-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KRvw8x47QsnTWYt/Zd15FOfEv1tJTdouOhKqj99HsgPn8uzKMgVGu2+tA9m2mj93 Z+I3ebEiHNeJ4Vnr9NPYfg== 0000950148-96-000549.txt : 19960403 0000950148-96-000549.hdr.sgml : 19960403 ACCESSION NUMBER: 0000950148-96-000549 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960402 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAM TAI ELECTRONICS INC CENTRAL INDEX KEY: 0000829365 STANDARD INDUSTRIAL CLASSIFICATION: CALCULATING & ACCOUNTING MACHINES (NO ELECTRONIC COMPUTERS) [3578] STATE OF INCORPORATION: D8 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-16673 FILM NUMBER: 96543844 BUSINESS ADDRESS: STREET 1: UNIT 513-520 NO1 STREET 2: HUNG TO ROAD KWUN TONG CITY: KOWLOON STATE: K3 BUSINESS PHONE: 8006698831 MAIL ADDRESS: STREET 1: C/O NAM TAI ELECTRONICS CANADA LTD STREET 2: 999 WEST HASTINGS STREET SUITE 530 CITY: BRITISH COLUMBIA STATE: A1 20-F 1 ANNUAL REPORT 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F [ ] Registration Statement Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 OR [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ---------------------------------- For the Fiscal Year Ended: Commission File Number: December 31, 1995 0-16673 ---------------------------------- NAM TAI ELECTRONICS, INC. (Exact name of registrant as specified in its charter) British Virgin Islands (Jurisdiction of incorporation or organization) Unit 513-520 No. 1 Hung To Road Kwun Tong, Kowloon, Hong Kong (Address of principal executive offices) ---------------------------------- Securities registered or to be registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Shares, $0.01 par value per share Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE As of December 31, 1995, there were 8,063,177 Common Shares of the registrant outstanding. Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark which financial statement item the registrant has elected to follow: Item 17 Item 18 X ----- ----- Page 1 of ________ Pages (including Exhibits) Exhibit Index on Page 53 - 1 - 2 TABLE OF CONTENTS FINANCIAL STATEMENTS AND CURRENCY PRESENTATION .......................................................... 2 PART I .................................................................................................. 3 Item 1. Description of Business ................................................................... 3 Item 2. Properties ................................................................................ 17 Item 3. Legal Proceedings ......................................................................... 18 Item 4. Control of the Company .................................................................... 19 Item 5. Nature of Trading Market .................................................................. 20 Item 6. Exchange Controls and Other Limitations Affecting Security Holders ........................ 20 Item 7. Taxation .................................................................................. 20 Item 8. Selected Financial Data ................................................................... 21 Item 9. Management's Discussion and Analysis of Results of Operations and Financial Condition ..... 22 Item 10. Directors and Executive Officers of the Company ........................................... 31 Item 11. Compensation of Directors and Officers .................................................... 33 Item 12. Options to Purchase Securities from the Company or its Subsidiaries ....................... 33 Item 13. Interest of Management in Certain Transactions ............................................ 33 PART II .................................................................................................. 34 Item 14. Description of Securities to be Registered ................................................ 34 PART III ................................................................................................. 34 Item 15. Defaults Upon Senior Securities ........................................................... 34 Item 16. Changes in Securities and Changes in Security For the Company's Securities ................ 34 PART IV ................................................................................................. 34 Item 17. Financial Statements ...................................................................... 34 Item 18. Financial Statements ...................................................................... 34 Consent of Independent Accountants (to incorporation of their report on Financial Statements into the Company's Registration Statement on Form S-8) ............. 52 Item 19. Financial Statements and Exhibits ......................................................... 53 SIGNATURES ............................................................................................... 53
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION The Company prepares its consolidated financial statements in accordance with generally accepted accounting principles in the United States of America. See "Report of Independent Accountants" included elsewhere herein. The Company publishes its financial statements in United States dollars for the following reasons: (i) the Company is incorporated in the British Virgin Islands where the currency is the United States dollar; (ii) the Company conducts the majority of its business transactions in United States dollars; and (iii) the exchange rate between the Hong Kong dollar and the United States dollar has been fixed at approximately 7.80 Hong Kong dollars to $1.00 since 1983. See Note 1(g) of Notes to Consolidated Financial Statements appearing in Item 18 of this Report. - 2 - 3 PART I ITEM 1. DESCRIPTION OF BUSINESS THE COMPANY Nam Tai Electronics, Inc. (which together with its subsidiaries is hereafter referred to as the "Company" or "Nam Tai") was incorporated as a limited liability International Business Company under the laws of the British Virgin Islands in August 1987. The Company's corporate administrative matters are conducted in the British Virgin Islands through its registered agent, Citco Trust Corporation Limited, P.O. Box 662, Road Town, Tortola, British Virgin Islands. The Company's principal executive offices are located in Hong Kong in Unit 513-520 No. 1 Hung To Road, Kwun Tong, Kowloon, Hong Kong. As an International Business Company, the Company is prohibited from doing business with persons resident in the British Virgin Islands, owning real estate in the British Virgin Islands, or acting as a bank or insurance company. The Company does not believe these restrictions materially affect its operations. Nam Tai was incorporated in the British Virgin Islands principally to facilitate trading in its shares. The government of Hong Kong imposes stamp duty on the transfer of shares equal to 0.3% of the value of the transaction. There is no such stamp duty imposed by the British Virgin Islands. As the United States securities industry is not geared toward the collection of stamp duties for share transactions, the Company was organized in this manner to avoid any such requirements. RECENT DEVELOPMENTS Inflation continues to be a problem in the People's Republic of China (hereafter referred to as "China") although the rate of inflation fell in 1995 compared to 1994 and 1993. China's economy grew at annual rates of 10.2% in 1995, 11.8% in 1994 and 13.4% in 1993. Inflation declined to 14.8% in 1995 from 21.7% in 1994 following the application of programs such as credit control to address major problems with the economy. Typically, countries which have high inflation experience a currency devaluation against countries such as the U.S. which have much lower inflation rates. However, the Chinese renminbi has been relatively stable in value against the U.S. dollar, actually strengthening slightly, with an average rate of 8.32 renminbi per $1.00 during 1995 and 8.45 renminbi per $1.00 during 1994. This was mainly the result of China's success in controlling money supply. Although only 6.2% of the Company's expenses were in Chinese renminbi in 1995, the appreciation of the renminbi against the U.S. dollar increases the expenses of the Company when translated into U.S. dollars. In order to expand production capacity, the Company is expanding its factory on an adjacent site consisting of approximately 283,200 square feet of land in Shenzhen, China. The Company purchased the right to use this site for 30 years for a total of approximately $2,450,000 in January 1994. Construction of the approximately 400,000 square feet of new factory complex began in early 1995 and portions were completed in August 1995 to house new factory employees that the Company is adding to expand production. Construction of the new factory is on schedule and completion of Phase I was essentially complete at the end of the first quarter of 1996. Phase II is anticipated to be complete by the end of 1998. Phase I consists of a factory building of approximately 160,000 square feet, an office building of approximately 40,000 square feet as well as new dormitories, recreation and dining facilities. In accordance with an expansion schedule, Nam Tai intends to establish production lines and equip the new factory on a floor-by-floor basis as required by growth in the Company's business through 1996 and into early 1997. Phase II of the new factory complex will consist of another factory building of approximately equal size to the one now under construction plus a swimming pool facility for all employees. - 3 - 4 COMPANY OVERVIEW Nam Tai Electronics, Inc. is an independent provider of high quality manufacturing services to original equipment manufacturers ("OEMs") in the consumer electronics industry. All of the Company's manufacturing operations are based in China. Nam Tai assists OEMs in the design and development of products and furnishes full turnkey manufacturing services to its OEM customers. The Company provides the components and other materials used in the assembly process, assembles the components into finished products or electronic subassemblies and performs post-assembly testing. The Company manufactures a broad line of finished products for its OEM customers, including personal organizers, linguistic products and calculators. In addition, it manufactures electronic components and subassemblies and is engaged in the development of products such as integrated circuit ("IC") or smart card readers (referred to as "IC card readers"). The electronic components and subassemblies are for printed circuit boards ("PCBs") utilizing advanced processes such as chip on board ("COB"), multichip modulators ("MCM"), surface mount technology ("SMT"), tape automated bonding ("TAB") and outer lead bonding ("OLB") technologies. These products produced by the Company include large scale integrated circuits ("LSI") bonded on PCBs that are used in the manufacture of products such as electronic toys, and subassemblies for liquid crystal display ("LCD") modules that are used in the manufacture of communications, camera and computer products. The Company also provides OEMs with silk screening services for plastic parts, polyvinyl chloride ("PVC") products and metal parts. The Company moved its manufacturing facilities to Shenzhen, China in 1987 to take advantage of lower overhead costs and competitive labor rates and to position itself to achieve low-cost, high volume manufacturing. The location of Nam Tai's factory in Shenzhen is about 30 miles from Hong Kong, providing the Company with close access to Hong Kong's infrastructure of communication and banking. This also facilitates transportation of the Company's products out of China through the port of Hong Kong. The Company moved to its present facility which initially consisted of approximately 150,000 square feet from a nearby location in August 1992, permitting Nam Tai to more than double its then production capacity. The Company reached capacity at the then current manufacturing facility during the third quarter of 1994 and became capacity constrained during late 1995. In planning for its future growth, in January 1994, the Company purchased the right of use of land adjacent to its existing factory site. Construction of the new factory complex began in early 1995 and portions were completed in August 1995 to house new factory employees that the Company is adding to expand production. Phase I of the new facility was essentially complete by the end of the first quarter of 1996 with the transfer of personnel and equipment into the new factory commencing thereafter. This consists of a factory complex of approximately 400,000 square feet, including a 160,000 square foot manufacturing facility, an office building of approximately 40,000 square feet and new dormitories, recreation and dining facilities. Phase II of the factory expansion is anticipated to be complete by the end of 1998. The Company emphasizes high responsiveness to the needs of OEM customers through the development and volume production of increasingly sophisticated products. The Company seeks to build long-term relationships with its customers through high quality standards (supported by ISO 9001/9002 Certification), competitive pricing, strong research and development support, advanced assembly processes and high volume manufacturing, and with key suppliers through volume purchasing and reliable forecasting of component purchases. The Company believes that the potential for increased manufacturing outsourcing by Japanese and U.S. OEMs in China is substantial and expects to take advantage of it by expanding production capacity at its factory complex in Shenzhen, China. Management believes Nam Tai's record of providing timely delivery in volume of high-quality, high technology, low-cost products builds close customer relationships and positions the Company to receive orders for more complex products. As the Company grows, management will seek to maintain a low cost structure, reduce overhead where possible, and continuously improve its manufacturing quality and processes. - 4 - 5 THE COMPANY'S SUBSIDIARIES The Company is a holding company for Nam Tai Electronic & Electrical Products Limited and its subsidiaries, and Nam Tai Electronics (Canada) Ltd. The chart below illustrates the organizational structure of the Company and its principal operating subsidiaries. Nam Tai Electronics, Inc. (A British Virgin Islands International Business Company) / / ---------------------------------------------- / / 100% 100% Nam Tai Nam Tai Electronics Electronic & (Canada) Ltd. Electrical Products ---- 75% (A Canadian Federal Ltd. / Company) (A Hong Kong / Limited Liability / Company) / / / ------------------------ / / / / 100% 100% / / Zastron Plastic & Namtai Electronic / Metal Products (Shenzhen) Co. / (Shenzhen) Ltd. Ltd. / (A Limited Liability (A Limited Liability / People's Republic of People's of Republic / China Foreign China Foreign / Operation) Operation) / / / / / / 25% / / Shenzhen-------- / Namtek Co., Ltd. (A Limited Liability People's Republic of China Foreign Operation) Nam Tai Electronic & Electrical Products Limited Nam Tai Electronic & Electrical Products Limited ("NTE&E") was incorporated in November 1983 and is engaged in the manufacture, assembly and marketing of electronic products. In 1991, NTE&E became the holding company for Namtai Electronic (Shenzhen) Co. Ltd. and Zastron Plastic & Metal Products (Shenzhen) Ltd. - 5 - 6 Namtai Electronic (Shenzhen) Co. Ltd. Namtai Electronic (Shenzhen) Co. Ltd. ("NTES") was established as Baoan (Nam Tai) Electronic Co. Ltd. in May 1989 as a joint venture company with limited liability in Baoan County, China, pursuant to the relevant laws of China. The equity of NTES was owned 70% by NTE&E and 30% by a Chinese Governmental agency. During 1992, the joint venture was dissolved and the company changed its name to NTES. As part of such termination, the company returned to the Chinese Governmental agency its real property and investment, and NTES became a wholly owned subsidiary of NTE&E. NTES is in the business of manufacturing and assembling electronic products such as personal organizers, linguistic products and calculators. In addition, it manufactures electronic components and subassemblies and is engaged in the development of products such as integrated circuit or smart card readers (referred to as "IC card readers"). Zastron Plastic & Metal Products (Shenzhen) Ltd. Zastron Plastic & Metal Products (Shenzhen) Ltd. ("Zastron") was incorporated in March 1992. The company has limited liability pursuant to the relevant laws of China. Zastron is in the business of manufacturing and silk screening metal and PVC products, much of which are used in manufactured products by NTES. Nam Tai Electronics (Canada) Ltd. Nam Tai Electronics (Canada) Ltd. ("NT Canada") was incorporated in August 1989 under the Canada Business Corporations Act. NT Canada previously acted as a marketing arm in North America for the Company, was engaged in research and development activities as well as the manufacture of electronic scales, thermometers and blood pressure meters. In 1994, Nam Tai sold its electronic scale, thermometer and blood pressure product lines. NT Canada currently provides finance, administrative and investor relations services to the Company. Shenzhen Namtek Co., Ltd. Shenzhen Namtek Co., Ltd. ("Namtek") was incorporated in December 1995. The company has limited liability pursuant to the relevant laws of China. Namtek is in the business of developing and commercializing software for the consumer electronics industry, particularly for products manufactured or to be manufactured by Nam Tai. It provides the facilities and expertise to assist in new product development and research, such that Nam Tai can offer its customers enhanced design and development services. PRODUCTS For the fiscal years ended December 31, 1995, 1994 and 1993 an aggregate of 77%, 81% and 94%, respectively, of the Company's net sales were from various models of electronic personal organizers, linguistic products and calculators. Currently, the Company's other products principally include subassemblies, IC card readers and LCD modules. - 6 - 7 The following table sets forth the percentage of net sales of each of the Company's product lines for the years ended December 31, 1995, 1994 and 1993.
YEAR ENDED DECEMBER 31, ----------------------- PRODUCT LINE 1995 1994 1993 ------------ ---- ---- ---- Personal organizers and linguistic products 47% 47% 46% Electronic calculators 30 34 48 Subassemblies and components 21 16 2 Silk screening 1 1 1 Other products and services 1 1 1 Discontinued products(1) 0 1 2 --- --- --- 100% 100% 100% === === ===
(1) Includes health care products, such as electronic scales, thermometers and blood pressure meters, which were discontinued in 1994. Personal Organizers and Linguistic Products The Company produces various types of electronic personal organizers, including telephone directories and business card organizers, generally with scheduler, clock, memo pad and calculator functions. The linguistic products manufactured by Nam Tai include electronic spell checkers, dictionaries and language translators. One model is a multi-language translator with a vocabulary of 3,400 words and instant translation among the English, German, French, Spanish and Italian languages. These models generally include a built-in calculator. Electronic Calculators The Company manufactures a wide range of electronic calculators with a variety of features. These include calculators designed for different uses or environments, including mini card, credit card, scientific, desk top, hand held, and printer calculators. Subassemblies and Components In 1994, the Company commenced delivering product whereby LSIs were bonded on PCBs utilizing advanced technological processes. These are used to manufacture components used in products such as electronic toys. Management believes that Nam Tai's PCB assembly process capabilities are comparable to those currently available from the most technologically advanced U.S. and Japanese manufacturers. It is the intention of the Company to seek to expand this business and to have it play an expanded role in future sales. IC Card Readers In 1995, the Company delivered a sample run of IC card readers. These readers are hand-held devices used to check information contained on the IC cards which are being developed for use by certain major banks in Europe and North America as an alternative to the use of cash. Test marketing continues through 1996. Management believes that IC cards products are a potential source of significant additional revenue in the years ahead. - 7 - 8 Other The Company also commenced manufacturing subassemblies for liquid crystal display ("LCD") modules. These subassemblies display information as part of such products as portable telephones, portable computers and facsimile machines, and employ the same bonding technologies as are used for the other LSI bonded PCBs. The manufacture of subassemblies has not yet contributed a significant percentage of sales revenue but is expected to become an important line of business over the coming years. The sale of electronic typewriters has declined to a relatively insignificant proportion of total sales. Silk Screening Services Through Zastron, the Company provides manufacturing and silk screening services to customers for plastic parts, PVC products and metal parts. This service is also supplied to other firms for incorporation into their finished products. MANUFACTURING Quality Control The Company maintains strict quality control programs for its products, including use of total quality management ("TQM") systems. All incoming raw materials and components are checked by the Company's quality control personnel. During the production stage, Nam Tai's quality control personnel check all work in process at several points in the production process. Finally, after the assembly stage, the Company conducts random testing of finished products. In addition, the Company provides office space at its Shenzhen facility for representatives of its major customers to permit them to monitor production of their products and to provide direct access to the Company's manufacturing personnel. Manufactured products have a low level of product defect, as required by the Company's OEM customers. When requested, Nam Tai provides a limited warranty of six months to one year for products it manufactures. To date, claims under the Company's warranty program have been negligible. The Company's Hong Kong and China subsidiaries have maintained ISO 9002 Certification since December 1993 and received ISO 9001 Certification in February 1996. The "ISO", or International Organization for Standardization, is a Geneva-based organization dedicated to the development of worldwide standards for quality management guidelines and quality assurance. ISO 9000, which was the first quality system standard to gain worldwide recognition, required a company to gather, analyze, document, monitor and make improvements where needed. The Company's receipt of ISO 9001 Certification demonstrates that the Company's manufacturing operations meet the most demanding established world standards. - 8 - 9 Management believes sophisticated customers are increasingly requiring their manufacturers to be ISO 9000 certified, and that manufacturers that are not so qualified are increasingly looking to certified manufacturers like Nam Tai rather than undertaking the expensive and time-consuming process of qualifying their own operations. Component Parts and Suppliers The Company purchases over 100 different component parts from more than 30 major suppliers and is not dependent upon any single supplier for any key component. The Company purchases components for its electronic products from suppliers in Japan and elsewhere. Orders for components are based on forecasts that Nam Tai receives from its OEM customers, which reflect anticipated shipments during the production cycle for a particular model. The major component parts purchased by the Company are ICs or "chips", LCDs, solar cells, printer heads and batteries. The Company purchases both stock "off the shelf" chips and custom chips, the latter being the most expensive component parts purchased by Nam Tai. At the present time, the Company purchases most of its chips from Toshiba Corporation, Sharp Corporation and certain of their affiliates, although there are many additional suppliers from which the Company could purchase chips. LCDs are readily available from many manufacturers and the Company currently has two major suppliers, Epson Hong Kong Ltd. and Sharp Corporation. PCBs and other circuit boards are purchased from circuit board manufacturers in Hong Kong and solar cells are purchased from Matsushita Battery Industrial Company Ltd. Batteries are standard "off the shelf" items, generally purchased in Hong Kong from agents of Japanese manufacturers. Certain components, including PCBs and LCDs, are currently subject to limited allocation by certain of Nam Tai's suppliers. Although such shortages and allocations have not had a material adverse effect on the Company's results of operations, there can be no assurance that any future allocation or shortages would not have such an effect. In an effort to assure an adequate supply of competitively priced key components, the Company has purchased a minority interest in its Hong Kong supplier of plastic parts, Deswell Industries, Inc. ("Deswell"). See - "Formation of Strategic Alliances". CUSTOMERS AND MARKETING General During the last several years, the Company has concentrated on marketing its products in Japan, North America and Europe. Approximate percentages of net sales to customers by geographic area, based upon location of product delivery, are set forth below for the periods indicated:
YEAR ENDED DECEMBER 31, ----------------------- GEOGRAPHIC AREAS 1995 1994 1993 ---------------- ---- ---- ---- Japan 34% 24% 10% North America 30 33 41 Hong Kong 17 23 25 Europe 13 14 17 Other 6 6 7 --- --- --- 100% 100% 100% === === ===
- 9 - 10 Six of the Company's major customers have done business with the Company for five years or more, and management believes that Nam Tai has a stable relationship with all of its customers. The Company places great emphasis on providing quality service to its customers and has, as a result, limited the number of companies for which it manufactures in an effort to ensure quality service. During the years ended December 31, 1995, 1994 and 1993, sales to OEM customers accounted for 99% of total net sales in each year. Management believes that the sale of personal organizers, linguistic products and calculators will continue to be the principal line of business for the Company for the next several years. The importance of subassembly and component sales is rising, and together with the potential for manufacture of LCD modules and IC card readers, these product lines are expected to contribute an increasing and significant proportion of total revenue. The Company's Hong Kong based management personnel and sales staff are responsible for marketing products to existing customers as well as potential new customers. The Company has in the past marketed products under the "PEACOCK" brand name in China. Although it has no immediate plans to re-enter the China market, management would consider doing so if economic and other factors appear favorable. Major Customers The Company's OEM customers are comprised of the following entities. The OEM customers either market Nam Tai's products under their own brand name or, where no brand name is shown, incorporate the Company's products into their products:
BRAND CUSTOMER CUSTOMER NAME PRODUCT SINCE -------- ---- ------- ----- A&A International (Yichi-HK) Ltd. Radio Shack Calculators 1993 Canon, Inc. Canon Personal organizers, calculators 1988 Casio Computer (Hong Kong) Limited Casio Aluminum panels and PVC wallets 1994 Glorysun Graphtech Ltd. Fortec Typewriters 1990 Matsushita Battery Industrial Co. ----- IC card readers 1994 Ltd. Nintendo, Inc. (through Sharp ----- Bonding on PCBs 1994 Corporation) Optrex Corporation ----- Assemblies for LCD modules 1994 Premier Precision Ltd. Citizen Silk screening, aluminum panel 1993 Sanyo Electric (H.K.) Ltd. Sanyo, Casio Silk screening 1988 Seiko Instruments Inc. Seiko, SII Personal organizers, linguistic 1991 products Sharp Corporation Sharp Personal organizers, calculators 1989 Texas Instruments Incorporated Texas Personal organizers, calculators 1989 Instruments
At any given time, different customers account for a significant portion of Nam Tai's business. Percentages of total sales by customer vary from year to year and may fluctuate depending on the timing of production cycles for particular products. Sales to four major customers, Sharp Corporation, Seiko Instruments Inc., Nintendo, Inc. (which orders through Sharp Corporation) and Texas Instruments Incorporated, aggregated approximately 92%, 90% and 86% - 10 - 11 of the Company's total net sales during the years ended December 31, 1995, 1994 and 1993, respectively. Sales to each of these customers as a percentage of the Company's total net sales during the years ended December 31, 1995, 1994 and 1993 were approximately as follows:
YEAR ENDED DECEMBER 31, ----------------------- CUSTOMER 1995 1994 1993 -------- ---- ---- ---- Sharp Corporation 47.9% 47.7% 47.0% Nintendo, Inc. (made through Sharp Corporation) 18.0 13.0 0 Seiko Instruments Inc. 13.2 19.2 20.6 Texas Instruments, Incorporated 13.2 9.8 18.6 ---- ---- ---- 92.3% 89.7% 86.2% ==== ==== ====
Although management believes that any one of the Company's customers could be replaced with time, the loss of any one of its major customers could have a material adverse effect on the Company's business. It is of note that a number of products are made for each of these customers such that the Company is not necessarily dependent on a single product by one customer. While each of the companies listed above is expected to continue to be a significant customer, the Company seeks to lessen its dependence on these customers in the future through efforts to diversify its customer and product base. There can be no assurance, however, that such efforts will prove successful. The Company's sales to all of its OEM customers are based on purchase orders. Except for these purchase orders, the terms of which in a few cases are supplemented by basic agreements dependent upon the receipt of purchase orders, Nam Tai has no written agreements with its OEM customers. The Company receives letters of credit to cover the next three months of orders and all the molds, tooling and development charges (including software design) are paid by OEM customers prior to production. Many of Nam Tai's customers have a relationship which extends for a number of years and consequently the Company believes its relations with these customers are good. The Company encourages cooperation and communication with its most important customers. For example, senior management includes a team of Japanese professionals who provide technical experience and work closely both with the Company's Japanese component suppliers and its Japanese customers. Management also believes the risk of a sudden withdrawal by any of its major customers is diminished by: (i) the lengthy production cycle, typically over three years for each model, which is required to produce the products sold to customers; (ii) the fact that production cycles may begin while other products for the same customers are in progress; and (iii) the investment in molds, tooling and development charges (including software design) that is borne by each OEM customer. Sales are predominately based on standard letters of credit denominated in U.S. dollars (except for 18.0% of sales where letters of credit are denominated in Japanese yen). Production Scheduling and Backlog The typical cycle for a product to be manufactured and sold to an OEM customer is three to four years, including the development period and production period. Initially an OEM customer gathers data from its sales personnel as to products for which there is market interest, including features and unit costs. The OEM then contacts the Company, and possibly other prospective manufacturers, with forecasted total production quantities and with design specifications or renderings. From that information, the Company in turn contacts its suppliers and determines estimated component costs. The Company later advises the OEM of the development costs, charges (including molds, tooling and development costs such as software design) and a unit cost based on the forecasted production quantities desired during the forecasted production cycle. Once the Company and the OEM customer agree to the Company's quotation for the development costs and the unit cost, the Company will begin developing the product. The development period lasts - 11 - 12 approximately nine to 15 months or longer if including software design. During this time the Company will complete all molds, tooling and software required to manufacture the product with the development costs reimbursed by the customer. Upon completion of the molds, tooling and software, the Company will produce samples of the product for the customer's quality testing, and once approved, will commence mass production of the product. The production period lasts approximately 18 to 30 months. Typically, more advanced products have longer production runs. If total production quantities change, the OEM customer will provide six months notice before discontinuing orders for a product. At any point in time the Company is in different stages of the development period and production period for the various models it has under development or in production for OEM customers. The Company's production is based on the forecast reconfirmation received from OEM customers every month, covering the following six month period, the first three months of which are basically firm with shipments scheduled. The forecasts are reviewed and adjusted where necessary at the beginning of each month for a rolling six month period with confirmed orders covering the first three months. Confirmed orders are supported by letters of credit and may not be cancelled once confirmed without the customer becoming responsible for all costs of the remaining components included in inventory for that order. These components will then be shipped to the customer. During the years ended December 31, 1995, 1994 and 1993, the Company did not suffer a material loss resulting from the cancellation of an OEM customer confirmed order. While the Company does not believe that a change in industry practice is imminent or contemplated, there can be no assurance that this favorable experience will continue in every case or at all. Backlog is defined by Nam Tai as the sales value of orders from OEM customers for which shipments have been scheduled during the following three months. The Company's backlog at December 31, 1995 and 1994 were approximately $24,500,000 and $21,100,000, respectively. Although these orders are confirmed and covered by letters of credit, there can be no assurance that the backlog can be produced, shipped and sales recorded in its entirety during the following three month period. Marketing Plans for China The Company has approval from the local Chinese government to sell up to 20% of the products manufactured and 10% of the parts manufactured by the Company in China. The Company does not have any immediate plans to re-enter the China market and make domestic sales, however, the Company would consider doing so if economic and other factors in China appear favorable. Formation of Strategic Alliances To support its business strategy, the Company believes that it must continue to have stable sources of component parts it uses in its manufacturing operations. Suppliers of these components have from time to time, in periods of short supply, limited allocation of their production among their customers. The Company believes that the formation of strategic alliances with certain of its suppliers will assist the Company to satisfy its OEM customers' needs for timely delivery of high-quality products and permit Nam Tai to have greater control over the quality of its suppliers' components. Consistent with this strategy, in 1994 the Company purchased and holds approximately 10% of the outstanding common stock of Deswell of Hong Kong, one of its plastics suppliers. Deswell is the holding company of the Hong Kong supplier of plastic parts used in many of the Company's products. It also has manufacturing facilities in Shenzhen. - 12 - 13 Transportation Since the Company sells its products F.O.B. Hong Kong, its customers are responsible for the transportation of finished products from Hong Kong to their final destination. Transportation of components and finished products to and from Shenzhen is by truck. Component parts purchased from Japan are generally shipped by air. To date, the Company has not been materially affected by any transportation problems. TECHNOLOGY DEVELOPMENT Between 1984 and 1994, the Company spent an average of approximately $360,000 per annum on research and development, chiefly to advance manufacturing technology. During the later half of this period Nam Tai concentrated on its OEM business and expenditures fell below the average by the end of the period. At that time the major responsibility of the Company's product design personnel was limited to the production of design to the satisfaction of and in accordance with the specifications provided by OEM customers. Increased emphasis is now being placed on research and development to provide greater service to OEM customers and assist in design and development work directed to future products. Research and development expenses increased accordingly to $945,000 in 1995 from $239,000 in 1994. COMPETITION The Company competes with numerous other companies in the contract electronic manufacturing industry and competition is intense. The Company's primary competitors in its principal business, namely the manufacture for OEM customers of personal organizers, linguistic products and calculators are Kimpo Electronics, Inc. (formerly Cal-Comp Electronics, Inc.) and Inventa Electronic Co. Ltd., both of Taiwan. Competition is limited by OEMs to a small number of companies who satisfy the requirements to become approved suppliers. While individual OEM customers are likely to prefer certain contract manufacturers, OEMs tend to order from several different suppliers in order to reduce dependence on any one. The competitors may have substantially greater technical, financial and marketing resources than Nam Tai, but management believes that no company dominates the market. Competition for OEM sales is based primarily on unit price, product quality and availability, promptness of service, reputation for reliability and OEM confidence in the manufacturer. The Company believes that it competes favorably in each of these areas. EMPLOYEES At December 31, 1995, Nam Tai employed 2,300 persons on a full-time basis, of which approximately 2,250 were working in China, 40 in Hong Kong, and 10 in Canada. Of these, approximately 2,000 were engaged in manufacturing, 100 were engaged in clerical, research and development and marketing positions and the balance in supporting jobs such as security, janitorial, and food and medical services. The Company is not a party to any material labor contract or collective bargaining agreement. The Company has experienced no significant labor stoppages and believes that relations with its employees are satisfactory. An employee incentive compensation program is in place in China whereby a regular bonus payment on the employee's return to work following the Chinese New Year holiday is paid to employees following the reopening of the factory. Management believes this method has contributed to low employee turnover in the factory. - 13 - 14 Subject to the profitability of the Company, stock options and cash bonuses will be considered on a year by year basis to management personnel and employees. As the new factory complex commences production, additional employees will be added as required based on production and the introduction of new high technology machines. This number is expected to reach up to an additional 1,500 to 2,000 employees during 1997. PATENTS, LICENSES AND TRADEMARKS The Company has no patents, licenses, franchises, concessions or royalty agreements that are material to its business as a whole. Due to rapid technological changes in the products manufactured, the Company does not believe the absence of patents has had or will have a material impact on its business. The Company has obtained trademark registrations in Hong Kong for the mark "FORTEC" in connection with electronic calculators and in the United States in connection with electronic typewriters. Nam Tai has also obtained a trademark registration in Hong Kong for the mark "SANTRON" in connection with electronic calculators. The Company has registered the trademark "NAMTAI" in connection with electronic calculators and electronic typewriters in Hong Kong, in connection with calculators in the United States and in connection with calculators in Canada. The trademark "PEACOCK" is registered in China although no products are currently being produced under this name. CERTAIN FOREIGN ISSUER CONSIDERATIONS Political, Legal, Economic and Other Uncertainties of Operations in China and Hong Kong Internal Political and Other Risks. All of the Company's manufacturing facilities are located in China. As a result, the Company's operations and assets are subject to significant political, economic, legal and other uncertainties. Changes in policies by the Chinese government resulting in changes in laws, regulations, or the interpretation thereof, confiscatory taxation, restrictions on imports and sources of supply, currency devaluations or the expropriation of private enterprise could materially adversely affect the Company. Under its current leadership, the Chinese government has been pursuing economic reform policies including the encouragement of private economic activity and greater economic decentralization. There can be no assurance, however, that the Chinese government will continue to pursue such policies, that such policies will be successful if pursued, that such policies will not be significantly altered from time to time or that business operations in China would not become subject to the risk of nationalization, which could result in the total loss of investments in that country. Economic development may be limited as well by the imposition of austerity measures intended to reduce inflation, the inadequate development of an infrastructure and the potential unavailability of adequate power, water supplies, transportation, communications, raw materials and parts. If for any reason the Company were required to move its manufacturing operations outside of China, the Company's profitability would be substantially impaired, its competitiveness and market position would be materially jeopardized and there can be no assurance that the Company could continue its operations. Uncertain Legal System and Application of Laws. The legal system of China relating to foreign investments is both new and continually evolving, and currently there can be no certainty as to the application of its laws and regulations in particular instances. China does not have a comprehensive system of laws. Enforcement of existing laws or agreements may be sporadic and implementation and interpretation of laws inconsistent. The Chinese judiciary is relatively inexperienced in enforcing the laws that exist, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. Even where adequate law exists in China, it may not be possible to obtain swift and equitable enforcement of that law. - 14 - 15 Current Dependence on Single Factory Complex. The Company's products are manufactured exclusively at its factory complex located in Baoan County, Shenzhen, China. The Company does not own this factory complex or the dormitories used to house workers. It occupies the original factory and its new factory site under agreements with the local Chinese government. In the case of the original factory, the lease agreement covers an aggregate of approximately 200,000 square feet of factory space and expires in August 2007. In the case of the new facility, the Company is entitled to use the land upon which its new factory complex is situated until 2024. These agreements and the operations of the Company's Shenzhen factories are dependent on the Company's relationship with the local government. The Company's operations and prospects will be materially and adversely affected by the failure of the local government to honor these agreements. In the event of a dispute, enforcement of these agreements may be difficult in China. Possible Changes and Uncertainties in Economic Policies. As part of its economic reform, China has designated certain areas, including Shenzhen where the Company has its manufacturing facilities, as Special Economic Zones. Foreign enterprises in these areas benefit from greater economic autonomy and more favorable tax treatment than enterprises in other parts of China. Changes in the policies or laws governing special Economic Zones would have a material adverse effect on the Company. Recent Turbulent Relations with the U.S. In 1995, the United States considered revocation of China's most favored nation ("MFN") trade status, which provides China with the trading privileges available generally to trading partners of the United States, and the United States and China have recently been involved in controversy over the protection in China of intellectual property rights. President Clinton extended China's MFN status until July 3, 1996. Various interest groups continue to urge that the United States not renew China's trade status and the United States continues to threaten China with a loss of MFN status. There can be no assurance that current or future controversies will not arise that again threaten the status quo involving trade between the United States and China or that the United States will not revoke or refuse to extend China's MFN status. In any of such eventualities, the business of the Company could be adversely affected. Relations Between China and Taiwan. Relations between China and Taiwan have been unresolved since Taiwan was established in 1949. The March 23, 1996 general election in Taiwan heightened tensions between them. Although not directly a threat to Nam Tai, peaceful and normal relations between China and its neighbors reduces the potential for events which could have an adverse impact on the Company's business. Operations in Hong Kong. The Company's executive and sales office, and several of its customers and suppliers are located in Hong Kong, which is currently a British Crown Colony. Sovereignty over Hong Kong will be transferred effective July 1, 1997 to China. As a result, there can be no assurance as to the continued stability of political, economic or commercial conditions in Hong Kong. Enforceability of Civil Liabilities The Company is a holding corporation organized as an International Business Company under the laws of the British Virgin Islands and its principal operating subsidiary is organized under the laws of Hong Kong, where the Company's principal executive offices are also located. The Company has appointed Mr. Stephen Seung, an attorney engaged in the private practice of law and a director of Nam Tai since 1995, of 2 Mott St., Suite 601, New York, New York 10013 as its agent upon whom process may be served in any action brought against the Company under the securities laws of the United States. However, outside the United States, it may be difficult for investors to enforce judgments against the Company obtained in the United States in any such actions, including actions predicated upon civil liability provisions of Federal securities laws. In addition, all of the Company's officers and most of its directors reside outside the United States and nearly all of the assets of these persons and of the Company are located outside of the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons, or to enforce against the Company or such persons judgments predicated upon the liability provisions of the U.S. securities laws. The Company has been advised by its Hong Kong counsel, and its British Virgin Island counsel, that there is substantial doubt as to the enforceability against the Company or any of its directors and officers located outside the United States in original actions or in actions for enforcement of judgments of U.S. courts of liabilities predicated on the civil liability provisions of Federal securities laws. - 15 - 16 Certain Legal Consequences of Incorporation in the British Virgin Islands The Company is organized under the laws of the British Virgin Islands. Principles of law relating to matters affecting the validity of corporate procedures, the fiduciary duties of the Company's management, directors and controlling shareholders and the rights of Nam Tai's shareholders differ from, and may not be as protective of shareholders as, those that would apply if the Company were incorporated in a jurisdiction within the United States. Directors of the Company have the power to take certain actions without shareholder approval, including an amendment of the Company's Memorandum or Articles of Association, a change in the Company's authorized capital, and certain fundamental corporate transactions, including reorganizations, certain mergers or consolidations, and the sale or transfer of assets. In addition, there is doubt that the courts of the British Virgin Islands would enforce liabilities predicated upon U.S. securities laws. Risks of International Operations The products of the Company are sold in the United States and internationally, principally in Japan, Europe, Hong Kong and Canada. International operations and sales may be subject to political and economic risks, including political instability, currency controls and exchange rate fluctuations, and changes in import/export regulations, tariff and freight rates. Changes in tariffs or other trade policies could adversely affect the Company's customers or suppliers or decrease the cost of products for Nam Tai's competitors relative to such costs for the Company. The Company acquires some of the components used in its products from firms located in Japan and sells its products to OEMs, most of which have operations based in Japan. Japan's rising trade surplus has forced revaluations of the Japanese yen and future revaluations may increase the cost of components used by Nam Tai. In addition, trade restrictions could be implemented to counter Japan's overseas trade surplus. Volatility of Share Price The markets for equity securities have been volatile and the price of the Company's common shares has been and could continue to be subject to wide fluctuations in response to quarter to quarter variations in operating results, news announcements, trading volume, sales of common shares by officers, directors and principal shareholders of the Company, general market trends and other factors. - 16 - 17 ITEM 2. PROPERTIES British Virgin Islands The registered office of the Company is located in the Citco Building, Wickhams Cay, P.O. Box 662, Road Town, Tortola, British Virgin Islands. Only corporate administrative matters are conducted at such office, through Nam Tai's registered agent, Citco Trust Corporation Limited. The Company neither owns nor leases property in the British Virgin Islands. Hong Kong In Hong Kong, the Company leases Unit 513-520 No. 1 Hung To Road, from September 1994 to September 1997. These premises house Nam Tai's principal executive and marketing offices. Rental to September 14, 1996 is approximately $17,800 per month, and $20,500 per month thereafter to September 1997. The Company owns a residential flat in Hong Kong which was purchased for total consideration of $1,850,000. This property houses the Chief Executive Officer of the Company and forms part of his overall compensation - (See Item 11. Compensation of Directors and Officers). The Company also owns approximately ten acres of agriculture land in Hong Kong which the Company plans to sell. Shenzhen, China The Company leases approximately 150,000 square feet of manufacturing space at its present factory site in Baoan County, Shenzhen, China which it first occupied in August 1992. Included within the factory site are four dormitory buildings and two cafeteria buildings for Nam Tai's employees. Also included within the factory complex are a library, several television rooms, a large karaoke room for 120 people, several exercise rooms, table tennis and billiard tables, basketball and badminton courts and a medical center. The Company has leased the factory site for 15 years and currently pays rent of approximately $32,000 per month. This rate is fixed for five years, with a 20% increase in years five and ten. Nam Tai has the right to use approximately 286,600 square feet of land adjacent to its existing factory site in Shenzhen for fifty years purchased at a total cost of approximately $2,450,000. The Company has since constructed a second manufacturing facility on this new site in order to expand its production capacity in China. During 1992, the Company purchased for development rights to leasehold land in Baoan County, Shenzhen, China. The purchase price was approximately $343,000. The land area consists of approximately 70,000 square feet of land in a developed area of commercial buildings and residences. The purchase of the leasehold land gives Nam Tai the right to use the land for fifty years. It was the Company's intention to build a high rise office building to house its corporate headquarters and to lease office and commercial space to third parties. The Company subsequently reevaluated the development of this property and concluded it preferred to concentrate on its core contract manufacturing business. Nam Tai has determined that it will not develop the property, except possibly with respect to the portion that it would utilize for its own administrative operations, and will seek to have the property developed by a third party who will be responsible for developing, financing and managing the project. The Company also has another facility in Shenzhen, consisting of approximately 26,000 square feet and located approximately one mile from its manufacturing facility, which contains 28 apartment units and which the Company uses to house certain of its factory managers who are married with families. The Company purchased this building for approximately $1,000,000, paying the final instalment in June 1993. - 17 - 18 Canada On November 1, 1995, Nam Tai Canada moved its corporate office to a new leased premises in Vancouver, British Columbia. The Company entered into a lease for approximately 2,637 square feet of office space at an annual rental of $26,000. The lease expires in August 1998. Commencing in October 1994, the Company developed a residential property in West Vancouver, British Columbia. Prior to the end of December 1995, the Company concluded arrangements for the sale of this property to Mr. M.K. Koo, the Chairman of the Board of the Company. The property was purchased for its book value of $2,620,445, being the higher of the book value and the appraised value of the property. In 1995, the Company completed construction of an office and manufacturing complex in Burnaby, British Columbia. The two-story building consists of approximately 7,000 square feet of office space and 8,000 square feet of factory area. Construction was completed in mid 1995 at a cost of approximately $2,400,000 including the cost of land. The property is currently listed for sale. General The Company believes that its existing offices and manufacturing facilities, including the new manufacturing facility, with expansion of the factory facilities, are adequate for the operation of its business for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company is not party to any legal proceedings other than routine litigation incidental to its businesses and there are no material legal proceedings pending with respect to the property of the Company other than as described below. In September 1993, Tele-Art, Inc., a shareholder of Nam Tai, commenced an action against the Company seeking an injunction prohibiting the Company from proceeding with a rights offering which was contemplated at that time. Tele-Art's application was based on claims that Nam Tai may have violated British Virgin Islands and United States law. Among other claims, Tele-Art asserted that the Company's rights offering was part of a scheme to enrich directors and management of Nam Tai and dilute the interest of minority shareholders. After a hearing, a temporary injunction obtained by Tele-Art was discharged, permitting the Company to proceed with, and complete, its rights and standby offerings in October 1993. Tele-Art is pursuing claims against Nam Tai for damages. In November 1993, Tele-Art applied to the Court to include the Company's directors in the proceedings, and in March 1994 the application was granted. The Company continues to believe that Tele-Art's claims are without merit and plans to continue to vigorously defend them as well as to seek from Tele-Art and its agents compensation for the damage caused by the injunction and the proceedings that were brought to obtain it. - 18 - 19 ITEM 4. CONTROL OF THE COMPANY The Company is not directly owned or controlled by another corporation or by any foreign government, other than such control, if any, by Lully Corporation Limited as may arise out of its shareholdings, as is more fully set forth below. The following table sets forth, as of December 31, 1995, the beneficial ownership of the Company's common shares by each person known by the Company to own beneficially more than 10% of the common shares of the Company outstanding as of such date and by the officers and directors of the Company as a group.
