-----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, Gt71U6phF3W8Eppe/4OSDN9loMOENUEa0hK2vJQPmIR7LFKPAFF1AxM0HggDXkdH YYlBdY07A1FWLswxHNUz+A== 0000950148-99-000654.txt : 19990402 0000950148-99-000654.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950148-99-000654 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAM TAI ELECTRONICS INC CENTRAL INDEX KEY: 0000829365 STANDARD INDUSTRIAL CLASSIFICATION: OFFICE MACHINES, NEC [3579] IRS NUMBER: 000000000 STATE OF INCORPORATION: D8 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 000-16673 FILM NUMBER: 99581533 BUSINESS ADDRESS: STREET 1: C/O NAM TAI ELECTRONICS INC STREET 2: SUITE 530-999 WEST HASTING ST CITY: VANCOUVER BC STATE: A1 ZIP: 00000 BUSINESS PHONE: 6046697800 MAIL ADDRESS: STREET 1: C/O NAM TAI ELECTRONICS CANADA LTD STREET 2: SUITE 530-999 WEST HASTING ST CITY: VANCOUVER BC STATE: A1 ZIP: 00000 20-F 1 FORM 20-F 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, 1998 0-16673 ---------------------------------- NAM TAI ELECTRONICS, INC. (Exact name of registrant as specified in its charter) British Virgin Islands (Jurisdiction of incorporation or organization) Unit 9, 15/F., Tower 1 China Hong Kong City, 33 Canton Road TST, Kowloon, Hong Kong (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Shares, $0.01 par value per share Common Share Purchase Warrants Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE As of December 31, 1998, there were 9,812,523 Common Shares of the registrant outstanding. Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark which financial statement item the registrant has elected to follow: Item 17. Item 18. X ----- ----- Exhibit Index on Page 66 2 TABLE OF CONTENTS FINANCIAL STATEMENTS AND CURRENCY PRESENTATION..................................................................2 PART I Item 1. Description of Business..........................................................................3 Item 2. Properties......................................................................................21 Item 3. Legal Proceedings...............................................................................22 Item 4. Control of the Company..........................................................................23 Item 5. Nature of Trading Market........................................................................24 Item 6. Exchange Controls and Other Limitations Affecting Security Holders..............................25 Item 7. Taxation........................................................................................25 Item 8. Selected Financial Data.........................................................................26 Item 9. Management's Discussion and Analysis of Results of Operations and Financial Condition...........27 Item 10. Directors and Executive Officers of the Company.................................................39 Item 11. Compensation of Directors and Officers..........................................................40 Item 12. Options to Purchase Securities from the Company or its Subsidiaries.............................40 Item 13. Interest of Management in Certain Transactions..................................................41 PART II Item 14. Description of Securities to be Registered......................................................42 PART III Item 15. Defaults Upon Senior Securities.................................................................42 Item 16. Changes in Securities and Changes in Security For the Company's Securities......................42 PART IV Items 17. and 18. Financial Statements............................................................................42 Item 19. Financial Statements and Exhibits...............................................................66 SIGNATURES ....................................................................................................67 Consent of Independent Accountants (to incorporation of their report on Financial Statements into the Company's Registration Statement on Forms F-3 and S-8)................................................68
This Annual Report on Form 20-F contains forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled Risk Factors under Item 1 - Description of Business. Readers should not place undue reliance on forward-looking statements, which reflect management's view only as of the date of this Report. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. Readers should also carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission. FINANCIAL STATEMENTS AND CURRENCY PRESENTATION The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and publishes its financial statements in United States dollars. -2- 3 PART I ITEM 1. DESCRIPTION OF BUSINESS THE COMPANY Nam Tai Electronics, Inc. (which together with its wholly owned subsidiaries is hereafter referred to as the "Company" or "Nam Tai") was incorporated as a limited liability International Business Company under the laws of the British Virgin Islands in August 1987. The Company's corporate administrative matters are conducted in the British Virgin Islands through its registered agent, McW. Todman & Co., McNamara Chambers, P.O. Box 3342, Road Town, Tortola, British Virgin Islands. The Company's principal executive offices are located in Hong Kong Special Administrative