asano Company Limited, respectively at an
issue price of HKD2.55 per share (incorporated by reference to
Exhibit 4.18 to the Companys Form 20-F for the year ended
December 31, 2005 filed March 15, 2006).4.3
    
    Supplemental Loan Agreement between Zastron Electronic (Shenzhen)
Co. Ltd. and Zastron Precision -Tech Limited extending repayment
of term for a loan of $18,660,000 granted from Zastron
Precision-Tech Limited to Zastron Electronic (Shenzhen) Co. Ltd.
in accordance with a loan agreement dated March 30, 2004
(incorporated by reference to Exhibit 4.19 to the Companys Form
20-F for the year ended December 31, 2005 filed with the SEC on
March 15, 2006).4.4
    
    Supplement Letter dated May 12, 2005 from Kazuhiro Asano to Nam
Tai Electronic & Electrical Products Limited to undertake certain
conditions set out in the attached Undertaking in relation to the
sale and purchase of the entire issued share capital of Namtek
Software Development Company Limited from Nam Tai Electronics,
Inc. and Asano Company Limited (incorporated by reference to
Exhibit 4.20 to the Companys Form 20-F for the year ended
December 31, 2005 filed with the SEC on March 15, 2006).4.5
    
    Banking Facilities Letter dated September 9, 2005 from The
Hongkong and Shanghai Banking Corporation Limited accepted and
confirmed by Nam Tai Electronics, Inc. granting of overdraft of
HK$500,000 treasury facilities of $30,000,000 and commercial card
facility of HK$1,100,000 (incorporated by reference to Exhibit
4.21 to the Companys Form 20-F for the year ended December 31,
2005 filed with the SEC on March 15, 2006).4.6*
    
    Banking Facilities Letter September 9, 2005 from The Hongkong and
Shanghai Banking Corporation Limited accepted and confirmed by Nam
Tai Electronic & Electrical Products Limited renewing corporate
card facility of HK$700,000, revolving loan of $30,000,000 and
$2,000,000 foreign exchange line of credit (incorporated by
reference to Exhibit 4.21 to the Companys Form 20-F for the year
ended December 31, 2005 filed with the SEC on March 15, 2006).4.7
    
    Protocol dated November 2005 for split share structure reform of
TCL Corporation (Approval by Namtai Electronic (Shenzhen) Co., Ltd. in December 2005).4.8.1
    
    Sale and Purchase Agreement dated March 9, 2006 between Nam
Tai Group Management Limited, as seller, and Top Ease (H.K.)
Limited, as purchaser, for the sale of the 15th Floor and car
park space no. 96 on 6th Floor, China Merchants Tower, Shun
Tak Centre, No. 168-200 Connaught Road Central, Hong Kong.
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ExhibitNumber
    
    Description4.8.2
    
    Assignment dated April 13, 2006 from Nam Tai Group Management
Limited, as seller, to Top Ease (H.K.) Limited, as purchaser,
transferring the 15th Floor and car park space no. 96 on 6th
Floor, China Merchants Tower, Shun Tak Centre, No. 168-200
Connaught Road Central, Hong Kong.4.9
    
    Investment Agreement dated March 14, 2006 between Zastron
Electronic (Shenzhen) Co. Ltd and Shenzhen Baoan District
High and New Technology Industrial Park Development and
Investment Co., Ltd. with respect the investment by Nam Tais
subsidiary in a project in Shenzhen Guangming Hi-Tech
Industrial Park.4.10
    
    Banking facilities letter dated July 17, 2006 The Hongkong
and Shanghai Banking Corporation Limited to Zastron
Electronic (Shenzhen) Co. Ltd for import credit facilities up
to $15 million.4.11
    
    Banking Facilities Letter dated July 17, 2006, The Hongkong
and Shanghai Banking Corporation Limited to Jetup Electronic
(Shenzhen) Co. Ltd. for documentary credits to suppliers and
import loan facilities up to approximately $12.9 million.4.12
    
    Guarantee dated July 21, 2006 by the Company. in favor of The
Hongkong and Shanghai Banking Corporation Limited
guaranteeing the banking facilities of Zastron Electronic
(Shenzhen) Co. Ltd. up to $15 million.4.13
    
    Cooperation Agreement dated October 26, 2006 between Zastron
Precision-Tech Limited and the Administration Committee of
Wuxi National High and New Technology Industry Development
District related to investment to build production plant for
LCD modules, electronic modules and other and establish an
industrial presence in Wuxi.4.14
    
    Cooperation Agreement dated October 26, 2006 between Zastron
Precision-Tech Limited and the Administration Committee of
Wuxi National High and New Technology Industry Development
District related to investment to build production plant for
flexible circuit boards and establish an industrial presence
in Wuxi.4.15
    
    Land Use Transfer Agreement dated December 25, 2006 between
Wuxi Municipal Bureau of State Land and Resources and Zastron
Precision-Tech (Wuxi) Co. Ltd relating to the land use right
to No. B14-A Plot located in Wuxi National High and New
Technology Industry Development District.4.16
    
    Land Use Transfer Agreement dated December 31, 2006 between
Wuxi Municipal Bureau of State Land and Resources and Zastron
Precision-Flex (Wuxi) Co. Ltd., relating to the land use
right to No. A64-2 Plot located in Meicun Industrial
Concentration Area of Wuxi New District.4.17
    
    2006 Stock Option Plan of Nam Tai Electronics, Inc adopted
February 10, 2006 and approved on June 9, 2006 (incorporated
by reference to Exhibit A attached to Exhibit 99.1 of the
Form 6-K furnished to the SEC on May 15, 2006).4.18
    
    Amendment to 2006 Stock Option Plan (incorporated by
reference to Exhibit 4.1.1 to the Companys Registration
Statement on Form S-8 File No. 333-136653 included with the
Company Form 6-K furnished to the SEC on November 13, 2006).4.19
    
    Amended 2001 Option Plan dated July 30, 2004 (incorporated by
reference to Exhibit 4.18 to the Companys Form 20-F for the
year ended December 31, 2004 filed with the SEC on March 15,
2005).4.20
    
    Amendment to 2001 Stock Option Plan (incorporated by
reference to Exhibit 4.1.1 to the Companys Registration
Statement on Form S-8 File No. File No. 333-76940 included
with Companys Form 6-K furnished to the SEC on November 13,
2006).8.1
    
    Diagram of Companys subsidiaries. See the Section headed
Organization Structure under Item 4 of this Report at page 35.
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ExhibitNumber
    
    Description11.1
    
    Code of Ethics (incorporated by reference to Exhibit 14.1 to
the Companys Form 20-F for the year ended December 31, 2004
filed with the SEC on March 15, 2005)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 2002.13.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.25.1
    
    Consent of Deloitte Touche Tohmatsu.
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SIGNATURES
  NAM TAI ELECTRONICS, INC.By:
    /s/ Warren LeeWarren LeeChief Executive Officer  87