Number of Identity of Common Shares Percent of Persons or Groups Beneficially Owned Class ----------------- ------------------ ---------- M. K. Koo 1,039,071 (Note 1.) 12.9% c/o Suite 530 999 West Hastings Street Vancouver, B.C. V6C 2W2 Canada Lully Corporation Limited 2,346,290 (Note 2.) 29.1% c/o 1507 Pinecrest Drive West Vancouver, B.C. V7S 3E8 Canada Officers and directors as a group 3,719,361 (Note 3.) 44.9% (five persons)
Notes 1. These shares are personally owned by Mr. Koo and do not include shares owned by Lully Corporation Limited ("Lully") (see Note 2.). A total of 738,388 common shares of the Company beneficially owned by Mr. Koo have been pledged to Wardley Canada Investment Fund Ltd. ("Wardley") pursuant to a secured convertible note. The note is convertible at the option of Wardley into 201,567 common shares of the Company owned by Mr. Koo. 2. By virtue of his majority interest in, and positions with, Lully, Mr. Koo may be deemed to be the beneficial owner of these shares. If so, he would beneficially own 3,385,361 of Nam Tai's outstanding common shares at December 31, 1995 or 41.9% of the outstanding common shares at that date. 3. Includes shares held and a total of up to 225,000 shares issuable to officers upon exercise of employee options exercisable at and within 60 days of December 31, 1995. Assumes that the common shares owned by Lully are beneficially owned by Mr. Koo (see Note 2. above). - 19 - 20 ITEM 5. NATURE OF TRADING MARKET COMMON SHARES The Company's common shares are traded in The Nasdaq National Market under the symbol "NTAIF". The following table sets forth the share prices for the quarters during the last two years indicating the high and low last reported sale prices as reported by The National Market.
QUARTER ENDED HIGH LOW ------------- ---- --- March 31, 1994 $ 15.50 $ 9.75 June 30, 1994 14.00 10.25 September 30, 1994 13.75 10.50 December 31, 1994 13.38 9.38 March 31, 1995 9.75 7.94 June 30, 1995 10.50 9.00 September 30, 1995 17.25 9.00 December 31, 1995 13.88 10.75
Of the 8,063,177 common shares of the Company outstanding as of December 31, 1995, approximately 4,500,000 are beneficially held by holders in the United States by approximately 1,300 record holders. ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS There are no exchange control restrictions on payments of dividends on the Company's common shares or on the conduct of the Company's operations either in Hong Kong, where the Company's principal executive offices are located, or the British Virgin Islands, where Nam Tai is incorporated. Other jurisdictions in which the Company conducts operations may have various exchange controls. Dividend distribution and repatriation by Nam Tai's subsidiaries in China are regulated by Chinese laws and regulations. To date these controls have not had and are not expected to have a material impact on the Company's financial results. There are no material British Virgin Islands laws which impose foreign exchange controls on the Company or that affect the payment of dividends, interest, or other payments to nonresident holders of the Nam Tai's securities. British Virgin Islands law and the Company's Memorandum and Articles of Association impose no limitations on the right of nonresident or foreign owners to hold or vote such securities of the Company. ITEM 7. TAXATION British Virgin Islands Tax Considerations No reciprocal tax treaty regarding withholding tax exists between the United States and the British Virgin Islands. Under current British Virgin Islands law, dividends, interest or royalties paid by the Company to individuals and gains realized on the sale or disposition of shares are not subject to tax as long as the recipient is not a resident of the British Virgin Islands. The Company is not obligated to withhold any tax for payments of dividends and shareholders receive gross dividends irrespective of their residential or national status. - 20 - 21 ITEM 8. SELECTED FINANCIAL DATA The selected financial information set forth below is derived from consolidated financial statements of the Company. The selected information is qualified in its entirety by reference to, and should be read in conjunction with, such consolidated financial statements, related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this annual report. SELECTED FINANCIAL INFORMATION (In thousands of U.S. dollars except per share data, see Note 1.)
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Income Statement Data - --------------------- Net sales $121,240 $96,564 $70,844 $57,955 $38,418 Gross margin 23,152 17,223 14,098 10,940 8,118 Income from continuing operations 11,419 8,099 5,197 2,503 1,492 Discontinued operations (see Note 2.) - - - - 1,476 Net income 11,419 8,099 5,197 2,503 2,968 Dividends paid 120 65 - 853 189 Per share amounts (Note 3.) - --------------------------- Income from continuing operations $ 1.40 $ 1.09 $ 0.87 $ 0.47 $ 0.38 Discontinued operations - - - - 0.38 Net income 1.40 1.09 0.87 0.47 0.76 Dividend paid 0.015 0.01 - 0.20 0.05 Balance Sheet Data - ------------------ Current assets $ 47,011 $45,520 $31,247 $23,071 $19,543 Property, plant and equipment - net 27,635 14,624 7,396 6,337 2,852 Total assets 79,281 66,287 39,530 29,474 22,980 Current liabilities 19,108 17,838 10,644 12,475 10,128 Non current liabilities - - 609 631 678 Shareholders' equity 60,173 48,449 28,162 16,368 11,323
Notes 1. Assets and liabilities are translated into United States Dollars using the appropriate rates of exchange at the balance sheet date. Income and expenses are translated at the average exchange rate in effect during the year. 2. Income from the sale of property in Hong Kong in 1991. 3. The weighted average number of shares outstanding and common stock equivalents for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 were 8,171,750, 7,459,570, 5,976,136, 5,301,996, and 3,880,564, respectively. - 21 - 22 ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS General The Company derives its revenues principally from manufacturing consumer electronic products and subassemblies for OEM customers in the electronics industry. The Company manufactures a broad line of finished products for its OEM customers, including personal organizers, linguistic products and calculators. In addition, it manufactures electronic components and subassemblies and is engaged in the development of products such as integrated circuit or smart card readers (referred to as "IC card readers"). In 1994, the Company discontinued sales of its proprietary products, sales of which had not been material to the Company prior to the sale of the product lines. The consumer electronics industry is very competitive and the Company is continuously under pressure to lower the selling price, and therefore reduce the gross profit margin of its existing product lines. In response to these pressures, the Company seeks to upgrade its technology in order to be capable of manufacturing more advanced products with higher unit prices and greater margins. The Company believes there is less competition in more advanced products due to the complexity involved in manufacturing. Since 1987, when the Company moved its manufacturing operations to China, Nam Tai has derived substantially all of its operating income from its China operations. The Company plans to continue increasing the scope of its operations and investment in China such that the trend of increased income from operations in China is expected to continue. Under current British Virgin Islands law, Nam Tai is not subject to tax on its income. Most of the Company's operating profits accrue in China, where its effective tax rate is 10%, and in Hong Kong, where the corporate tax rate on assessable profits is currently 16.5%. The Company also receives tax credits in China related to its investment there which reduces the overall tax rate of the Company. For additional information concerning Nam Tai's income taxes - see Note 9 of Notes to Consolidated Financial Statements. The Company uses a standard cost system to value its inventory, which is purchased in U.S. dollars, Japanese yen and Hong Kong dollars. At the end of each quarter, the Company revalues its inventory based upon actual costs and the resulting standard cost revaluation flows through cost of sales when the inventory is sold. - 22 - 23 The first quarter is typically the Company's slowest sales period because, as is customary in China, the Company's manufacturing facilities in China are closed for two weeks for the Chinese New Year holidays. The following table sets forth certain unaudited quarterly financial information for the four quarters of 1995, 1994 and 1993.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (In thousands of U.S. dollars, except per share data) 1995 - ---- Summary of Operations Net sales $22,443 $30,065 $35,514 $33,218 Gross profit 4,256 5,987 6,967 5,942 Income from operations 1,609 2,880 3,736 2,541 Net income 1,556 3,210 4,637 2,016 Net income per share $ 0.19 $ 0.39 $ 0.57 $ 0.25 1994 - ---- Summary of Operations Net sales $14,888 $24,625 $32,127 $24,924 Gross profit 2,602 4,681 5,702 4,238 Income from operations 672 2,111 3,137 1,694 Net income 655 2,003 3,494 1,947 Net income per share $ 0.09 $ 0.28 $ 0.48 $ 0.24 1993 - ---- Summary of Operations Net sales $13,398 $16,092 $23,106 $18,248 Gross profit 2,719 3,283 4,477 3,619 Income from operations 912 1,265 2,058 1,581 Net income 886 797 1,669 1,845 Net income per share $ 0.16 $ 0.14 $ 0.29 $ 0.28
- 23 - 24 The following table presents selected consolidated financial information stated as a percentage of net sales for the years ended December 31, 1995, 1994 and 1993:
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1994 1993 ---- ---- ---- Net Sales 100.0% 100.0% 100.0% Cost of sales 80.9 82.2 80.1 ----- ----- ----- Gross profit 19.1 17.8 19.9 Costs and expenses Selling, general and administrative expenses 9.4 9.7 10.9 Research and development expenses 0.8 0.2 0.8 ----- ----- ----- 10.2 9.9 11.7 Income from operations 8.9 7.9 8.2 Other income 0.2 0.8 (0.6) Interest expense (0.2) (0.2) (0.2) ----- ----- ----- Income from consolidated companies before income taxes and minority interests 8.9 8.5 7.4 ----- ----- ----- Net income 9.4 8.4 7.3 ----- ----- -----
- 24 - 25 Year ended December 31, 1995 Compared to Year Ended December 31, 1994 Nam Tai's sales increased by 26% to $121,240,000 in the year ended December 31, 1995 compared to $96,564,000 for the year ended December 31, 1994, primarily due to increases in sales to Sharp Corporation, Nintendo, Inc. (which orders through Sharp Corporation) and Texas Instruments Incorporated. The Company also received additional orders from Optrex Corporation. The Company's gross profit margin increased to $23,152,000 or 19.1% of sales for the year ended December 31, 1995 from $17,223,000 or 17.8% of sales. The principal reasons for the increase in profit margins were (i) low cost of raw materials, in part the result of the weakness of the Japanese yen in relation to the US dollar, and (ii) improvements to quality control which resulted in a reduction of the scrap rate. Selling, general and administrative expenses increased by 22.1% to $11,441,000 or 9.4% of sales in the year ended December 31, 1995 from $9,370,000 or 9.7% of sales for the year ended December 31, 1994. The increase in absolute dollars mainly reflected additional staff and costs required to provide services to the Company in line with growth in sales. The decrease in such expenses as a percent of sales was the result of efficiencies obtained in general administrative expense as the Company handled a greater level of activity with existing resources. Other expenses included the initial start up expenses associated with the formation of the new subsidiary operation, Namtek. No gain or loss on disposal of fixed assets was incurred in the year ended December 31, 1995 compared to a net loss on disposal of fixed assets of $48,000 in the year ended December 31, 1994. Other income - net declined to $225,000 for the year ended December 31, 1995 from $761,000 for the year ended December 31, 1994. This income mainly consists of $1,548,000 of interest income less a $560,000 charge relating to undepreciated cost of the Deferred Compensation Arrangement and $376,000 associated with a one-time bonus to staff in Hong Kong, China and Canada to recognize exceptional work in the fourth quarter of 1995 (a period of high activity). The provision taken to expense the Deferred Compensation Arrangement applied to certain senior management who are the beneficiaries of such arrangement but did not involve the payment of any funds and will eliminate the need to accrue for this expense in the future. Interest expense increased to $161,000 for the year ended December 31, 1995 from $129,000 for the year ended December 31, 1994. Income from continuing operations before income taxes increased to $10,830,000 for the year ended December 31, 1995 from $8,198,000 for the year ended December 31, 1994. The improvement of 32.1% was primarily attributable to higher operating income reflecting increased sales volume and higher gross profit margins associated with 1995 sales. The income tax benefit of $589,000 for the year ended December 31, 1995 compared to a provision for income tax expense of $173,000 for the year ended December 31, 1994. The tax recovery resulted from the refund of $782,000 China tax paid for the year ended December 31, 1994 which was received during the second quarter of 1995. Hong Kong tax payable was $106,000 for the year ended December 31, 1995. Minority interest in subsidiaries declined to nil for the year ended December 31, 1995 from $74,000 for the year ended December 31, 1994 following the repurchase of shares of NT Canada from a minority shareholder during 1994. Net income increased by 41% to $11,419,000 (or 9.4% of sales) for the year ended December 31, 1995 compared to $8,099,000 (or 8.4% of sales) for the year ended December 31, 1994. This resulted in earnings per share for the year ended December 31, 1995 of $1.40 compared to earnings per share of $1.09 for the year ended December 31, 1994. The increase in net income and earnings per share was in line with the increase in sales taking into consideration the higher operating margins. The weighted average number of common shares outstanding and common stock equivalents increased to 8,171,750 for the year ended December 31, 1995 from 7,459,570 for the year ended December 31, 1994, reflecting the exercise of warrants issued according to the 1993 Rights Offering which occurred in September 1994. - 25 - 26 Current assets remained relatively stationary at $47,011,000 for the year ended December 31, 1995 compared to $45,520,000 for the year ended December 31, 1994. Cash, cash equivalents and term deposits declined to $17,362,000 for the year ended December 31, 1995 from $23,681,000 for the year ended December 31, 1994. This decline of $6,319,000 resulted from expenditures on new plant construction. The increase in accounts receivable and inventories for the year ended December 31, 1995 to the equivalent period in 1994 was in line with the increase in sales plus additional receivables at December 31, 1995 in the amount of $2,620,000, which relates to the residential property in West Vancouver, British Columbia, Canada. The sale of this property was concluded as at December 31, 1995 and the title registration completed at February 9, 1996. Long term investment, representing primarily the investment in common shares of Deswell remained an asset of the Company through 1995. This investment is shown at cost, approximately 87% of the market value of Deswell common shares as reported on The National Market as at December 31, 1995. The increase in property, plant and equipment - net to $27,635,000 for the year ended December 31, 1995 from $14,624,000 for the year ended December 31, 1994 reflects the expenditure of capital on new plant facilities, net of depreciation. Current liabilities increased by 7.1% to $19,108,000 for the year ended December 31, 1995 from $17,838,000 for the year ended December 31, 1994. This increase was in line with the increase in current assets and represents a smaller increase than the increase in sales for the subject period. Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 Nam Tai's sales increased by 36% to $96,564,000 in the year ended December 31, 1994 compared to $70,844,000 for the year ended December 31, 1993, primarily due to increases in sales to Sharp Corporation and sales of PCBs to Nintendo, Inc. which orders through Sharp Corporation. The Company also received additional orders from Seiko Instruments, Inc. The Company's gross profit margins decreased slightly from 19.9% in the year ended December 31, 1993 to 17.8% in the year ended December 31, 1994. The three principal reasons for this decline were (i) a change in product mix whereby proportionately more personal organizers, which have a lower gross profit, were produced; (ii) higher scrap rates in the newly expanded PCB department; and (iii) higher labor and material costs in the fourth quarter as a new product was introduced which required the employment of new technology and training of the work force. Selling, general and administrative expenses increased by 21% to $9,370,000 (or 9.7% of sales) in the year ended December 31, 1994 from $7,735,000 (or 10.9% of sales) in the year ended December 31, 1993. Selling expenses increased to $1,240,000 in the year ended December 31, 1994 from $878,000 in the year ended December 31, 1993. This increase mainly reflected additional advertising expenses of $301,000 incurred to promote Nam Tai's own brand name health care products, which were discontinued following the sale of the health care product line in 1994, and increases in shipping expense and export duties reflecting the higher sales volume for the period. Increases in general and administrative expenses reflect increases in salaries resulting from annual incremental salary increases and the addition of employees and additional depreciation resulting from newly purchased assets. In spite of these increases, selling, general and administrative expenses as a percentage of net sales decreased to 9.7% of sales in the year ended December 31, 1994 from 10.9% of sales in the comparable period in 1993. Research and development expenses decreased by approximately 56% to $239,000 for the year ended December 31, 1994 compared to $547,000 for the year ended December 31, 1993 as Nam Tai terminated its research activity in Canada and sold its line of health care products in 1994. The Company's research and development activities in China continue. - 26 - 27 Net loss on disposal of fixed assets was $48,000 in the year ended December 31, 1994 compared to zero in 1993. The loss in 1994 mainly reflected the write off of leasehold improvements and a loss on disposal of automobiles and equipment. Other income (loss) - net, which consists of foreign exchange gains and losses, interest income, bank charges and miscellaneous income and expenses (see Note 6 to Consolidated Financial Statements), was $761,000 for the year ended December 31, 1994 compared to a loss of $413,000 for the year ended December 31, 1993. Results for 1994 include a foreign exchange gain of $68,000 and a gain of $594,000 on the release of the remaining deferred credit - - (see Note 1(c) to Consolidated Financial Statements) previously included on the Company's balance sheet. Previously, the credit was being amortized over 40 years. However, because the subsidiary to which the credit related began liquidation proceedings, the remaining balance of $594,000 was credited to other income in the third quarter of 1994. Results for 1993 were negatively affected by a foreign exchange loss of $400,000. Interest expense decreased by approximately 6% to $129,000 in the year ended December 31, 1994 from $137,000 in the year ended December 31, 1993 because the discounted bills in 1994 were mainly in Japanese yen, which had a much lower interest rate. Income from continuing operations before income taxes (excluding gain or loss on disposal of fixed assets) increased to $8,320,000 in the year ended December 31, 1994 from $5,270,000 in the year ended December 31, 1993. This 58% improvement was primarily attributable to higher operating income of approximately $1,800,000 reflecting increased sales volume for the period, and the increase in other income. Provision for income tax expense was $173,000 for the year ended December 31, 1994 compared to $73,000 for the year ended December 31, 1993. Income tax expense for 1994 included a refund of taxes paid of $270,000 as a result of Nam Tai's additional investment in China. These refunds, which consisted of $212,000 and $58,000 of taxes paid on 1993 and 1992 profits, respectively, of the Company's China subsidiary, resulted from reinvestment of such profits as additional equity in the subsidiary. The tax provision for 1993 benefited from the settlement of a tax dispute and release of bank guarantees of $305,000 relating to the Company's dormant subsidiary. Earnings per share for the year ended December 31, 1994 were $1.09 compared to $0.87 in the comparable period in 1993. Weighted average common shares outstanding and common stock equivalents increased to 7,459,570 during the year ended December 31, 1994, compared to 5,976,136 for the year ended December 31, 1993. Increases in weighted average common shares and common stock equivalents resulted primarily from the sale to shareholders and the public of 750,000 units ("Units") in rights and standby offerings completed in October 1993. Each Unit consisted of one and two Common Share Purchase Warrants ("Warrants"). The Company called the Warrants for redemption in August 1994, resulting in the issuance and sale of an additional 1,485,202 common shares in September 1994. Accounts receivable were up 18% to $11,744,000 at December 31, 1994 compared to $9,887,000 in the previous year. This increase reflected the 37% increase in sales in the fourth quarter 1994 compared to the fourth quarter of 1993. Days outstanding accounts receivable decreased to 44 days in 1994 from 51 days in 1993. This reflected the reduced proportion of receivables with 60 days terms at December 31, 1994 compared to December 31, 1993. Nam Tai trade receivables are largely backed by letters of credit, therefore the Company has incurred no bad debt expense. Inventory increased by 36% to $9,087,000 at December 31, 1994 compared to $6,673,000 at December 31, 1993. This increase in inventory mainly relates to increases in raw materials and work in process and reflects the 31% increase in orders for the first quarter of 1994 compared to the first quarter of 1993. The 38% increase in accounts payable to $10,532,000 at December 31, 1994 compared to $7,615,000 at December 31, 1993 was primarily the result of an increase in trade payables in 1994 reflecting the higher sales volume. - 27 - 28 LIQUIDITY AND CAPITAL RESOURCES In August 1992, Nam Tai moved to its present factory in Shenzhen, China. This factory is leased under a 15 year agreement with an agency of the Government of China. The lease provides for a 20% increase in rental payments every five years. The current monthly rental is approximately $32,000. The lease commitment is not expected to have a significant effect on future reported earnings or cash flows as the compound annual increase in rentals averages only 2.5% per year. The next increase is scheduled for August 1997. During 1995, the Company commenced the expansion of its manufacturing capacity in China and construction of its new factory complex, adjacent to the Company's present factory, was complete by the end of the first quarter, 1996. The Company expects to spend in excess of $20,000,000 in total to develop the new factory and dormitory facilities and to purchase manufacturing equipment. The Company will use its existing cash balances to finance the construction and purchase equipment. To December 31, 1995, the Company had spent an aggregate of approximately $15,000,000 on this project. In September 1994, the Company agreed to a three-year lease for new office space in Hong Kong and effective March 1, 1995 moved its principal executive offices there. The rent for the first two years is approximately $17,800 per month and for the final year is $20,500 per month. Rental for the new space is not expected to have a material impact on Nam Tai's liquidity or results of operations. In recent years, the Company has shifted investment and operations from Hong Kong to China as the Company has attempted to take advantage of the lower overhead and labor costs in China. On December 31, 1995, 32% and 54% of the Company's identifiable assets were located in Hong Kong and China, respectively, as compared to 35% and 29%, respectively as at December 31, 1994. Identifiable assets in Canada totalled 14% as at December 31, 1995 as compared to 36% of total assets as at December 31, 1994. This decrease principally resulted from decreased cash and term deposits. The Company has traditionally relied on short-term bank borrowings to meet its working capital requirements and to provide funds for investments in property, plant and equipment. These borrowings have been supplemented by internally generated funds, trade credits from suppliers and proceeds from the sale of its equity. The average aggregate outstanding balance of short-term bank borrowings (including notes payable) was $2,671,000 for the year ended December 31, 1995 and $2,844,000 for the year ended December 31, 1994. As at December 31, 1995 the Company had working capital of approximately $27,903,000. Cash flow from operations for 1995 included net income of $11,419,000 and depreciation of $2,612,000. The net cash utilized by changes in working capital (excluding cash and bank borrowings) was $6,250,000. During 1995, the Company's investment activities utilized $13,696,000 in additions to property, plant and equipment, mainly consisting of capitalized construction costs for the Company's new factory in China and additional bonding equipment. The Company invested $3,931,000 for 14% of Deswell in 1994. In July 1995, Deswell completed an initial public offering of its securities in the United States and, as a result, the Company's investment amounted to approximately 10.5% of Deswell's outstanding shares as at December 31, 1995. Net cash utilized by financing activities was $37,000 in 1995. No major financing was undertaken during the year. At December 31, 1995, Nam Tai had in place general banking facilities with three financial institutions aggregating $38,202,000. Such facilities, which are subject to annual review, permit the Company to obtain overdrafts, lines of credit for forward exchange contracts, letters of credit, import facilities, trust receipt financing, shipping guarantees and working capital, as well as fixed loans. As at December 31, 1995, the Company had utilized approximately $10,216,000 under such general credit facilities and had available unused credit facilities of $27,986,000. Interest on notes payable averaged 3.6% per annum during the year ended December 31, 1995. During the year ended December 31, 1995, the Company paid a total of $161,000 in interest on indebtedness. During 1994, the Company - 28 - 29 arranged for a construction loan to be secured by a mortgage against the residential building and office complex that the Company constructed in Burnaby, British Columbia. This loan was repaid during 1995. The Company believes that there are no material restrictions (including foreign exchange controls) on the ability of Nam Tai's non-China subsidiaries to transfer funds to the Company in the form of cash dividends, loans, advances, or product/material purchases. With respect to the Company's China subsidiaries, there are restrictions on the payment of dividends and the removal of dividends from China. However, the Company believes that such restrictions will not have a material effect on the Company's liquidity or cash flow. In the third quarter of 1991, the Company began paying dividends at the rate of $0.025 per common share. In 1992, Nam Tai increased the quarterly dividends to $0.05 per common share. Total dividends paid in the year ended December 31, 1992 were $853,000 as compared to $189,000 in the year ended December 31, 1991. Quarterly dividends were discontinued in January 1993 and the Company resumed payment of annual dividends in 1994, paying shareholders aggregate dividends of $65,000 ($0.01 per share) in 1994 and $120,000 (0.015 per share) in 1995. IMPACT OF INFLATION The Company believes that inflation has not had a material effect on its past business. The Company has generally been able to increase the prices of its products in order to keep pace with inflation. The Company believes that increases in labor costs, which represent the most significant component of the Company's production costs (other than material costs), will not materially affect its business because of the Company's utilization of less expensive labor through its operations in China. Moreover, the Company believes that any possible significant increases in material costs would also affect the entire electronics industry, and thus would not have a significant negative impact on the Company's competitive position. EXCHANGE RATES The Company sells most of its products in U.S. dollars and pays for its material components in Japanese yen, U.S. dollars and Hong Kong dollars. It pays labor costs and overhead expenses in renminbi, the currency of China (the basic unit of which is the yuan), Hong Kong dollars and Canadian dollars. The exchange rate of the Hong Kong dollar to the United States dollar has been fixed by the Hong Kong government since 1983 at approximately HK$7.80 to U.S. $1.00 through the currency issuing banks in Hong Kong and accordingly has not presented a currency exchange risk. Canadian operations are relatively small with the percentage of expense in Canadian dollars representing 2.0% of the total expenses before operating income for the year ended December 31, 1995. Labor and overhead expenses related to Nam Tai's Chinese factory amounted to 6.2% during the year ended December 31, 1995 and 6.5% of the Company's total expenses before operating income during the year ended December 31, 1994. Management believes that the Company's only significant foreign exchange risk results from material purchases made in Japanese yen. Approximately 33%, 35% and 14% of Nam Tai's material costs have been in yen during the years ended December 31, 1995, 1994 and 1993, respectively. Sales made in yen have increased substantially since 1994, accounting for approximately 18% of sales for the year ended December 31, 1995, versus 13% of sales for the prior year. In addition, the Company believes its customers will accept an increase in the selling price of manufactured products if the exchange rate of the Japanese yen moves beyond a range of 5% to 10%. Oral agreements have been reached as are customary in the industry and which do not affect production in process. Based on the close working relationships with its principal customers, and because management believes that similar oral agreements exist between these OEMs and their other suppliers, the Company believes that the oral nature of these agreements will not prevent its OEMs from honoring them. However, there can be no assurance that such agreements will be honored, and the refusal to honor such an agreement in the event of a severe fluctuation of the yen at a time when sales made in yen are insufficient to cover material purchases in yen would materially and adversely affect the Company's operations. - 29 - 30 Effective January 1, 1994, China adopted a floating currency system whereby the official exchange rate is equal to the market rate. Since the market and official yuan rates were unified, the value of the yuan against the dollar has been stable. However, China suffered significant inflation during 1994 and 1995 which placed devaluation pressure on the yuan. The Chinese Government took steps to restrict credit to counteract these pressures, which taken together with the net inflow of capital into China, resulted in a stable currency against the United States dollar for the year ended December 31, 1995. The Company believes that because its Chinese operations presently are confined to manufacturing products for export, any devaluation of the yuan would benefit Nam Tai provided that action or other economic pressures do not lead to fundamental changes in the present economic climate in China. Foreign exchange transactions involving the renminbi take place through the Bank of China or other institutions authorized to buy and sell foreign exchange or at an approved foreign exchange adjustment center (known as a "swap center"). In the past, when exchanging Hong Kong dollars for renminbi, the Company used the swap center to obtain the best rate possible. When translating the Chinese company account into U.S. dollars, the Company uses the same exchange rate as quoted by the Bank of China. Since January 1, 1994, when China adopted a floating currency system (whereby the official rate is equal to the market rate), swap centers and banks in China offer essentially the same market rates, facilitating the exchange of Hong Kong dollars for renminbi. The adoption of a floating currency system has had no material impact on the Company. The Company also hedges its currency exchange risk in an effort to minimize it. In an attempt to lower the costs of expenditures in foreign currencies, management will periodically enter into forward contracts to buy or sell foreign currency(ies) against the U.S. dollar through one of its banks. A buy contract allows Nam Tai to buy a targeted currency at a fixed price for up to one year, but which the Company normally books forward six months. Conversely, a sale contract allows the Company to sell the currency at a fixed price during the contract period. The type of contract and currency that the Company enters into depends on whether management believes the currency will rise or fall against the dollar in the succeeding period. Nam Tai will enter into buy forward contracts if it appears the currency will rise and sell forward contracts if it appears the currency will fall against the dollar. If there is a fluctuation in the two currencies a gain or loss occurs between the buy forward exchange rate and the sell forward exchange rate. The Company enters into foreign currency contracts in order to manage foreign exchange exposures. However, since the foreign currency contracts are not intended to hedge identifiable foreign currency commitments, as required by generally accepted accounting principles, the contracts are marked to the market with any realized and unrealized gains or losses recorded as other income (loss) - net. As at December 31, 1995, the Company had open forward contracts amounting to $60,000 and at December 31, 1994 there were no open contracts. During 1995, Nam Tai recorded a gain of $52,000 from hedging transactions involving Canadian dollars. The Company's financial results have been affected in the past due to hedging activities, resulting in foreign exchange gains of approximately $52,000 in 1995 and $68,000 in 1994 and foreign exchange losses of approximately $400,000 in 1993 and $350,000 in 1992. These exchange gains and losses were caused by the difference between the buy forward rate and sell forward rate for exchange contracts between the foreign currencies (Japanese yen in 1992 and 1993, Canadian dollars in 1994 in 1995) entered into by the Company. The Company is continuing to review its hedging strategy and there can be no assurance that Nam Tai will not suffer losses in the future as a result of currency hedging. - 30 - 31 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Management As at January 2, 1996, the directors and executive officers of the Company were as follows:
Name Position with Company - ---- --------------------- M.K. Koo Chairman of the Board and Director Tadao Murakami Chief Executive Officer, Vice-Chairman and Director Yoshio Inagawa Chief Operating Officer and Director Ronald G. Erdman Chief Financial Officer, Secretary and Director Maxwell Yeung Financial Controller, Treasurer and Director Charles Chu Director Stephen Seung Director
M.K. KOO. Mr. Koo has served as Chairman of the Board and a Director of Nam Tai and its predecessor companies since inception. Mr. Koo serves on the Company's audit committee. Mr. Koo received his Bachelor of Laws degree from National Taiwan University in 1970. TADAO MURAKAMI. Mr. Murakami has served the Company in various executive capacities since 1984. He became Secretary and a Director of the Company in December 1989. From June 1989, he has been employed as the President of the Company's Hong Kong subsidiary. In July 1994, Mr. Murakami succeeded Mr. Koo as President and in June 1995 became the Company's Chief Executive Officer. Mr. Murakami assumed the position of Vice-Chairman in January 1996 and is in charge of the day-to-day manufacturing and marketing operations of the Company. Mr. Murakami graduated from Japan Electronic Technology College in 1964. YOSHIO INAGAWA. Mr. Inagawa joined the Company as Vice President in June 1994, at which time he also became a Director. He assumed the position of Chief Operating Officer in January 1996 and is responsible for managing Nam Tai's manufacturing activities in China and overseeing the new factory development. From 1953 to 1993, Mr. Inagawa was employed by Sharp Corporation in various positions, his latest being the Factory Deputy General Manager of Sharp Corporation's factory located in Nara, Japan. RONALD G. ERDMAN. Mr. Erdman joined Nam Tai as Chief Financial Officer, Secretary and Director in January 1996 based in Vancouver, Canada. He also serves as President of Nam Tai Electronics (Canada) Ltd. Mr. Erdman was employed by HSBC Capital Canada Inc. (formerly Wardley Canada Inc.), acting as Chief Executive Officer since 1992. Mr. Erdman obtained a BSc. (Eng.) from Queen's University, Kingston, Ontario, Canada in 1973 and M.B.A. from Cranfield School of Management, Cranfield, United Kingdom in 1979. - 31 - 32 MAXWELL YEUNG. Mr. Yeung joined Nam Tai as Financial Controller, Treasurer and Director with responsibility for finance and administration in the People's Republic of China and Hong Kong. Mr. Yeung has worked in the banking industry since 1983, most recently as Assistant General Manager of Banque Worms in Hong Kong. Mr. Yeung obtained a B.Soc. Sc. from the University of Hong Kong in 1983 and M.B.A. from the Chinese University of Hong Kong in 1990. CHARLES CHU. Mr. Chu originally served as Secretary and a Director of the Company from August 1987 to September 1989. He was reappointed a Director in December 1992. Since July 1988, Mr. Chu has been engaged in the private practice of law in Hong Kong. Mr. Chu serves on Nam Tai's audit committee. Mr. Chu received his Bachelor of Laws degree and Post-Graduate Certificate of Laws from the University of Hong Kong in 1980 and 1981, respectively. STEPHEN SEUNG. Mr. Seung was appointed a Director of Nam Tai in 1995. Mr. Seung is an attorney and Certified Accountant and has been engaged in the private practice of law in New York since 1981. Mr. Seung received a B.S. degree in Engineering from the University of Minnesota in 1969, an M.S. degree in Engineering from the University of California at Berkeley in 1971, an MBA degree from New York University in 1973 and a J.D. degree from New York Law School in 1979. Mr. Seung serves on Nam Tai's audit committee, serves as a Director and member of the audit committee of Deswell and serves Nam Tai as its authorized agent in the United States. No family relationship exists among any of the named directors, executive officers or key employees. No arrangement or understanding exists between any such director or officer and any other persons pursuant to which any director or executive officer was elected as a director or executive officer of the Company. Directors of the Company are elected each year at its annual meeting of shareholders and serve until their successors take office or until their death, resignation or removal. Executive officers serve at the pleasure of the Board of Directors of the Company. - 32 - 33 ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS The aggregate amount of compensation (including non-cash benefits) paid by Nam Tai and its subsidiaries during the year ended December 31, 1995 to all directors and officers as a group for services in all capacities was approximately $773,750. The Company also provides housing for the Chief Executive Officer in Hong Kong. On August 13, 1990 the Company fixed compensation for loss of office at $500,000 for Mr. M.K. Koo and $300,000 each for Mr. Tadao Murakami and another officer who retired from the Company in 1991. The Company also fixed the age of retirement for directors at age 65 years. For the years prior to and including 1995, the Company accrued $240,000 in connection with this arrangement. A provision for the balance of $560,000 was taken at December 31, 1995. Directors who are not employees of the Company or any of its subsidiaries are paid $1,000 per month for services as a director, $750 per meeting attended in person, $500 per meeting attended by telephone and are reimbursed for all reasonable expenses incurred in connection with services as a director. ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY OR ITS SUBSIDIARIES As of December 31, 1995, the Company had outstanding options to purchase an aggregate of 570,850 common shares. Of these options, all of which were granted under the Company's 1993 stock option plan, 200,100, 360,750 and 10,000 options are exercisable at $5.35, $11.00 and $11.375 per share and expire on September 9, 1998, and July 15, 1999 and July 15, 1999, respectively. Of these options, an aggregate of 225,000 options to purchase common shares were held by the Company's officers and directors as a group as at December 31, 1995. ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS In January 1995, Nam Tai entered into an arrangement with Mr. M.K. Koo, Chairman of the Board, requiring Mr. Koo to purchase a residential property in West Vancouver, British Columbia, Canada no later than December 31, 1995 at the higher of book value or market value. The commitment was honored as at December 29, 1995, with registration of transfer of ownership completed as at February 9, 1996. It is the Company's policy that all transactions between the Company and any interested director or executive officer be approved by a majority of the disinterested directors and on terms no more favorable than would be available from an independent third party. - 33 - 34 PART II ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED Not Applicable. PART III ITEM 15. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR THE COMPANY'S SECURITIES Not Applicable. PART IV ITEM 17. FINANCIAL STATEMENTS Not Applicable. ITEM 18. FINANCIAL STATEMENTS The following financial statements are filed as part of this Report:
Page No. -------- Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Consolidated Statements of Income for the years ended December 31, 1995, December 31, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Consolidated Balance Sheets as of December 31, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . 37 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1995, December 31, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . 38 Consolidated Statements of Cash Flows for the years ended December 31, 1995, December 31, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
All other schedules for which provisions made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. - 34 - 35 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF NAM TAI ELECTRONICS, INC. We have audited the accompanying consolidated balance sheets of Nam Tai Electronics, Inc and its subsidiaries as of December 31, 1995 and 1994, and the related statements of income, shareholders' equity, and cash flows for each of the three years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nam Tai Electronics, Inc. and its subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years ended December 31, 1995, 1994 and 1993 in conformity with accounting principles generally accepted in the United States of America. PRICE WATERHOUSE Certified Public Accountants HONG KONG, March 28, 1996 - 35 - 36 NAM TAI ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands of U.S. Dollars except share data)
Year ended December 31, ----------------------- 1995 1994 1993 ---- ---- ---- Net sales $121,240 $ 96,564 $ 70,844 Cost of sales 98,088 79,341 57,746 ------ ------ ------ Gross profit 23,152 17,223 14,098 ------ ------ ------ Costs and expenses Selling, general and administrative expenses 11,441 9,370 7,735 Research and development expenses 945 239 547 ------ ------ ------ 12,386 9,609 8,282 ------ ------ ------ Income from operations 10,766 7,614 5,816 (Loss) on disposal of fixed assets 0 (48) 0 Other income (loss) - net (Note 6) 225 761 (413) Interest expense (161) (129) (137) ------ ------ ------ Income from consolidated companies before income taxes and minority interests 10,830 8,198 5,266 Income tax benefit (expense)(Note 9) 589 (173) (73) ------ ------ ----- 11,419 8,025 5,193 Minority interests in subsidiaries 0 74 4 ------ ----- ----- Net income $ 11,419 $ 8,099 $ 5,197 ====== ====== ====== Earnings per share $ 1.40 $ 1.09 $ 0.87 ====== ====== ====== Weighted average Common Shares outstanding and common stock equivalents (Note 1) 8,171,750 7,459,570 5,976,136 ========= ========= =========
See accompanying notes to consolidated financial statements. - 36 - 37 NAM TAI ELECTRONICS, INC. CONSOLIDATED BALANCE SHEETS (In thousands of U.S. Dollars)
As at December 31, ------------------ 1995 1994 ---- ---- ASSETS Current assets: Cash and cash equivalents (Note 13) $ 10,927 $ 23,281 Term deposit 6,435 400 Accounts receivable 17,699 11,744 Inventories (Note 4) 10,425 9,087 Prepaid expenses and deposits 1,525 1,008 ------ ------ Total current assets 47,011 45,520 ------ ------ Long term investment (Note 5) 3,931 3,931 ------ ------ Property under development (Note 11) 0 1,887 ------ ------ Property, plant and equipment, at cost 35,365 20,121 Less: Accumulated depreciation and amortization (7,730) (5,497) ------ ------ 27,635 14,624 ------ ------ Other assets 704 325 ------ ------ Total assets $ 79,281 $ 66,287 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term bank borrowings $ 273 $ 563 Notes payable 5,320 6,117 Accounts payable and accrued expenses 13,408 10,532 Income taxes payable 107 626 ------ ------ Total current liabilities 19,108 17,838 ------ ------ Shareholders' equity: Common stock (Note 14) 80 80 Additional paid-in capital 28,182 27,645 Stock option grants (Note 14(b)) 467 631 Retained earnings 31,417 20,118 Foreign currency translation adjustment 27 (25) ------ ------ Total shareholders' equity 60,173 48,449 ------ ------ Total liabilities and shareholder's equity $ 79,281 $ 66,287 ====== ====== Commitments and contingencies (Note 12)
See accompanying notes to consolidated financial statements. - 37 - 38 NAM TAI ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands of U.S. Dollars except shares outstanding)
Common Shares Foreign Total ------------- Additional Stock Currency Share- Shares Paid-in Option Retained Translation holders' Outstanding Amount Capital Grants Earnings Adjustment Equity ----------- ------ ------- ------ -------- ----------- -------- Balance at December 31, 1992 5,272,098 $ 53 $ 9,417 - $ 6,887 $ 11 $16,368 Shares issued on exercise of options 476,727 4 1,188 - - - 1,192 Shares issued on Rights Offering 750,000 8 4,750 - - - 4,758 Stock options issued - - - 690 - - 690 Net income - - - - 5,197 - 5,197 Foreign currency translation adjustments - - - - - (43) (43) --------- ----- ------ ------ ----- ------ ------ Balance at December 31, 1993 6,498,825 $ 65 $15,355 $ 690 $12,084 $ (32) $28,162 Shares issued on exercise of options 9,000 - 69 (21) - - 48 Options cancelled - - - (38) - - (38) Warrants cancelled - - (657) - - - (657) Shares issued on exercise of warrants 1,485,202 15 12,878 - - - 12,893 Net income - - - - 8,099 - 8,099 Dividends paid - - - - (65) - (65) Foreign currency translation adjustments - - - - - 7 7 --------- ----- ------ ------ ------ ------ ------ Balance at December 31, 1994 7,993,027 $ 80 $27,645 $ 631 $20,118 $ (25) $48,449 Shares issued on exercise of options 70,150 - 537 (161) - - 376 Options cancelled - - - (3) - - (3) Net income - - - - 11,419 - 11,419 Dividends paid - - - - (120) - (120) Foreign currency translation adjustments - - - - - 52 52 --------- ----- ------ ------ ------ ------ ------ Balance at December 31, 1995 8,063,177 $ 80 $28,182 $ 467 $31,417 $ 27 $60,173 ========= ===== ====== ====== ====== ====== ======
See accompanying notes to financial statements. - 38 - 39 NAM TAI ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of U.S. Dollars)
Year ended December 31, -------------------------- 1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Net income $ 11,419 $ 8,099 $ 5,197 ------ ------ ------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,612 2,063 1,186 Amortization of deferred credit - (15) (22) Gain on release of deferred credit to income - (594) - Loss on disposal of property, plant and equipment - 48 - Gain on disposal of product lines - (129) - Stock option (recovery) compensation expense - (38) 690 Minority interests - (74) (4) Other items - 62 16 Changes in current assets and liabilities: (Increase) decrease in accounts receivable (5,955) (1,857) (2,601) (Increase) decrease in inventories (1,338) (2,414) (1,566) (Increase) decrease in prepayments and deposits (517) (337) 475 Increase (decrease) in notes payable (797) 4,244 (221) Increase (decrease) in accounts payable and accrued expenses 2,876 2,917 (2,308) (Decrease) increase in income taxes payable (519) (140) 308 ------ ------ ------ (3,638) 3,736 (4,047) ------ ------ ------ Net cash provided by operating activities 7,781 11,835 1,150 ------ ------ ------ Cash flows from investing activities: Proceeds from disposal of property, plant and equipment 12 12 - Proceeds from disposal of product lines - 270 - Additions to property, plant and equipment (13,696) (10,673) (3,065) Other assets (379) (199) (60) Term deposit (6,035) - (400) Purchase of long term investment - (3,931) - ------ ------ ------ Net cash used in investing activities (20,098) (14,521) (3,525) ------ ------ ------ Cash flows from financing activities: Increase (decrease) in short-term bank loans and overdraft (290) 173 390 (Distributed to) received from minority interests - (41) 119 Additional shares issued (net) 373 12,284 5,950 Dividends paid (120) (65) - ------ ------ ------ Net cash (used in) provided by financing activities (37) 12,351 6,459 ------ ------ ------ Net increase (decrease) in cash and cash equivalents (12,354) 9,665 4,084 Cash and cash equivalents at beginning of period 23,281 13,616 9,532 Cash and cash equivalents at end of period $ 10,927 $ 23,281 $ 13,616 SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Interest paid $ 186 $ 131 $ 135 Income taxes paid $ 47 $ 313 $ 70
See accompanying notes to consolidated financial statements. - 39 - 40 NAM TAI ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In U.S. Dollars) 1 Summary of Significant Accounting Policies a Basis of presentation The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. b Principles of consolidation The consolidated financial statements include the financial statements of Nam Tai Electronics, Inc. ("the Company") and all its subsidiaries. Intercompany accounts and transactions have been eliminated on consolidation. The details of the Company's subsidiaries are described in Note 10. c Deferred credit When a subsidiary is purchased, the excess of the fair value of the net assets acquired over the purchase price is recorded as a reduction to non-current assets with any remainder being recorded as a deferred credit. If the purchase price exceeds the fair value of net assets acquired, the excess cost is recorded as goodwill. Any goodwill or deferred credit which may result is amortized over its estimated useful life, not to exceed forty years. The remaining deferred credit of $594,000 at September 30, 1994 was credited to income in 1994 as the subsidiary to which the deferred credit related commenced liquidation procedures. d Inventories Inventories are stated at the lower of cost and market value. Cost is determined on the first-in, first-out basis. e Property, plant and equipment Property, plant and equipment are recorded at cost. The cost of major improvements and betterments is capitalized whereas the cost of maintenance and repairs is expensed in the year incurred. All land in Hong Kong is owned by the government which leases the land at public auction to nongovernmental entities. With the exception of those leases which expire after June 30, 1997 and before June 30, 2047 with no right of renewal, the Sino-British Joint Declaration extends the terms of all currently existing land leases for another 50 years beyond 1997. Thus, all of the Company's land leaseholds are considered to be purchased long-term assets. The cost of such land leaseholds is amortized on the straight-line basis over the respective terms of the leases. All land in the People's Republic of China ("PRC") is owned by the government. The government in the PRC, according to PRC law, may sell the right to use the land for a specified period of time. Thus all of the Company's land purchases in the PRC are considered to be land leaseholds and are amortized on the straight line basis over the respective term of the right to use the land. - 40 - 41 1 Summary of Significant Accounting Policies (cont'd) e Property, plant and equipment (cont'd) Depreciation and amortization rates computed using the straight-line method are as follows:
Classification Rate -------------- ---- Long-term leasehold buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2%-4.5% Freehold buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4% Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18%-25% Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9%-25% Molds and tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18%-25% Motor vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 18%-25% Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25%-33%
f Per share amounts The per share amounts in the consolidated statements of income have been computed based on the weighted average number of Common Shares and Common stock equivalents outstanding during each period, adjusted retroactively to reflect the stock splits (Note 14(a)). Common stock equivalents include the number of shares that would be issued from the exercise of in the money stock options reduced by the number of shares that could be purchased from the proceeds based on the average market price of the Company's common stock. The weighted average number of shares outstanding for the years ended December 31, 1995, 1994 and 1993 were 8,018,252, 6,934,098 and 5,717,551, respectively. Common stock equivalents for the years ended December 31, 1995, 1994 and 1993 were 153,498, 525,472, and 258,585, respectively. Fully diluted earnings per share do not differ materially from the undiluted figures. g Foreign currency translations The financial statements have been stated in United States dollars, the official currency used in the British Virgin Islands (the Company's place of incorporation). Although the operating facilities are located in Hong Kong and the PRC, the United States dollar is the currency of the primary economic environment in which the Company's consolidated operations are conducted. The exchange rate between the Hong Kong dollar and the United States dollar has been pegged (HK$7.80 to US$1.00) since October 1983. All transactions in currencies other than functional currencies during the year are translated at the exchange rates existing on the respective transaction dates. Related accounts payable or receivable existing at the balance sheet date denominated in currencies other than functional currencies are translated at the exchange rates existing on that date. Exchange differences arising in these cases are dealt with in the income statements. The financial statements of all subsidiaries expressed in currencies other than the United States dollar are translated in accordance with Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation". Accordingly, all assets and liabilities are translated at the rates of exchange ruling at the balance sheet date and all income and expenditure items are translated at the average rates of exchange over the year. With the exception of Namtai Electronic (Shenzhen) Co. Ltd. ("NTES") and Zastron Plastic & Metal Products (Shenzhen) Ltd. ("Zastron"), which are companies incorporated in the PRC, all exchange differences arising from translation of subsidiaries' financial statements are dealt with as a separate component of equity. - 41 - 42 1 Summary of Significant Accounting Policies (cont'd) g Foreign currency translations (cont'd) As NTES and Zastron act as production centers for the Company, the Company controls their operations and the majority of their transactions are made in Hong Kong dollars. Therefore, the Hong Kong dollar has been determined to be the functional currency of NTES and Zastron. Accordingly, all translation adjustments resulting from the conversion of NTES and Zastron's financial statements to Hong Kong dollars are taken to the income statements. Exchange rates used to translate and remeasure transactions and balances of NTES and Zastron are the rates quoted by the Bank of China. h Income taxes The Company provides for all taxes based on income whether due at year end or estimated to become due in future periods but based on profits earned to date. However, under the current tax legislation in the People's Republic of China ("PRC"), the Company has reasonable grounds to believe that income taxes paid in respect of any year would be refunded after the profits earned in that year are reinvested in the business. Deferred income taxes are provided to recognize the effect of temporary differences between profit as computed for tax reporting purposes and profit as stated in the accounts to the extent that a liability or an asset is expected to be payable or realizable in the foreseeable future. i Staff retirement plan costs The Company's contributions to the staff retirement plan (Note 7) are charged to the income statements as incurred. j Deferred Compensation Arrangement costs For the years 1990 to 1995, the liability relating to the Deferred Compensation Arrangement (Note 8) was provided ratably over the future employment periods of the beneficiaries of the plan until their dates of retirement or earlier departure from the Company. At December 31, 1995, the remaining balance was fully provided for. k Cash and cash equivalents Cash includes certificates of deposit having a maturity date of three months or less. l Currency contracts The Company enters into forward currency contracts in its management of foreign currency exposures. However, since the forward currency contracts are not intended to hedge an identifiable foreign currency commitment, generally accepted accounting principles require that the contracts are marked to the market rate with the net realized or unrealized gains or losses on forward currency contracts recognized in other income (loss). (See Note 6). m Property under development Property under development is stated at the lower of cost and market value. - 42 - 43 2 Comparative Figures Certain expenses have been reallocated between cost of sales, selling, general and administrative expenses and research and development expenses. As a result, the comparative figures for prior periods have been reclassified, where appropriate, in order to conform with the presentation used in the current period. 3 Financial Instruments The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of its cash equivalents and trade receivables. The Company's cash equivalents are in high-quality deposits placed with a wide array of institutions with high credit ratings. This investment policy limits the Company's exposure to concentration of credit risk. The trade receivable balances largely represent amounts due from the Company's principal customers who are generally international organizations with high credit ratings. As a consequence, concentrations of credit risk are limited. Letters of credit are the principal security obtained to support lines of credit or negotiated contracts when the financial strength of a customer is not considered sufficient. All of the Company's significant financial instruments at December 31, 1995 are reported in current assets or current liabilities in the consolidated balance sheet at carrying amounts which approximate their fair value. From time to time, the Company hedges its currency exchange risk, which primarily arises from materials purchased in currencies other than the United States dollar, through the purchase and sale of forward exchange contracts. Such contracts typically allow the Company to buy or sell currency at a fixed price for up to one year, but the Company normally books forward six months. At December 31, 1994, there was no open forward currency contract and at December 31, 1995, the open forward contracts amounted to $60,000. 4 Inventories Inventories consist of (in thousands):
As at December 31, ------------------ 1995 1994 ---- ---- Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,927 $ 435 Work-in-progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,690 2,828 Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,808 5,824 ------ ------ $10,425 $ 9,087 ====== ======
5 Long Term Investment In December 1994, the Company purchased 14.04% or 477,370 of the outstanding common shares of Deswell Investment Holdings Limited ("Deswell"), a supplier of plastic parts to the Company, for a total consideration of $3,931,284. In 1995, Deswell changed its name to Deswell Industries, Inc. and completed its initial public offering which reduced the Company's ownership to approximately 10.5% at December 31, 1995. - 43 - 44 6 Other Income (Loss) - Net Other income (loss) - net consists of (in thousands):
As At December 31, ------------------ 1995 1994 1993 ---- ---- ---- Foreign exchange gains (losses) on forward contracts . . . . . . . . . . . . . . . . . . . . . . $ 52 $ 68 $ (400) Interest income . . . . . . . . . . . . . . . . . . . . . . . . 1,548 591 298 Bank charges . . . . . . . . . . . . . . . . . . . . . . . . (490) (364) (268) Release of deferred credit (Note 1(c)) . . . . . . . . . . . . . . - 594 - Offering costs written off . . . . . . . . . . . . . . . . . . . . (334) - - Full provision for Deferred Compensation Arrangement (Note 8) . . . . . . . . . . . . . . . . . . . . . . (560) - - Special bonus . . . . . . . . . . . . . . . . . . . . . . . . (376) - - Miscellaneous income (expenses) . . . . . . . . . . . . . . . . . 385 (128) (43) ------ ------ ------ $ 225 $ 761 $ (413) ======= ======= =======
7 Staff Retirement Plan The Company maintains staff retirement plans (defined contribution pension plans) which cover certain of its employees. The cost of the Company's contributions amounted to $80,545, $67,034 and $63,256 for the years ended December 31, 1995, 1994 and 1993 respectively. 8 Deferred Compensation Arrangement In August 1990, the Company agreed to provide compensation in the event of loss of office, for whatever reason, for two officers. The amount of compensation to be ultimately provided is $500,000 for Mr. Koo and $300,000 for Mr. Murakami. A provision of $40,000 was made in each of the years ended December 31, 1995, 1994 and 1993. At December 31, 1995, the balance of the deferred compensation arrangement, which amounted to $560,000, was provided for. 9 Income Taxes Under the current British Virgin Islands law, the Company's income is not subject to taxation. In Hong Kong, the holding company of a group of companies does not file a consolidated tax return but instead each company having operations in Hong Kong is required to file a separate tax return. As a consequence, income tax returns are filed on an individual company basis. The parent Company has no income subject to taxation. However, subsidiaries, primarily operating in Hong Kong and the PRC, are subject to income tax as described below. The provision for current income taxes of the subsidiaries operating in Hong Kong has been calculated by applying the current rate of taxation of 16.5% (1994: 16.5% and 1993: 17.5%) to the estimated taxable income earned in or derived from Hong Kong during the period. Deferred tax, where applicable, is provided under the liability method at the rate of 16.5% (1994: 16.5%, 1993: 17.5%), being the effective Hong Kong statutory income tax rate applicable to the ensuing financial year, on the temporary differences between taxable income and income reported in the financial statements. - 44 - 45 9 Income Taxes (cont'd) The basic corporate tax rate for Foreign Investment Enterprises ("FIE's") in the PRC, such as NTES and Zastron, is currently 33% (30% state tax and 3% local tax). However, because both NTES and Zastron are located in the designated Special Economic Zone ("SEZ") of Shenzhen and are involved in production operations, they qualify for a special reduced state tax rate of 15%. In addition, the local tax authorities in the Shenzhen SEZ are not currently assessing any local tax. Since NTES and Zastron have agreed to operate for a minimum of ten years in the PRC, a two year tax holiday from the first profit making year is available, following which in the third through fifth years there is a 50% reduction to 7.5%. In any event, for FIE's such as NTES and Zastron which export 70% or more of the production value of their products, a reduction in the tax rate is available; in all cases apart from years in which a tax holiday is available, there is an overall minimum tax rate of 10%. In 1990 and 1991, NTES qualified for a tax holiday; tax was payable at the rate of 7.5% on the assessable profits of NTES in 1992, 1993 and 1994, and 10% in 1995. In 1992 and 1993, Zastron qualified for a tax holiday; tax was payable at the rate of 7.5% on the assessable profits of Zastron in 1994 and 1995. An FIE whose foreign investor directly reinvests its share of profits obtained from that FIE in establishing or expanding an export-oriented or technologically advanced enterprise in the PRC for a minimum period of five years may obtain a refund of the taxes already paid on those profits. NTES qualified for such a refund of its 1992, 1993 and 1994 taxes as a result of the reinvestment of its 1992, 1993 and 1994 profits. In May 1994, NTES received a tax refund of $58,000 for the reinvestment of its 1992 profits, in November 1994 received a tax refund of $212,000 for the reinvestment of its 1993 profits, and in August 1995 received a tax refund of $714,000 for the reinvestment of its 1994 profit. Similarly, in August 1995, Zastron also received a tax refund of $68,000 for the reinvestment of its 1994 profits. At December 31, 1994, $391,000 was accrued for 1994 PRC taxes based on a prudent approach pending the establishment of a pattern of receiving the tax refunds to which the PRC subsidiaries were entitled. As such a pattern has now been established, this accrual was reversed in 1995. The Company intends to reinvest profit earned in 1995 by NTES and Zastron and accordingly no provision for PRC taxes was made in 1995. The Company has gained reasonable assurance through previous experience that when profits are reinvested, PRC taxes paid are refunded in full in the ensuing year. The current and deferred components of the income tax (expense) benefit are as follows (in thousands):
Year Ended December 31, ----------------------- 1995 1994 1993 ---- ---- ---- Current tax . . . . . . . $589 $(173) $(73) Deferred tax . . . . . . . 0 0 0 ---- ----- ---- $589 $(173) $(73) ==== ===== ====
- 45 - 46 9 Income Taxes (cont'd) A reconciliation of the tax (expense) benefit to the amount computed by applying the current tax rate to the income (loss) from continuing operations before taxes in the consolidated statements of income is as follows (in thousands except tax rate):
Year ended December 31, ------------------------ 1995 1994 1993 ---- ---- ---- Hong Kong statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . 16.5% 16.5% 17.5% Income tax expense at current tax rate on income from consolidated companies before income taxes and minority interests . . . . . . . . . . . . . . . . . . . . . . . $(1,787) $(1,353) $ (921) Tax (expense) benefit arising from items which are (not allowable) assessable for tax purposes: Gain on write-off of deferred credit which is not taxable under Hong Kong tax law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 98 0 Effect of difference between PRC and Hong Kong tax applied to PRC taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,659 873 368 Reversal of subsidiary's tax provision . . . . . . . . . . . . . . . . . . . . . 314 0 305 Income tax refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391 270 0 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (61) 175 ------ ------ ------ $ 589 $ (173) $ (73) ====== ====== ======
No income tax arose in the United States of America in any of the periods presented. In prior years, the purchase cost of patents and trademarks and certain expenses incurred by a subsidiary, Nam Tai Supplies Ltd., were claimed as tax deductible expenses. The Hong Kong Inland Revenue Department ("IRD") has taken issue on the deductibility of these expenses and issued revised assessments to recover taxes of $995,000. In January 1994, the IRD petitioned the Hong Kong court to wind up the subsidiary for non-payment of assessed taxes. A winding up order was made on March 9, 1994, and the Official Receiver was appointed as liquidator. In 1995, the tax provision of $314,000 for this subsidiary was reversed as the subsidiary was in the process of liquidation. - 46 - 47 10 Investment in Subsidiaries
Percentage of ownership ------------- Consolidated Country of Principal December 31, subsidiaries incorporation activity 1995 1994 ------------ ------------- --------- ---- ---- Nam Tai Electronic & Electrical Products Limited Hong Kong Trading 100% 100% Nam Tai Electronics (Canada) Ltd. Canada Services 100% 100% Namtai Electronic (Shenzhen) Co. Ltd. PRC Manufacturing 100% 100% Zastron Plastic & Metal Products (Shenzhen) Ltd. PRC Manufacturing 100% 100%
In March 1994, NTEE invested $9,944,000 in NTES to result in total investment of $14,944,000. This investment consisted of a reinvestment of NTES's 1993 net income of $4,162,000 and the conversion of an intercompany loan between NTEE and NTES totalling $5,782,000. In February 1995, NTEE invested a further $9,546,000 in NTES by reinvesting NTES's 1994 net income. This increased NTEE's total investment in NTES to $24,490,000. At December 31, 1995, NTEE's investment in Zastron was $3,100,000 and Nam Tai Electronics, Inc's investment in Nam Tai Electronics (Canada) was $256,000. Retained earnings are not restricted as to the payment of dividends except to the extent dictated by prudent business practices. The Company believes that there are no material restrictions, including foreign exchange controls, on the ability of its non-PRC subsidiaries to transfer surplus funds to the Company in the form of cash dividends, loans, advances or purchases. With respect to the Company's PRC subsidiaries, there are restrictions on the purchase of materials by these companies, the payment of dividends and the removal of dividends from the PRC. However, the Company believes that such restrictions will not have a material effect on the group's liquidity or cash flows. 11 Related Party Transactions In June 1995, the Company completed the construction of a residential property pursuant to an agreement dated January 13, 1995. As the property had not been sold to a third party by December 31, 1995, Mr. M.K. Koo, the Chairman of the Company, purchased the property for book value of $2,620,000 being the higher of the market value and book value of the property as required by the contract. At December 31, 1995 this amount was included in accounts receivable. - 47 - 48 12 Commitments and Contingencies a Pursuant to the August 17, 1992 land purchase and development agreement between NTES and Baoan County City Development Foundation, NTES is required to construct a multi-purpose business building of seven floors or more in Baoan City, Shenzhen, PRC. The Company is looking for a partner to develop, manage and finance the entire project. To date, the Company has invested $488,000 to purchase the land and in capitalized design fees. Should the project not proceed, the Company expects its maximum exposure will be $488,000. b Lease commitments At December 31, 1995, there were annual commitments under operating leases which relate to land and buildings as follows (in thousands): - 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 935 - 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 746 - 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513 - 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481 - 2000 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 4,907 ------ $7,582 ======
c The Company has been advised that Tele-Art, Inc., a shareholder of the Company, intends to pursue claims in a court in the British Virgin Islands for damages allegedly suffered as a result of the rights offering completed in 1993 (Note 14(c)). Management believes that the claim is without merit and will vigorously defend it and believes that the outcome of the case will not have a significant effect on the financial statements. - 48 - 49 13 Banking Facilities General banking facilities amounted to $38,202,000 at December 31, 1995, (December 31, 1994 - $24,022,000; December 31, 1993 - $20,849,000), with interest charged based on the Hong Kong prime rate for Hong Kong dollar transactions and banks' cost of funds rate for transactions in other currencies (effectively 8.75% and 0.55%, respectively at December 31, 1995). The total amount of banking facilities utilized as at December 31, 1995 was $10,216,000 (December 31, 1994 - $8,701,000). The notes payable, which include trust receipts, shipping guarantees and discounted bills, may not agree to utilized banking facilities due to a timing difference between the Company receiving the goods and the bank issuing the trust receipt to cover financing of the purchase. The Company recognizes the outstanding letter of credit as a note payable when the goods are received, even though the bank may not have issued the trust receipt. However, this will not affect the total bank facility utilization, as an addition to trust receipts will be offset by a reduction in the same amount of outstanding letters of credit.
December 31, ----------------------- 1995 1994 ---- ---- Outstanding letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,724 $ 5,789 Usance bills pending maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,159 - Discounted bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,349 Trust receipts and shipping guarantees . . . . . . . . . . . . . . . . . . . . . . . . . - - Short-term bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 563 Forward Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 - ------ ------ Total banking facilities utilized . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,216 8,701 Less: Outstanding letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,724) (5,789) Short-term bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (273) (563) Forward Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60) - Plus: Goods received but trust receipts not issued by the bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,161 3,768 ------ ------ Notes payable per balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,320 $ 6,117 ====== ======
Discounted bills normally have a term to maturity of 30 days. Trust receipts normally have terms from 90 to 100 days. The interest rate for the above facilities is normally prime plus 3/4% for all currencies. At December 31, 1994, cash and term deposits totalling $2,605,000, certain fixed assets and a corporate guarantee were pledged to secure the banking facilities. In the third quarter of 1995, the Company's bankers agreed to release the charges on the pledged assets and to provide the banking facilities with only the corporate guarantee from Nam Tai Electronics, Inc., the parent company, and its undertaking not to pledge any assets to any banks without the prior consent of the Company's bankers. - 49 - 50 14 Common Shares a Authorized shares In July 1992, the Company effected a 2 for 1 forward stock split, and the number of authorized Common Shares was increased to 10,000,000. At the same time, the par value for each Common Share decreased to $0.01. In July 1994, the Board of Directors increased the number of authorized Common Shares to 20,000,000. b Stock options In January 1988, the Company issued options at fair market value to certain directors and shareholders. Remaining options of 476,727 were exercised during 1993 at $2.50 per share realizing $1,191,818 proceeds for the Company. In August 1993, the Board of Directors approved a stock option plan which authorized the issuance of 300,000 options to key employees of the Company at an exercise price of $5.35. The options expire in September 1998. Because the option's exercise price was less than the market value of the Company's Common Shares, the Company recorded compensation expense of $690,000 in accordance with U.S. generally accepted accounting principles, reflecting the fair value of the total discount of the options at the inception date. In December 1993, the option plan was amended and the maximum number of shares to be issued pursuant to the exercise of options granted was increased to 650,000. A summary of stock option activity is as follows:
Number of Option Price Options Per Share ------- --------- Outstanding at December 31, 1992 . . . . . . . . . . . . . . . . . . . . . 476,727 $2.50 Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (476,727) $2.50 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 $5.35 -------- Outstanding at December 31, 1993 . . . . . . . . . . . . . . . . . . . . . 300,000 $5.35 Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,000) $5.35 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365,000 $11.00 Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,750) $5.35 & $ 11.00 -------- Outstanding at December 31, 1994 . . . . . . . . . . . . . . . . . . . . . 615,250 $5.35 & $ 11.00 Reissued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,750 $11.00 Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (70,150) $5.35 Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,000) $11.00 Reissued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 $11.38 -------- Outstanding at December 31, 1995 . . . . . . . . . . . . . . . . . . . . . 570,850 ========
c Rights Offering On October 14, 1993 the Company completed a public offering of 750,000 Units at $7.65 per Unit for total proceeds of $5,737,500. After deducting total offering expenses of $979,500, the Company received net proceeds of $4,758,000. Each Unit consisted of one Common Share and two identical Common Share Purchase Warrants. - 50 - 51 15 Business Segment Information The Company operates principally in the consumer electronic products industry. The following is a summary of sales, income from continuing operations and assets by geographic area (in thousands):
Year ended December 31, ----------------------- 1995 1994 1993 ---- ---- ---- Net sales from operations within Hong Kong: Unaffiliated customers $119,417 $ 95,470 $ 70,405 Related parties - - - Intersegment sales 353 - 969 ------- ------- ------- 119,770 95,470 71,374 People's Republic of China: Unaffiliated customers 1,445 810 350 Intersegment sales 112,804 92,612 62,278 ------- ------- ------- 114,249 93,422 62,628 Canada: Unaffiliated customers 378 284 89 Intersegment eliminations (113,157) (92,612) (63,247) ------- ------- ------- Total net sales $121,240 $ 96,564 $ 70,844 ======= ======= ======= Income (loss) from continuing operations within: - Hong Kong 4,196 2,020 1,031 - People's Republic of China 10,448 7,491 4,760 - Canada (3,225) (1,412) (594) ------- ------- ------- Income from continuing operations $ 11,419 $ 8,099 $ 5,197 ======= ======= ======= Identifiable assets by geographic area: - Hong Kong 25,505 23,463 17,912 - People's Republic of China 42,416 19,116 14,192 - Canada 11,360 23,708 7,426 ------- ------- ------- Total assets $ 79,281 $ 66,287 $ 39,530 ======= ======= =======
Intersegment sales arise from the transfer of finished goods between subsidiaries operating in different areas. These sales are generally at estimated market prices.