Region ("Hong Kong"), of the People's Republic of China ("PRC"). Its address is Unit 9, 15/F., Tower 1, China Hong Kong City, 33 Canton Road, TST, Kowloon, Hong Kong. As an International Business Company, the Company is prohibited from doing business with persons resident in the British Virgin Islands, owning real estate in the British Virgin Islands, or acting as a bank or insurance company. The Company does not believe these restrictions materially affect its operations. Nam Tai was incorporated in the British Virgin Islands principally to facilitate trading in its shares. The government of Hong Kong imposes stamp duty on the transfer of shares equal to 0.3% of the value of the transaction. There is no such stamp duty imposed by the British Virgin Islands. The Company was organized in this manner to avoid any such requirements for the collection of stamp duties for share transactions. COMPANY OVERVIEW Nam Tai provides design and manufacturing service to original equipment manufacturers ("OEMs") of consumer electronic products. Nam Tai's two principal customers include Texas Instruments Incorporated and Sharp Corporation. All of the Company's design and manufacturing operations are based in Shenzhen, China, approximately 30 miles from Hong Kong. Products manufactured by Nam Tai include calculators, personal organizers, personal digital assistants, linguistic products, integrated circuit ("IC") or smart card readers (referred to as "IC card readers"), and various components including microwave oven control panel modules. Nam Tai assists OEMs in the design and development of products and furnishes full turnkey manufacturing services to its OEM customers utilizing advanced processes such as chip on board ("COB"), multichip modulators ("MCM"), surface mount technology ("SMT"), tape automated bonding ("TAB"), outer lead bonding ("OLB") and anisotropic conductive film ("ACF") heat seal technologies. The Company provides hardware and software design, plastic molding, component purchasing, assembly into finished products or electronic subassemblies, post-assembly testing and shipping. It also manufactures electronic components and subassemblies for printed circuit boards ("PCBs"). This includes large scale integrated circuits ("LSI") bonded on PCBs that are used in the manufacture of products such as electronic toys and telecommunication systems, and subassemblies for liquid crystal display ("LCD") modules that are in turn used in the manufacture of communications, camera and computer products. In addition, Nam Tai provides OEMs with silk screening services for plastic parts, polyvinyl chloride ("PVC") products and metal parts, and is developing Original Design Manufacturing ("ODM") capabilities. The Company moved its manufacturing facilities to China in 1980 and later located in Shenzhen, China in 1987 to take advantage of lower overhead costs, lower material costs, and competitive labor rates and to position itself to achieve low-cost, high volume, high quality manufacturing. The location of Nam Tai's facility in Shenzhen, about 30 miles from Hong Kong, provides the Company with access to Hong Kong's infrastructure of communication and banking. This also facilitates transportation of the Company's products out of China through the port of Hong Kong. The Company emphasizes high responsiveness to the needs of OEM customers through the development and volume production of increasingly sophisticated and specialized products. The Company seeks to build long-term relationships with its customers through high quality standards (supported by ISO 9001 Certification), competitive 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. -3- 4 The Company believes that the potential for increased manufacturing outsourcing by Japanese and U.S. OEMs in China is substantial and that it is in a position to take advantage of this because of its expanded production capacity, and experience. Management believes Nam Tai's record of providing timely delivery in volume of high-quality, high technology, low-cost products builds close customer relationships and positions the Company to receive orders for more complex products. As the Company grows, management will seek to maintain a low cost structure, reduce overhead where possible and continuously strive to improve its manufacturing quality and processes. THE COMPANY SUBSIDIARIES The Company is a holding company for Nam Tai Electronic & Electrical Products Limited and its subsidiaries, Nam Tai Electronics (Canada) Ltd. and Albatronics (Far East) Company Limited ("Albatronics"). See Note 1 of Notes to Consolidated Financial Statements appearing in Item 18 of this report. The chart below illustrates the organizational structure of the Company and its principal operating subsidiaries. Nam Tai Electronics, Inc. (A British Virgin Island International Business Company) / ---------------------------------/------------------------------------/ / / / 100% 100% 50% Nam Tai Nam Tai Albatronics Electronics Electronic & (Far East) (Canada) Ltd. Electrical Products Ltd. Company Limited (A Canadian Federal (A Hong Kong Limited (A Hong Kong Limited Company) Liability Company) Liability Company) / and its subsidiary / Company / ---------------------------------------------------------------------/ / / / / 100% 100% / Namtai Electronic Zastron Plastic & Metal / (Shenzhen) Co. Ltd. Products (Shenzhen) Ltd. / (A Limited Liability of (A Limited Liability / China Foreign of China Foreign / Operation) Operation) / / / / / / 75% / Shenzhen / Namtek Co., Ltd. / (A Limited Liability--------------------/ of China Foreign 25% Operation)