Year ended December 31, ----------------------- 1995 1994 1993 ---- ---- ---- Net sales to customers by geographic area: - Japan $ 41,532 $ 23,547 $ 6,888 - North America 36,730 31,686 29,107 - Hong Kong 20,544 21,855 17,416 - Europe 16,003 13,831 12,218 - Other 6,431 5,645 5,215 ------- ------ ------ Total net sales $121,240 $ 96,564 $ 70,844 ======= ====== ======
The Company had sales to four major customers, each individually exceeding 10% of total sales in 1995 as follows:
Customer -------- A $ 58,124 $ 46,032 $ 33,330 B (through A) 21,805 12,600 0 C 16,022 9,421 13,191 D 15,962 18,573 14,617 ------- ------ ------ $111,913 $ 86,626 $ 61,138 ======= ====== ======
- 51 - 52 ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements. See list under Item 18 of this Report. (b) Exhibits. The following documents are filed as exhibits herewith, unless, otherwise specified and are incorporated herein by this reference:
Exhibit Number Exhibit - ------- ------- 2.1 Tenancy agreement dated September 13, 1995 with Lord Realty Holdings Limited for Suite 530, 999 West Hastings Street, Vancouver, British Columbia, Canada 2.2 Letter Agreement dated July 25,1995 revising banking facilities with The Hongkong and Shanghai Banking Corporation Limited 2.3 Letter Agreement dated September 18, 1995 revising banking facilities with The Sanwa Bank Limited 2.4 Letter Agreement dated September 5, 1995 revising credit facilities with Banque Worms 2.5 Construction Agreement dated March 3, 1995 with Guangdong 2nd Building Engineering Co. for construction of the new factory in China 2.6 Construction Agreement dated May 19, 1995 with Shimizu Corporation for construction of the new factory in China 2.7 Supply Contract dated May 19, 1995 with Shimizu Hong Kong Co., Ltd. for Diesel Generators at the new factory in China 2.8 Contracts of Purchase and Sale dated December 29, 1995 with Mr. M.K. Koo regarding a residential property in West Vancouver 2.9 Diagram of the Company's operating subsidiaries and affiliates - (see page five of this Report)
- 52 - 53 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. NAM TAI ELECTRONICS, INC. Date: April 1, 1996 By: /s/ M.K. KOO --------------------- M.K. Koo Chairman of the Board - 53 - 54 PRICE WATERHOUSE [LOGO] CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-73954) of Nam Tai Electronics, Inc. of our reported dated March 28, 1996 appearing in this Form 20-F. /s/ PRICE WATERHOUSE - ------------------------------- PRICE WATERHOUSE Certified Public Accountants HONG KONG, March 28, 1996 55 EXHIBIT INDEX
Exhibit Number Exhibit - ------- ------- 2.1 Tenancy agreement dated September 13, 1995 with Lord Realty Holdings Limited for Suite 530, 999 West Hastings Street, Vancouver, British Columbia, Canada 2.2 Letter Agreement dated July 25,1995 revising banking facilities with The Hongkong and Shanghai Banking Corporation Limited 2.3 Letter Agreement dated September 18, 1995 revising banking facilities with The Sanwa Bank Limited 2.4 Letter Agreement dated September 5, 1995 revising credit facilities with Banque Worms 2.5 Construction Agreement dated March 3, 1995 with Guangdong 2nd Building Engineering Co. for construction of the new factory in China 2.6 Construction Agreement dated May 19, 1995 with Shimizu Corporation for construction of the new factory in China 2.7 Supply Contract dated May 19, 1995 with Shimizu Hong Kong Co., Ltd. for Diesel Generators at the new factory in China 2.8 Contracts of Purchase and Sale dated December 29, 1995 with Mr. M.K. Koo regarding a residential property in West Vancouver 2.9 Diagram of the Company's operating subsidiaries and affiliates - (see page five of this Report)
- 55 - EX-2.1 2 TENANCY AGREEMENT DATED SEPTEMBER 13, 1995 1 EXHIBIT 2.1 999 West Hastings Street Vancouver, British Columbia LEASE Landlord: LORD REALTY HOLDINGS LIMITED acting by its attorney in fact, POLARIS REALTY (CANADA) LIMITED Tenant: NAM TAI ELECTRONICS (CANADA) LTD. 2 TABLE OF CONTENTS ARTICLE 1 - BASIC TERMS 1.01 Basic Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2 - PREMISES 2.01 Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 3 - TERM 3.01 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 4 - RENT 4.01 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.02 Adjustment of Rent when Areas are Measured or Changed . . . . . . . . . . . . . . . . . . . . . . 2 4.03 Rent Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 5 -TENANT'S COVENANTS 5.00 Tenant's Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.01 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.02 Permitted Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.03 Waste and Nuisance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.04 Insurance Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.05 Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.06 By-Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.07 Fire Exit Doors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.08 Rules and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.09 Overholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.10 Signs and Directory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.11 Inspection and Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.12 Showing Leased Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE 6 - LANDLORD'S COVENANTS 6.00 Landlord's Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.01 Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.02 Interior Climate Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.03 Elevators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.04 Entrances; Lobbies, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6.05 Washrooms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6.06 Janitor Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6.07 Maintenance of Common Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE 7 - REPAIR AND DAMAGE AND DESTRUCTION 7.01 Landlord's Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.02 Tenant's Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.03 Abatement and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE 8 - TAXES AND OPERATING COSTS 8.01 Landlord's Tax Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8.02 Tenant's Tax Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 8.03 Tenant's Tax Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 8.04 Postponement, etc. of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 8.05 Receipts, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 8.06 Allocation of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 8.07 Operating Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(i) 3 ARTICLE 9 - UTILITIES AND ADDITIONAL SERVICES 9.01 Water and Telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 9.02 Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 9.03 Additional Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 9.04 Alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 10 - LICENSES, ASSIGNMENTS AND SUBLETTINGS 10.01 Licenses, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 10.02 Assignment and Subletting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 10.03 Change in Control of Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 11 - FIXTURES AND IMPROVEMENTS 11.01 Installation of Fixtures and Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 11.02 Liens and Encumbrances on Fixtures and Improvements . . . . . . . . . . . . . . . . . . . . . . . 10 11.03 Removal of Fixtures and Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE 12 - INSURANCE AND LIABILITY 12.01 Landlord's Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 12.02 Tenant's Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 12.03 Limitation of Landlord's Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 12.04 Limitation of Tenant's Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 12.05 Indemnity of Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE 13 - SUBORDINATION, ATTORNNENT, REGISTRATION AND CERTIFICATES 13.00 Tenant's Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 13.01 Sale or Financing of Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 13.02 Subordination and Attornment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 13.03 Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 13.04 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 13.05 Assignment by Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE 14 - OCCURRENCE OF DEFAULT 14.01 Unavoidable Delay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 14.02 No Admission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 14.03 Part Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE 15 - REMEDIES OF LANDLORD AND TENANTS DEFAULT 15.01 Remedying by Landlord, Non-payment and Interest . . . . . . . . . . . . . . . . . . . . . . . . . 14 15.02 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 15.03 Right of Re-entry on Default or Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 15.04 Termination and Re-entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 15.05 Payment of Rent, etc. on Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 15.06 Waiver of Distress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 15.07 Re-letting, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE 16 - EVENTS TERMINATING LEASE 16.01 Cancellation of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 16.02 Prohibited Occupancy, Bankruptcy, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(ii) 4 ARTICLE 17 - MISCELLANEOUS 17.01 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 17.02 Extraneous Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 17.03 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 17.04 Area Determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 17.05 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 17.06 Frustration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 17.07 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 17.08 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 17.09 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 17.10 Net Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 17.11 Special Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE 18 - DEFINITIONS 18.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (a) Additional Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (b) Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (c) Cost of Additional Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 (d) Fair Market Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (e) Insured Damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (f) Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (g) Leased Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (h) Leasehold Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (i) Normal Business Hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (J) Operating Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (k) Operating Cost - fiscal period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (1) Rentable Area - whole floor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (m) Rentable Area - part floor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (n) Service Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (o) Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (p) Tax Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (q) Tenant's Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (r) Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (s) Total Rentable Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SCHEDULES AND APPENDICES - ------------------------ Schedule "A" Outline of Lease Premises Schedule "B" Rules and Regulations Schedule "C" Special Provisions Schedule "D" Option to Renew
(iii) 5 THIS LEASE dated the 13th day of September, 1995 in pursuance of the Land Transfer Form Act is made between the Landlord and the Tenant named herein who, in consideration of the agreements herein contained, covenant and agree as follows: ARTICLE I BASIC TERMS 1.01 The basic terms of this Lease are: (a) (i) Landlord: Lord Realty Holdings Limited, (Registration No. 25475A), acting by its attorney in fact, Polaris Realty (Canada) Limited (ii) Address of Landlord: P.O. Box 12075 555 West Hastings Street Vancouver, British Columbia V6B 4N5 (b) (i) Tenant (legal name): NAM TAI ELECTRONICS (CANADA) LTD. (ii) Address of Tenant: #530 - 999 West Hastings Street Vancouver, B.C. V6C 2W2 (iii) Individual to contact: Mr. M.K. KOO (c) Leased Premises: Suite #530, 999 West Hastings Street, Vancouver British Columbia, comprising approximately 2,700 square feet of rentable Area determined in accordance with sections 18.01(l) and 18.01(m) (d) (i) Term: two (2) years, eleven (11) months and -0- days (ii) Commencement Date: October 1, 1995 (iii) Expiry Date: August 31, 1998
(e) Rent: Year of Term Per Annum Per Month Per S.F. ------------ --------- --------- -------- Oct 1/95 - Aug 31/98 $36,234.00 $3,019.50 $13.42
(f) Additional Charges: The estimated additional charges payable by the Tenant (per sections 8.02(c), 8.07 and 9.02(a)) at the Commencement Date is $36,369.00 per annum payable monthly in advance in the amount of $3,030.75 per month. (g) Permitted Business: a general business office only. (h) Operating Name of Business: NAM TAI ELECTRONICS (CANADA) LTD. (i) Deposit: The Tenant has paid a deposit of $ 13,500.00 to be credited to the rent and additional charges for the first and last months of the Term. 1 6 ARTICLE 2 PREMISES 2.01 PREMISES. In consideration of the rents, covenants and agreements hereinafter reserved and contained on the part of the Tenant to be paid, observed and performed, the Landlord hereby demises and leases to the Tenant the Leased Premises. ARTICLE 3 TERM 3.01 TERM. TO HAVE AND TO HOLD the Leased Premises for the term set out in section 1.01(d)(i) commencing on the Commencement Date set out in section 1.01(d)(ii). ARTICLE 4 RENT 4.01 RENT. YIELDING AND PAYING THEREFOR unto the Landlord, at the office of the Landlord's building manager, or at such other place as the Landlord may direct in writing, during the Term in lawful money of Canada the rent set out in section 1.01(e) in advance on the first day of each and every month during the Term, the first instalment to be paid on or before the Commencement Date. If the Term should commence on a day other than the first, or end on a day other than the last day of the month, the rent for the fraction of a month shall be calculated on a per diem basis at a rent per month equal to one three hundred and sixty-fifth part of the annual rent. 4.02 ADJUSTMENT OF RENT WHEN AREAS ARE MEASURED OR CHANGED. The annual rent set out in section 1.01(e) has been calculated on the basis of the Rentable Area of the Leased Premises being as set out in section 1.01(c) at a rate for each square foot of such Rentable Area determined by dividing such annual rent by the Rentable Area. If the Rentable Area of the Leased Premises was estimated by or on behalf of the Landlord for the purposes of this Lease because the Rentable Area thereof could not be accurately determined prior to the execution of the Lease, or if the Rentable Area of the Leased Premises changes at any time during the Term, then, once the Rentable Area of the Leased Premises can be accurately determined and if the estimate previously made was not correct or has changed, the annual rent and other payments under this Lease base on the Rentable Area shall be adjusted appropriately. 4.03 RENT REVIEW. If annual rent for that portion of the Term following the fifth anniversary of the Commencement Date has not been specifically agreed to by the parties, the annual rent payable under section 1.01(e) hereof shall be reviewed by the parties each fifth anniversary of the Commencement Date to determine if such annual rent then is the Fair Market Rent for the Leased Premises; provided that the annual rent payable by the Tenant for such portion of the Term shall in no event be less than the annual rent payable immediately preceding such anniversary date. The parties shall make bona fide efforts to agree as to the Fair Market Rent for the Leased Premises. If, however, the parties have not agreed as to the amount of such Fair Market Rent by the date one (1) calendar month subsequent to such anniversary date, then such Fair Market Rent shall be determined either: (a) by an arbitrator mutually agreed upon by the parties who shall be a person currently active in the Province of British Columbia as an accredited real estate appraiser having not less than five (5) years experience as an appraiser; or 2 7 (b) if the parties are unable to agree as to an arbitrator pursuant to section 4.03(a), then such Fair Market Rent shall be determined by a single arbitrator in accordance with the provisions of the Commercial Arbitration Act S.B.C. 1986, c. 3 and amendments thereto or legislation in substitution thereof. Until the rent has been determined as herein provided, the Tenant shall continue to pay the monthly rent payable theretofore and upon such determination the Landlord or the Tenant, as the case may be, shall make the appropriate payment to the other together with interest thereon from the date of such fifth anniversary to the date of payment at the rate specified in section 15.01. ARTICLE 5 TENANT'S COVENANTS 5.00 TENANT'S COVENANTS. That the Tenant covenants with the Landlord as follows: 5.01 RENT. To pay Rent. 5.02 Permitted Use. To use the Leased Premises only for the purpose of an office for the conduct of the Tenant's business set forth in section 1.01(g) under the name set forth in section 1.01(h) and not to use or permit to be used the Leased Premises or any part thereof for any other purpose or business. 5.03 WASTE AND NUISANCE. Not to commit or permit any waste or injury to the Leased Premises including the Leasehold Improvements and trade fixtures therein, any overloading of the floors thereof, any nuisance therein or any use or manner of use causing annoyance to other tenants and occupants of the Building. 5.04 INSURANCE RISKS. Not to do, omit to do or permit to be done or omit to be done upon the Leased Premises anything which would cause the Landlord's cost of insurance (whether fire or liability) to be increased (and, without waiving the foregoing prohibition the Landlord may demand, and the Tenant shall pay to the Landlord upon demand, the amount of any such increase of cost caused by anything so done or omitted to be done) or which shall cause any policy of insurance to be subject to cancellation. 5.05 CONDITION. Not to permit the Leased Premises to become untidy, unsightly or hazardous or permit unreasonable quantities of waste or refuse to accumulate therein, and at the end of each business day to leave the Leased Premises in a condition such as to reasonably facilitate the performance of the Landlord's janitor and cleaning services referred to in section 6.06. 5.06 BY-LAWS. To comply at its own expense with all municipal, federal, provincial, sanitary, fire and safety laws, by-laws, regulations and requirements pertaining to the operation and use of the Leased Premises, the condition of the Leasehold Improvements, trade fixtures, furniture and equipment installed by the Tenant therein and the making by the Tenant of any repairs, changes or improvements therein. 5.07 FIRE EXIT DOORS. To permit the installation by the Landlord of all doors in the exterior wall of the Leased Premises necessary to comply with the requirements of any statute, law, by-law, regulation, ordinance, order or regulation referred to in section 5.06, and to permit ingress and egress to and from the Leased Premises by the Landlord or by other tenants of the Landlord or by their respective employees, servants, workmen and invitees, by use of such doors in case of fire or emergency. 5.08 RULES AND REGULATIONS. To observe, and to cause its employees, invitees and others over whom the Tenant can reasonably be expected to exercise control to observe the Rules and Regulations attached as Schedule "B" hereto, and such further and other reasonable rules and regulations and amendments and changes therein as may hereafter be made by the Landlord of which notice in writing shall be given to the Tenant and all such rules and regulations shall be deemed to be incorporated into and form part of this Lease. 3 8 5.09 OVERHOLDING. That if the Tenant shall continue to occupy the Leased Premises after the expiration of this Lease without any further written agreement and without objection by the Landlord, the Tenant shall be a monthly tenant at a monthly rent equal to One Hundred and Fifty Percent (150%) of the monthly rent payable by the Tenant during the last month of the Term and (except as to length of tenancy) on and subject to the provisions and conditions herein set out. 5.10 SIGNS AND DIRECTORY. Not to paint, display, inscribe, place or affix any sign, symbol, notice or lettering of any kind anywhere outside the Leased Premises (whether on the outside or inside of the Building) or within the Leased Premises so as to be visible from the outside of the Leased Premises, with the exception only of a building standard identification sign at or near the entrance of the Leased Premises and a directory listing in the main lobby of the Building, in each case containing only the name of the Tenant, and to be subject to the approval of the Landlord as to design, size and location. Such identification sign and directory listing shall be installed at the expense of the Tenant, and the Landlord reserves the right to install them as an Additional Service. 5.11 INSPECTION AND ACCESS. To permit the Landlord at any time and from time to time to enter and to have its authorized agents, employees and contractors enter the Leased Premises for the purpose of inspection, window cleaning, maintenance, providing janitor service, making repairs, alterations or improvements to the Leased Premises or the Building, or to have access to utilities and services (including underfloor header ducts and access panels, which the Tenant agrees not to obstruct) or to determine the electric light and power consumption by the Tenant in the Leased Premises and the Tenant shall provide free and unhampered access for the purpose, and shall not be entitled to compensation for any inconvenience, nuisance or discomfort caused thereby, but the Landlord in exercising its rights hereunder shall proceed to the extent reasonably possible so as to minimize interference with the Tenant's use and enjoyment of the Leased Premises. 5.12 SHOWING LEASED PREMISES. To permit the Landlord and its authorized agents and employees to show the Leased Premises to prospective tenants during the Normal Business Hours of the last six (6) months of the Term. ARTICLE 6 LANDLORD'S COVENANTS 6.00 LANDLORD'S COVENANTS. That the Landlord covenants with the Tenant as follows: 6.01 QUIET ENJOYMENT. For quiet enjoyment. 6.02 INTERIOR CLIMATE CONTROL. To provide to the Leased Premises during Normal Business Hours, by means of a system for heating and cooling, filtering and circulating air, processed air in such quantities, at such temperatures as shall maintain in the Leased Premises conditions of reasonable temperature and comfort in accordance with good standards of interior climate control generally pertaining at the date of this Lease applicable to normal occupancy of premises for office purposes, but the Landlord shall have no responsibility for any inadequacy of performance of the said system if the Leased Premises depart from the design criteria for such system, namely that the occupancy will not exceed one person for every 100 square feet of floor area, that the electrical power consumed in the Leased Premises for all purposes shall not exceed 3.0 watts per square foot of floor area, that the Tenant shall not have installed partitions or other installations in locations which interfere with the proper operation of the said system, that the window coverings on exterior windows shall be fully closed while such windows are exposed to direct sunlight. If the use of the Leased Premises does not accord with the said design criteria and changes in the system are feasible and desirable to accommodate such use the Landlord may, and at the written request of the Tenant shall, make such changes and the entire expense of such changes will be reimbursed by the Tenant to the Landlord. 6.03 ELEVATORS. Subject to the supervision of the Landlord, to furnish for use by the Tenant and its employees and invitees in common with other persons entitled thereto passenger elevator service to the Leased Premises, and to furnish for the use of the Tenant in common with others entitled thereto at reasonable intervals and at such hours as the Landlord may select, elevator service to the Leased Premises for the carriage of furniture, equipment, 4 9 deliveries and supplies, provided however, that if the elevators shall become inoperative or shall be damaged or destroyed the Landlord shall have a reasonable time within which to repair such damage or replace such elevator and the Landlord shall repair or replace the same as soon as reasonably possible, but shall in no event be liable for indirect or consequential damages or other damages for personal discomfort or illness during such period of repair or replacement. 6.04 ENTRANCES, LOBBIES, ETC. To permit the Tenant and its employees and invitees to have the use during Normal Business Hours in common with others entitled thereto of the common entrances, lobbies, stairways and corridors of the Building giving access to the Leased Premises (subject to the Rules and Regulations referred to in section 5.08 and such other reasonable limitations as the Landlord may from time to time impose). 6.05 WASHROOMS. To permit the Tenant and its employees and invitees in common with others entitled thereto to use the washrooms in the Building on the floor and floors on which the Leased Premises are situate. 6.06 JANITOR SERVICE. To cause when reasonable necessary from time to time the floors and windows of the Leased Premises to be swept and cleaned and the desks, tables and other furniture of the Tenant to be dusted all in keeping with a first-class office building but with the exception of the obligation to cause such work to be done, the Landlord shall not be responsible for any act of omission or commission on the part of the persons employed to perform such work; such work shall be done at the Landlord's direction without interference by the Tenant, its servants or employees. 6.07 MAINTENANCE OF COMMON AREAS. To cause the elevators, common entrances, lobbies, stairways, corridors, washrooms and other parts of the Building from time to time provided for common use and enjoyment to be swept, cleaned or otherwise maintained substantially in keeping with a first-class office building. ARTICLE 7 REPAIR AND DAMAGE AND DESTRUCTION 7.01 LANDLORD'S REPAIRS. The Landlord covenants with the Tenant: (a) to keep in a good and reasonable state of repair, and consistent with the general standards of first-class office buildings in the City of Vancouver, but subject to section 7.03(b): (i) the Building (other than the Leased Premises and premises of other tenants) including the foundation, roof, exterior walls including glass portions thereof, the systems for interior climate control, the elevators, entrances, stairways, corridors and lobbies and washrooms from time to time provided for use in common by the Tenant and other tenants of the Building and the systems provided for bringing utilities to the Leased Premises; (ii) the structural members or elements of the Leased Premises; and (b) to repair defects in construction performed or installations made by the Landlord in the Leased Premises and Insured Damage. 7.02 TENANT'S REPAIRS. The Tenant covenants with the Landlord: (a) to keep in a good and reasonable state of repair and consistent with the general standards of first-class office buildings in the City of Vancouver, but subject to section 7.03(b), the Leased Premises including all Leasehold Improvements and all trade fixtures therein and all glass therein other than glass portions of exterior walls thereof, but with the exception of structural members or elements of the Leased Premises and defects in construction performed or installations made by the Landlord and Insured Damage therein; (b) that the Landlord may enter and view the state of repair, and that the Tenant will repair according to notice in writing, and that the Tenant will leave the Leased Premises in a good and reasonable state of repair, subject always to the exceptions referred to in section 7.02(a); and 5 10 (c) that if any part of the Building including the systems for interior climate control and for the provision of utilities becomes out of repair, damaged or destroyed through the negligence or misuse of the Tenant or its employees, invitees or others over which the Tenant can reasonably be expected to exercise control, the expense of repairs or replacements thereto necessitated thereby shall be reimbursed to the Landlord promptly upon demand. 7.03 ABATEMENT AND TERMINATION. It is agreed between the Landlord and the Tenant that: (a) in the event of damage to the Leased Premises or to the Building and if the damage is such that the Lease Premises or any substantial part thereof is rendered not reasonably capable of use and occupancy by the Tenant for the purposes of its business for any period of time in excess of ten (10) days, then (i) unless the damage was caused by the fault or negligence of the Tenant or its employees, invitees or others under its control, from and after the date of occurrence of the damage and until the Leased Premises are again reasonably capable of use and occupancy as aforesaid, rent shall abate from time to time in proportion to the part or parts of the Leased Premises not reasonably capable of use and occupancy; and (ii) unless this Lease is terminated as hereinafter provided, the Landlord or the Tenant, as the case may be (according to the nature of the damage and their respective obligations to repair as provided in sections 7.01 and 7.02 hereof) shall repair such damage with all reasonable diligence, but to the extent that any part of the Leased Premises is not reasonably capable of such use and occupancy by reason of damage which the Tenant is obligated to repair hereunder, any abatement of rent to which the Tenant is otherwise entitled hereunder shall not extend later than the time by which, in the reasonable opinion of the Landlord, repairs by the Tenant ought to have been completed with reasonable diligence; and (b) if either: (i) the Leased Premises; or (ii) premises whether of the Tenant or other tenants of the Building comprising in the aggregate half or more of the Rentable Area of the Building; are substantially damaged or destroyed by any cause to the extent such that in the reasonable opinion of the Landlord they cannot be repaired or rebuilt within one hundred and eighty (180) days after the occurrence of the damage or destruction, the Landlord or the Tenant may at its option, exercisable by written notice to the other given thirty (30) days after the occurrence of such damage or destruction, terminate this Lease, in which event neither the Landlord nor the Tenant shall be bound to repair as provided in sections 7.01 and 7.02 hereof, and the Tenant shall instead deliver up possession of the Leased Premises to the Landlord with reasonable expedition but in any event within sixty (60) days after delivery of such notice of termination, and rent shall be apportioned and paid to the date upon which possession is so delivered up (but subject to any abatement to which the Tenant may be entitled under section 7.03(a) by reason of the Leased Premises having been rendered in whole or in part not reasonably capable of use and occupancy), but otherwise the Landlord or the Tenant as the case may be (according to the nature of the damage and their respective obligations to repair as provided in sections 7.01 and 7.02) shall repair such damage with such reasonable diligence. ARTICLE 8 TAXES AND OPERATING COSTS 8.01 LANDLORD'S TAX OBLIGATIONS. The Landlord covenants with the Tenant subject to the provisions of section 8.02, to pay promptly when due to the taxing authority or authorities having jurisdiction, all Taxes. 6 11 8.02 TENANT'S TAX OBLIGATIONS. The Tenant covenants with the Landlord: (a) to pay when due, all taxes, business taxes, business licence fees, and other taxes, rates, duties or charges levied, imposed or assessed by lawful authority in respect of the use and occupancy of the Leased Premises by the Tenant, the business or businesses carried on therein, or the equipment, machinery of fixtures brought therein by or belonging to the Tenant, or to anyone occupying the Leased Premises with the Tenant's consent, or from time to time levied, imposed or assessed in the future in lieu thereof, and to pay to the Landlord upon demand the portion of any tax, rate, duty or charge levied or assessed upon the Land and Building that is attributable to any equipment, machinery or fixtures on the Leased Premise which are not the property of the Landlord, or which may be removed by the Tenant; (b) to pay to the federal, provincial or municipal authority imposing the same all service, business transfer, transaction value, ad valorem or other taxes by whatever name called, if any, assessed upon and as a direct result of the payment of rent hereunder as often as such taxes become due and whether or not such taxes are applicable on the date of the execution of this Lease or become applicable thereafter. In the event that such taxes are by statute, by-law or regulation, imposed upon or payable by the Landlord as recipient of the rent, the Tenant shall reimburse the Landlord for the full amount of such taxes within thirty (30) days of such taxes becoming due. (c) to pay promptly to the Landlord when demanded or otherwise due hereunder all Taxes in respect of all Leasehold Improvements in the Leased Premises; (d) to pay to the Landlord in the manner specified in section 8.03 the Tenant's Share of the Tax Cost. 8.03 TENANT'S TAX COST. After the commencement of the Term of this Lease and prior to the commencement of each fiscal period selected by the Landlord thereafter which commences during the Term the Landlord shall estimate the Tenant's Share of any Tax Cost for the ensuing fiscal period or (if applicable) broken portion thereof, as the case may be, to become payable under section 8.02, and notify the tenant in writing of such estimate. The amount so estimated shall be payable in equal monthly instalments in advance over the fiscal period or broken portion of the fiscal period in question, each such instalment being payable on each monthly rental payment date provided in Article 4. When the Tax Cost for the fiscal period or broken portion of the fiscal period in question becomes finally determined the Landlord shall recalculate the same. If the Tenant has overpaid such Tax Cost, the Landlord shall refund any excess paid, but if any balance remains unpaid, the Landlord shall fix monthly instalments for the then remaining balance of such fiscal period or broken portion thereof such that, after giving credit for instalments paid by the Tenant hereunder on the basis of such estimate, the Tenant's entire Tax Cost will have been paid during such fiscal period or broken portion thereof but if for any reason the Tax Cost is not finally determined within such fiscal period or broken portion thereof, the parties shall make the appropriate readjustment when such Tax Cost becomes finally determined. Neither party may claim a readjustment in respect of the Tax Cost based on any error of estimation, determination or calculation thereof unless claimed in writing prior to the expiration of one (1) year after the fiscal period to which the Taxes relate. Any report of the Landlord's auditor as to the Tax Cost shall be conclusive as to the amount thereof for any period to which such report relates. 8.04 POSTPONEMENT, ETC. OF TAXES. The Landlord may postpone payment of any Taxes payable by it pursuant to section 8.01 and the Tenant may postpone payment of any Taxes, rates, duties, levies and assessments payable by it under section 8.02(a) and (b), in each case to the extent permitted by law and if prosecuting in good faith any appeal against the imposition thereof, and provided in the case of a postponement by the Tenant that if the Building or any part thereof or the Landlord shall become liable to assessment, prosecution, fine or other liability the Tenant shall have given security in a form and of an amount satisfactory to the Landlord in respect of such liability and such undertakings as the Landlord may reasonably require to ensure payment thereof. 7 12 8.05 RECEIPTS, ETC. Whenever requested by the Landlord the Tenant will deliver to it receipts for payments of all taxes, rates, duties, levies and assessments payable by the Tenant pursuant to sections 8.02(a) and (b) hereof and furnish such other information in connection therewith as the Landlord may reasonably require. 8.06 ALLOCATION OF TAXES. If a separate allocation of Taxes is not issued by the relevant taxing authority with respect to any Leasehold Improvements, the Landlord or the Tenant may from time to time apply to the taxing authority for a determination of the portion of Taxes attributable to such Leasehold Improvements, which determination shall be conclusive for the purposes of this Article. In the event that no such determination may be obtained from the taxing authority, the Landlord shall establish the portion of Taxes attributable to such Leasehold Improvements using the then current established principles of assessment used by the taxing authority, or such other method which is fair, reasonable and equitable as determined by the Landlord. 8.07 OPERATING COST. During the Term of the Lease the Tenant shall pay to the Landlord in the manner set forth in this section the Tenant's Share of the Operating Cost. Prior to the commencement of the Term of this Lease and the commencement of each fiscal period selected by the Landlord thereafter which commences during the Term the Landlord shall estimate the amount of the Tenant's Share of any Operating Cost for the ensuing fiscal period or, if applicable broken portion thereof, as the case may be, and notify the Tenant in writing of such estimate. The amount so estimated shall be payable in equal monthly instalments in advance over the fiscal period or broken portion thereof in question, each such instalment being payable on each monthly rental payment date provided in Article 4. The Landlord may from time to time alter the fiscal period selected, in which case, and in the case where only a broken portion of a fiscal period is included within the Term, the appropriate adjustment in monthly payments shall be made. From time to time during a fiscal period the Landlord may re-estimate the amount of Operating Cost in which event the Landlord shall notify the Tenant in writing of such re-estimate and fix monthly instalments for the then remaining balance of such fiscal period or broken portion thereof such that, after giving credit for instalments paid by the Tenant on the basis of the previous estimate or estimates, the Operating Cost will have been paid during such fiscal period or broken portion thereof. As soon as practicable after the expiration of each fiscal period the Landlord shall make a final determination of Operating Cost for such fiscal period or (if applicable) broken portion thereof and notify the Tenant, and the parties shall make the appropriate readjustment. Neither party may claim a readjustment in respect of the Operating Cost based upon error of estimation, determination or calculation thereof unless claimed in writing prior to the expiration of one (1) year after the fiscal period to which the Operating Cost relates. Notices by the Landlord stating the amount of any estimate, re-estimate or determination of Operating Cost, or monthly instalments payable need not include particulars of Operating Cost. Any report of the Landlord's auditor as to the Operating Cost shall be conclusive as to the amount thereof for any period to which such report relates. ARTICLE 9 UTILITIES AND ADDITIONAL SERVICES 9.01 WATER AND TELEPHONE. The Landlord shall furnish appropriate ducts for bringing telephone services to the Leased Premises and shall provide hot and cold water to washrooms available for the Tenant's use in common with others entitled thereto. 9.02 ELECTRICITY. The Tenant shall pay throughout the Term promptly to the Landlord when demanded: (a) the cost of electrical light and power supplied to the Leased Premises monthly based on the electric light and power requirements of the Tenant on a pro rata basis as determined from time to time during the Term and billed by the Landlord, provided that the Tenant or a duly authorized representative shall have the right to verify that the method of apportionment used is consistent with the method used for other tenants of the Building; 8 13 (b) the cost of cleaning, maintaining and servicing in all respects all electrical lighting fixtures in the Leased Premises including the cost of replacement of electrical light bulbs, tubes, starters and ballasts used to replace those installed at the commencement of the said Term, such cleaning, maintaining, servicing and replacement shall be within the exclusive right of the Landlord. 9.03 ADDITIONAL SERVICES. The Landlord, if it shall from time to time so elect, shall have the exclusive right, by way of Additional Services, to provide or have its designated agents or contractors provide any janitor or cleaning services to the Leased Premises required by the Tenant which are additional to those required to be provided by the Landlord under section 6.06, including the Additional Services which the Landlord agrees to provide by arrangement and to supervise the moving of furniture or equipment of the Tenant and the making of repairs or alterations conducted within the Leased Premises, and to supervise or make deliveries to the Leased Premises. The cost of Additional Services provided to the Tenant, whether the Landlord shall be obligated hereunder or shall elect to provide them as Additional Services, shall be paid to the Landlord by the Tenant from time to time promptly upon receipt of invoices therefor from the Landlord. Cost of Additional Services charges directly to the Tenant and other tenants shall be credited in computing Operating Cost. 9.04 ALTERATIONS. Where, after substantial completion, of the Building, the Landlord is required by law or a competent authority to make alterations to the Leased Premises, then in each year of the Term after completion of such alterations (but not after the cost thereof has been repaid to the Landlord), the Tenant shall pay to the Landlord ten percent (10%) of the cost to the Landlord of making such alterations, and if the Landlord is required to make similar alterations to other portions or areas of the Building the cost of so doing shall be reasonably apportioned by the Landlord to each of the premises. ARTICLE 10 LICENSES, ASSIGNMENTS AND SUBLETTINGS 10.01 LICENSES, ETC. The Tenant shall not suffer or permit any part of the Leased Premises to be used or occupied by any persons other than the Tenant, any subtenants permitted under section 10.02 and the employees of the Tenant and any such permitted subtenant, or suffer or permit any part of the Leased Premises to be used or occupied by any licensee, franchisee or concessionaire, or suffer or permit any persons to be upon the Leased Premises other than the Tenant, such permitted subtenants and their respective employees, customers and others having lawful business with them. 10.02 ASSIGNMENT AND SUBLETTING. The Tenant shall not assign this Lease or sublet the whole or any part of the Leased Premises, unless (1) it shall have received or procured a bona fide written offer to take an assignment or sublease which is not inconsistent with, and the acceptance of which would not breach any provision of this Lease if this section is complied with and which the Tenant has determined to accept subject to this section being complied with, and (2) it shall have first requested and obtained the consent in writing of the Landlord thereto. Any request for such consent shall be in writing and accompanied by a true copy of such offer, and the Tenant shall furnish to the Landlord all information available to the Tenant and requested by the Landlord as to the responsibility, reputation, financial standing and business of the proposed assignee or subtenant. Within fifteen (15) days after the receipt by the Landlord of such request for consent and of all information which the Landlord shall have requested hereunder (and if no such information has been requested, within fifteen (15) days after receipt of such request for consent) the Landlord shall have the right upon written notice to the Tenant, if the request is to assign this Lease or sublet the whole of the Leased Premises (unless this request is for assignment is for assignment or subletting to an affiliate or associate or subsidiary company of the Tenant and provided the Tenant shall not profit from an increase in the Rent or by cash payment or inducement paid by the Assignee or Sublessee to the Tenant), to cancel and terminate this Lease, or if the request is to sublet a part of the Leased Premises only, to cancel and terminate this Lease with respect to such part in each case of a termination date to be stipulated in the notice of termination which shall not be less than sixty (60) days or more than ninety (90) days following the giving of such notice, and in such event the Tenant shall surrender the whole or part, as the case may be, of the Leased Premises in accordance with such notice and rent shall be apportioned and paid to the date of surrender and, if a part only of the Leased Premises is surrendered, 9 14 rent payable as set forth in section 1.01(e) shall thereafter abate proportionately. If the Landlord shall not exercise the foregoing right of cancellation then the Landlord's consent to the Tenant request for consent to assign or sublet shall not be unreasonably withheld and if such consent shall be given, the Tenant shall assign or sublet, as the case may be, only upon the terms set out in the offer submitted to the Landlord as aforesaid and not otherwise. The Tenant further agrees that if the Landlord consents to any such assignment or subletting, the Tenant shall be responsible for and shall hold the Landlord harmless from any and all capital costs for Leasehold Improvements and all other expenses, costs and charges in respect to or arising out of any such assignment or subletting. Notwithstanding any such consent being given by the Landlord and such assignment or subletting being effected, the Tenant hereunder shall remain bound to the Landlord for the fulfillment of all the terms, covenants, conditions and agreements herein contained during the Term and any Renewal Term. 10.03 CHANGE IN CONTROL OF TENANT. If the Tenant is a private corporation and if by the sale or other disposition of its shares or securities the control or the beneficial ownership of such corporation is changed at any time during the Term of this Lease, such change shall be deemed to be an assignment of this Lease within the meaning of section 10.02. If such control or beneficial ownership is changed without the prior written consent of the Landlord, the Landlord may, at its option, cancel the Lease and the Term hereby granted upon the giving of sixty (60) days notice to the Tenant of its intention to cancel and this Lease and the Term shall thereupon be cancelled. ARTICLE 11 FIXTURES AND IMPROVEMENTS 11.01 INSTALLATION OF FIXTURES AND IMPROVEMENTS. The Tenant will not make, erect, install or alter any Leasehold Improvements or trade fixtures in the Leased Premises without having requested and obtained the Landlord's prior written approval, which the Landlord shall not unreasonably withhold. In making, erecting, installing or altering any Leasehold Improvements or trade fixtures the Tenant shall obtain all required building and occupancy permits and shall not alter or interfere with any installations which have been made by the Landlord without the prior written approval of the Landlord, and in no event shall alter or interfere with window coverings installed by the Landlord on exterior windows. The Tenant's request for any approval hereunder shall be in writing and accompanied by an adequate description of the contemplated work and, where appropriate, working drawings and specifications thereof. Any out of pocket expenses incurred by the Landlord in connection with any such approval shall be deemed incurred by way of Additional Service. All work to be performed in the Leased Premises shall be performed by competent contractors and subcontractors of whom the Landlord shall have approved (such approval not to be unreasonably withheld, but provided that the Landlord may require that the Landlord's contractors and subcontractors be engaged for any mechanical or electrical work) and by workmen whose labor union affiliations are compatible with those of workmen employed by the Landlord and its contractors and subcontractors. All such work shall be subject to inspection by and the reasonable supervision of the Landlord, as an Additional Service, and shall be performed in accordance with any reasonable conditions or regulations imposed by the Landlord and completed in good and workmanlike manner in accordance with the description of the work approved by the Landlord. 11.02 LIENS AND ENCUMBRANCES ON FIXTURES AND IMPROVEMENTS. In connection with the making, erection, installation or alteration of Leasehold Improvements and trade fixtures and all other work or installations made by or for the Tenant in the Leased Premises the Tenant shall comply with all the provisions of The Builders Lien Act and other statutes from time to time applicable thereto (including any provision requiring or enabling the retention of portions of any sums payable by way of hold-backs) and except as to any such hold-back shall promptly pay all accounts relating thereto. The Tenant will not create any mortgage, conditional sale agreement or other encumbrance in respect of its Leasehold Improvements or trade fixtures or permit any such mortgage, conditional sale agreement or other encumbrance to attach to the Leased Premises. If and whenever any mechanics' or other lien for work, labour, services or materials supplied to or for the Tenant or for the cost of which the Tenant may be in any way liable or claims therefor shall arise or be filed or any such mortgage, conditional sale agreement or other encumbrance shall attach, the Tenant shall within twenty (20) days after receipt of notice thereof procure the discharge thereof, including any 10 15 certificate of action registered in respect of any lien, by payment or certificate of action registered in respect of any lien, by payment or giving security or in such other manner as may be required or permitted by law, and failing which the Landlord may in addition to all other remedies hereunder avail itself of its remedy under section 15.01 and may make any payments required to procure the discharge of any such liens or encumbrances, shall be entitled to be reimbursed by the Tenant as provided in section 15.01, and its right to reimbursement shall not be affected or impaired if the Tenant shall then or subsequently establish or claim that any lien or encumbrance so discharged was without merit or excessive or subject to any abatement, set off or defence. This section shall not prevent the Tenant mortgaging or encumbering its chattels, furniture and equipment not of the nature of fixtures. 