-4- 5 Nam Tai Electronic & Electrical Products Limited Nam Tai Electronic & Electrical Products Limited ("NTEE") was incorporated in November 1983 and became the holding company for Namtai Electronic (Shenzhen) Co. Ltd. and Zastron Plastic & Metal Products (Shenzhen) Ltd. in 1992. Marketing, customer relations and management operations are the main functions handled by NTEE. Namtai Electronic (Shenzhen) Co. Ltd. Namtai Electronic (Shenzhen) Co. Ltd. ("NTSZ") was established as Baoan (Nam Tai) Electronic Co. Ltd. in May 1989 as a joint venture company with limited liability pursuant to the relevant laws of China. The equity of NTSZ was owned 70% by NTEE and 30% by a Chinese Governmental agency. During 1992, the joint venture was dissolved and the company changed its name to NTSZ. As part of such termination, the Company returned to the Chinese Governmental agency its real property and investment, and NTSZ became a wholly owned subsidiary of NTEE. NTSZ is the principal manufacturing arm of the Company and is engaged in research and development, manufacturing and assembling the Company's electronic products in China. Zastron Plastic & Metal Products (Shenzhen) Ltd. Zastron Plastic & Metal Products (Shenzhen) Ltd. ("Zastron") was organized in March 1992 as a limited liability company pursuant to the relevant laws of China. Zastron is principally engaged in silk screening metal and PVC products, much of which are used in products manufactured by the Company's manufacturing subsidiary. Zastron also provides silk screening of products for other unrelated companies. Shenzhen Namtek Co., Ltd. Shenzhen Namtek Co., Ltd. ("Namtek") was organized in December 1995 as a limited liability company pursuant to the relevant laws of China. Namtek commenced operations in early 1996 developing and commercializing software for the consumer electronics industry, particularly for the customers of the Company and for products manufactured or to be manufactured by Nam Tai. Namtek employs approximately 20 software engineers and provides the facilities and expertise to assist in new product development and research, enabling Nam Tai to offer its customers enhanced software design and development services, and strengthening the Company's ODM capabilities. Nam Tai Electronics (Canada) Ltd. Nam Tai Electronics (Canada) Ltd. (`NT Canada") was incorporated in August 1989 under the Canada Business Corporations Act. NT Canada currently provides finance, administrative and investor relations services to the Company from its office in Vancouver, British Columbia, Canada. Albatronics (Far East) Company Limited Consistent with the Company's strategy to review acquisition prospects that would complement the Company's existing products and services, augment market coverage and sales ability, or enhance its technological capabilities the Company signed an agreement to acquire just over 50% of Albatronics (Far East) Company Limited ("Albatronics") by purchasing newly issued shares from Albatronics. Albatronics is a publicly traded company listed on the Hong Kong Stock Exchange (Hang Seng company # 987). The purchase price paid by Nam Tai on November 30, 1998 was approximately $9,980,000 including transaction fees. Albatronics is principally engaged in the trade and distribution of Sony semiconductors and CD mechanisms, and the OEM and Original Design Manufacturing ("ODM") development, manufacture and trade of consumer electronic products. Its existing manufactured products include CD players, digital cameras and audio amplifiers, which are sold to major customers such as Sony, Aiwa, Panasonic and Fuji Film. Additionally, Albatronics possesses advanced research and development capabilities in semiconductor system design, information processing and data communications, which it carries out in Japan. -5- 6 Products under development by Albatronics include telecommunication products, the AC-3 Music Centre, the Slim Discman, and minidisc ("MD"). Albatronics also owns a material equity interest of approximately 21.72% in Shanghai Albatronics Co., Ltd., a publicly listed company in the PRC, which manufactures and distributes consumer electronic products in the PRC. In addition, Albatronics has invested in joint ventures in the PRC, which are engaged in plastic and metal manufacturing, the manufacture and sale of telecommunication products, and the implementation of wire bonding technologies. Albatronics is headquartered in Hong Kong and employs approximately 1600 people as of March 1, 1999. Its principal manufacturing facility, located in Dongguan, Guangdong, PRC, is around 50 miles northwest of Nam Tai's manufacturing facilities in Shenzhen, PRC. Albatronics' manufacturing facility is situated on approximately 778,540 sq. ft. of land housing a factory, administrative buildings and dormitories comprising approximately 312,740 sq. ft. The manufacturing facility has been ISO 9002 certified since July 1996. Albatronics' products are principally sold and delivered to customers in the PRC, Hong Kong and Japan. RISK FACTORS The Company may from time to time make written or oral forward-looking statements. Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases, and in reports to shareholders, or on the Company's web site. The Private Securities Reform Act of 1995 contains a safe harbor for forward-looking statements on which the Company relies in making such disclosures. In connection with this "safe harbor" the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by or on behalf of the Company. Any such statement is qualified by reference to the following cautionary statements: CUSTOMER CONCENTRATION; DEPENDENCE ON ELECTRONICS INDUSTRY During the years ended December 31, 1998, 1997 and 1996, sales to the Company's four largest customers aggregated approximately 92.4%, 89.3%, and 90.3%, respectively, of the Company's total net sales. During the same periods, sales to its principal customers, i.e., customers which accounted for more than 10% of the Company's total sales during 1998, aggregated approximately 76.2%, 73.3% and 90.3%, respectively, of the Company's total sales. See "-- Customers and Marketing -- Customers." The Company's sales transactions to all its OEM customers are based on purchase orders received by the Company from time to time. Except for these purchase orders, the terms of which in a few cases are supplemented by basic agreements dependent upon the receipt of purchase orders, the Company has no written agreements with its OEM customers. The loss of any of its largest customers, especially its principal customers, or a substantial reduction in orders from them would have a material adverse effect on the Company's business. There can be no assurance that Nam Tai will be able to quickly replace expired, canceled or reduced orders with new business. See "-- Risk Factors -- Potential Fluctuations of Operating Results." Most of the Company's sales are to customers in the electronics industry, which is subject to rapid technological change and product obsolescence. The factors affecting the electronics industry in general, or any of the Company's major customers or competitors in particular, could have a material adverse effect on the Company's results of operations. Nam Tai's success will depend to a significant extent on the success achieved by its customers in developing and marketing their products, some of which may be new and untested. If customers' products become obsolete or fail to gain widespread commercial acceptance, the Company's business may be materially adversely affected. -6- 7 POTENTIAL FLUCTUATIONS IN OPERATING RESULTS The Company's quarterly and annual operating results are affected by a wide variety of factors that could materially and adversely affect net sales, gross profit and profitability. This could result from any one or a combination of factors such as, but not limited to, the cancellation or postponement of orders, the timing and amount of significant orders from the Company's largest customers, customers' announcement and introduction of new products or new generations of products, evolutions in the life cycles of customers' products, the Company's timing of expenditures in anticipation of future orders, effectiveness in managing manufacturing processes, changes in cost and availability of components, mix of orders filled, adverse effects to the Company's financial statements resulting from, or necessitated by the Albatronics acquisition, possible future acquisitions, local factors and events that may affect production volumes such as local holidays and seasonality of customers' production requirements, and changes or anticipated changes in economic conditions. The volume and timing of orders received during a quarter are difficult to forecast. The Company's customers from time to time encounter uncertain and changing demand for their products. Customers generally order based on their forecasts. If demand falls below such forecasts or if customers do not control inventories effectively, they may reduce or postpone shipments of orders. The Company's expense levels during any particular period are based, in part, on expectations of future sales. If sales in a particular quarter do not meet expectations, operating results could be materially adversely affected. In addition, the Company's operating results are often affected by seasonality during the second and third quarters in anticipation of the start of the school year and Christmas buying season and in the first quarter resulting from both the closing of the Company's factories in China for one-half of a month for the Chinese New Year holidays and the general reduction in sales following the holiday season. See Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations. The market segments served by the Company are also subject to economic cycles and have in the past experienced, and are likely in the future to experience, recessionary periods. A recessionary period affecting the industry segments served by the Company could have a material adverse effect on the Company's results of operations. Results of operations in any period should not be considered indicative of results to be expected in any future period, and fluctuations in operating results may also result in fluctuations in the market price of the Company's Common Shares. POLITICAL, LEGAL, ECONOMIC AND OTHER UNCERTAINTIES OF OPERATIONS IN CHINA AND HONG KONG INTERNAL POLITICAL AND OTHER RISKS. The Company's manufacturing facilities are located in China. As a result, the Company's operations and assets are subject to significant political, economic, taxation, legal and other uncertainties associated with doing business in China. Changes in policies by the Chinese government resulting in changes in laws, regulations, or the interpretation and enforcement thereof, confiscatory or increased taxation, restrictions on imports and sources of supply, import duties, corruption, currency revaluations or the expropriation of private enterprise could materially and adversely affect the Company. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. There can be no assurance that the Chinese government will continue to pursue such policies, that such policies will be successful if pursued, that such policies will not be significantly altered from time to time or that business operations in China would not become subject to the risk of nationalization, which could result in the total loss of investment in that country. Following the Chinese government's program of privatizing many state owned enterprises, the Chinese government has attempted to augment its revenues through increased tax collection. Continued efforts to increase tax revenues could result in increased taxation expenses being incurred by the Company. Economic development may be limited as well by the imposition of austerity measures intended to reduce inflation, increase taxes, or reform money losing state-owned enterprises, the inadequate development of infrastructure and the potential unavailability of adequate power, water supplies, transportation, communications, raw materials and parts or the deterioration of the general political, economic or social environment in China, any of which could have a material adverse effect on the Company's business. The Company maintains its own electrical generator, water treatment and water storage facilities at the factory sites to address certain of these concerns. If for any reason the Company were required to move its manufacturing operations outside of China, the Company's profitability would be substantially impaired, its competitiveness and market position would be materially jeopardized and there can be no assurance that the Company could continue its operations. -7- 8 UNCERTAIN LEGAL SYSTEM AND APPLICATION OF LAWS. The legal system of China relating to foreign investments is both new and continually evolving, and currently there can be no certainty as to the application of its laws and regulations in particular instances. China does not have a comprehensive system of laws. Enforcement of existing laws or agreements may be sporadic and implementation and interpretation of laws inconsistent. The Chinese judiciary is relatively inexperienced in enforcing the laws that exist, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. Even where adequate law exists in China, it may not be possible to obtain swift and equitable enforcement of that law. CURRENT DEPENDENCE ON SINGLE FACTORY COMPLEX. The Company's products are manufactured exclusively at its complex located in Baoan County, Shenzhen, China. The Company does not own the land underlying its factory complex. It occupies the site under agreements with the local Chinese government. In the case of its original facility, the lease agreement covers an aggregate of approximately 150,000 square feet of factory space and expires in August 2007. In the case of the newer facility, the Company is entitled to use the land upon which it is situated until 2044. These agreements and the operations of the Company's Shenzhen factories are dependent on the Company's relationship with the local government. The Company's operations and prospects would be materially and adversely affected by the failure of the local government to honor these agreements. In the event of a dispute, enforcement of these agreements could be difficult in China. Moreover, firefighting and disaster relief or assistance in China is primitive by Western standards. Material damage to, or the loss of, the Company's factory complex due to fire, severe weather, flood, or other act of God or cause may not be adequately covered by proceeds of its insurance coverage. In addition any interruptions to the business caused by such disasters would have a material adverse effect on the Company's financial condition, business and prospects. POSSIBLE CHANGES AND UNCERTAINTIES IN ECONOMIC POLICIES. As part of its economic reform, China has designated certain areas, including Shenzhen where the Nam Tai manufacturing complex is located, as Special Economic Zones. Foreign enterprises in these areas benefit from greater economic autonomy and more favorable tax treatment than enterprises in other parts of China. Changes in the policies or laws governing Special Economic Zones could have a material adverse effect on the Company. Moreover, economic reforms and growth in China have been more successful in certain provinces than others, and the continuation or increase of such disparities could affect the political or social stability of China. INHERENT RISKS OF BUSINESS IN CHINA. Conducting business in China, like most developing countries, is