11.03 REMOVAL OF FIXTURES AND IMPROVEMENTS. All Leasehold Improvements in or upon the Leased Premises shall immediately upon termination of this Lease be and become the Landlord's property without compensation therefor to the Tenant. Except to the extent otherwise expressly agreed by the Landlord in writing, no Leasehold Improvements, trade fixtures, furniture or equipment shall be removed by the Tenant from the Leased Premises either during or at the expiration or sooner termination of the Term except that (1) the Tenant may at the end of the Term remove its trade fixtures, (2) the Tenant shall at the end of the Term remove such of its Leasehold Improvements and trade fixtures as the Landlord shall require to be removed, and (3) the Tenant may remove its furniture and equipment at the end of the Term, and also during the Term in the usual and normal course of its business where such furniture or equipment has become excess for the Tenant's purposes or the Tenant is substituting therefor new furniture and equipment. The Tenant shall, in the case of every removal either during or at the end of the Term, immediately make good any damage caused to the Leased Premises by the installation and removal. ARTICLE 12 INSURANCE AND LIABILITY 12.01 LANDLORD'S INSURANCE. The Landlord shall be deemed to have insured (for which purpose it shall be a co-insurer, if and to the extent that it shall not have insured) the Building and all improvements and installations made by the Landlord in the Leased Premises, except to the extent hereinafter specified, in respect of perils and to amounts and on terms and conditions which from time to time are insurable at a reasonable premium and which are normally insured by reasonably prudent owners of properties similar to the Building, as from time to time determined at reasonable intervals (but which need not be determined more often than annually and shall not be determined less often than every three (3) years) by insurance advisors selected by the Landlord, and whose written opinion shall be conclusive. Upon the request of the Tenant from time to time the Landlord will furnish a statement as to the perils in respect of which and the amounts to which it has insured the Building, and the Tenant shall be entitled at reasonable times upon reasonable notice to the Landlord to inspect copies of the relevant portions of policies of insurance in effect and a copy of any relevant opinions of the Landlord's insurance advisors. 12.02 TENANT'S INSURANCE. The Tenant shall take out and keep in force in respect of any loss which might occur during the Term: (a) comprehensive general liability (including bodily injury, death, personal injury and property damage) insurance on an occurrence or "claims made" form with respect to the business carried on, in or from the Leased Premises and the Tenant's use and occupancy thereof of not less than $3,000,000.00 which insurance shall include the Landlord as a named insured and shall protect the Landlord in respect of claims by the Tenant as if the Landlord were separately insured; and (b) insurance in such amounts as may be reasonably required by the landlord in respect of fire and such other perils, including sprinkler leakage as are from time to time defined in the usual extended coverage endorsement covering the Tenant's trade fixtures and the furniture and equipment of the Tenant and (except as to Insured Damage) all Leasehold Improvements of the Tenant, and which insurance shall include the Landlord as a named insured as the Landlord's interest may appear with respect to the insured Leasehold Improvements and provided that any proceeds recoverable in the event 11 16 of loss to Leasehold Improvements shall be payable to the Landlord but the Landlord agrees to make available such proceeds toward the repair or replacement of the insured property if this Lease is not terminated pursuant to any other provision hereof; and if the Landlord shall require the same from time to time then also: (c) Tenant's fire legal liability insurance in an amount not less than the actual cash value of the Leased Premises; and (d) insurance upon all plate glass in or which forms a boundary of the Leased Premises in an amount sufficient to replace all such glass. All insurance required to be maintained by the Tenant hereunder shall be on terms and with insurers to which the Landlord has no reasonable objection and shall provide that such insurers shall provide to the Landlord thirty (30) days' prior written notice of cancellation or material alteration of such terms. The Tenant shall furnish to the Landlord evidence as to the insurance from time to time required to be effected by the Tenant and its renewal or continuation in force either by means of a certified copy of the policy or policies of its insurance with all amendments and endorsements or a certificate from the Tenant's insurer which shall provide such information as the Landlord may reasonably request. If the Tenant shall fail to take out, renew and keep in force such insurance the Landlord may do so as the agent of the Tenant and the Tenant shall repay to the Landlord any amounts paid by the Landlord as premiums forthwith upon demand. 12.03 LIMITATION OF LANDLORD'S LIABILITY. The Tenant agrees that: (a) the Landlord shall not be liable for any bodily injury or death of, or loss or damage to any property belonging to, the Tenant or its employees, invitees, or licensees or any other person in, on or about the Building unless resulting from the actual fault or negligence of the Landlord, but in no event shall the Landlord be liable: (i) for any damage other than Insured Damage which is caused by steam, water, rain or snow which may leak into, issue or flow from any part of the Building or from the pipes or plumbing works thereof or from any other place or quarter or for any damage caused by or attributable to the condition or arrangement of any electric or other wiring or for any damage caused by anything done or omitted by any other tenant; (ii) for any act or omission (including theft, malfeasance or negligence) on the part of any agent, contractor or person from time to time employed by it to perform janitor services, security services, supervision or any other work in or about the Leased Premises or the Building; or (iii) for loss or damage, however caused, to money, securities, negotiable instruments, papers or other valuables of the Tenant; and (b) the Landlord will have no responsibility or liability for the failure to supply interior climate control or elevator service when prevented from doing so by strikes, the necessity of repairs, any order or regulation of any body having jurisdiction, the failure of the supply of any utility required for the operation thereof or any other cause beyond the Landlord's reasonable control, and shall not be held responsible for any bodily injury, death or damage to property arising from the use of, or any happening in or about, any elevator. 12.04 LIMITATION OF TENANT'S LIABILITY. The Landlord releases the Tenant from all claims or liabilities in respect of any damage which is Insured Damage, to the extent of the cost of repairing such damage, but not from injury, loss or damage which is consequential thereto or which arises therefrom where the Tenant is negligent or otherwise at fault. 12 17 12.05 INDEMNITY OF LANDLORD. Except as provided in section 12.04, the Tenant agrees to indemnify and save harmless the Landlord in respect of all claims for bodily injury or death, property damage or other loss or damage arising from the conduct of any work by or any act or omission of the Tenant or any assignee, subtenant, agent, employee, contractor, invitee or licensee of the Tenant, and in respect of all costs, expenses and liabilities incurred by the Landlord in connection with or arising out of all such claims, including the expenses of any action or proceeding pertaining thereto, and in respect of any loss, costs, expense or damage suffered or incurred by the Landlord arising from any breach by the Tenant of any of its covenants and obligations under this Lease. ARTICLE 13 SUBORDINATION, ATTORNMENT, REGISTRATION AND CERTIFICATES 13.00 TENANT'S COVENANTS. The Tenant agrees with the Landlord that: 13.01 SALE OR FINANCING OF BUILDING. The rights of the Landlord under this Lease may be mortgaged, charged, transferred or assigned to a purchaser or to a mortgagee, or trustee for bond holders and in the event of a sale or of default by the Landlord under any mortgage, trust deed or trust indenture and the purchaser, mortgagee or trustee, as the case may be, duly entering into possession of the Building or the Leased Premises, the Tenant agrees to attorn to and become the tenant of such purchaser, mortgagee or trustee under the terms of this Lease. 13.02 SUBORDINATION AND ATTORNMENT. If required by any mortgagee or the holder of any trust deeds or trust indentures, this Lease and all rights of the Tenant hereunder shall be subject and subordinate to all mortgages, trust deeds or trust indentures now or hereafter existing which may now or hereafter affect the Building and to all renewals, modifications, consolidations, replacements and extensions thereof; provided that the Tenant whenever required by any mortgagee (including any trustee under a trust deed or trust indenture) shall attorn to such mortgagee as the tenant upon all of the terms of this Lease. The Tenant agrees to execute promptly whenever requested by the Landlord or by such mortgagee an instrument of subordination or attornment, as the case may be, as may be required of it. 13.03 REGISTRATION. The Tenant covenants and agrees with the Landlord that the Landlord shall not be obliged to provide this Lease in registrable form and the Tenant agrees not to register this Lease, provided that the Tenant at the request of the Landlord and at the cost and expense of the Tenant, will cause this Lease to be registered in the Land Title Office in the city in which title to the Leased Premises is registered. Notwithstanding the provisions of section 13.02, in the event the Landlord requires this Lease to be registered in priority to any mortgage, trust deed or trust indenture which may now or any time hereafter affect in whole or in part the Leased Premises or the Building and whether or not any such mortgage, trust deed or trust indenture shall affect only the Leased Premises or the Building or shall be a blanket mortgage, trust deed or trust indenture affecting other premises as well, the Tenant covenants and agrees with the Landlord that the Tenant shall execute promptly upon request by the Landlord any certificate, priority agreement, or other instrument which may from time to time be requested to give effect thereto. 13.04 CERTIFICATES. The Tenant agrees with the Landlord that the Tenant shall promptly whenever requested by the Landlord from time to time execute and deliver to the Landlord (and if required by the Landlord, to any mortgagee (including any trustee under a trust deed or trust indenture) or purchaser designated by the Landlord) a certificate in writing as to the then status of this Lease, including as to whether it is in full force and effect, is modified or unmodified, confirming the rental payable hereunder and the state of the accounts between the Landlord and Tenant, the existence or non-existence of defaults, and any other matter pertaining to this Lease as to which the Landlord shall request a certificate. 13.05 ASSIGNMENT BY LANDLORD. In the event of the sale by the Landlord of the Building or a portion thereof containing the Leased Premises or the assignment by the Landlord of this Lease or any interest of the Landlord hereunder, and to the extent that such purchaser or assignee has assumed the covenants and obligations of the Landlord hereunder, the Landlord shall, without further written agreement, be freed and relieved of liability upon such covenants and obligations. 13 18 ARTICLE 14 OCCURRENCE OF DEFAULT 14.01 UNAVOIDABLE DELAY. Except as herein otherwise expressly provided, if and whenever and to the extent that either the Landlord or the Tenant shall be prevented, delayed or restricted in the fulfillment of any obligations hereunder in respect of the supply or provision of any service or utility, the making of any repair, the doing of any work or any other thing (other than the payment of rent or other moneys due) by reason of strikes or work stoppages, or being unable to obtain any material, service, utility or labour required to fulfil such obligation or by reason of any statute, law or regulation of or inability to obtain any permission from any governmental authority having lawful jurisdiction preventing, delaying or restricting such fulfillment, or by reason of other unavoidable occurrence, the time for fulfillment of such obligation shall be extended during the period in which such circumstance operates to prevent, delay or restrict the fulfillment thereof, and the other party to this Lease shall not be entitled to compensation for any inconvenience, nuisance or discomfort thereby occasioned; but nevertheless the Landlord will use its best efforts to maintain services essential to the use and enjoyment of the Leased Premises. 14.02 NO ADMISSION. The acceptance of any rent from or the performance of any obligation hereunder by a person other than the Tenant shall not be construed as an admission by the Landlord of any right, title or interest of such personas a subtenant, assignee, transferee or otherwise in the place and stead of the Tenant. 14.03 PART PAYMENT. The acceptance by the Landlord of a part payment of any sums required to be paid hereunder shall not constitute waiver or release of the right of the Landlord to payment in full of such sums. ARTICLE 15 REMEDIES OF LANDLORD AND TENANT'S DEFAULT 15.01 REMEDYING BY LANDLORD, NON-PAYMENT AND INTEREST. In addition to all the rights and remedies of the Landlord available to it in the event of any default hereunder by the Tenant either by any other provision of this Lease or by statute or the general law, the Landlord: (a) shall have the right at all times to remedy or attempt to remedy any the Tenant, and in so doing may make any payments due or be due by the Tenant to third parties and may enter upon Premises to do any work or other things therein and in all expenses of the Landlord in remedying or attempting such default shall be payable by the Tenant to the Landlord forthwith upon demand; and (b) shall have the same rights and remedies in the event of any nonpayment by the Tenant of any amounts payable by the Tenant under any provision of this Lease as in the case of non-payment of rent. If the Tenant shall fail to pay any rent or other amount from time to time payable by it to the Landlord hereunder promptly when due, then the Tenant shall pay interest thereon at a rate of three percent (3%) per annum in excess of the rate of interest published from time to time by the main branch in Vancouver, British Columbia, of the Landlord's bank, as its reference rate for calculating interest on commercial loans of Canadian dollars and referred to by such bank as its prime rate, from the date upon which the same was due until actual payment thereof. Any interest payable under this section shall be payable on the first day of each month and all arrears of interest shall bear interest at the same rate. 15.02 REMEDIES CUMULATIVE. The Landlord may from time to time resort to any or all of the rights and remedies available to it in the event of any default hereunder by the Tenant, either by any provision of this Lease or by statute or the general law, all of which rights and remedies are intended to be cumulative and not alternative, and the express provisions hereunder as to certain rights and remedies are not to be interpreted as excluding any other or additional rights and remedies available to the Landlord by statute or general law. 14 19 15.03 RIGHT OF RE-ENTRY ON DEFAULT OR TERMINATION. Provided and it is expressly agreed that if and whenever the rent hereby reserved or other monies payable by the Tenant or any part thereof, whether lawfully demanded or not, are unpaid and the Tenant shall have failed to pay such rent or other monies within five (5) business days after the Landlord shall have given to the Tenant notice requiring such payment, or if the Tenant shall breach or fail to observe and perform any of the covenants, agreements, provisos, conditions, rules or regulations and other obligations on the part of the Tenant to be kept, observed or performed hereunder, or if this Lease shall have become terminated pursuant to any provision hereof, or if the Landlord shall have become entitled to terminate this Lease and shall have given notice terminating it pursuant to any provision hereof, then and in every such case it shall be lawful for the Landlord thereafter to enter into and upon the Leased Premises or any part thereof in the name of the whole and the same to have again, repossess and enjoy as of its former estate, anything in this Lease contained to the contrary notwithstanding. 15.04 TERMINATION AND RE-ENTRY. If and whenever the Landlord becomes entitled to re-enter upon the Leased Premises under any provision of this Lease, the Landlord, in addition to all other rights and remedies, shall have the right to terminate this Lease forthwith by leaving upon the Leased Premises notice in writing of such termination. 15.05 PAYMENT OF RENT, ETC. ON TERMINATION. Upon the giving by the Landlord of a notice in writing terminating this Lease, whether pursuant to this or any other provision of this Lease, this Lease and the Term shall terminate, rent and any other payments for which the Tenant is liable under this Lease shall be computed, apportioned and paid in full to the date of such termination, and the Tenant shall immediately deliver up possession of the Leased Premises to the Landlord, and the Landlord may re-enter and take possession of them. 15.06 WAIVER OF DISTRESS. The Tenant waives and renounces the benefit of any present or future statute taking away or limiting the Landlord's right of distress and covenants and agrees that notwithstanding any such statute none of the goods and chattels of the Tenant on the Leased Premises at any time during the Term shall be exempt for levy by distress for rent in arrears. The Tenant will not sell, dispose of or remove any of the fixtures, goods or chattels of the Tenant from or out of the Leased Premises during the Term without the consent of the Landlord, unless the Tenant is substituting new fixtures, goods or chattels of equal value or is bona fide disposing of individual items which have become excess for the Tenant's purposes; and the Tenant will be the owner of its fixtures, good and chattels and will not permit them to become subject to any lien, mortgage, charge or encumbrance. 15.07 RE-LETTING, ETC. Whenever the Landlord becomes entitled to re-enter upon the Leased Premises under any provision of this Lease the Landlord in addition to all other rights it may have shall have the right as agent of the Tenant to enter the Leased Premises and re-let them and to receive the rent therefor and as the agent of the Tenant to take possession of any furniture or other property thereon and to sell the same at public or private sale without notice and to apply the proceeds thereof and any rent derived from re-letting the Leased Premises upon account of the rent due and to become due under this Lease and the Tenant shall be liable to the Landlord for the deficiency, if any. ARTICLE 16 EVENTS TERMINATING LEASE 16.01 CANCELLATION OF INSURANCE. If any policy of insurance upon the Building from time to time effected by the Landlord shall be cancelled or about to be cancelled by the insurer by reason of the use or occupation of the Leased Premises by the Tenant or any assignee, subtenant or licensee of the Tenant or anyone permitted by the Tenant to be upon the Leased Premises and the Tenant after receipt of notice in writing from the Landlord shall have failed to take such immediate steps in respect of such use or occupation as shall enable the Landlord to reinstate or avoid cancellation of (as the case may be) such policy of insurance, the Landlord may at its option terminate the Lease by leaving upon the Leased Premises notice in writing of such termination. 15 20 16.02 PROHIBITED OCCUPANCY, BANKRUPTCY, ETC. In case without the written consent of the Landlord the Leased Premises shall be used by any other persons than the Tenant or its permitted assigns or subtenants or for any purpose other than that for which they were leased, or occupied by any persons whose occupancy is prohibited by this Lease, or if the Leased Premises shall be vacated or abandoned, or remain unoccupied for fifteen (15) days or more while capable of being occupied, or if the Term or any of the goods and chattels of the Tenant shall at any time be seized in execution or attachment, or if the Tenant shall make any assignment for the benefit of creditors or any bulk sale, become bankrupt or insolvent or take the benefit of any statute now or hereafter in force for bankrupt or insolvent debtors or (if a corporation) shall take any steps or suffer any order to be made for its winding-up or other termination of its corporate existence, then in any such case the Landlord may at its option terminate this Lease by leaving upon the Leased Premises notice in writing of such termination and thereupon, in addition to the payment by the Tenant of rent and other payments for which the Tenant is liable under this Lease, rent for the current month and the next ensuing three (3) months' rent shall immediately become due and be paid by the Tenant. ARTICLE 17 MISCELLANEOUS 17.01 NOTICES. Any notice required or contemplated by any provision of this Lease shall be given in writing, and if to the Landlord, either delivered to an executive officer of the Landlord or mailed by prepaid registered mail addressed to the Landlord at the address set out in section 1.01(a); and if to the Tenant, either delivered to the Tenant personally (or to a partner or officer of the Tenant if the Tenant is a firm or corporation) or mailed by prepaid registered mail addressed to the Tenant at the address set out in section 1.01(b). At the option of the Landlord any notice may be delivered to the Tenant at the Leased Premises. Every such notice shall be deemed to have been given when delivered or, if mailed as aforesaid upon the day when it was mailed in Canada. The Landlord may from time to time by notice in writing to the Tenant designate another address in Canada as the address to which notices are to be mailed to it. 17.02 EXTRANEOUS AGREEMENTS. The Tenant acknowledges that there are no covenants, representations warranties, agreements or conditions expressed or implied relating to this Lease or the Leased Premises save as expressly set out in this Lease and in any agreement to lease in writing between the Landlord and the Tenant pursuant to which this Lease has been executed. This Lease may not be modified except by an agreement in writing executed by the Landlord and the Tenant. 17.03 TIME OF ESSENCE. Time shall be of the essence of this Lease. 17.04 AREA DETERMINATION. In the event that any calculation or determination by the Landlord of the Rentable Area of any premises (including the Leased Premises) or the Building is disputed or called into question, it shall be calculated or determined by the Landlord's architect or surveyor from time to time appointed for the purpose, whose certificate shall be conclusive. 17.05 SUCCESSORS AND ASSIGNS. This Lease and everything herein contained shall enure to the benefit of and be binding upon the successors and assigns of the Landlord and the heirs, executors and administrators and the permitted successors and assigns of the Tenant. References to the Tenant shall be read with such changes in gender as may be appropriate, depending upon whether the Tenant is a male or female person or a firm or corporation, and if the Tenant is more than one person or entity, the covenants of the Tenant shall be deemed joint and several. 17.06 FRUSTRATION. The Landlord and the Tenant agree that notwithstanding the occurrence or existence of any event or circumstance or the non-occurrence of any event or circumstance and so often and for so long as the same may occur or continue which, but for this section, would frustrate or void this Lease, the obligations and liabilities of the Tenant hereunder shall continue in full force and effect as if such event or circumstance has not occurred or existed. 16 21 17.07 WAIVER. No condoning, excusing or overlooking by the Landlord or Tenant of any default, breach or non-observance by the Tenant or the Landlord at any time or times in respect of any covenant, proviso or condition herein contained shall operate as a waiver of the Landlord's or the Tenant's rights hereunder in respect of any continuing or subsequent default, breach or non-observance or so as to defeat or affect in any way the rights of the Landlord or the Tenant herein in respect of any such continuing or subsequent default or breach and no waiver shall be inferred from or implied by anything done or omitted by the Landlord or the Tenant save only express waiver in writing. 17.08 GOVERNING LAW. This Lease shall be governed by and construed in accordance with the laws of the Province of British Columbia. The Landlord and the Tenant agree that all of the provisions of this Lease are to be construed as covenants and agreements as though the words importing such covenants and agreements were used in each separate section hereof. Should any provision or provisions of this Lease be illegal or not enforceable, it or they shall be considered separate and severable from the Lease and its remaining provisions shall remain in force and be binding upon the parties hereto as though the said provision or provisions had never been included. 17.09 CAPTIONS. The captions appearing in this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease or of any provision thereof. 17.10 NET LEASE. The Tenant acknowledges and agrees that it is intended that this Lease shall be a completely carefree net lease for the Landlord except as shall be otherwise provided in the specific provisions contained in this Lease, and that the Landlord shall not be responsible during the Term for any costs, charges, expenses and outlays of any nature whatsoever arising from or relating to the Leased Premises, and the Tenant, except as shall be otherwise provided in the specific provisions contained in this Lease, shall pay all charges, impositions and costs of every nature and kind relating to the Leased Premises whether or not referred to herein and whether or not within the contemplation of the Landlord or the Tenant and the Tenant covenants with the Landlord accordingly. 17.11 SPECIAL PROVISIONS. If there is a Schedule "C" to this Lease the parties agree to each of its provisions. ARTICLE 18 DEFINITIONS 18.01 DEFINITIONS. In this Lease the following expressions shall have the following meanings: (a) "Additional Service" or "Additional Services" means the services and supervision supplied by the Landlord and referred to in section 9.03 or in any other provision hereof as Additional Services, and any other services which from time to time the Landlord supplies to the Tenant and which are additional to the janitor and cleaning and to other services which the Landlord has agreed to supply pursuant to the provisions of this Lease and to like provisions of other leases of the Building or may elect to supply as included within the standard level of service available to tenants generally and includes janitor and cleaning services in addition to those normally supplied, the provision of labour and supervision in connection with deliveries and supervision in connection with the moving of any furniture or equipment of any tenant and the making of any repairs or alterations by any tenant and maintenance or other services not normally furnished to tenants generally; (b) "Building" means that certain office building of approximately nineteen storeys located on the Land; (c) "Cost of Additional Services" shall mean in the case of Additional Services provided by the Landlord a reasonable charge made therefor by the Landlord which shall not exceed the cost of obtaining such services from independent contractors and in the case of Additional Services provided by independent contractors the Landlord's total cost of providing Additional Services to the Tenant including the cost of all labour (including salaries, wages and fringe benefits) and materials and other direct expenses incurred, the cost of supervision and other indirect expenses capable of being allocated 17 22 thereto (such allocation to be made upon a reasonable basis) and all other out-of-pocket expenses made in connection therewith including amounts paid to independent contractors plus an amount equal to ten percent (10%) thereof. A report of the Landlord's auditor or other licensed public accountant appointed by the Landlord for the purpose as to the amount of any Cost of Additional Services shall be conclusive; (d) "Fair Market Rent" means that rent that would be paid for leases of similar duration for office space similar to the Leased Premises in office buildings of similar age, class, size, amenities and leasehold improvements between persons dealing in good faith and at arm's length. (e) "Insured Damage" means that part of any damage occurring to the Leased Premises of which the entire cost of repair is actually recoverable by the Landlord under a policy of insurance in respect of fire and other perils from time to time effected by the Landlord, or, if and to the extent that the Landlord has not insured or is deemed to be a co-insurer or self-insurer pursuant to section 12.01, would have been recoverable had the Landlord effected insurance in respect of perils and to amounts and on terms of which it is deemed to be insured; (f) "Land" means all and singular those certain parcels or tracts of land, situate, lying and being In the City of Vancouver, Province of British Columbia, more particularly described as: Lot I Block 16 District Lot 541 Plan 17421 New Westminster District (g) "Leased Premises" means that portion of the Building set out in section 1.01(c), and shown outlined in red on the Plan attached as Schedule "A" hereto. The exterior face of the Building and any space in the Leased Premises used for stairways or passageways to other premises, stacks, shafts, pipes, conduits, ducts or other building facilities, heating, electrical, plumbing, air conditioning and other systems in the Building are expressly excluded from the Leased Premises; (h) "Leasehold Improvements" means all fixtures, improvements, installations, alterations and additions from time to time made, erected or installed in the Leased Premises or by other tenants in other premises with the exception of trade fixtures and furniture and equipment not of the nature of fixtures, but includes all partitions however fixed (including moveable partitions) and includes all wall-to-wall carpeting with the exception of such carpeting where laid over vinyl tile or other finished floor and affixed so as to be readily removable without damage; (i) "Normal Business Hours" means the hours from 8:00 a.m. to 6:00 p.m Monday to Friday, inclusive, of each week, and the hours from 8:00 a.m. to 1:00 p.m. Saturdays, holidays excepted; (j) "Operating Cost" means the total of all expenses, without duplication, incurred in the complete maintenance and operation of the Building and the Land, whether incurred by or on behalf of any owner or owners of parts of or interests in the Building and the Land with whom the Landlord may from time to time have agreements for the pooling or sharing of costs or by or on behalf of lessees of space in the Building with whom the Landlord may from time to time have agreement whereby in respect of their premises such lessees perform any cleaning, maintenance or other work or services usually performed by the Landlord, and which expenses if directly incurred by the Landlord would have been included in Operating Cost. If at any time during any fiscal period the Building shall be less than ninety-five percent (95%) occupied by tenants, the Landlord shall have the right to adjust any cost incurred in the Building that is 18 23 related to tenant occupancy so that the Landlord will fully recover its expenditure and Operating Cost for such fiscal period shall be deemed to be the amount of Operating Cost which would have been incurred if the Building had been ninety-five percent (95%) occupied by tenants during the whole of the fiscal period. Operating Cost (without limiting the generality of the foregoing): (i) shall include (but subject to certain deductions as hereinafter provided) the cost of providing complete cleaning, janitor, supervisory and all maintenance services, the cost of operating elevators, the cost of heating, cooling and ventilating all space including both rentable and non-rentable areas, the cost of providing hot and cold water, electricity (including lighting), telephone and other utilities and services to both rentable and non-rentable areas, the cost of all repairs including repairs to the Building or services including elevators, the cost of window cleaning and providing security and supervision, the costs of all insurance for liability or fire or other casualties (and if the Landlord shall elect in whole or in part to self-insure, the amount of reasonable contingency reserves not exceeding the amount of premiums which would otherwise have been incurred in respect of the risk undertaken), accounting costs incurred in connection with maintenance and operation including computations required for the imposition of charges to tenants and audit charges required to be incurred for the conclusive determination of any costs hereunder, and the reasonable rental value (having regard to the rentals prevailing from time to time for similar space) of space utilized by the Landlord in connection with the operation or maintenance of the Building and the Land, the amount of all salaries, wages and fringe benefits paid to employees engaged in the maintenance or operation of the Building and the Land, amounts paid to independent contractors for any services in connection with such maintenance or operation, the cost of direct supervision and of management and other indirect expenses to the extent allocable to the maintenance and operation of the Building and the Land, the cost to the Landlord of making a capital improvement resulting in the reduction of the Operating Cost, the cost of any management fees and managing agent's fees and all other expenses of every nature incurred in connection with the maintenance and operation of the Building and the Land; (ii) shall exclude Taxes, debt service, depreciation expenses properly chargeable to capital account (except capital expenditures that are made by the Landlord to reduce Operating Cost), costs determined by the Landlord from time to time to be fairly allocable to the correction of construction faults or initial maladjustments in operating equipment and all management cost not allocable to the actual maintenance and operation of the Building (such as in connection with leasing and rental advertising). In computing Operating Cost there shall be credited as a deduction the amounts of proceeds of insurance relating to Insured Damage and other damage actually recovered by the Landlord (or if the Landlord is deemed to self-insure, a corresponding application of reserves) applicable to such damage, recovery from tenants of the costs of electricity and light bulb and tube and ballast replacement, in each case to the extent that the cost thereof was included therein. Any expenses not directly incurred by the Landlord but which are included in the Operating Cost may be estimated by the Landlord on whatever reasonable basis the Landlord may select if and to the extent that the Landlord cannot ascertain the actual amount of such expenses from the owners or lessees who incurred them. Any report of the Landlord's auditor or other licensed public accountant appointed by the Landlord for the purpose shall be conclusive as to the amount of Operating Costs for any period to which such report relates; (k) "Operating Cost" in any fiscal period means an amount equal to the aggregate of all Operating Cost for such fiscal period; 19 24 (l) "Rentable Area", in the case of a whole floor of the Building, means all area within the outside walls and shall be computed by measuring to the inside surface of the glass outer Building walls without deduction for columns and projections necessary for the Building, and shall include the Service Areas serving the floor, but shall not include stairs and elevator shafts supplied by the Landlord for use in common with other tenants and flues, stacks, pipe shafts and vertical ducts with their enclosing walls; (m) "Rentable Area", in the case of part of a floor of the Building, means the area occupied, plus an amount equal to the product of the fraction having as its numerator the Rentable Area contained in the Leased Premises on such floor (exclusive of such fraction of the total area of the Service Areas) and as its denominator the sum of the Rentable Area of such floor, multiplied by the total area of Service Areas serving such floor, and shall be computed by measuring from the inside surface of the glass outer Building walls to the office side of corridors or other permanent partitions and to the centre of partitions which separate the area occupied from adjoining Rentable Areas without deduction for columns and projections necessary to the Building, but shall not include stairs and elevator shafts supplied by the Landlord for use in common with other tenants and flues, stacks, pipe shafts or vertical ducts within their enclosed walls within the area occupied; (n) "Service Areas" shall mean the area of corridors, elevator lobbies, service elevator lobbies, washrooms, air-cooling rooms, fan rooms, janitor's closets, telephone and electrical closets and other closets on serving the Leased Premises and other premises on a floor should the floor be a multiple tenant floor; (o) "Taxes" means all taxes, rates, duties, levies and assessments whatsoever, whether municipal, parliamentary or otherwise, levied, imposed or assessed against the Building, the Land and the rents payable to the Landlord by tenants of the building or upon the Landlord in respect of the Building, the Land, such rents or the rental of space in the Building to such tenants or from time to time levied, imposed or assessed in the future in lieu thereof, including those levied, imposed or assessed for education, schools and local improvements, and including all costs and expenses (including legal and other professional fees and interest and penalties on deferred payments) incurred by the Landlord in good faith in contesting, resisting or appealing any taxes, rates, duties, levies or assessments, but excluding taxes and license fees in respect of any business carried on by tenants and occupants of the Building (including the Landlord) and income or profits taxes upon the income of the Landlord to the extent such taxes are not levied in lieu of taxes, rate, duties, levies and assessments against the Building or the Land or upon the Landlord in respect thereof and shall also include any and all taxes which may in future be levied in lieu of taxes as hereinbefore defined; (p) "Tax Cost" for any fiscal period means an amount equal to the aggregate of all Taxes for such fiscal period; (q) "Tenant's Share" means the fraction which has as its numerator the Rentable Area of the Leased Premises and its denominator the Total Rentable Area; (r) "Term" means the term of this Lease set forth in section 1.01(d)(i) and any renewal or extension thereof and any period of permitted overholding; (s) "Total Rentable Area" shall mean the total Rentable Area of the Building, whether rented or not, calculated as if the Building were entirely occupied by tenants renting whole floors. The lobby and entrances on the ground floor and subservice floors used in common by tenants, mechanical equipment areas and areas rented or to be rented for automobile parking or for storage shall be excluded from the foregoing calculations. The calculation of the Total Rentable Area, whether rented or not, shall be determined upon completion of the Building and shall be adjusted from time to time to give effect to any structural or fractional change affecting the same. 20 25 IN WITNESS WHEREOF the Landlord and the Tenant have executed this Lease the day and year first above written. LORD REALTY HOLDING LIMITED, ) acting by its attorney in ) fact, POLARIS REALTY (CANADA) ) LIMITED, whose common seal ) was affixed in the presence ) of: ) ) [SIG] ) - ------------------------------ ) Title: ) ------------------------ ) ) C/S [SIG] ) - ------------------------------ ) Title: Jon Hall Vice President ) Western Region THE COMMON SEAL of the ) TENANT was affixed in the ) presence of: ) ) [SIG] ) - ------------------------------- ) Title: President ) ) - ------------------------------- ) C/S Title: ) ------------------------- ) 21 26 SCHEDULE "A" PLAN OF LEASE AREA OF THE 5th FLOOR OF THE "B.C"E.D. CENTRE" LOCATED AT 999 W. HASTINGS ST., VANCOUVER, B.C. [FLOOR LAYOUT] 27 SCHEDULE "B" TO LEASE RULES AND REGULATIONS The Tenant shall observe the following Rules and Regulations (as amended, modified or supplemented from time to time by the Landlord as provided in the Lease): 1. The Tenant shall not use or permit the use of the Leased Premises in such manner as to create any objectionable noises, odours or other nuisance or hazard, or breach any applicable provisions of municipal by-law or other lawful requirements applicable thereto or any requirements of the Landlord's insurers, shall not permit the Leased Premises to be used for cooking (except with the Landlord's prior written consent) or for sleeping, shall keep the Leased Premises tidy and free from rubbish, shall deposit rubbish in receptacles which are either designated or clearly intended for waste and shall leave the Leased Premises at the end of each business day in a condition such as to facilitate the performance of the Landlord's janitor services in the Leased Premises. 2. The Tenant shall not abuse, misuse or damage the Leased Premises or any of the improvements or facilities therein, and in particular shall not deposit rubbish in any plumbing apparatus or use it for other than purposes for which it is intended, and shall not deface or mark any walls or other parts of the Leased Premises. 3. The Tenant shall not perform, patronize or (to the extent under its control) permit any canvassing, soliciting or peddling in the Building, shall not install in the Leased Premises any machines vending or dispensing refreshments or merchandise and shall not permit food or beverages to be brought to the Leased premises except by such means, at such times and by such persons as have been authorized by the Landlord. 4. The entrances, lobbies, elevators, staircases and other facilities of the Building are for use only for access to the Leased Premises and other parts of the Building and the Tenant shall not obstruct or misuse such facilities or permit them to be obstructed or misused by its agents, employees, invitees or others under its control. 5. No safe or heavy office equipment shall be moved by or for the Tenant unless the consent of the Landlord is first obtained and unless all due care is taken. Such equipment shall be moved upon the appropriate steelbearing plates, skids or platforms and subject to the Landlord's direction, and at such times, by such means and by such persons as the Landlord shall have approved. No furniture, freight or bulky matter of any description shall be moved in or out of the Leased Premises or carried in the elevators except during such hours as the Landlord shall have approved. Hand trucks and similar appliances shall be equipped with rubber tires and other safeguards approved by the Landlord, and shall be used only by prior arrangement with the Landlord. 6. The Tenant shall permit and facilitate the entry of the Landlord, or those designated by it, into the Leased Premises for the purpose of inspection, repair, window cleaning and the performance of other janitor services, and shall not permit access to main header ducts, janitor and electrical closets and other necessary means of access to mechanical, electrical and other facilities to be obstructed by the placement of furniture or otherwise. The Tenant shall not place any additional locks or other security devices upon any doors of the Lease Premises without the prior written approval of the Landlord and subject to any conditions imposed by the Landlord for the maintenance of necessary access. 7. The Landlord may require that all or any persons entering and leaving the Building at any time other than the Normal Business Hours satisfactorily identify themselves and register in books kept for the purpose and may prevent any person from entering the Leased Premises unless provided with a key thereto and a pass or other authorization from the Tenant in a form satisfactory to the Landlord and may prevent any person removing any goods therefrom without written authorization. 8. The Tenant shall refer to the Building only by the name from time to time designated by the Landlord for it and shall use such name only for the business address of the Leased Premises and not for any promotion or other purpose. 28 9. The Tenant shall not interfere with window coverings installed upon exterior windows, and shall close or (if window coverings are remotely controlled) permit to be closed such window coverings during such hours from dusk to dawn as the Landlord may require, and shall not install or operate any interior drapes installed by the Tenant so as to interfere with the exterior appearance of the Building. The foregoing Rules and Regulations, as from time to time amended, are not necessarily of uniform application, but may be waived in whole or in part in respect of other tenants without affecting their enforceability with respect to the Tenant and the Leased Premises, and may be waived in whole or in part with respect to the Leased Premises without waiving them as to future application to the Leased Premises, and the imposition of such Rules and Regulations shall not create or imply an obligation of the Landlord to enforce them or create any liability of the Landlord for their non-enforcement. 29 SCHEDULE "C" TO LEASE SPECIAL PROVISIONS FREE BASIC RENT The Tenant shall have a Free Basic Rent period during the first two (2) months from the Commencement Date of this Lease. During this period the Tenant shall pay to the Landlord its Proportionate Share of Operating Costs and Property Taxes and abide by all other term of this Lease. EARLY ACCESS For the purposes of planning and constructing of its Leasehold Improvements, the Tenant shall have early access to the Leased Premises one (1) month prior to the Commencement Date. During this period the Tenant shall not be obligated to pay any Basic Rent or Additional Rent, but shall abide by ALL other terms of this Lease. LEASEHOLD IMPROVEMENTS The Tenant shall be responsible for providing their own leasehold improvements, including designer fees, architectural inspection fees, demolition and construction costs and signage, ALL in keeping with the Landlord's Tenant Guidelines and to the prior approval of the Landlord. 30 SCHEDULE "D" TO LEASE OPTION TO RENEW 1. Provided that the Tenant shall not be in default under any of the covenants or conditions of this Lease, the Landlord hereby grants to the Tenant a right of renewal, exercisable by the Tenant giving written notice to the Landlord not less than six (6) months and not more than nine (9) months prior to the expiration of the Term, to renew the Term of this Lease for a further period of three (3) years (in this Lease called the "Renewal Term"). 2. There shall be no further right of renewal beyond the Renewal Term. 3. The renewal lease shall contain the same covenants, conditions and agreements as are contained in this Lease, except: (a) the right of renewal already exercised shall be omitted; (b) any section or clause of this Lease which requires revision to state correctly the manner in which it is to be applied during the Renewal Term shall be so revised; and (c) Rent for the Renewal Term shall be determined as provided in paragraph 4 hereof. 4. The Rent payable with respect to the Renewal Term shall be the greater of: (a) the Rent payable during the final year of this Lease: or (b) the Fair Market Rent (as defined in Article 18, Section 18.01 (d)) for the Leased Premises as at the commencement date of the Renewal Term. 5. The parties shall make bona fide efforts to agree as to the Fair Market Rent with respect to the Leased Premises as at the commencement date of the Renewal Term. If, however, the parties have not agreed as to the amount of rent by the sixtieth (60th) day prior to the commencement of the Renewal Term, then such rent shall be determined either: (a) by an arbitrator mutually agreed upon by the parties who shall be a person currently active in the Province of British Columbia as an Accredited Real Estate appraiser having not less than five years experience as an appraiser; or (b) if the parties are unable to agree as to an arbitrator pursuant to clause (a) of this paragraph, then such Fair Market Rent shall be determined by a single arbitrator in accordance with the provisions of the Commercial Arbitration Act S.B.C. 1986, c. 3 and amendments thereto or legislation in substitution therefore. EX-2.2 3 LETTER AGREEMENT DATED JULY 25, 1995 1 [LOGO] EXHIBIT 2.2 HONGKONGBANK THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED Hong Kong Main Office: 1 Queen's Road Central, Hong Kong Ref: CORPORATE & INSTITUTIONAL BANKING TOYS & ELECTRONICS DIVISION CONFIDENTIAL Nam Tai Electronic & Electrical Products Ltd Unit 513-520 No.1 Hung To Road Kwun Tong KOWLOON 25 July 1995 Attention: Mr Tadao Murakami Dear Sirs BANKING FACILITIES A/C NO. 600-848972-001 With reference to our recent discussion, we are pleased to advise that we have reviewed your banking facilities and offer a renewal within the following revised limits which will be made available on the specific terms and conditions outlined below and upon the satisfactory completion of the security detailed below. These facilities are subject to review at any time and, in any event by 31 May 1996, and also subject to our overriding right of withdrawal and repayment on demand, including the right to call for cash cover on demand for prospective and contingent liabilities.
New Previously --- ---------- Overdraft HKD 500,000 HKD 500,000 - --------- Interest on the overdraft facility will continue to be charged on daily balances at 1/2% per annum over out best lending rate, (currently 9% per annum, but subject to fluctuation at our discretion) and payable monthly in arrears to the debit of your current account. Import/Export Facilities HKD60,000,000 HKD25,000,000 - ------------------------ Documentary Credits with import finance up to 90 days and/or D/P bills purchased on approved drawees. within which (HKD60,000,000) (HKD25,000,000) - ------------ Goods under your control and/or Trust Receipts.