inherently risky. Corruption, extortion, bribery, pay-offs, theft, and other fraudulent practices may be more common in developing countries. The Company has attempted to implement safeguards to prevent losses from such practices, but there can be no assurance that despite these safeguards the Company will not suffer losses relating to such practices. UNCERTAINTY AND POSSIBLE CHANGES IN CHINA TAX LAWS. The basic corporate tax rate for Foreign Investment Enterprises ("FIEs") such as Nam Tai's China subsidiaries is currently 33% (30% state tax and 3% local tax). However, because Nam Tai's China subsidiaries are located in the designated Special Economic Zone ("SEZ") of Shenzhen and are involved in production operations, they qualify for a special reduced state tax rate of 15%. In addition, the local tax authorities in the Shenzhen SEZ are not currently assessing any local tax. Since Nam Tai's subsidiaries have agreed to operate for a minimum of 10 years in China, a two-year tax holiday from the first profit making year is available, following which in the third through fifth years there is a 50% reduction to 7.5%. In any event, for FIEs such as Nam Tai's China subsidiaries which export 70% or more of the production value of their products, a reduction in the tax rate is available; in all cases apart from the years in which a tax holiday is available, there is an overall minimum tax rate of 10%. On January 8, 1999, Nam Tai's principal China subsidiary received the recognition of "High and New Technology Enterprise" which entitles it to various tax benefits including a lower income tax rate of 7.5% until January 7, 2004. For a full discussion of the Company's income taxes, see Note 8 of Notes to Consolidated Financial Statements included elsewhere herein. Because of this favorable tax treatment and pursuant to the provisions of applicable Chinese law, the Company has received substantial refunds income taxes paid over the years on its operations in China and management believes that under existing tax laws Nam Tai will continue to qualify for favorable tax treatment in the future, particularly if Nam Tai reinvests profits attributable to its Chinese operations in its Chinese subsidiaries. However, the Chinese tax system is subject to substantial uncertainties and was subject to significant changes enacted on January 1, 1994, the interpretation and enforcement of which are still uncertain. -8- 9 Moreover, following the Chinese government's program of privatizing many state owned enterprises, the Chinese government has attempted to augment its revenues through heightened tax collection efforts. In early 1999 the Company learned that for the 1996 and 1997 tax years it would not receive a 100% tax refund on taxes paid by its principal Chinese subsidiary because the large intercompany receivable between that subsidiary and a Hong Kong subsidiary was not considered by the tax authorities to be a reinvestment of profits. Continued efforts by the Chinese government to increase tax revenues could result in other decisions by the taxing authorities which are unfavorable to Nam Tai and which increase its future tax liabilities. There can be no assurance that changes in Chinese tax laws or their interpretation or application will not subject the Company to additional Chinese taxation in the future. MFN STATUS. China currently enjoys most favored nation ("MFN") trade status, which provides China with the trading privileges generally available to trading partners of the United States. The United States annually reconsiders the renewal of China's MFN status. Various interest groups continue to urge that the United States not renew MFN for China and there can no assurance that controversies will not arise that threaten the status quo involving trade between the United States and China or that the United States will not revoke or refuse to renew China's MFN status. In any of such eventualities, the business of the Company could be adversely affected, by among other things, causing the Company's products in the United States to become more expensive, which could result in a reduction in the demand for the Company's products by customers in the United States. Trade friction between the United States and China, whether or not actually affecting Nam Tai's business, could also adversely affect the prevailing market price of the Company's Common Shares and Warrants. SOUTHEAST ASIA ECONOMIC PROBLEMS. Several countries in Southeast Asia, including Korea, Thailand and Indonesia, have experienced a significant devaluation of their currencies and decline in the value of their capital markets in 1997 and 1998. In addition, these countries have experienced a number of bank failures and consolidations. Most of the Company's products are paid for in U.S. dollars; therefore, the Company believes that it is less susceptible to the direct effects of a devaluation in the Hong Kong dollar or Chinese renminbi if either or both were to occur despite assurances to the contrary by the Chinese government. The decline in the currencies of other Southeast Asian countries could render the Company's products less competitive if competitors located in these countries are able to manufacture competitive products at a lower effective cost. Management believes that the currency declines in