GPO Box 64, Hong Kong Telephone: 2822 1111 Telex: 73205 HSBC HX Telegrams: Hongbank Hongkong Facsimile: Member HSBC Group 2 [LOGO] Nam Tai Electronic & Electrical Products Ltd - 2 - 25 July 1995 - ------------------------------------------------------------------------------- Interest on the USD import and export finance will continue to be charged on a daily basis at 1% below our board rates (published by us from time to time but subject to fluctuation at our discretion) and payable monthly in arrears to the debit of your current account. New Previously --- ---------- Foreign Exchange Line - --------------------- Total Spot Contract Limit - HKD5,000,000 Total Forward Contract Limit up to HKD10,000,000 HKD5,000,000 6 months. Unless by prior arrangement, contracts entered into under this facility are not to exceed six months in duration. Terms and Conditions - -------------------- Contracts may only be entered into to cover trade related exchange exposure incurred in the normal course of business. Foreign Exchange facilities remain subject to our overriding right to call for cash cover on demand if in the Bank's view a negative foreign exchange position requires such cover. Further, the Bank may, after having discussed the position with yourselves, close out any or all of your outstanding forward foreign exchange contracts and demand settlement of the balance due. Foreign exchange contracts continue to be governed by the conditions appearing on the reverse of the standard contract form. These contract forms should be checked upon receipt and the copy signed and returned to the Bank. Security - -------- As requested, we are agreeable to releasing the corporate guarantee dated 7 September 1994 for HKD26,400,000 from Nam Tai Electronics Inc together with a board resolution dated 7 September 1994, which is supported by a deposit for USD400,000 in name of Nam Tai Electronics Inc placed with HongkongBank of Canada and held under lien to us. As alternative security, please let us have:- 1) A corporate guarantee for HKD65,000,000 from Nam Tai Electronics Inc together with a supporting board resolution authorizing its issuance. We enclose our standard form of guarantee for your completion and return. 2) A Negative Pledge from Nam Tai Electronics Inc not to pledge any of its assets with any banks as securities without our prior consent. 3 [LOGO] Nam Tai Electronic & Electrical Products Ltd - 3 - 25 July 1995 - ------------------------------------------------------------------------------- Please arrange for the authorized signatories of your company, in accordance with the terms of the mandate given to the Bank, to sign and return to us the duplicate copy of this letter to signify your confirmation as to the correctness of the security held, and your continued understanding and acceptance of the terms and conditions under which these facilities are granted. A review fee of HKD12,000 will be charged to the debit of your current account upon receipt of your acceptance to these facilities. These facilities will remain open for acceptance until the close of business on 15 August 1995 and if not accepted by that date will be deemed to have lapsed. We are pleased to be of continued assistance. Yours faithfully We hereby confirm our acceptance of the terms and conditions under which the aforesaid facilities are granted Eden Y D Wong Assistant Corporate Relationship Manager by/NAMTAI Enc EX-2.3 4 LETTER AGREEMENT DATED SEPTEMBER 18, 1995 1 EXHIBIT 2.3 THE SANWA BANK LIMITED (INCORPORATED IN JAPAN) TELEPHONE: 2843 3888 HONG KONG BRANCH CABLE ADDRESS: TELEX: 73423 SANWA HX FAIRMONT HOUSE 'SANWABANK HONGKONG' FACSIMILE: 2537 1669 8 COTTON TREE DRIVE CENTRAL SWIFT ADDR: SANWHKHH HONG KONG Our Ref: 95-OL-497 18th September, 1995 Nam Tai Electronic and Electrical Products Limited Unit 513-520, No. 1 Hung To Road, Kwun Tong, Kowloon, CONFIRMATION Hong Kong Dear Sirs, Re: Banking Facilities - ---------------------- With reference to our recent discussions, we write to confirm our agreement that the banking facilities made available by us to your esteemed company under the facility letter dated 6th April, 1994 shall be revised upon and subject to the terms and conditions set out below. 1. Facilities and Amount --------------------- (a) Import facility (including letter of credit opening, acceptance and bills receivable provided that the tenor of each letter of credit shall not exceed 6 months and any item under acceptance and bills receivable together shall not exceed 100 days) of up to HK$56,000,000 with a sub-limit for acceptance and bills receivable together of up to HK$32,000,000. (b) Overdraft facility of up to HK$1,000,000. (c) Shipping guarantee facility (under letter of credit) of up to HK$10,000,000. (d) Bills negotiation facility (without letter of credit) of up to HK$5,000,000 provided that this facility is restricted to bills drawn by Canon Inc., Sharp Corp., Seiko Instruments Inc. and Toshiba Corp. only and the minimum interest charges for this facility is 4 days' interest on each advance. - 1 - 2 (e) Bills negotiation facility (under letter of credit) of up to HK$40,000,000. (f) Forward foreign exchange facility of up to HK$20,000,000. 2. Interest -------- Overdraft Interest shall be charged at 0.25% per annum above whichever is the higher of our cost of funds or the prevailing Hong Kong Dollars Prime Rate quoted by us from time to time and shall be payable monthly in arrears on the first day of each calendar month. Bills receivable Interest shall be charged at the prevailing Hong Kong and Dollars Prime Rate quoted by us from time to time bills negotiation (in case of Hong Kong dollars items) or 0.75% per annum above our cost of funds (in case of any other currencies items). We reserve the right to charge additional interest from the date of any default in payment, on a daily basis, at 5% per annum above the prevailing Hong Kong Dollars Prime Rate quoted by us from time to time or, in case of default sum denominated other than in Hong Kong Dollars, 5% per annum above our cost of funding the default sum. 3. Commission ---------- (a) In lieu of exchange commission and opening commission shall be charged on the amount of each letter of credit as follows: -1/4% on the first US$50,000 or its equivalent; -1/8% on any amount in excess of US$50,000 and up to US$150,000 or their respective equivalent; -1/12% on any amount in excess of US$150,000 and up to US$250,000 or their respective equivalent; and -1/24% on any amount in excess of US$250,000 or its equivalent. (b) Collection commission shall be charged as follow: -1/8% on the first US$150,000 or its equivalent; -1/12% on any amount in excess of US$150,000 and up to US$250,000 or their respective equivalent; and -1/24% on the balance, if any. (c) The minimum commission and charges for each bills transaction shall be determined by us from time to time at our sole discretion. -2- 3 (d) The commission scale charged on the above facilities shall always be subject to the General Rules of The Hong Kong Association of Banks and its amendment from time to time. 4. Repayment --------- Any amount advanced under the overdraft facility shall be repaid on demand and any amount advanced under other banking facilities shall be repaid on the respective due dates applicable thereto. 5. Security -------- The above facilities (including principal, interest and all other monies payable hereunder or in connection with the facilities) shall continue to be secured by an unconditional and irrevocable letter of guarantee dated 19th August, 1991 given by Nam Tai Electronics, Inc. (the "Guarantor"). 6. Availability ------------ The availability of the above facilities is subject to our having received from you on or before 18th October, 1995 the following documents in form and substance satisfactory to us in all respects:- (a) the enclosed duplicate of this facility letter duly signed by you to signify your acceptance hereof and countersigned by the Guarantor; (b) the Overdraft Agreement duly executed by you; (c) certified copies of the resolutions of your Board of Directors approving the terms and conditions of this facility letter and the Overdraft Agreement and authorizing a person or persons to sign such documents on your behalf; (d) certified copy of the resolution of the Board of Directors of the Guarantor approving the countersignature of this facility letter; (e) list of specimen signatures (authenticated to our satisfaction) of the Directors and the person(s) authorized to act on behalf of you and the Guarantor by the resolutions referred to in sub-clauses (c) and (d) above; and (f) such other necessary documents required to validate the above facilities and the security conditions as we may specify from time to time. - 3 - 4 7. Undertakings ------------ You hereby undertake with us that so long as the above facilities being available and/or any money remaining outstanding thereunder, you will:- (a) submit to us satisfactory written evidence evidencing the release of all cash deposits maintained with and charged to other banks or financial institution before we shall release the existing mortgage over the property situated at Flat B, 1/F, Block 5 and carpark space no. 184 on Basement 2 of Cavendish Heights, 33 Perkins Road, Jardine's Lookout, Hong Kong; and (b) not create or allow to exist (except in our favour) any mortgage, charge (whether fixed or floating), security interest or other encumbrance over any part of present or future assets of you or any of your subsidiaries without our prior written consent. 8. Lien and Set-off ---------------- We shall be entitled to exercise, at any time without notice, our right of lien and our rights to set-off and combine your account(s) with us in or towards satisfaction of your indebtedness to us in respect of the facilities whenever due or payable. 9. Expenses -------- You shall pay to us upon demand all costs, charges and expenses (including legal expenses on a full indemnity basis, stamp, registration or other duties) incurred by us in connection with the preparation of the documentation contemplated hereby, the administration of the facilities, or the enforcement of or preservation of any rights hereunder or otherwise in connection with the facilities. 10. Governing Law ------------- The above facilities and this facility letter shall be governed by and construed in accordance with the laws of Hong Kong. 11. Other Conditions ---------------- (a) The above facilities shall be subject to all other terms and conditions which you may have agreed with us in writing. (b) Notwithstanding any provision to the contrary contained in this facility letter or any applicable documents, we reserve the right, at our discretion, to modify, cancel or - 4 - 5 terminate all or part of the facilities and the terms governing thereof, on demand, and to declare all amounts then outstanding to be immediately due and payable and to call cash cover for your prospective and contingent liabilities. 12. Acceptance and Agreement ------------------------ Please confirm your agreement (i) to be bound by the above terms and conditions and (ii) that any change to the above terms and conditions which is requested by you or your duly authorized representatives and which is approved by us will also be binding on you by signing and returning to us the duplicate of this facility letter together with the documents referred to in clause 6 above. Yours faithfully, For and on behalf of The Sanwa Bank, Limited Hong Kong Branch /s/ Y. HIRANO - --------------------------------- Y. Hirano Assistant General Manager - 5 - 6 To: The Sanwa Bank, Limited Hong Kong Branch We accept the above revised terms and conditions for your grant of the facilities to us and agree to be bound thereby. For and on behalf of Nam Tai Electronic and Electrical Products Limited /s/ TADAO MURAKAMI - ----------------------------------- Name: Mr. Tadao Murakami Title: Director Date: September 29, 1995 We hereby acknowledge and agree to the above revised terms and conditions for your grant of the facilities to Nam Tai Electronic and Electrical Products Limited and confirm that the Continuing Guarantee dated 19th August, 1991 given by us remains in full force, valid and effect. For and on behalf of Nam Tai Electronics, Inc. /s/ M.K. KOO - ----------------------------- Name: Mr. M.K. Koo Title: Director Date: September 29, 1995 - 6 - EX-2.4 5 LETTER AGREEMENT DATED SEPTEMBER 5, 1995 1 EXHIBIT 2.4 [LOGO] BANQUE WORMS HONG KONG BRANCH 39th FLOOR TELEPHONE: 28028382 CENTRAL PLAZA TELEX: 60139 WORHK HX 18 HARBOUR ROAD FAX: 28028065 HONG KONG 5 September, 1995 Nam Tai Electronic & Electrical Products Ltd Unit 513-520 No. 1 Hung To Road Kwun Tong, Kowloon Attn.: Mr Tadao Murakami, President Dear Sirs We are pleased to advise that the following credit facilities have been made available for NAM TAI ELECTRONIC & ELECTRICAL PRODUCTS LTD until further notice:- CREDIT FACILITIES Line (01) US$7,000,000 (UNITED STATES DOLLARS SEVEN MILLION ONLY) - For opening letters of credit. Sublimit 01-1 US$4,000,000 (UNITED STATES DOLLARS FOUR MILLION ONLY) - For trust receipt loans up to 90 days; and/or - For issuing shipping guarantee under letters of credit issued by us; and/or - For discounting sight D/P bills drawn on customers acceptable to us; and/or - For short term loan up to 90 days and/or overdraft up to HK$3,900,000. Line (02) US$1,000,000 (UNITED STATES DOLLARS ONE MILLION ONLY) - For negotiation of export bills under letters of credit with discrepancies supported by your letter or guarantee; and/or - For advance against export bills up to 30 days under letters of credit sent for collection. Line (03) US$4,000,000 (UNITED STATES DOLLARS FOUR MILLION ONLY) - For booking foreign exchange contracts up to 180 days. INCORPORATED IN FRANCE WITH LIMITED LIABILITY 2 5 September, 1995 Nam Tai Electronic & Electrical Products Ltd - 2 - COMMISSION AND INTEREST RATE (i) Bills Commission - 1/4% for the first US$50,000 1/8% for balance up to US$150,000 1/12% for balance up to US$250,000 1/24% for balance (ii) Bills interest - 3/4% p.a. over cost of fund (iii) Short term loan interest - 1% p.a. over cost of fund (iv) Overdraft interest - 1/4% p.a. over Prime All interest rates are subject to fluctuation at our discretion. CONDITIONS The availability of the credit facilities is subject to:- (1) Corporate guarantee of Nam Tai Electronics Inc for US$8,400,000; (2) Undertaking by Nam Tai Electronic & Electrical Products Ltd not to pledge any of their existing or future assets to any third party; (3) Evidence confirming the release of all existing tangible securities currently pledged to other bankers; and (4) Submission of audited annual and unaudited half yearly financial statements of Nam Tai Electronic & Electrical Products Ltd and Nam Tai Electronics Inc for our review as soon as possible but no later than 180 days and 60 days from respective closing dates. Usage of the above facilities is subject to our availability of funds and completion of our normal banking documentation as well as the usual requirement that there be no materially adverse changes in the financial conditions of your group. As a general banking practice, we reserve our overriding right of demand for repayment of principal plus interest. LIEN AND SET OFF We shall be entitled to exercise, without notice, our right of lien and our right to set off and combine your account(s) with us in or towards satisfaction of your indebtedness to us in respect to the facilities whenever due. EXPENSES You shall pay to us upon demand all costs, charges and expenses (including legal expenses on a full indemnity basis, stamp, registration, or other duties) incurred by us in connection with the enforcement of or preservation of any rights hereunder or in connection with the facilities. 3 5 September, 1995 Nam Tai Electronic & Electrical Products Ltd - 3 - GOVERNING LAW The above facilities and this letter shall be governed by and construed in accordance with the Laws of Hong Kong. This letter supersedes all our previous letters of facilities offer. As a token of your understanding and acceptance of the above terms and conditions, please sign and return the duplicate of this letter together with your Board Resolutions authorizing borrowing from our bank under the aforesaid terms. We thank you for this opportunity to be of continued service to you and look forward to a mutually beneficial relationship and closer working relationship with your group. Yours faithfully per pro BANQUE WORMS HONG KONG BRANCH /s/ MAXWELL YEUNG Maxwell Yeung Assistant General Manager EX-2.5 6 CONSTRUCTION AGREEMENT DATED MARCH 3, 1995 1 EXHIBIT 2.5 Received 2-3-95 [LOGO] Namtai NAM TAI ELECTRONIC & ELECTRICAL PRODUCTS LTD UNIT G13-520, NO.1 HUNG TO ROAD, KWUN TONG, KOWLOON, HONG KONG TEL: (652) 2341 0273 FAX: (652) 2341 4164 FAXGRAM ------- REF: F 500 1 of 1 DATE: MARCH 27, 1995 ------------ ---------------- COUNTRY OF DESTINATION: Canada FAX NO.: 604-299-3031 ------------ -------------- ATTENTION: Mr. Mark Waslen FROM: Andrea Chu -------------------------- ----------------- COMPANY: Nam Tai - Canada APPROVED BY: ---------------------------- ---------- NO. OF PAGE(S): 25 ------- (INCLUDING THIS PAGE)
Dear Mark: Re: Construction Agreement for New Factory Faxed hereto please find a copy of the English version of the construction agreement for the new factory for your kind attention. Both English and Chinese copies have been faxed to Mark Klein direct. Thank you for your kind attention. /s/ ANDREA CHU Andrea Chu FAX-298 2 SHENZHEN CONSTRUCTION PROJECT CONTRACT Project name: Namtai Electronic (Shenzhen) Co. Ltd. Industrial Estate Project site: Gusu Industrial Estate, Baoan Shenzhen Invested by: Namtai Electronic (Shenzhen) Co. Ltd. Constructed by: G.D. 2th Building Engineering Co. Shenzhen Co. March 3, 1995 3 CONTRACT Party A: Namtai Electronic (Shenzhen) Co. Ltd. Party B: G.D. 2th Building Engineering Co. Shenzhen Co. This contract is drafted with reference to "The Economical Contract Law of PRC (as amended)". "Construction Project Contract Samples" and all the relevant regulations. ARTICLE 1. PROJECT ITEMS 1.1 Project Name Namtai Electronic (Shenzhen) Co. Ltd. new factory Project Site Gusu Industrial Estate, Baoan Shenzhen Project Content New Factory Site's Construction Project Area 41,112.50 M2 [passways, water supply & drainage system project complements- workshop (1 block), office, senior staff dormitory, general staff dormitory, canteen, worker's dormitory (3 blocks)] etc. Contract Scope All construction items included in the drawings designed by Shanxi Construction Designing Institute, Shenzhen Branch; including foundation work, main structure, interior & exterior decoration, aluminium frame (for windows & doors), curtain wall, water supply & drainage, electrical lighting, fire-fighting system, passways, boundary wall, green land (within the redline) excluding: the further decoration for office, the installation of electrical & air-conditioning system of factory and office (water supply & drainage equipments installation for toilets - still under negotiation) Party A shall pay for expenses of such items and Party B shall cope with them accordingly.
4 1.2 Construction Period: 1) Pursuant to the agreement, the Period of construction is agreed as follows: workers dormitory (1 block) - July 31, 1995 workers dormitory (remaining 2 blocks) - Aug 31, 1995 staff dormitory - Aug 15, 1995 canteen - July 31, 1995 factory - Sep 15, 1995 office - Aug 15, 1995 (others shall be separately agreed upon)
2) Commencing date Mar 9, 1995 Completion date 1.3 Quality Grade: Fine 1.4 Contract price (including tax): RMB51,881,938.00 The Contract price is calculated with reference to: 1) Fee standards - o based on the working drawings & contract contents; o with reference to the relevant norm regulations of Guangdong Province; o Fee standards for first class construction enterprises of Shenzhen o difference of Grade A wages 2) Material price difference - In accordance with the relevant latest regulations published by the Shenzhen Norm Control Bureau 3) Settlement - The budget shall be prepared by Party B and checked by Party A & approved by the Shenzhen Construction Bank or Norm Control Bureau 4) Site Organizing Measures Fee - According to the work organization plan, Party B shall prepare the budget for Party A's review & approval. 5) Where change of design occurred on site, fees shall be charged according to the aforesaid 1) & 2). If there is any variation of contract price, both parties will settle quarterly. 5 1.5 Contract manner: 1) According to the contract price including wages, materials, schedules, quality and standard 2) Party B shall pay for all the relevant taxes which have been included within the contract price. ARTICLE 2. DOCUMENTS & EXPLANATION PROCEDURES 2.1 Agreement Articles 2.2 Contract Terms 2.3 Contract Appendices and Supplements 2.4 Actual Work Amount List; Equipment & Material List; or Project Budget, Drawings as confirmed in the contract price (approval from Party A is required) 2.5 Minutes & Agreement for confirming the negotiation and alteration of the rights and obligations of both parties 2.6 Standards, Regulations, Technical Requirements ARTICLE 3. DRAWINGS 3.1 Party A shall submit 8 sets working drawings to Party B within 3 days form the signing of this contract (including 2 sets of standard drawings of the Designing Institute and the interim verification of foundation and relevant information) ARTICLE 4. SITE REPRESENTATIVE OF PARTY A 4.1 Party A shall appoint professional technical personal as its site representative or its appointed agent Party A shall notify Party B 7 days in advance of any change of representative. The new representative shall be fully responsible for the work of his pre-decessor. 4.2 All the instruction or notice from Party A's representatives or its agent shall be signed by him in writing and submitted to Party B and shall become effective only after Party B have acknowledged and signed on them, 4.3 List of Party A's site representative or its appointed person: 6 4.4 Name and Authority the social supervision engineers and their appointed agent authority scope: ARTICLE 5. PARTY A'S WORK RESPONSIBILITY 5.1 Party A shall handle the formalities of the Land requisition certificate; compensate for young crops & trees damage; remove all unnecessary buildings & obtacles. 5.2 Party A shall get ready the followings 30 days before the commencing date of the project; 1) water/power supply, passway (outside the red line) 2) site clearing: (within the red line) The connecting point for water/power supply must be within 50 metres from the buildings; (50- 100m from the public supply system). The supply load must be enough for the normal work. 5.3 Party A shall supply the accurate data for geology and underground pips/line system within the project, site area 10 days before the commencing date of the project. 5.4 Party A shall go through a formalities for "Construction Permission Certificate". "Project Start Certificate", "Temporary Occupation Certificate" 5 days before the commencing date of the project. 5.5 Party A shall provide the coodinate & datum point to Party 13 in writing on site 10 days before the commencing date. 5.6 Within 15 days after the signing of this Contract Party A shall organise the checking of drawings documents together with Party B's designers and supervision contractors and distribute the minutes to Party B in the same manner as the distribution of drawings. 5.7 Party A shall coordinate in the protection work for the underground pipe/line system surrounding buildings and bear the relative expenses. 7 ARTICLE 6. SITE REPRESENTATIVE OF PARTY B 6.1 Party B shall appoint site's chief Representative or agents and notify Party A in writing. If there is any change, Party B shall notify Party A 7 days' in advance, the new representative shall be fully be responsible for the work of his predecessor. 6.2 Party B's representative shall notify Party A's representative in writing for executing the agreed obligations and responsibilities, requirements and notice and which shall become effective after Party B his acknowledged and signed on them. ARTICLE 7. PARTY B'S WORK RESPONSIBILITY 7.1 Temporary facilities of the site; Construct temporary passways; install the water/power supply equipments. 7.2 Prepare site work organization plan or, work schedule, (work progress schedule, facilities, materials, finished goods or goods in progress plan) and submit to Party A. 7.3 Report progress to Party A weekly; Submit the monthly schedule and finished work report within 4 days after the 25th of every month, else Party A will not pay for the instalment. 7.4 Provide & maintain lighting, guards, fence and security, etc. as required by the project. If Party B fails to comply with the aforesaid obligations, Party 13 shall be liable for all the property and human damages and all other costs incurred therein. 7.5 Observe relevant government regulations concerning site traffic, site noise control, pollution control and environmental protection. Party A shall bear cost for necessary formalities except penalty caused by Party B's responsibilities. 7.6 Carry out work-inspection with reference to the drawings, specifications; minutes, design variation notices and State's prevailing inspection regulations. 8 7.7 Keep progress notes, hidden construction report and all relating documents as records for handing over to Party A. 7.8 Enforce the site management & organization, keep the site in good order; keep the passways clear, and up to national standards for hygienic cities. 7.9 Be fully responsible for the site protection, before final handing over to Party A. If any damage happens during the protection period. Party B is responsible for amending & bear the costs therein. If the damage is caused by Party A's advance operation without having completed inspection & accepting procedures), Party A shall bear all the costs. 7.10 During the guarantee period after the completion of the project, Party B shall unconditionally make good all defects if it is caused by the quality problem on the date of receipt of notice from Party A. If the quality problem is caused by the design or Party A's operation and other reasons, Party B shall amend it at the cost of Party A. 7.11 Except Party A's own responsibility all accidents during the work shall be borne by Party B and which should be reported to Party A and construction supervision departments of the local government. 7.12 Keep the underground pipe/line system, nearby buildings, main passways, paths, under good protection; Submit the necessary protection plans to Party A and local government for approval. The costs incurred therein shall be borne by Party A. Party B shall pay for all the loss caused by their negligence. 7.13 Clear up the site when the project is completed, (including; unnecessary construction materials, refuse, temporary buildings and facilities); Clean all windows, glass floor, drainage system of toilets and kitchens; Dredge pipe system. ARTICLE 8. DELAY IN COMMENCING WORK. 8. 1 Commencing date of the project shall be determined by Party A. 9 8.2 If Party B fails to start the project on time, Party B shall submit the application with reasonable explanation in written form to Party A 5 days in advance. If Party A fails to reply within 3 days, it shall be deemed to agree to Party B's request and the work can be delayed. Otherwise, no delay is allowed. ARTICLE 9. SUSPENSION 9.1 If necessary , Party A's representative can notify Party B in writing to suspend the work and give instruction 48 hours from the notice. Party B shall observe the instruction and be responsible for the protection of the finished work during the suspension period. After observing the instruction, Party B shall request for work resumption. After receiving Party A's permission. Party B must start the work as soon as possible, or, if it receives no reply after 48 hours, Party B can go on the construction. If Party A is responsible for the suspension, the costs shall be borne by Party A and the project period postpones accordingly; if Party B is responsible for the suspension, Party B shall pay for the expenses and no delay is allowed, 9.2 If the project has to be stopped or suspended because of the change of policy, the parties shall compromise to a reasonable state. The responsibilities for the costs shall be settled under negotiation. ARTICLE 10. POSTPONEMENT 10.1 If the project schedule is affected by one of the following factors, Party B shall arrange for overtime work. Any inadequency shall be negotiated by both parties 1) Variation of design and work amount; 2) Suspension caused by successive shortage of water/power supply for 6 hours not caused by Party B; 3) Party A fails to clear up obstacles on the site and supply water/power on time for commencement in accordance with the schedule 4) Force Majeure: war, turmoil, falling down of flying objects, explosion or not caused by either party's default. Fire, typhoon, heavy rain, earthquake, etc. 5) Party A deliberately fails to sign the certificate and affect the progress of the following schedule; 10 6) Suspension or holding up of the work due to Party A's insufficient fund; 7) Party A fails to pay for the downpayment or instalments in accordance with this contract and affects the progress of work; 8) Party A's subcontract work delays the progress; 9) The delivery delay or defects occurred in the equipments etc. supplied by Party A. 10.2 Party B shall report to Party A in writing of details and expenses incurred in such delay within two days from the occurrence of the aforesaid event and Party A shall confirm within 2 days from receipt of report. 10.3 Except for the reason indicated in above 10.1, Party B shall be liable for breach of contract if the project fails to complete on time. ARTICLE 11. AHEAD OF TIME 11.1 If it is necessary to complete the project earlier, two parties shall sign on agreement to complete the schedule to an earlier date. 11.2 Party B shall pay penalty of RMB5,000/day for unreasonable delay. ARTICLE 12. QUALITY STANDARD 12.1 The quality of work should be up to fine standards as approved by national or professional quality evaluation departments. 12.2 If the quality fails to meet the required design standards, Party A has the right to request Party B to stop or reconduct the unqualified work at the cost of Party B and the project schedule will not be postponed. 12.3 Any dispute about the quality between the parties shall be finally settled by Shenzhen Quality Evaluation & Supervision Department. The cost of the arbitration and the loss caused by the delay shall be borne by the losing party. 11 ARTICLE 13. INSPECTION & REWORK 13.1 Party B shall follow Party A's instruction, fully obey the relevant regulations, requirements, designing plan; accept & cooperate with Party A's inspections, Party B is responsible for the costs of variation or reduction of their defects work while Party A bears the expenses caused by other reasons. 13.2 Party B shall provide quality documents as requested by Party A, such as: Qualified Products Outgoing Certificate for materials or equipments, test reports, etc. 13.3 Party B shall set up quality control regulations and appoint full time site QC. ARTICLE 14. COVERING WORK AND INSPECTION 14.1 When the project comes to the interim inspection or covering period, Party B shall arrange for prior inspection and inform Party A for inspection 24 hours in advance. Only after Party A accepts the Inspection (with signature) can Party B go on with the job. If Party A fails to attend for inspection after 24 hours from receipt of notice front Party B, Party A has to go through all formalities for inspection later. 14.2 If the work has met the quality requirements. Party B can go on with the work even though Party A has not signed the inspection in 24 hours. Party B must complete all the necessary variation within the prescribed time and get ready for another re-inspection if the inspection fails. ARTICLE 15. TRIAL RUN 15.1 Party B shall arrange for trial run if the facilities instalment meets with the necessary requirement. When the trial run is passed, both parties shall sign on the trial run record. The project will be completed and delivered. 15.2 If the trial run fails due to design, Party A will bear the cost of design amendment, dismantlement reinstatement, etc. 12 15.3 If the trial run fails due to Party B's construction, the representatives of Party A will put forth amendment proposal within 24 hours after the trial run. After amendment, Party B will hold the trial run for the second time and bear the cost of amendment and re-trial run and the project completion date cannot be postponed. 15.4 If the trial run fails due to the facilities quality, provided that the facilities are purchased by Party B, Party B will bear the cost of repair, dismantlement or repurchase and reinstatement of the trial run. The project completion date cannot be delayed. Provided that the facilities are purchased by Party A, Party A will bear all the economic cost mentioned above. 15.5 If Party A has not put out the amendment proposal within the specified time or made no signature on trial run record after the trial run has passed, the record will be effective of itself in 24 hours from the completion of the trial run completed. Party B can continue the construction or project completion formalities. ARTICLE 16. ACCEPTANCE AND RE-ACCEPTANCE 16.1 If the representatives of Party A take part in the acceptance, or the trial run on time, they must request Party B to postpone the date provided the postponement must not exceed 2 days. If the representatives of Party A fails to execute the foregoing Party B can organise the acceptance or trial run themselves and Party A should admit the acceptance or the trial run record and sign on it. 16.2 No matter whether the representatives of Party A take part in the acceptance, if they require to recheck the concealed work which has been completed, Party B should strip the concealed work to meet their requirements and recover or repair the concealed work after checking. If the checking gets passed, Party A should bear all the economic costs and compensate Party B's loss and defer the project completion date. If the checking is failed, Party B should bear all the economic costs and keep the present project completion date. ARTICLE 17. CONTRACT PRICE AND ADJUSTMENT 17.1 The contract price is conditionally adjustable by the following issues: (1) design change, revision and construction site certificate approved by the representatives of Party A; 13 (2) increase or decrease of construction work approved by representatives of Party A; (3) the price adjustment announced by the architectural chief commission. 17.2 Upon the above occurrence, Party B will make an adjustment account document and forward to Party A for review and then hand in the engineering cost audit commission to confirm the increase or decrease of contract price. ARTICLE 18. PAYMENT OF THE PROJECT 18.1 Party A should pay 25% downpayment of the total Project cost, equivalent to RMB12,000.000 to Party B in 5 days after the contract becomes effective. 18.2 Upon the commencement of the project, Party A should pay 100% of the project cost to Party B by 3 instalments after deducting the aforesaid downpayment (RMB12,000,000) and retaining 5% balance as retention money:- i.e. 50% to be paid on May 1, equivalent to RMB18,600,000 35% to be paid on July 1, equivalent to RMB13,000,000 15% to be paid on August 15, equivalent to RMB5,681,986 18.3 Balance of 5% retention money (RMB2,600,000) will be paid off after the acceptance of the project (excluding guarantee cost of 2.5%). ARTICLE 19. VERIFICATION AND PAYMENT OF PROJECT PROGRESS COST 19.1 Party B shall deliver to Party A the completed work in progress report within 4 days of the 25th of every month. Party A shall examine and verify same with 3 days after receipt. 19.2 In accordance with the reviewed and approved project work and the relevant items which make up the contract price, Party A shall pay for the cost of work in progress to Party B within 6 days after receipt of the report. 14 19.3 After Party B has furnished the monthly work in progress report to Party A, if Party A fails to review or pay for the work in progress cost against the contract Party A shall compensate Party B for the economic loss and accordingly defer the project completion date. 19.4 Party A can defer the payment date if approved by Party B in writing. 19.5 After settling 95% of the project cost by Party A, the remaining cost will be paid off upon delivery of the completion work. ARTICLE 20. MATERIAL, FACILITIES SUPPLY 20.1 The materials and facilities excluded in "materials and facilities sheet supplied by Party A" will be purchased by Party B, price to be approved by Party A. 20.2 Party A shall hold the responsibility of foreign currency for purchasing the three major materials; regarding the decorative material, lift, alternative power unit, air conditioners, fire extinguishers, water and electrical equipment, etc., Party A will bear the required foreign currency. If these materials are purchased by Party B, the unit price must be approved by Party A. 20.3 The materials, finished products and self-finished products supplied by both parties must be attached with the original manufacturer's certificate and quality certificates and inspected before using, after inspected as "accepted", the equipments can be put into use and the supplied party will bear the inspection cost. If there is discrepancy between the two parties, the inspection should be carried out again, if it gets passed, the objected party will bear the fee or the supplied party will bear it. 20.4 The materials, equipments, specification, quantity, unit price, quality, supplied date, delivery destination, etc. supplied by Party A are referred to the comments written in detail in "materials and equipments sheet" supplied by Party A; which is an appendix document of this contract and have the same force as this contract. 20.5 Upon approval by the design company and Party A, Party B can use some substitute materials and equipments as required. 15 ARTICLE 21. DESIGN CHANGE 21.1 Party B is not allowed to amend or change the original design unless with the prior approval of Party A in accordance with the following terms: - (1) It must be approved by the original design ad programme audit party and obtained the relevant approval document on the increase of investment (including the budgeted plan) if exceeded the original design structure and standard; (2) Send to the original design party for checking and get the relevant drawings and specifications (amended notice or drawings, specification and no. of issued copy will be the same as the original drawing); 21.2 If Party A changes the original design they must inform Party B before the commencement of the project and send the alteration in writing to Party B after they have obtained the agreement of the above 2 issues, Party B will then make changes. Otherwise, Party B can have the right to decline the change. 21.3 No matter Party A or Party B request for alterations or change of the original design, it can be proceeded after reporting to the original design and programme audit commission for approval. Party A will hear the charges and both parties will discuss and agree on the project completion date. 21.4 Party B should bear the alteration expense if due to their construction quality and no delay on the project is allowed. 21.5 Party B should inform Party A in writing as soon as they discover any defects in design. Upon receipt of notice, Party A must hold discussion with the original design commission and prepare the revision or change design documents, and then it will be proceeded after both parties have signed and approved, Party A should bear all the costs, and the project completion data is under their discussion. Before receiving the revision or change design documents, any party is not allowed to start the project or that party will hold full responsibilities for the consequences. 16 ARTICLE 22. CONFIRMATION OF PRICE CHANGES 22.1 If the changes or modification in design as listed in Article 21 occurred, Party B should put forward the changed price at a mutually agreed time or within 10 days after Party A received the document on the changes (or modifications). After the changed price is approved by Party A, Party A should submit it to concerned Department of Cost & Price Control in Government for confirmation of the contract price and the completion date of the project. (1) If the changed price has been remarked in the contract already, price should be calculated in accordance with that provision. (2) If the changed price is similar to the price remarked in the contract, the changed price can be decided by that price. (3) If there is no applicable or similar price in the contract as the changed price, Party B should put forward an appropriate price for Party A's approval and Party A should submit it to concerned Department of Cost & Price Control in Government to confirm the cost of changed part of the project. ARTICLE 23. INSPECTION AND HAND-OVER OF THE COMPLETED PROJECT 23.1 If the completed project is ready for inspection, Party B should provide the completion documents in quadruplicate and the report for inspection and hand over 15 days before the inspection of the project. Party A will appoint concerned Department to inspect same within 15 days after the receipt of report, and the suggestions on modification should be put forward within 5 days after the project has been inspected. Party B should modify it according to the suggestions and bear the costs for modification caused by Party B. 23.2 If Party A fails to inspect it without reasonable excuses within 15 days after receipt of the Report for Inspection and handover or neither give suggestion for modification nor approve it within 5 days, The Report for inspection and handover will be regarded as approved, and the final settlement can be done. 17 23.3 Completion Date of the Project: The completion date of the project follows the date when Party B put forward The Report for Inspection and handover. If modification is required, the completion data of the project adopts the date when Party B submits the Report of Inspection and handover again. 23.4 If Party A fails to inspect, the project at the designated time, Party A should bear the project's custodian fee from the last day of the period. Custodian fee per day is 0.08% of project cost stated in contract. 23.5 If the quality of the project is up to the National Quality Standard, Party B shall hand it over to party A within 5 days after the completion of the inspection. If the project hasn't been taken over on time, Party A should be liable for all the economical loss therein. 23.6 If the project is put to use or being used presumptuously by Party A, the completion date of the project shall be the date when Party A used it. Party A should then be responsible for the safety/quality problems and economic expense/loss accordingly. 23.7 If some single items need to be transferred to Party A, the delivery should go through intermediary procedures as the evidences of such inspection. Party B should put forward the documents for settlement within 20 days after completion of the inspection, and the documents should be submitted to the related Department of Cost & Price Control for confirmation within 10 days after being approved by Party A. 23.8 When some items are partly completed an agreement for defining individual responsibilities should be made between the two parties. 23.9 If the completed project's quality should be up to The National Quality Standard for Inspection, Party B can't refuse to hand over because of economic dispute reasons. 23.10 The temporary installations and facilities for production and living at the construction site which located by contract should be withdrawn within 15 days after the Report for Inspection and handover. 18 ARTICLE 24. FINAL ACCOUNT FOR COMPLETED PROJECT 24.1 Party B should put forward Report for Final Account and complete all relative information within 15 days after the delivery of the Report of Inspection and handover. Party A should submit The Report for Final account to concerned Department of Construction Control for confirmation after being approved by Party A. 24.2 Final account should be settled within one month after the completion of the project. 24.3 If the Report for Final Account is not approved and submitted to Construction Control Department for confirmation, or the balance of the project is not paid within 5 days after the Certificate of Acceptance being received, Party A should pay the interest of late payments at interest rate of extraordinary bank loan to Party A from the 16th day from the signing of the Certificate of Acceptance. ARTICLE 25. WARRANTY 25.1 Time limit for warranty: The warranty term is from the date of each single item being accepted and the Certificate of Acceptance being signed by Party A. According to National Warranty Regulations: o 1 year warranty for construction projects; o 3 months warranty for High-class or second time decoration; o 6 months warranty for installation works (one circle of service) 25.2 Warranty Guarantee conditions; Party B's warranty covered the problems of Construction Quality, unsuitable custody before being turned over, such as falling off, metamorphise, lose, crack etc. However, this warranty does not covered the factors due to Party A, such as man-made breakdown; hidden peril from original design, defects in substitute materials required by Party A, intentional damage or damage without intention, and damage by natural calamity and force majeure event in the course of the project being used. 19 25.3 Warranty contents: The warranty should cover all the projects which are paid in this contract (including its supplements), the decisions made at the site, the agreements in writing, changes and modification in design, and all contents mentioned in minutes of meeting. 25.4 Warranty Charges: Warranty charge will be deducted from the balance of the project, accounting for 2.5% of the contract price. If accumulated warranty charges exceed total budget for warranty, the excess part should also be paid by Party B. 25.5 During the warranty term, Party B should appoint resident workers there for providing warranty. (A special Room provided by Party A). 25.6 Party A must pay the balance of warranty charges to Party B at one time within 20 days after the end of the warranty term. ARTICLE 26. DISPUTE 26.1 If the dispute occurs in the course of fulfilling the contracts the two parties should negotiate it friendly. If the dispute cannot be settled by negotiation, the following solutions should be sought (1) Apply for intercession to SHENZHEN Construction Management Dept. or its authorised Construction Cost & Price Control Department. (2) Apply for arbitration to concerned authorities which response to economic contract arbitration. (3) Proceed legal actions at People's Court. 26.2 If the dispute is settled by the first way and the two parties accept the intercession, the intercession should be carried out within 2 days after issue of the intercession. If the intercession is not accepted or intercession cannot be fulfilled because of one party refusing to carry out, any party can apply for arbitration or seek for action at People's court. 20 21 ARTICLE 27 BREACH OF CONTRACT 27.1 Settlement of Breach of contract: Any party who is not able to carry out the contract completely is regarded as breach of contract. Default party should compensate for the economic loss for the other part. Responsibilities' sharing when the work schedule being delayed due to breach of contract: If Party A fails to observe the contract, work schedule can be postponed; If Party B fails to observe the contract, work schedule can't be postponed. 27.2 Penalty for breach of Contract: Any party without reason terminates the contract by itself shall be regarded as the defaulting party. The defaulting party shall be liable for all compensation for the other party's economic loss and shall pay for the penalty to the other party equivalent to 30% of the project cost in this contract. 27.3 Extent of compensation: (1) Party A does not comply with the provisions of this contract to issue necessary notices, approval or confirmation and does not carry out the obligations, payment and the other actions and result in the loss of Party B. (2) Economic loss to Party A is caused by that Party B does not complete the project on time, the project's quality cannot reach the requirements of the design and standard, or the other actions according to the contract which lead the contract cannot be fulfilled. 27.4 Calculation of damages: Actual and direct Loss + actual and Indirect Loss + interests at the interest rate of extraordinary loan from the bank. 27.5 Unless both parties agree to terminate this contract or this contract cannot be implemented due to the default of either party, the defaulting party shall fully be responsible for the loss and shall continue to implement this contract. 22 27.6 If this contract fails to carry out or one party decide to cancel the contract, the defaulting party should inform the other party by 10 days advance notice and shall sign the termination or cancellation agreement for approval by relevant authority. 27.7 If the termination of this contract is caused by Party B, Party A has the right to decide whether it accepts all the facilities, materials, equipment, tools at the construction site belonged to Party B. ARTICLE 28 CLAIM FOR COMPENSATION 28.1 If Party A does not pay the individuals expenses, postpone the work schedule, compensate the loss by contract, Party B can claim for compensation on Party A according to the following regulations: (1) The claims for compensation is legal with supporting evidences (2) Party A shall serve the notice of claim after 20 days of the occurrence of such claim. (3) Party A shall approve the claim within 10 days from the notice or claim or request Party B to provide further evidences or reasons. If Party A does not confirm within 10 days, the claim shall be regarded as approved by Party A. 28.2 If Party B does not finish the construction work or does not fulfil the obligations in this contract and cause the economic loss to Party A, Party A can have the right to claim for compensation from Party B in accordance with the following regulations: (1) The claims for compensation is legal with supporting evidences (2) Party B shall serve the notice of claim after 20 days of the occurrence of such claim. (3) Party B shall approve the claim within 10 days from the notice or claim or request Party A to provide further evidences or reasons. If Party B does not confirm within 10 days, the claim shall be regarded as approved by Party B. 23 ARTICLE 29 SAFETY OF CONSTRUCTION WORK 29.1 Based on the relevant safety regulations prevention measures and policies must be implemented strictly and scientifically by Party B to keep the construction work and third party's safety, and Party B should be liable for accidents, faults and expenses caused by Party B or due to its negligence. 29.2 If heavy casualty accidents occur, according to relevant regulations, Party B should report it to concerned department of construction management and notify Party A. Party A should provide necessary rescue conditions, but the expenses caused by it would be borne by defaulting party, 29.3 If the construction work located at the sites for power equipments, high-tension network, underground-pipes, sealed and quakeproof workshops, inflammable/explosives and, vital traffic lines, etc, Party B should notify Party A and apply for prevention and protective measure. If the application is approved, the prevention and protective measures can be implemented and the expenses for it will be borne by Party A. 29.4 If the construction work is located at poisonous environment, Party A should provide appropriate prevention protective measures and pay for the expenses for it. ARTICLE 30 UNDERGROUND OBSTACLES If Party B discovers articles which are valuable for archaeological and geological studies, such as cultural relic, ancient tomb, ancient construction base, fossil, ancient coin etc. or underground obstacles which interfere with the construction work, Party A should be notified within 4 hours and report concerned department so as to implement effective protection measure for Party B's measure should be approved by or proposals should be put forward to Party A within 12 hours after notice being received. Party A shall be responsible for the expenses of such protective measures, and the work schedule shall be postponed accordingly. ARTICLE 31 SUBCONTRACT 31.1 Terms of subcontract: Party B cannot subcontract the construction projects listed in the contract to the third party without the consent of Party A. 24 If the third party enters the construction site, Party A has the right to terminate the contract by notice to Party B and Party B should be responsible for all the subsequent economic loss. Party B can subcontract some construction projects to the third party with the approval of Party A. Party B should submit the copy of sub-contract agreement to Party A after the sub-contract is signed between Party B and the subcontractor. 31.2 Subcontract's responsibility: The obligations and duties of Party B will not be released by the subcontract agreement. Party B should appoint supervisors to supervise the subcontracted site to ensure that the subcontractor has not breached any terms of this contract. The breach of contract or negligence by the subcontractor shall be regarded as breach of contract or negligence of Party B. Article 32 Force majeure 32.1 The following shall be regarded as force majeure: (1) Earthquake above level 5 (2) Typhoon no. 8 or above lasting for one day (3) Heavy rain and storm exceeding 200mm for a continuous 6 hours. (4) Fire disaster caused by nature (5.) Other force majeure 32.2 If the above force majeure occur, Party B shall immediately implement appropriate measures and report to Party A. Party B shall further report the extent of damages, the expenses for clearing and renovating within 3 days after the disaster ended. If disasters happen intermittently, Party B shall report it to Party A at intervals of 3 days until the disaster ended. Party A shall provide necessary conditions for handling disaster. 32.3 The expenses incurred by for the disaster should be shared by both parties: (1) The damage of construction itself, Party B's temporary facilities at the site and the expenses for renovating should be shared and agreed between the two parties. 25 (2) Party B's equipments, machinery, vehicle etc. and the loss on idle time and work stoppage should be borne by Party B. (3) The expenses for clearing and renovating work shall be agreed upon by supplemental contract. ARTICLE 33 INSURANCE 33.1 Party A shall arrange and pay for the Insurance of persons and properties of Party A at the construction site; 33.2 Party B shall arrange and pay for the Insurance of Party B's persons and properties at the construction site; 33.3 Insurance of third party and its properties at the construction site shall be arranged and paid by the third party. 33.4 If accidents occur subsequent to the insurance, the relevant insured shall be responsible for the compensation. ARTICLE 34 SUSPENSION OR ADJOURNMENT OF CONSTRUCTION 34.1 If the construction has to be suspended and postponed due to a change of policy, force majeure event and the reasons out of Party A and Party B, the two parties should sign an agreement and submit to concerned authority for filing. 34.2 The problem regarding construction's suspension and adjournment should be negotiated among Party A, Party B and the concerned authority. ARTICLE 35 EFFECTIVENESS AND TERMINATION OF CONTRACT The contract will become effective after being signed and stamped by the legal representative or agent of the two parties, and confined by Shenzhen Construction Cost & Price Control Department. The contract will be terminated after the hand over of the completed project and the settlement being carried out save and. Except the terms for warranty all other terms will be inoperative. After the expiration of the warranty period, the terms for warranty will be inoperative. 26 ARTICLE 36 NO. OF CONTRACT COPIES 2 originals of the contract for Party A and Party B each. 12 copies will be distributed to Construction Control Dept., Cost & Price Control Station, banks as well as Party A and Party B and which shall simultaneously have the same effect. Party A: Party B: address : legal representative: appointed agent : telephone no. : bank's name : Bank of China, Baoan sub-branch bank account no. : 0115010008709 post code : 518126 date of contract : March 16, 1995 place of signing :
EX-2.6 7 CONSTRUCTION AGREEMENT DATED MAY 19, 1995 1 EXHIBIT 2.6 ENGLISH TRANSLATION CONSTRUCTION AGREEMENT Namtai Electronic (Shenzhen) Co. Ltd. Additional Construction of Equipment Work for the New Factory AND the Interior Decoration of Office May 19,1995 Namtai Electronic (Shenzhen) Co. Ltd. Shimizu Corporation 1 2 ENGLISH TRANSLATION AGREEMENT Pursuant to the additional equipment work for the new factory and the interior decoration of office of Namtai Electronic (Shenzhen) Co. Ltd. ("hereinafter referred to as the "Work"), Namtai Electronic (Shenzhen) Co. Ltd. (hereinafter referred to as the "Company") and Shimizu Corporation (hereinafter referred to as the "Contractor") have entered into this Agreement in accordance with the terms and conditions as stipulated below (1) Name and Site of the Work 1. Name of the Work; Additional equipment work and interior decoration work of office of the Shenzhen factory of Namtai Electronic (Shenzhen) Co. Ltd. 2. Site: Gusu Industrial Estate, Xinan, Baoan, Shenzhen, PRC. (2) The Work Content 1. Additional equipment work and office's interior decoration of Shenzhen factory. (3) Work period 1. Commencing Date : May 22, 1995 2. Completion Date: November 30, 1995 (4) Contract sum The Company shall pay to the Contractor a total sum of HK$32,687,000, details as set forth in the list attached hereto. (5) Payment Schedule The Company shall pay to the Contractor in accordance with the following payment schedule Upon signing of this Agreement 20% HK$6,537,400 (May 31, 1995) July 31, 1995 20% HK$6,537,400 September 30, 1995 25% HK$8,171,750 November 30, 1995 25% HK$8,171,750 December 31, 1995 10% HK$3,268,700
2 3 ENGLISH TRANSLATION The Contractor shall pay to the Company a 5% retention for guarantee of repair as soon as it receives the 10% balance contract sum. (6) Payment term 1. The Company shall telex transfer to the following designated account of the Contractor in HK$ Bank of Tokyo, Shenzhen Branch Shimizu Corporation Shenzhen office HK$ Account No. 500000775 2. Charges on such telex transfer shall be borne by the Company (7) Purchase of imported equipment Pursuant to the provisions of this Agreement, the equipments, machineries, appliances, tools, etc. shall be solely arranged by the Contractor. Nevertheless, if such goods have to be imported, after the Company has confirmed the quantity and price, with the approval of the Foreign Economic and Trade Committee, it will submit the list of equipments to the Contractor who shall act as its agent to purchase the designated equipments outside China. The Company shall be responsible for its importation and the price of such equipments shall be included in the contract sum. (8) Miscellaneous 1. The terms and conditions of this Agreement is formulated on the basis of the terms of agreement of Japan's "Four United Committee" with supplemental terms that [when there is changes in the laws, regulations of Shenzhen city and China and the instructions from government department relating to the design policy and drawings which affect the Work period and Contract sum, the Work period and Contract sum shall be revised accordingly.] (9) Enforceability of Agreement This Agreement shall become effective upon its signing and shall remain in full force and effect until both the Company and the Contractor have executed their responsibility. Provided however, if the Company or the Contractor have not obtained China government department's approval for implementing this Agreement, this Agreement shall become void. Each of the Company and the Contractor shall keep a set of this Agreement. 3 4 ENGLISH TRANSLATION May 19,1995 Company: Gusu Industrial Estate, Xinan, Baoan, Shenzhen, PRC. Namtai Electronic (Shenzhen) Co. Ltd. --------------------------------------- Director/General Manager Y. Inagawa Contractor: Shibaura 1-2-3, Minato-ku, Tokyo, Japan Shimzu Corporation --------------------------------------- Manager cons-agt 4 5 ENGLISH TRANSLATION TERMS AND CONDITIONS (1) General 1. The Company (hereinafter referred to as "Party A") and the Contractor (hereinafter referred to as "Party B") shall mutually and equally execute this Agreement. 2. Party B shall comply with the terms & conditions ("the Terms") of this Agreement and the design drawings and details of work (hereinafter referred to as "the Design Drawing Book" and incorporating the site specification and explanation items) to complete and deliver the Work and Party A shall settle all the Contract sum to Party B. (2) Work Site etc. 1. Party A shall provide all necessary site, building ("the Work Site") to Party B in accordance with provision of the Design Drawing Book and ensure that the same shall be provided to Party B prior to the required date. (if the Design Drawing Book has specified such date, the date shall follow that date) 2. In the event of problems relating to the boundary or its adjoining site, Party A shall settle with the assistance of Party B. (3) Details of Contract sum and Work schedule Party B shall submit details of contract sum and Work schedule to Party A upon signing of this Agreement. (hereinafter referred to as "the Contract Breakdown") (4) Assignment and Appointment Party B shall not assign or appoint the whole or the majority part of the Work to any third party. (5) Rights & Obligations on Assignment 1. Neither party shall assign any rights and obligations of this Agreement to any third party unless with the written consent of the other party. 2. Neither party shall assign, lent or pledge the target object and materials to any third party unless with the written consent of the other party. 5 6 ENGLISH TRANSLATION (6) Site responsible person 1. Party B shall designate a site responsible person and notify Party A in writing. 2. The site responsible person shall be fully in charge of all the Works provided that he should notify Party A on such significant matters relating to the Site's operation as the site management, safety measures, disaster prevention and commencing date of Work, etc. (7) Differences relating to the Work Party A shall notify Party B in writing specifying the reason when it considers that the act of the site responsible person and his workers are not appropriate for Party B to take necessary action. (8) Materials and machineries of the Work 1. Party B shall use the designated materials and equipment machineries as contained in the Design Drawing Book. Otherwise, it should use the product in accordance with the standard of the People's Republic of China. Party A shall request Party B to change (if it considers the same not appropriate). 2. Party B shall test the materials and machineries if the Design Drawing Book has specified such testing. 3. All direct cost for the above testing shall be borne by Party B. However, all cost for testing not specified in the Design Drawing Book shall be borne by Party A. 4. Party B shall arrange its own machineries, equipments, tooling, etc. to facilitate the Work. Party A shall support in the imported formalities if necessary. (9) Payment of materials and leasing of goods 1. The goods or materials shall be inspected or duly passed by Party B when making payment of materials or leasing of goods. 2. After Party B has paid for the materials or goods, if it discovered any hidden defects in accordance with the aforesaid inspection or test, it shall notify Party A for instruction. 6 7 ENGLISH TRANSLATION 3. The date of delivery of goods and the payment of materials shall be based on the Work Schedule submitted by Party B. If the place of delivery has not been specified in the Design Drawing Book, it shall be deemed the Site. 4. Party B shall carefully safe-keep and use all paid materials and leased goods. 5. Unless specifically provided in the Design Drawing Book, all usage of paid materials and residue materials shall be treated according to the instruction of Party A. 6. lf not designated in the Design Drawing Book, the place for returning materials not necessary to pay or used goods shall be the Site. (10) Prevention of damage 1. Party B shall at its own expenses protect all target object, materials and prevent any damage to the neighboring object or third party before yielding up the completed Work and take necessary measures in accordance with the Design Drawing Book and related regulations. 2. Upon confirmed by both Party A and Party B that the measures in respect of the protection of the object attached to the Work Site should not be responsible by Party B, such expenses shall be borne by Party A. 3. Party B shall seek for advice of Party A in the prevention of damage if it thinks fit. In emergency cases, Party B can take action before liaising with Party A. 4. Party B shall comply with the requirements of Party A in taking temporary measures. 5. The cost for the aforesaid measures shall be mutually determined by both parties. (11) Third Party Injury 1. Party B shall compensate for the injury of third party during the course of Work. Nevertheless, if it is apparent that the responsibility rests with Party A, Party A shall be liable. 7 8 ENGLISH TRANSLATION 2. If Party B has taken all appropriate course of prevention of noises, the sinking of foundations, stoppage of underground water, etc. without success and caused injury of third party, Party A shall be liable regardless of the aforesaid provision. 3. Any disputes with third party regarding the aforesaid provision and other matters of the Work shall be mutually managed by both parties. 4. The damage caused by the provision to third Party of sun shelter, wind damage, obstruction of electronic wave, etc. which are the responsibility of Party A shall be managed & settled by Party A. If necessary, Party B shall assist Party A. Compensation to third party shall be borne by Party A. 5. Due to the aforesaid, Party A shall follow the request of Party B to postpone the Work Period, if necessary, which date shall be mutually determined by both parties. (12) General damage to the Work 1. Party B shall take responsibility on all damage to the object of this Agreement, materials or other general damage in the course of work prior to its completion & the Work Period shall not be delayed. 2. If the aforesaid damage falls within the following circumstances, Party A shall be liable. If necessary, Party B can request for postponement of Work Period. (a) problem of Party A and hindered the Commencement Date or Party A delayed or stopped the Work (b) the delay in the payment of material or leased goods and caused the waiting or suspension of the Work of Party B (c) the delay in payment of the deposit or installment and result in the suspension of the Work of Party B (d) Because of the China government, such as apparent delay in the permission of Work import or custom formalities and affect the Work (e) Force Majeure as stipulated in Clause (13) (f) other causes due to Party A's responsibility 8 9 ENGLISH TRANSLATION (13) Force Majeure Party B shall not be responsible for the following damage as a result of Force Majeure but shall be entitled to extend the Work Period which cost shall be mutually determined by both parties. (a) Significant change in international situation or war; (b) riots or strikes; (c) orders from governmental authorities for execution, demolition or forbidden of transportation, etc.; (d) the change of laws or regulations in China, Japan or Hong Kong; (e) natural disaster, such as earthquake, burst of volcano, typhoon, rainstorm that caused flooding; (f) the influence by the damage of neighbouring site; (g) the prolonged time for unloading of imported goods; (h) the problems of Party A on the lease of the land of the Site. (14) Damage Insurance Party B shall arrange for their own insurance on its responsibility and third party insurance, etc. and notify details to Party A. However, the overall insurance of the building shall be insured by Party A or the owner of such building. (15) Completion inspection 1. After the completion of the Work by Party B in accordance with the Design Drawing Book, it shall be passed by the relevant China departments and then request for inspection by Party A. Party A shall accompany with Party B for inspection and deliver up the target object. 2. If it is found that Party B has not complied with all the necessary requirements, Party B shall rectify within the Work Period or within the designated time stipulated by Party A for re-inspection by Party A and relevant departments. 9 10 ENGLISH TRANSLATION 3. Party B shall liaise with Party A to clear up the Site within a designated time after completion of the Work. 4. If the clearing up of the Site as aforesaid is delayed without reason. Party A shall take action and charge the cost to Party B. (16) Partly use 1. Although the Work is still in progress, if necessary, Party A can begin using a part with the written consent of Party B and the confirmation of relevant departments. The part that used by Party A shall be managed by Party A. 2. Party A shall be responsible for the damages caused to the aforesaid part used by it. (17) Request, Payment & Settlement 1. Following the passing of the inspection as provided in clause (15) above, Party B shall yield up the object to Party A who shall settle all the payment in this Agreement. 2. Party A shall be entitled to settle part of the Contract sum for the portion of object that passed the inspection. (18) Protection of Defects 1. Party A shall request Party B to rectify the defects occurred in the Work within the required time or to compensate the loss in lieu thereof. Provided however, if such defect is immaterial and the cost for making good the same is excessively high, Party A and Party B shall negotiate mutually. 2. The guarantee of the aforesaid defects shall be calculated for 6 months from the delivery date as stipulated in sub-clause 1. and 2. of Clause (17). 3. Regarding defects on the interior decoration and furnitures, if Party A has requested for rectification or replacement upon the inspection of Party A, Party B shall have no responsibility thereof. However, hidden defects shall still remain 6 months guarantee (wear and tear excepted) 10 11 ENGLISH TRANSLATION 4. Party A shall immediately notify Party B for the defect mentioned in 1. above upon the yielding up of the object. Otherwise, it shall not request for rectification or compensation notwithstanding the provision of 1. above save and except the knowledge of Party B. 5. If Party A has not submitted the claims, within the period provided in sub-clause 2. above for the damage or defects affected by sub-clause 1. above within 3 months, all such rights shall become invalid. (19) Alteration of Work and Work Period 1. Party A shall make additional or alter the Work, if necessary. 2. Party A shall request to Party B for alteration of the Work Period. 3. Party B shall claim for compensation for loss to Party B due to the aforesaid sub-clauses. 4. Party B shall with reason request for extension of the Work Period due to additional work, alteration of work, suspension of work due to sub-clause 1 of clause 22. force majeure, etc. Extension of time shall be mutually agreed upon. (20) Alteration of Contract sum 1. Either party shall request for the other party to alter the Contract sum for the following: (a) alteration or addition of Work (b) change of Work Period (c) during the term of this Agreement, there is significant consequence to this Agreement due to the changes of laws, regulations, economic situations, etc. that make the Contract sum becomes unreasonable. (d) the Contract sum becomes unreasonable subsequent to the suspension of Work or recommencement of Work after damage. (e) changes to the type, quantity, place of delivery of materials or goods. 11 12 ENGLISH TRANSLATION 2. The Contract sum with regards the reduction of Work shall be completed by reference to the provision of the details or Work. Additional work shall be calculated by reference to the prevailing market price to be determined by both parties. (21) Delay and Default fine 1. if Party B fails to deliver the target object due to its own responsibility, Party A shall be entitled to a daily default fine at 0.1% of the balance Contract sum after deducting the completed portion, the part used by Party A pursuant to Clause (16) and the completed inspection work material. 2. If Party A fails to comply with the provision of sub-clause 1 or 2 of Clause (17) hereof for the payment of Contract sum or the sum equivalent to the Work, Party B shall be entitled to the daily default fine of 0.1%. 3 . The aforesaid provision applies to the delay in settling the deposit or installment by Party A. 4. Party B shall be entitled to reject the delivery of target object if Party A fails to comply with the provision of 2. above. Party B shall not be liable for any damage to the target object if it has taken reasonable care to manage. The cost of such management by Party B shall be borne by Party A. (22) Rights of termination by Party A 1. If necessary, Party A shall terminate the Work and cancel this Agreement but shall compensate for loss to Party B. 2. Party A shall be entitled to terminate this Agreement and claim for damages against Party B for the following circumstances (a) Party B fails to start the Work on the Commencement Date without reasonable excuse. (b) if fails to complete the Work within the Work Period or forecast the completion in accordance with the Work Schedule. (c) Party B fails to comply with the provision of Clause (4). 12 13 ENGLISH TRANSLATION (d) Party B fails to comply with the provision of sub-clause 2 of Clause (20) without reason and fails to settle despite the pushing of Party A. (e) Other than the 4 items mentioned above, Party B fails to comply with the terms and conditions of this Agreement and which caused the failure to achieve this Agreement. (f) Party B fails to request for termination pursuant to any reason provided in sub-clause 2. of Clause (23). (23) Rights of termination by Party B 1. Party B shall be entitled to terminate this Agreement on the following circumstances and claim for damages against Party A despite repeated reminder (a) Party A fails to settle deposit or installment. (b) Party A without reason fails to observe sub-clause 4 of Clause (19) or sub-clause 2. of Clause (20). (c) Party A fails to provide the Site as stipulated in Clause (2), or due to force Majeure. (d) Party A's responsibility that cause significant delay in the Work other than 3 above items. 2. Party B shall be entitled to cancel this Agreement due to the following: (a) the aforesaid day or suspension of Work for exceeding 1/4 of the Work Period. (b) Significant reduction of Work by Party A for more than 1/2 of the Contract sum. (c) the non-fulfillment by Party A of the terms of this Agreement that make it impossible to execute by Party B. (d) failure to pay for the Contract sum. 3. Party B can request for damages for the aforesaid circumstances. 13 14 ENGLISH TRANSLATION (24) Method of termination 1. Party A shall accept for the completed part and the materials and equipments purchased by party B and settle mutually 2. Pursuant to the provision of sub-clause 2. of Clause (22), all Contract sum excessively paid by Party A shall be refunded to Party A with interest calculated at the same rate as the short term loan in China. 3. Both Party A and Party B shall clear up their goods on the Site within the time agreed by both parties upon its termination. 4. If either party fails to deal with the aforesaid despite reminders, the other party shall take action on its behalf and change the necessary cost. (25 Settlement of dispute Any disputes arising from the execution of this Agreement, the Design Drawing Book, the Terms, etc. shall be settled pursuant to the International Trade Laws Arbitration Rules by means of one or more arbitrators selected therein. (26) Other matters 1. Any terms not stipulated in this Agreement and the Terms shall be mutually negotiated. 2. The interpretation of this Agreement applies to Japanese version. (27) Supplement 1. This Agreement shall become effective upon its execution. 14 EX-2.7 8 SUPPLY CONTRACT DATED MAY 19, 1995 1 EXHIBIT 2.7 SUPPLY CONTRACT FOR THE DIESEL GENERATORS FOR NAM TAI ELECTRONIC (SHENZHEN) LTD. FACTORY EXPANSION PROJECT AT SHENZHEN CITY, CHINA IN MAY, 1995 BETWEEN NAM TAI ELECTRONIC (SHENZHEN) LTD. AND SHIMIZU HONG KONG CO., LTD. 2 Supply Contract for the Diesel Generators for Nam Tai Electronic (Shenzhen) Ltd. Factory Expansion Project This Supply Contract is made 19th day of May 1995 Between Nam Tai Electronic (Shenzhen) Ltd., Gusu Industrial Estate, Xinan, Baoan, Shenzhen City, People's Republic of China (the Purchaser) of the one part and Shimizu Hong Kong Co., Ltd, Room 3302, Central Plaza, 18 Harbour Road, Hong Kong (the Supplier) of the other part. Whereas The Purchaser is desirous of procuring the Diesel Generators necessary for the Nam Tai Electronic (Shenzhen) Factory Expansion Project, and the Supplier is willing to supply each Generators to the Purchaser in accordance with the terms and conditions stipulated below. Now it is hereby agreed as follows: - 1. Supplier Obligations The Supplier shall at its cost procure the Generators and ancillary materials and deliver them to: The project site at Gusu Industrial Estate, Xinan, Baoan, Shenzhen City People's Republic of China 2. Contract Value The total value of the purchase, supply and delivery of materials and equipments shall be HK$19,016,000.00 (the Supply Contract Price). 3. Delivery Date The delivery dates of the Diesel Generators shall be the dates as determined by the Purchaser. 4. Specifications for the Diesel Generators Diesel Engine - Generator 3 Nos. Capacity: 3 Phase 380V 1,000 rpm, 1250 KV Water Cooled Type Cooling System, Exhaust System, Fuel System, Lubrication System, Generator Control Panel, Switch Board, D.C. Panel, and Subcentral Panel for D/G Set Manufacturer: Mitsubishi Heavy Industries Ltd. 3 5. Taxes and Duties All taxes and duties that may be applicable to the importation of the materials and equipment shall be borne by the Purchaser. 6. Terms of Payment The Supplier shall provide copies of all relevant shipping documents to the Purchaser for record purposes. The Purchaser shall make payments to the Supplier against the invoices by the Supplier in accordance with the agreed payment schedule (Appendix 1). The payments shall be made by telegraphic transfer to Supplier's bank account stated below, and the Purchaser shall bear the related bank charge. Supplier's Bank Account: c/o The Dai-ichi Kangyo Bank Ltd, Hong Kong Branch Current A/C No.: HIO-768-002981 Payee's Name: SHIMIZU HONG KONG CO., LTD. In Witness Whereof this Supply Contract has been prepared in duplicate and the parties hereto have signed hereunder. Signed for and on behalf of Nam Tai Electronic (Shenzhen) Ltd. [SIG] - -------------------------------- Witness: [SIG] Yoshio Inagawa -------------------------------- General Manager Signed for and on behalf of SHIMIZU Hong Kong Co., Ltd. [SIG] - -------------------------------- Witness: [SIG] Kiyoshi Koshida -------------------------------- Director 4 Terms and Conditions of Supply Contract 1. Acceptance Execution of this Supply Contract constitutes unconditional acceptance of these terms and conditions. 2. Delivery a) Unless otherwise stated, delivery shall be made to the destination stipulated in this Supply Contract and the cost thereof is deemed to be included in the prices quoted herein. b) The delivery dates given by the Purchaser's Main Contractor shall be strictly adhered to and the Supplier shall give notice to the Purchaser in writing immediately when any delay is foreseen. 3. Price The Supply Contract price shall be a fixed lump sum subject to adjustment agreed between the Purchaser and supplier. 4. Quality and Safe Custody The Supplier shall be responsible for the safe custody of all materials and equipment until delivered to the destination. The Supplier shall be responsible for reinstating at his own expense any materials damaged in transit or as a result of careless handling or storage. The quality of the materials and equipments shall conform to the specifications in the Contract. 5. Payment The Purchaser shall pay the Supplier the Supply Contract Price in Hong Kong dollar in accordance with the payment terms stipulated in this Supply Contract. In the event the Purchaser, without legal grounds, fails to pay against an application for payment issued by the Supplier within the period of 28 working days from receipt of such an application, and continues such default for a further seven days after receipt by registered post of a notice of termination from the Supplier, the Supplier shall be entitled to terminate this contract forthwith. 5 6. Packing The goods and materials shall be suitably packed and protected for transport and delivery to the destination. 7. Insurance The Supplier shall be responsible for providing all risks insurance coverage for the transportation and storage of all goods and materials. The insurance coverage shall be for the total value of the goods and materials. 8. Arbitration All disputes, controversies or differences which may arise between the Supplier and the Purchaser out of or in relation to or in connection with this Supply Contract, or for breach thereof shall be finally settled by arbitration in Hong Kong in accordance with the United Nations Commission on International Trade law (UNCITRAL) Arbitration Rules in force on the date of the Contract. The appointing and administering authority shall be the Hong Kong International Arbitration Centre. The award of such Arbitration shall be final and binding on the parties. 9. Governing Law This Supply Contract shall be governed in all respects by the laws of Hong Kong. 6 (Appendix I) Payment Schedule
Schedule % of Supply contract Price -------- -------------------------- 1. 31 of May, 1995 20% (HK$3,803,200.00) 2. 31 of July, 1995 20% (HK$3,803,200.00) 3. 30 of September, 1995 25% (HK$4,754,000.00) 4. 30 of November, 1995 25% (HK$4,754,000.00) 5. 31 of December, 1995 against 5% Bank Guarantee 10% (HK$1,901,600.00) (Maintenance Bond) -------------------- Total HK$19,016,000.00 ====================
7 PRELIMINARY SINGLE LINE DIAGRAM DWG NO. S6UP -XXXXX- [DIAGRAM] MITSUBISHI HEAVY INDUSTRIES, LTD. SAGAMIHARA MACHINERY WORKS [SEAL] 8 PRELIMINARY FLOW DIAGRAM DWG NO. S6UP -XXXXX-XX MITSUBISHI HEAVY INDUSTRIES, LTD. SAGAMIHARA MACHINERY WORKS [SEAL] EX-2.8 9 CONTRACTS OF PURCHASE DATED DECEMBER 29,1995 1 EXHIBIT 2.8 CONTRACT OF PURCHASE AND SALE Dated for reference the 29th day of December, 1995. BETWEEN: MING KOWN KOO Businessman, and SUI SIN CHO, Businesswoman, both of 5339 Buckingham Street, Burnaby, British Columbia, V5E 1Z9 (hereinafter jointly and severally called the "Buyer") OF THE FIRST PART AND: NAM TAI ELECTRONICS (CANADA) LTD., of #530 - 999 West Hastings Street, Vancouver, British Columbia, V6C 2W2 (hereinafter called the "Seller") OF THE SECOND PART WHEREAS: A. Nam Tai Electronics (Canada) Ltd. is the registered owner in fee simple of the following property: Civic address: 1507 Pinecrest Drive, West Vancouver, British Columbia Legal Description: Municipality of West Vancouver Parcel Identifier: 014-577-097 Lot 15 Block 57 Capilano Estates Extension No. 22 Plan 22343 (the "Property") B. The Buyer are directors of the Seller. C. The Seller has agreed to sell and the Buyer has agreed to buy the Property on the terms and subject to the conditions hereinafter provided. 2 D. The book value of the Property consisting of land and buildings as reflected in the financial statements of the Seller is CDN$2,200,000.00. E. The 1996 Property Assessment Notice prepared by the British Columbia Assessment Authority, a copy of which is attached hereto as Schedule "A", provides an assessed value of the land and buildings of the Property at $1,956,000.00. NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the parties hereto agree each with the other as follows: 1. The completion date shall be on or before February 29, 1996 (the "Completion Date"). 2. Upon the terms and subject to the conditions hereof, the Seller agrees to sell and transfer to the Buyer, and the Buyer agrees to buy from the Seller the Property at the purchase price of TWO MILLION TWO HUNDRED THOUSAND CANADIAN DOLLARS (CDN$2,200,000.00) (the "Purchase Price"). 3. The Seller shall execute and deliver in registrable form where necessary all documents required to give effect to this Contract of Purchase and Sale, including documents necessary for the transfer of the title to the Property from the Seller to the Buyer and any joint owner as may be designated by the Buyer, on the Completion Date. 4. The Seller shall deliver title to the Buyer free and clear of all encumbrances except subsisting conditions, provisos, restrictions, exception and reservations, including royalties, contained in the original grant or contained in any other grant or disposition from the Crown, registered or pending restrictive covenants and rights-of-way in favour of utilities and public authorities, existing tenancies set out below, if any, and except as otherwise set out herein. 5. The Possession Date shall be the same as the Completion Date. 2 3 6. The Adjustment Date shall be the same as the Possession Date. The Buyer will assume and pay all taxes, rates, local improvement assessments, insurance, fuel, utilities and other charges from, and including the date set for adjustments, and all adjustments both incoming and outgoing of whatsoever nature will be made as of the Adjustment Date. 7. All buildings on the Property and all other items included in the purchase and sale will be and remain at the risk of the Seller until 12:01 a.m. on the Completion Date. After that time, the Property and all included items will be at the risk of the Buyer. 8. The Seller declares and represents that the Seller is a resident of Canada as defined under the Income Tax Act. 9. The parties hereto shall execute such further assurances and other documents and instruments and do such further and other things as may be necessary to implement and carry out the intent of this Contract of Purchase and Sale. 10. This Contract of Purchase and Sale shall enure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. IN WITNESS WHEREOF the parties hereto have hereunto set their hands and seals as of the date first above written. SIGNED, SEALED AND DELIVERED ) by MING KOWN KOO in the ) ) presence of: ) ) ) Name: [SIG] ) [SIG] ---------------------------) ---------------------------------- PATRICK E. LEE, Esq. ) MING KOWN KOO Address: ) ------------------------) ) - --------------------------------) ) Occupation: ) ---------------------) 3 4 SIGNED, SEALED AND DELIVERED ) ) by SUI SIN CHO in the ) presence of: ) ) ) Name: /s/ PATRICK E. LEE ) /s/ SUI SIN CHO ---------------------- ) -------------------------- PATRICK E. LEE, Esq. ) SUI SIN CHO Barrister & Solicitor ) ) Address: Notary Public ) Suite 212 - 475 Main Street ) Vancouver, B.C. V6A 2T7 ) --------------------------- ) ) Occupation: ) ------------------------- ) EXECUTED on behalf of ) NAM TAI ELECTRONICS ) (CANADA) LTD. by its ) authorized signatory: ) ) ) ) /s/ MARK WASLEN ) - ---------------------------------- ) Authorized Signatory ) - - MARK WASLEN ) 4 5 SCHEDULE "A" BRITISH COLUMBIA ASSESSMENT ROLL NUMBER OFFICE USE ASSESSMENT AUTHORITY 08-45-328-24-0306-000-000 NEIGHCD 024 District of West Vancouver 025529 1996 PROPERTY ASSESSMENT This is your 1996 Property Assessment Notice. The purpose of this notice is to provide you with an estimate of your property value. This information will be used by the provincial government, municipalities, regional districts, and hospital boards to calculate your 1996 property taxes. PROPERTY DESCRIPTION Your property description may consist of a property address, legal description and the property identification (PID) number assigned by the Land Titles Office. 1507 PINECREST DR Lot 15, Block 57, Plan 22343, District Lot CE #22, New Westminster Group 1 Land District. PID-014-577-097 PROPERTY VALUE The value of your property is determined by local real estate market conditions. The ASSESSED VALUE is BC Assessment's estimate of the market value (most probable selling price) for your property had it been for sale on July 1, 1995. This value reflects the physical condition of your property as of October 31, 1995. VALUE CLASS LAND 709,000 BUILDINGS 1,247,000 ASSESSED VALUE $1,956,000 RESIDENTIAL TAXABLE VALUE $1,956,000 ADDITIONAL INFORMATION This information relates to your property and may be of interest to you. o This is an assessment of an incomplete building or structure. o "Residential" includes dwellings, recreational property, apartments, condominiums, manufactured homes, farm buildings and some vacant land. o 1995 assessed value (as of July 1, 1994) was $1,328,000 YOUR ASSESSMENT OFFICE FOR THIS PROPERTY IS: North Shore-Squamish Valley Area 255 First St W Suite 210 North Vancouver BC V7M 3G8 08-45-328-24-0306-000-000 Local Office (604) 984-9751 or 1-800-571-1211 Fax (604) 984-9310 If you have any questions about your 1996 Property Assessment, please call your local assessment office. During the month of January, the office will be open between 8:30 a.m. and 5:00 p.m., Monday through Friday. For more information, please see the back of this notice. PLEASE NOTE THAT THE DEADLINE FOR APPEALING YOUR ASSESSMENT IS JANUARY 31, 1996. THE OWNER/LESSEE OF THIS PROPERTY IS: NAM TAI ELECTRONICS LTD 530 999 HASTINGS ST W 40 VANCOUVER BC V6C 2W2 6 CONTRACT THIS AGREEMENT made as of the 29th day of December, 1995. BETWEEN: MING KOWN KOO, Businessman, of 5339 Buckingham Street, Burnaby, British Columbia, V5E 1Z9 (hereinafter called "KOO") OF THE FIRST PART AND: NAM TAI ELECTRONICS, INC., of Unit 513 - 520 No. 1 Hung To Road, Kwun Tong, Kowloon, Hong Kong (hereinafter called "NAM TAI INC.") OF THE SECOND PART WHEREAS: A. Nam Tai Electronics (Canada) Ltd. ("Nam Tai Canada") is a whollyowned subsidiary of Nam Tai Inc. B. Nam Tai Canada and Koo have entered into contracts (the "Contracts") for the purchase and sale of the land and buildings (the "Property"), and the home furnishings and accessories, household appliances and home theatre equipment (the "Furnishings") located at: Civic address: 1507 Pinecrest Drive, West Vancouver, British Columbia Legal Description: Municipality of West Vancouver Parcel Identifier: 014-577-097 Lot 15 Block 57 Capilano Estates Extension No. 22 Plan 22343 1 7 C. Koo agreed with Nam Tai Inc., through its subsidiary, Nam Tai Canada to purchase the Property at the purchase price which shall be the greater of: (i) the appraised value of the Property as determined by a fully qualified appraiser, with experience in appraisals of similar properties; and (ii) the value of the Property as reflected in the financial statements of Nam Tai Canada. D. The total book value of the Property and the Furnishings as reflected in the financial statements of Nam Tai Canada is equal to US$2,620,444.56. E. Canada Springfield Appraisal Consultants Ltd. has prepared an appraisal report of the Property, a copy of which is attached hereto as Schedule "A". The market value conclusion provided in this appraisal is equal to US$2,063,287.40. F. The 1996 Property Assessment Notice on the Property issued by the British Columbia Assessment Authority is attached hereto as Schedule "B". G. The total purchase price (the "Total Purchase Price") payable by Koo pursuant to the Contracts is equal to US$2,620,444.56 H. The values set out in paragraphs D, E and G are calculated at the exchange rate of CDN$1.3652 to US$1.0000, being the average of the buying and selling exchange rates as at the close of December 29, 1995. I. Nam Tai Inc. and Nam Tai Canada have represented to Koo the following: (i) Upon the respective completion dates in the Contracts, Nam Tai Canada shall assign and transfer to Nam Tai Inc. all of the rights of Nam Tai Canada to receive from Koo the respective purchase prices under the Contracts (the "Transfer of Receivables"); and (ii) Nam Tai Inc. has agreed with Nam Tai Canada that upon the Transfer of Receivables, the outstanding amount of the loans 2 8 owed by Nam Tai Canada to Nam Tai Inc. shall be reduced by the corresponding amount equal to the respective purchase prices under the Contracts (the "Partial Repayment of Inter-company Loan"). NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the parties hereto agree each with the other as follows: 1. Nam Tai Inc. and Koo agree: (a) on the completion dates under the Contracts, Nam Tai Inc. will effect the Transfer of Receivables and the Partial Repayment of Inter-company Loan on the same date; and (b) upon the Transfer of Receivables the Total Purchase Price shall be converted and payable in United States funds calculated at the exchange rate of CDN$1.3652 to US$1.00, being the average of the buying and the selling exchange rates as at the close of December 29, 1995, resulting in a final total purchase price of US$2,620,444.56 (the "Final Price"). 2. Koo and Nam Tai Inc. further agree as follows: (a) Koo shall waive all his rights to receive from Nam Tai Inc. the sum of FIVE HUNDRED THOUSAND US DOLLARS (US$500,000.00) payable to Koo as compensation for loss of office in exchange for a discount of US$450,000.00 on the Final Price; and (b) pursuant to sub-paragraph 2(a) above, the Final Price shall be reduced by FOUR HUNDRED FIFTY THOUSAND US DOLLARS (US$450,000.00) to TWO MILLION ONE HUNDRED SEVENTY THOUSAND FOUR HUNDRED FORTY-FOUR US DOLLARS and FIFTY-SIX CENTS ($2,170,444.56) (the "Net Purchase Price"). 3. As partial payment in the amount of FIFTY THOUSAND US DOLLARS (US$50,000.00) towards the Net Purchase Price, Koo shall transfer to Nam Tai Inc. 375 shares of Series B 10% Convertible Preferred Stock of Joseph Charles & Co., Inc., Warrant No. W-8, being a warrant for the purchase of 375 shares Of Series B 10% Convertible Preferred Stock of Joseph Charles & Co., Inc., and the right to receive 3.70% of all dealer warrants as evidenced by letter from Joseph Charles & Associates, Inc. Koo and Nam Tai Inc. agree that the above securities shall be valued at FIFTY THOUSAND US DOLLARS (US$50,000.00). 3 9 4. Koo and Nam Tai Inc. further agree that: (a) the payment term is that the balance of the Net Purchase Price in the amount of TWO MILLION ONE HUNDRED TWENTY THOUSAND FOUR HUNDRED FORTY-FOUR US DOLLARS and FIFTY-SIX CENTS ($2,120,444.56) shall be payable by Koo to Nam Tai Inc. on or before December 31, 1997, but in any event, upon Koo receiving demand in writing from Nam Tai Inc. for such payment if Nam Tai Inc. intends to issue securities through a recognized stock exchange or by private placement; and (b) after Nam Tai Inc. has made the written demand as set out in sub-paragraph 4(a), Nam Tai Inc. shall have the right to cause Koo to sell as much of Koo's shareholdings in Nam Tai Inc. as is necessary to ensure full payment of the balance of the Net Purchase Price as set out in sub-paragraph 4(a) above. 5. As security for the payment of the balance of the Net Purchase Price, Koo shall pledge to Nam Tai Inc. THREE HUNDRED THOUSAND SIX HUNDRED EIGHTY-TWO (300,682) shares in the capital stock of Nam Tai Inc., INC. (the "Security") and the Share certificates representing the Security shall be held in trust by a trustee (the "Trustee") to be appointed by Nam Tai Inc. Upon the full payment of the balance of the Net Purchase Price by Koo to Nam Tai Inc., Nam Tai Inc. shall cause the Trustee to return the said share certificates to Koo. The value of the Security based on the closing price of the shares of Nam Tai Inc. on the NASDAQ Exchange as at December 29, 1995 was US$3,533,014.00. 6. This Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns. IN WITNESS WHEREOF the parties hereto have hereunto set their hands and seals as of the date first above written. SIGNED, SEALED AND DELIVERED ) by MING KOWN KOO in the ) presence of: ) ) Name: IRENE M.C. SO ) ----------------------- ) ------------------------------ ) MING KOWN KOO Address: 3006 Albion Drive ) -------------------- ) Coquitlam, BC V3B 6W9 ) Canada ) ) Occupation: Secretary ) ----------------- ) 4 10 EXECUTED on behalf of ) NAM TAI ELECTRONICS, ) INC. by its authorized ) signatory(ies): ) ) ) ) ) ) - ------------------------------ ) Authorized Signatory ) ) ) ) ) ) - ------------------------------ ) Authorized Signatory ) 5 11 SCHEDULE "A" APPRAISAL REPORT of 1507 Pinecrest Drive West Vancouver, B.C. AS AT: May 30, 1995 PREPARED FOR: Nam Tai Electronics Ltd. Attn: Mark Waslen PREPARED BY: Canada Springfield Appraisal Consultants Ltd. 12 Lender Reference No.: APPRAISAL REPORT File No.: R506047F.SK Lender/Client Nam Tai Electronics Ltd. HOME OWNERSHIP UNITS APPRAISER Canada Springfield Attn: Mark Waslen ADDRESS OF PROPERTY Appraisal Consultants Ltd. Address: 4185 Still Creek Drive 1507 Pinecrest Drive Address: #830-505 Burrard Street Burnaby, B.C. V5C 6G9 West Vancouver, B.C. Vancouver, B.C. V7X 1M4 Tel: (____) _________ Tel: (604) 688-5675 APPLICANT NAME -- ---------------------------------------------------------------- LEGAL DESCRIPTION LOT 15, BLK 57, DL CE #22, LD 37, PLN 22343, PID: 014-577-097 ------------------------------------------------------------- MUNICIPALITY OR DISTRICT District of West Vancouver -------------------------- ASSESSMENT: LAND 657000 IMP 671000 TOTAL 1328000.00 TAXES $4,444.68-94 YEAR 1995 ------ ------ ---------- ------------ ---- PURPOSE OF APPRAISAL: To estimate the market value X or as of May 30, 1995 ----- ------------------ PROPERTY RIGHTS APPRAISED: Fee simple X Leasehold Condominium Co-operative Other (Specify) ----- ------ ------ ------ ------ OCCUPIED BY: Owner Tenant Vacant X ------------------------ ---------------------- ----- HIGHEST & BEST USE: Yes As improved NOTE: IF HIGHEST & BEST USE IS NOT THE CURRENT USE - SEE COMMENTS. ----- NIEGHBOURHOOD DESCRIPTION NATURE OF DISTRICT TREND OF DISTRICT CONFORMITY OF SUBJ. AVG. AGE OR PROPERTIES SUPPLY DEMAND X Residential Improving Inferior IN NEIGHBOURHOOD: X Good X Good - ----- ----- ----- ----- ----- Rural X Stable X Similar New to 35 Years Fair Fair - ----- ----- ----- --------- ----- ----- Mixed Deteriorating Superior Area Built Up 100% Poor Poor - ----- ----- ----- ----- ----- Transition - ----- ----------- ----- ----- ----------- DISTANCE Elementary School 1 km Public Transportation 0.5 km Price Range in Neighbourhood -------- ----------- TO: Secondary School 1 km Shopping Facilities 3.5 km $550,000-2,500,000 --------- ------------- ---------------------------- Downtown 12 km (Vancouver) ------------------------------- ------------------------ ---------------------------- SUMMARY: Including ADVERSE INFLUENCES IN AREA, if any (e.g. railroad tracks, commercial/industrial properties, unkempt properties, major traffic arteries, etc.) See addendum (1) - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- SITE DESCRIPTION SITE DIMENSIONS: 132.3X86.5/152/44.9/20.3/24.8 X PAVED ROAD X TELEPHONE X SANITARY SEWER -------------------------------- ----- ----- ----- SITE AREA: 12,744 sq.ft. SOURCE: site plan GRAVEL ROAD X GAS SEPTIC -------------------------------------- ----- ----- ----- TOPOGRAPHY: gently slopes up from street to* SIDEWALK X MUNICIPAL WATER X STORM SEWER ------------------------------------- ----- ----- ----- CONFIGURATION: irregular * rear X CURBS WELL-PRIVATE OPEN DITCH ---------------------------------- ----- ----- ----- ZONING: RS-3 X STREET LIGHTS X WELL-COMMUNAL ----------------------------------------- ----- ----- --------------- ----- -------------- X CABLEVISION - ------------------------------------------------- ----- ----- --------------- ----- -------------- DOES PRESENT USE CONFORM: X YES NO (IF NO, SEE COMMENT) ----- ----- LANDSCAPING EASEMENTS DRIVEWAY X EXCELLENT FAIR UTILITY X PRIVATE SINGLE CONCRETE X UNDERGROUND - ----- ----- ----- ----- ----- ----- ----- GOOD POOR ACCESS MUTUAL DOUBLE ASPHALT OVERHEAD - ----- ----- ----- ----- ----- ----- ----- AVERAGE NONE X Not known NONE Pav'g stone - ----- ----- ----- ------- ----- ----- ------ ----- -------- ----- ----------- COMMENT ON ANY POSITIVE/NEGATIVE FEATURES: (e.g. regarding conforming of zoning, effects of easements, value trends, etc.) The subject site is located at the corner of Pinecrest Drive and Chartwell Drive, has a view of the city and Burrard Inlet. - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- DESCRIPTION OF IMPROVEMENTS - EXTERIOR ESTIMATED YEAR BUILD: 1995 EFFECTIVE AGE: New ESTIMATED REMAINING LIFE: (yrs) 60 Yr -------------------- -------------------- --------------- CONSTRUCTION COMPLETE: No PERCENTAGE COMPLETE: 95% HOLDBACK RECOMMENDED: ------------------- -------------- ------------------------- FLOOR AREA BASEMENT TYPE OF BUILDING DESIGN CONSTRUCTION MAIN 2498.4 X FULL X DETACHED ONE STOREY X WOOD FRAME -------------------- ----- ----- ----- ----- 2nd 1933.7 PARTIAL SEMI-DETACHED SPLIT-LEVEL BRICK --------------------- ----- ----- ----- ----- 3rd CRAWL SPACE ROW/TOWNHOUSE 1 1/2 STOREY STONE --------------------- ----- ----- ----- ----- TOTAL 4432.1 TOTAL AREA 2108.8 APARTMENT X 2-STOREY CONCRETE ------------------- ----- ------------- ----- ----- ----- X SQ.FT. SQ.M. X SQ.FT. SQ.M. -------------------- ----- ----- ----- ----- ----- WINDOW SASH/GLAZING EXTERIOR FINISH ROOFING MATERIAL OVERALL EXT. CONDITION Double glazed/ BRICK VENNER WOOD SIDING ASPHALT SHINGLE X GOOD - ------------------------- ----- ----- ----- ----- wood SOLID BRICK ALUMINUM WOOD SHINGLE AVERAGE - ------------------------- ----- ----- ----- ----- U.F.F.I. APPARENT STONE VENEER VINYL TAR & GRAVEL FAIR ----- ----- ----- ----- YES X SOLID STONE INSULBRICK X Conc Tile POOR - ----- ----- ----- ----- --------- X NO X STUCCO New APPROX. AGE - ----- ----- ----- ----------- ----- ----- ---------------- DESCRIPTION OF IMPROVEMENTS - INTERIOR INSULATION FLOORING WALLS CEILINGS FINISH X CEILING X W-W CARPET SHEET VINYL PLYWOOD - ----- ----- ------------- ----- ------- -------- X WALLS SOFTWOOD VINYL TILE PLASTER - ----- ----- ------------- ----- ------- -------- X BASEMENT HARDWOOD X CERAMIC X X GYPSUM BOARD - ----- ----- ------------- ----- ------- -------- X CRAWL LINOLEUM - ----- ----- ------------- ----- ------------ ------- -------- ---------------------- X Marble tile - ----- ------------------- ----- ------------- ----- ------------ ------- -------- ---------------------- FLOOR PLAN CLOSETS BEDROOMS (#) BATHROOMS (#) OVERALL INT. CONDITION X GOOD X GOOD 1 LARGE 2 2-Pc. X GOOD X GOOD - ----- ----- ----- ------- ----- ----- AVERAGE AVERAGE 4 AVERAGE 1 3-Pc. AVERAGE AVERAGE - ----- ----- ----- ------- ----- ----- FAIR FAIR SMALL 4 4-Pc. POOR FAIR - ----- ----- ----- ------- ----- ----- POOR POOR 5-Pc. CUSTOMER POOR - ----- ----- ----- ------- ----- ----- 1 6-Pc. Upon Comp'tion - ----- ----- ------------- ----- ------------ ------- ----- -------- ----- FORM #: CSA-USPAP 01/92 Page 1 This form was produced using CRAL by CSA, Inc., Copyright (C) 1989 - 1994 Canada Springfield Appraisal Consultants
13 FOUNDATION WALLS PLUMBING LINES ELECTRICAL WATER HEATER HEATING SYSTEM X POURED CONCRETE X COPPER FUSES X GAS FORCED AIR - --- --- --- --- --- CONCRETE BLOCK X PVC X BREAKERS ELECTRIC GRAVITY - --- --- --- --- --- CONCRETE SLAB GALVANIZED X HOT WATER - --- --- --- ------ --- ------ --- BRICK STONE RATED CAPACITY OF MAIN N/A CAPACITY - --- --- ------------- --- BREAKERS 400 AMPS FUEL TYPE Gas FUEL TYPE - --- ------------ --- ------------- ----- --- --- BUILT-IN APPLIANCES/EXTRA FEATURES: X STOVE X VACUUM CENTRAL AIR SAUNA X SOLARIUM X Heat Exchanger - --- ---- --- --- --- --- --------------------- X OVEN X GARBAGE DISPOSAL AIR CLEANER WHIRLPOOL X SKYLIGHTS X Microwave - --- ---- --- --- --- --- --------------------- X DISHWASHER 2-gas FIREPLACE(S) X SECURITY SYSTEM X SWIMMING POOL X GARAGE OPENER X Sub-zero Refrigerator - --- ----- --- --- --- --- ---------------------
BASEMENT FINISHES, UTILITY: See addendum (2) GARAGES/CARPORTS: Attached triple garage. DECKS, PATIOS, OTHER IMPROVEMENT: See addendum (3) COMMENTS: Building, appearance, quality, condition, services including extras: See addendum (1)
ROOM ALLOCATION COST APPROACH LEVEL: MAIN SECOND THIRD BSMT. SOURCE OF COST DATA: MANUAL LOCAL CONTRACTOR X OTHER ---- ---- --- ROOMS: ENTRANCE 3 LAND VALUE: $750000 LIVING 1 ----------------------------------- ----------- DINING 1 KITCHEN 1+nook BUILDING COST NEW DEPRECIATED COST FULL BATH 1-6pc 1-3pc PART BATH 2-2pc 3-4pc 1-4pc COST 6541.00 @ $ 275.00 $ 1798775 BEDROOM 4 1 -------- -------- ----------- FAMILY 1 GARAGE: $ 18000 $ LAUNDRY 1 ----------------------- ----------- ----------- OTHER(S) pantry ** wine BASEMENT FINISH: study media cellar -------------- room rec rm $ $ steam bar ------------------------------ ----------- ----------- room ** OTHER EXTRAS: Pool house, $ $ ---------------- ----------- ----------- landscaping, fence, $ $ ------------------------------ ----------- ----------- patio, walking & drive- $ $ ------------------------------ ----------- ----------- way, etc. $ 250000 ------------------------------ ----------- ----------- TOTAL REPLACEMENT COST: $ 2066775 ------- ----------- LESS ACCRUED DEPRECIATION % $ $ 2066775 --- ----------- ----------- INDICATED VALUE: $ 2816775 ---------------------------- ----------- VALUE BY THE COST APPROACH (rounded) $ 2816800
DIRECT COMPARISON APPROACH ITEM SUBJECT PROPERTY COMPARABLE NO. 1 COMPARABLE NO. 2 COMPARABLE NO. 3 DESCRIPTION $ ADJUST. DESCRIPTION $ ADJUST. DESCRIPTION $ ADJUST. ADDRESS 1507 Pinecrest Drive West Vanc. DATE OF SALE SALE PRICE SITE SIZE 12,744 sq.ft. PLEASE SEE ADDENDUM (4) S.F.L.F.A. 4432 sf AGE/CONDITION New / Good / / / STYLE 2 stry w/bsmt RMS/BEDS/BATH 13 /5/1F/2H5E / / / / / / BASEMENT 2109 sf GARAGE/PARK Triple garage ADJUSTED VALUES/NET ADJUSTED TOTALS
CONCLUSIONS: See addendum (5) VALUE BY THE DIRECT COMPARISON APPROACH (ROUNDED) $2,700,000 FINAL ESTIMATE OF VALUE/COMMENT ON REASONABLE EXPOSURE TIME: See addendum (6) COMMENT ON AND ANALYZE ANY KNOWN SALES, LISTING OR OFFER TO PURCHASE ON THE SUBJECT PROPERTY OVER THE PAST YEAR: (Include source of information) There are no transaction involving the subject over the past year. The last known transaction involving the subject occurred in September 1989, when the present owner acquired the property as is vacant for $585,000. AS A RESULT OF MY APPRAISAL AND ANALYSIS IT IS MY OPINION THAT THE MARKET VALUE OF THE SUBJECT PROPERTY AS AT May 30, 1995 is $2,700,000. THIS REPORT WAS COMPLETED ON June 13, 1995. ADDITIONAL SALES: ATTACHED SKETCH ADDENDUM: ATTACHED OTHER: (SPECIFY) ---- ---- NARRATIVE ADDENDUM: X ATTACHED PHOTO ADDENDUM: X ATTACHED ATTACHED ---- ---- ---- LIMITING MAP ADDENDUM: X ATTACHED CONDITIONS/CERTIFICATION: ATTACHED ATTACHED ---- ---- ---- INSPECTED PROPERTY (DATE) APPRAISER Steven Kwan SIGNATURE /s/ STEVEN KWAN DESIGNATION 05/30/95 -------------------------------- -------------------- ------------- -------- SUPERVISORY APPRAISER David J. Wilson B.Sc ARICS SIGNATURE /s/ DAVID J. WILSON DESIGNATION AACI ---------------------------------- -------------------- -------------
This form was produced using CRAL by CSA, Inc., Copyright (C) 1989 - 1994 Form #: CSA-USPAP 01/94 Page 2 Canada Springfield Appraisal Consultants 14 LENDER/CLIENT Nam Tai Electronics Ltd. ADDRESS OF PROPERTY Attn: Mark Waslen 1507 Pinecrest Drive ADDRESS: 4185 Still Creek Drive West Vancouver, B.C. Burnaby, B.C. V5C 6G9 TEL: ( ) - ------------------------------------------------------------------------------- NARRATIVE ADDENDUM: APPRAISAL REPORT - ------------------------------------------------------------------------------- (1) A. NEIGHBOURHOOD The subject property is located in a quiet prestigious residential known as British Properties within the District of West Vancouver. The neighbourhood is a developed area composed of detached single family dwellings of mixed ages. The surrounding developments are of good quality and in well maintained condition. The area residents are of the upper income group. General amenities such as shopping and schools are within easy driving distance and public transportation is within easy walking distance. B. SITE DESCRIPTION The subject is a freehold property. It is terraced and has a gentle slope from the street up towards the rear. The site is an irregular-shaped corner lot containing an area of approx. 12,744 sq.ft. There is a good view of the city, Burrard Inlet and the ocean from the property. The site enjoys a full complement of municipal services. Municipal services to the site include asphalt paved street with concrete curbs and gutter, concrete sidewalk, hydro, natural gas, water, sanitary and storm sewers, street lighting, cablevision, and police and fire protection. C. IMPROVEMENT The improvement is a two storey, full-basement dwelling. It is of wood construction on concrete foundation. The exterior is finished with acrylic stucco and solid granite stone facing, and the roof covering is of combination of tar and gravel and concrete tile finish. The total gross floor area is 6,532 square feet, comprising 2,489 square feet on the main floor, and 1,934 square feet on the upper floor, and 2,109 square feet of finished area in the basement. The main floor contains a living room with a gas fireplace, dining room, kitchen with an eating area, family room, laundry, pantry, study and two-2pc powder room. The upper floor contains 4 bedrooms with a 6pc ensuite in the master bedroom, and an 4pc ensuite in each of the remaining bedroom. The basement is fully finished and contains a recreation room with a full bar, 1 bedroom with 4pc ensuite, a 3pc bathroom with a changing area and steam room, and a utility room. An accessory building adjacent to the garden terrace contains a 14'x8' heated and filtered inground swimming pool. PARKING Parking is provided by an attached triple garage with a concrete and paving stone paved driveway. 15 - ------------------------------------------------------------------------------- LENDER/CLIENT Nam Tai Electronics ADDRESS OF PROPERTY Ltd. Attn: Mark Waslen ADDRESS: 4185 Still Creek Drive 1507 Pinecrest Drive Burnaby, B.C V5C 6G9 West Vancouver, B.C. TEL: ( )........................ .............................. - --------------------------------- ------------------------------ - ------------------------------------------------------------------------------- NARRATIVE ADDENDUM: APPRAISAL REPORT - ------------------------------------------------------------------------------- SPECIAL FEATURES * 12 feet high ceiling over the living room * Wainscotting in the dining room * Skylights over the breakfast area, master ensuite & the secondary staircases * The kitchen (is of good quality) and will have siematic 7,007 RA cabinets, gaggenau cook top & wok top, jennair built-in oven, microwave oven, dishwasher, garburator and sub-zero refrigerator * Good quality bathroom with jacuzzi bathtub (all Kohler brand) * Walk-in closet in the master bedroom * Remote control garage door openers and electronic remote control front gate * Heated and filtered inground swimming spa pool * Built-in vacuum system and alarm system * Radiant hot water heating * Intercom with video monitor * Extensive use of mohogary trim and panels * Built-in wall cabinets & closet organizers * Sound insulated media room The subject building is currently at the final finishing stage, and we assumed that the subject building will be in a good condition throughout upon completion. To the best of our knowledge, the subject property does not contain Urea Formaldehyde insulation. (2) BASEMENT FINISHES, UTILITY: The basement is finished with similar quality of finishing as the other floors, has a recreation room with full bar, mini theatre, exercise room and steam room, etc. (3) DECKS, PATIOS, OTHER IMPROVEMENT: Slate paving terrace off the family room. Garden terrace off the study room at rear. Detached accessory building containing a 14'x8' swimming spa pool surrounded with tiled floor, adjacent to the garden terrace. Paving stone tile view deck off the master ensuite and the upper floor hallway. 16 - ------------------------------------------------------------------------------- LENDER/CLIENT Nam Tai Electronics ADDRESS OF PROPERTY Ltd. Attn: Mark Waslen ADDRESS: 4185 Still Creek Drive 1507 Pinecrest Drive Burnaby, B.C V5C 6G9 West Vancouver, B.C. TEL: ( )........................ .............................. - --------------------------------- ------------------------------ - ------------------------------------------------------------------------------- NARRATIVE ADDENDUM: APPRAISAL REPORT - ------------------------------------------------------------------------------- Addendum (4)
======================================================================================================================== COMP ADDRESS LOT SIZE BUILDING SALE PRICE/ NO. (SQ.FT.) DATE - ------------------------------------------------------------------------------------------------------------------------ 1 1438 Chippendale 85.3'x128.3'/86.9'/156.7' 7,000 $2,400,000/ Road or 12,028 sq.ft. April 1995 - ------------------------------------------------------------------------------------------------------------------------ 2 1322 Cammeray 135'x120'/89.98'/92.7'/42.3' 6,340 $2,300,000/ Road Dec 16, 1994 - ------------------------------------------------------------------------------------------------------------------------ 3 1438 Bramwell Road 74.35'x156'/105'/170.88' 7,027 $2,210,000/ or 14,402 sq.ft. April 1995 - ------------------------------------------------------------------------------------------------------------------------ 4 2558 Westhill Drive 115.6'x167.1'/54'/62.5'/19.4' 6,368 $1,920,000/ or 11,996 sf Aug 3, 1995 - ------------------------------------------------------------------------------------------------------------------------ 5 1509 Chartwell Drive 97.14'x157.76'/100'/191.18' 9,000 $2,688,000 Aug 12, 1994 ========================================================================================================================
Addendum (5) In preparing our estimate current market value of the subject property, a number of current listings and sales comparables have been examined, and we have placed most emphasis on sales of dwellings offering similar location and quality of improvement. Comparable No. 1 is a recent private sale, improved with a 5 year old, 2 storey with basement, architectural design building containing a total of 7,000 square feet livable area. It is situated on a similar size lot, slightly superior in location, however, slightly inferior in quality of finishing, has a slightly sloped driveway. Comparable No. 2 is a slightly dated sale, improved with a newly constructed 2 storey with basement, architectural design building containing a total of 6,340 square feet livable area. It is situated on a similar size lot, slightly inferior in location and quality of finishing, has a level driveway. Comparable No. 3 is a recent exclusive sale, improved with a 6 year old, 2 storey with basement, architectural design building containing a total of 7,027 square feet livable area. It is situated on a slightly larger lot, similar in location and quality of finishing, has a slightly sloped driveway. Comparable No. 4 is a recent sale, improved with a 5 year old, architectural design building containing a total of 6,368 square feet livable area. It is situated on a similar size lot, inferior in location, has similar quality of finishing, and a driveway moderately sloped down from street. Comparable No. 5 is a dated sale, improved with a newly renovated and modernized 17 year old, 2 storey with basement building containing a total of 9,000 square feet livable area. It is situated on a slightly larger but steeply sloped lot, similar in location and quality of finishing. These data suggested an adjusted range in value of the subject property from $2,700,000 to $2,800,000, within this range, we feel that the lower limit is warranted due to the current soft market condition. Therefore based upon our inspection and analysis of limited data available, it is our opinion that the market value of the subject property on May 30, 1995 was:- TWO MILLION AND SEVEN HUNDRED THOUSAND DOLLARS ($2,700,000) 17 - ------------------------------------------------------------------------------- LENDER/CLIENT Nam Tai Electronics ADDRESS OF PROPERTY Ltd. Attn: Mark Waslen ADDRESS: 4185 Still Creek Drive 1507 Pinecrest Drive Burnaby, B.C V5C 6G9 West Vancouver, B.C. TEL: ( )........................ .............................. - --------------------------------- ------------------------------ - ------------------------------------------------------------------------------- NARRATIVE ADDENDUM: APPRAISAL REPORT - ------------------------------------------------------------------------------- Addendum (6) FINAL ESTIMATE OF VALUE In the subject appraisal, two approaches to value have been employed with the following results: Cost Approach $2,800,000 Market Approach $2,700,000
Both approaches provide the similar results. There is weakness in the Cost Approach as the subject is a new dwelling and is difficult to estimate the developer's profit. In the Market Approach, truly comparable sales are scarce and a considerable amount of adjustments for location, building and lot size, age and quality of improvements of the comparable sales have been made. The indicated value estimate relies somewhat on our experience and judgement. Both approaches contain weakness but combine to provide a reasonable indication of value. In our final analysis, we have placed more weight on the Market Approach. Therefore, it is our opinion that the market value of the subject property as at May 30, 1995 was $2,700,000. The reasonable exposure time is likely in the region of three to nine months. 18 - ------------------------------------------------------------------------------- LENDER/CLIENT Nam Tai Electronics ADDRESS OF PROPERTY Ltd. Attn: Mark Waslen ADDRESS: 4185 Still Creek Drive 1507 Pinecrest Drive Burnaby, B.C V5C 6G9 West Vancouver, B.C. TEL: ( )........................ .............................. - --------------------------------- ------------------------------ - ------------------------------------------------------------------------------- SUMMARY OF SALIENT FACTS AND CONCLUSIONS - ------------------------------------------------------------------------------- LEGAL DESCRIPTION: LOT 15, BLK 57, DL CE #22, LD 37, PLN 22343, PID: 014-577-097 MUNICIPALITY OR DISTRICT: District of West Vancouver HIGHEST AND BEST USE: Yes SITE: SITE AREA: 12,744 sq. ft. ZONING: RS-3 IMPROVEMENTS: ESTIMATED YEAR BUILT: 1995 EFFECTIVE AGE: New ESTIMATED REMAINING LIFE: 60 yr ROOMS/BEDROOMS/BATH: 13 /5/lF/2H5E TOTAL LIVING AREA: 4432.1 REAL ESTATE TAXES ($): 4,444.68-94 DATE OF APPRAISAL: May 30, 1995 SALES INFORMATION: DATE OF SALE: SALE PRICE: SUMMARY OF VALUE FINDINGS VALUATION APPROACH VALUE INDICATION ($) COST APPROACH: 2,816,800 DIRECT COMPARISON APPROACH: COMP 1: COMP 2: COMP 3: COMP 4: COMP 5: COMP 6: VALUE BY THE DIRECT COMPARISON APPROACH: 2,700,000 LAND VALUE: 750,000 MARKET VALUE CONCLUSION ($) 2,700,000 19 - ------------------------------------------------------------------------------- CERTIFICATION AND STATEMENT OF LIMITING CONDITIONS - PAGE 1 - ------------------------------------------------------------------------------- DEFINITION OF MARKET VALUE: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition in the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and sailor are typically motivated; (2) both parties are well informed or well advised, with each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in Canadian dollars or In terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. CERTIFICATION AND STATEMENT OF LIMITING CONDITIONS CONTINGENT AND LIMITING CONDITIONS: The certification that appears in the appraisal report is subject to the following conditions: 1. Because market conditions, including economic, social and political factors change rapidly and, an occasion, without warning, the market value estimate expressed as of the date of this appraisal cannot be relied upon as of any other date except with further advice from the appraiser confirmed in writing. 2. No responsibility is assumed for matters of a legal nature that affect either the property being appraised or the title to it. It has been assumed that the title is good and marketable and, therefore, no opinion is rendered about the title. The subject property must comply with government regulations, including zoning, building code and health regulations and, if it doesn't comply, its non-compliance may affect market value. To be certain of compliance, further investigation may be necessary. The property is appraised on the basis of it being under responsible ownership. 3. No survey of the property has been made. Any sketch in the appraisal report shows approximate dimensions and is included only to assist the reader of the report in visualizing the property. 4. This report is completed on the basis that testimony or appearance in court is not required as a result of this appraisal unless specific arrangements to do so have bean made beforehand. Such arrangements will include, but not necessarily be limited to, adequate time to review the appraisal report and data related thereto and the provision of appropriate compensation. 5. Unless otherwise stated in the appraisal report, there are no known unapparent or hidden conditions of the property (including but not limited to its soils, physical structure, mechanical and other operating system, its foundation etc.) or adverse environmental conditions (on it or a neighbouring property, including the presence of hazardous wastes, toxic substances etc.) that would make the property more or lose valuable. It has been assumed that there are no such conditions unless they were observed at the time of inspection or became apparent during the normal research involved in completing the appraisal. The attached report should not be construed as an environmental audit or a detailed property condition report, as such reporting is beyond the scope of this report and/or the qualifications of the appraiser. Responsibility is not accepted for any such unapparent or hidden conditions that do exist, or for any research, testing or engineering that might be required to discover whether such conditions exist. 6. Information, estimates, and opinions that have been expressed in the appraisal report are obtained from sources considered to be reliable and they are believed to be true and correct. No responsibility is assumed for the accuracy of such items that were furnished by other parties. 7. The opinions of value and other conclusions contained herein assume satisfactory completion of any work remaining to be completed in a good and workmanlike manner. Further inspection may be required to confirm completion of such work. 8. The contents of this report are considered confidential and will not be disclosed by the author to any party except as provided for in the Standards of Professional Practise of the Appraisal Institute of Canada and/or when properly entered into evidence of a duly qualified judicial or quasi-judicial body. 9. Written consent from the author and supervisory appraiser must be obtained before all (or any part) of the content of the appraisal report can be used for any purposes by anyone except: the client specified in the report and, where the client is the mortgages, its insurer and the borrower, if he/she paid the appraisal fee. The author's written consent and approval must also be obtained before the appraisal (or any pan of it) can be conveyed by anyone to any other parties, including mortgagees other than the client and the public through prospectus, offering memo, advertising, public relations, news, sales or other media. 20 - ------------------------------------------------------------------------------- CERTIFICATION AND STATEMENT OF LIMITING CONDITIONS - PAGE 2 - ------------------------------------------------------------------------------- APPRAISER'S CERTIFICATION: The Appraiser certifies and agrees that: 1. The subject market area has been researched and a minimum of three recent sales of properties have been selected that are the most similar and proximate to the subject property for consideration in sales comparison analysis and a dollar adjustment have been made where appropriate to reflect the market reaction to those items of significant variation. If a significant item in a comparable property is superior to, or more favourable then, the subject property, a negative adjustment is made to reduce the adjusted sales price of the comparable and, it a significant item in a comparable property is inferior to, or lose favourable than the subject property, a positive adjustment is made to increase the adjusted sales price of the comparable. 2. All factors known to the appraiser (and to the extent that the data permits) that have an impact on value have boon taken into consideration to the extent felt necessary in rendering a considered opinion of value. No significant information has been knowingly withhold from the appraisal report and it is believed to the best of my knowledge, that all statements and information in the appraisal report are true and correct. 3. Only my personal, unbiased, and professional analysis, opinions, and conclusions are stated in the appraisal report. Included on this form are all contingent and limiting conditions affecting the analysis, opinions, and conclusions, whether they were imposed by the terms of the assignment or by the appraiser. 4. I have no past, present or prospective interest in the property that is the subject to this report, and I have no present or prospective personal interest in the property or bias with respect to the parties involved. 5. The opinion of value stated within this report does not result from a requirement to report a predetermined value or direction in value that favours the cause of the client or any related party, the attainment of a specific result, or the occurrence of a subsequent event in order to receive the compensation and/or employment for performing the appraisal. The reported value is not based on a requested minimum valuation, a specific valuation, or the need to approve a specific mortgage loan. 6. The appraisal has been performed in conformity with the Standards of the Appraisal Institute of Canada with the exception of the departure provision of those Standards, which does not apply. It is acknowledged that an estimate of a reasonable time for exposure in the open market is a condition in the definition of market value and the estimate developed is consistent with the marketing time noted in the appropriate section of this report unless otherwise stated in the reconciliation section. 7. The interior and exterior of the subject property were personally inspected on the date shown in the attached report. It is hereby certified that any apparent or known adverse conditions have been noted herein, in the subject improvements, on the subject site, or on any site, within the immediate vicinity of the subject property which were apparent as of the date of inspection and that adjustments have been made for these adverse conditions in the analysis of the property value to the extent that market evidence was available to support them. 8. All conclusions and opinions about the real estate were personally prepared as same are set forth in the appraisal report. If there was reliance on significant professional assistance from any individual or individuals in the performance of the appraisal or the preparation of the appraisal report, such individual(s) have been named heroin including the disclosure of specific tasks performed by them. No authorization has been given to anyone to make a change to any item in the report; therefore, if an unauthorized change is made to the appraisal report, no responsibility for such changes is assumed. SUPERVISORY APPRAISER'S CERTIFICATION: If a supervisory appraiser signed the appraisal report, he or she certifies and agrees that: direct supervision of the appraiser who prepared the appraisal report was performed and that the supervisor participated in the development of the estimate of market value in this appraisal report, reviewed the appraisal report, agree with the statements and conclusions of the appraiser, and take full responsibility for the appraisal report. APPRAISER: SUPERVISORY APPRAISER (if applicable): Signature: Signature: [SIG] ----------------------------- ------------------------- Name: Steven Kwan Name: David J. Wilson B.SC ARICS --------------------------------- ------------------------------ Inspected Property: Yes: X No: Inspected property: Yes: No X ---- --- --- --- --- --- Date Signed: June 14, '95 Date Signed: June 14, '95 --------------------------- ----------------------- Designation: Designation: AACI --------------------------- ---------------------- Recertified: Yes: No: X Recertified: Yes: X No: ---- ---- ---- ---- ---- ----- 21 - ------------------------------------------------------------------------------- LENDER/CLIENT Nam Tai Electronics ADDRESS OF PROPERTY Ltd. Attn: Mark Waslen ADDRESS: 4185 Still Creek Drive 1507 Pinecrest Drive Burnaby, B.C V5C 6G9 West Vancouver, B.C. TEL: ( )........................ .............................. - --------------------------------- ------------------------------ - ------------------------------------------------------------------------------- CERTIFICATION AND STATEMENT OF LIMITING CONDITIONS ADDITIONAL COMMENTS - ------------------------------------------------------------------------------- 9. Address: 1508 Pinecrest Drive, West Vancouver, B.C. Legal description of Property: LOT 15, BLK 57, DL CE#22, LD 37, PLN 22343, PID: 014-577-097 Date of Inspection: May 30, 1995 Appraisal Value: $2,700,000 Effective Date of Valuation: May 30, 1995 10. That as of May 30, 1995, the effective date of this report, the subject property identified as 1507 Pinecrest Drive, West Vancouver, B.C., has a value Of TWO MILLION AND SEVENTY THOUSAND DOLLARS ($2,700,000), subject only to the underlying assumptions and limiting conditions set out in this report. 11. That the subject property was inspected on May 30, 1995 and that no one else provided significant professional assistance to the persons signing this report. 22 - ------------------------------------------------------------------------------- LENDER/CLIENT Nam Tai Electronics ADDRESS OF PROPERTY Ltd. Attn: Mark Waslen ADDRESS: 4185 Still Creek Drive 1507 Pinecrest Drive Burnaby, B.C V5C 6G9 West Vancouver, B.C. TEL: ( )........................ .............................. - --------------------------------- ------------------------------ - ------------------------------------------------------------------------------- BUILDING SKETCH ADDENDUM - ------------------------------------------------------------------------------- [MAP] 23 - ------------------------------------------------------------------------------- LENDER/CLIENT Nam Tai Electronics ADDRESS OF PROPERTY Ltd. Attn: Mark Waslen ADDRESS: 4185 Still Creek Drive 1507 Pinecrest Drive Burnaby, B.C V5C 6G9 West Vancouver, B.C. TEL: ( )........................ .............................. - --------------------------------- ------------------------------ - ------------------------------------------------------------------------------- LOCATION MAP ADDENDUM - ------------------------------------------------------------------------------- [MAP] 24 - ------------------------------------------------------------------------------- LENDER/CLIENT Nam Tai Electronics ADDRESS OF PROPERTY Ltd. Attn: Mark Waslen ADDRESS: 4185 Still Creek Drive 1507 Pinecrest Drive Burnaby, B.C V5C 6G9 West Vancouver, B.C. TEL: ( )........................ .............................. - --------------------------------- ------------------------------ - ------------------------------------------------------------------------------- SITE MAP ADDENDUM - ------------------------------------------------------------------------------- [MAP] 25 SCHEDULE "B" ASSESSMENT ROLL NUMBER OFFICE USE 08-45-328-24-0306-000-000 NEIGHCD DISTRICT OF WEST VANCOUVER 025529 BRITISH COLUMBIA ASSESSMENT AUTHORITY 1996 PROPERTY ASSESSMENT This is your 1996 Property Assessment Notice. The purpose of this notice is to provide you with an estimate of your property value. This information will be used by the provincial government, municipalities, regional districts, and hospital boards to calculate your 1996 property taxes. PROPERTY DESCRIPTION Your property description may consist of a property address, legal description and the property identification (PID) number assigned by the Land Titles Office. 1507 PINECREST DR Lot 15, Block 57, Plan 22343, District Lot CE #22, New Westminster Group 1 Land District. PID-014-577-097 PROPERTY VALUE The value of your property is determined by local real estate market conditions. The ASSESSED VALUE is BC Assessment's estimate of the market value (most probable selling price) for your property had it been for sale on July 1, 1995. This value reflects the physical condition of your property as of October 31, 1995.
VALUE CLASS LAND 709,000 BUILDINGS 1,247,000 ASSESSED VALUE $1,956,000 RESIDENTIAL TAXABLE VALUE $1,956,000
ADDITIONAL INFORMATION This information relates to your property and may be of interest to you. o This is an assessment of an incomplete building or structure. o "Residential" includes dwellings, recreational property, apartments, condominiums, manufactured homes, farm buildings and some vacant land. o 1995 assessed value (as of July 1, 1994) was $1,328,000 YOUR ASSESSMENT OFFICE FOR THIS PROPERTY IS: North Shore-Squamish Valley Area 255 First St W Suite 210 North Vancouver BC V7M 3G8 08-45-328-24-0306-000-000 Local Office (604) 984-9751 or 1-800-571-1211 Fax (604) 984-9310 THE OWNER/LESSEE OF THIS PROPERTY IS: NAM TAI ELECTRONICS LTD 530 999 HASTINGS ST W 40 VANCOUVER BC V6C2W2 OFFICE HOURS If you have any questions about your 1996 Property Assessment, please call your local assessment office. During the month of January, the office will be open between 8:30 a.m. and 5:00 p.m., Monday through Friday. For more information, please see the back of this notice. PLEASE NOTE THAT THE DEADLINE FOR APPEALING YOUR ASSESSMENT IS JANUARY 31, 1996. -----END PRIVACY-ENHANCED MESSAGE-----