other countries have resulted in increased pressure from customers for the Company to reduce its prices. While the Company's two principal competitors in the manufacture of its principal product lines of calculator, personal organizers and linguistic products also manufacture from China and therefore, the Company believes, are in the same position as Nam Tai vis-a-vis Southeast Asia's economic problems, there can be no assurance as to the ability of the Company's products to continue to compete with products of other competitors from other Southeast Asian countries suffering devaluations of their currencies or that currency or other effects of the decline in Southeast Asia will not have a material adverse effect on the Company's business, financial condition, results of operations or market price of its securities. RELATIONS BETWEEN CHINA AND TAIWAN. Relations between China and Taiwan have been unresolved since Taiwan was established in 1949. Although not directly a threat to Nam Tai, peaceful and normal relations between China and its neighbors reduces the potential for events that could have an adverse impact on the Company's business. OPERATIONS IN HONG KONG. The Company's executive and sales offices, and several of its customers and suppliers are located in Hong Kong, formerly a British Crown Colony. Sovereignty over Hong Kong was transferred effective July 1, 1997 to China. The Company prepared for this transition in Hong Kong by increasing the role and capability of its personnel in China to manage a number of responsibilities previously managed through the Hong Kong office. Certain other responsibilities have been transferred to the Company's office in Vancouver, British Columbia, Canada. While the Company does not believe that the transfer of sovereignty over Hong Kong to China will have a material adverse effect on the Company's business, there can be no assurance as to the continued stability of political, economic or commercial conditions in Hong Kong, and any instability could have an adverse impact on the Company's business. The Hong Kong dollar and the United States dollars have been fixed at approximately 7.80 Hong Kong dollars to $1.00 since 1983. Although the Chinese government has expressed its intention to maintain the stability of the Hong -9- 10 Kong currency there can be no assurance that the system of a fixed exchange rate will be maintained at this rate or at all. Any change, or even expectations of a change, will increase the currency risks for the Company. See "Exchange Rate Fluctuations." RISKS ASSOCIATED WITH RECENT ACQUISITIONS AND POTENTIAL FUTURE ACQUISITIONS The Company completed the Albatronics' acquisition in November 1998. Due to the troubled financial condition of Albatronics at December 31, 1998, and the possibility of Albatronics being wound up within a relatively short period, Nam Tai did not consolidate Albatronics' financial statements in, or at December 31, 1998. Instead, Nam Tai wrote down its investment in Albatronics to a nominal value. See "The Company's Subsidiaries - Albatronics" and Note 1 of Notes to Consolidated Financial Statements. Currently, Nam Tai is seeking to work together with Albatronics' major trade creditor and Albatronics' bankers to try to support Albatronics. If any of these three parties refuses to provide the necessary support, Albatronics' directors will consider all available options including liquidation. Nam Tai's financial statements included in this Report may be restated if a restructuring agreement for Albatronics is reached or is probable and Nam Tai continues with its investment in Albatronics. Under those circumstances Nam Tai would restate its 1998 financial statements to consolidate Albatronics' results since December 1, 1998 and its balance sheet at December 31, 1998 with Nam Tai's financial statements for the year ended December 31, 1998 and would restate future financial statements that it issues before a decision requiring consolidation is made. Based on their respective results during 1998, Nam Tai's financial statements would be materially and adversely affected if they were consolidated with Albatronics' and future Nam Tai results and financial condition probably would be materially adversely affected as well. See Item 9. Management's Discussion of Financial Statements and Results of Operations. An important element of the Company's strategy is to review acquisition prospects that would complement the Company's existing products and services, augment its market coverage and sales ability or enhance its technological capabilities. Accordingly, the Company may acquire additional businesses, products or technologies in the future. Future acquisitions by the Company could result in charges similar to those incurred in connection with the Albatronics acquisition, potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, any of which could materially adversely affect the Company's business, financial condition and results of operations and/or the price of the Company's Common Shares. Acquisitions entail numerous risks, including the assimilation of the acquired operations, technologies and products, diversion of management's attention to other business concerns, risks of entering markets in which the Company has no or limited prior experience, the potential loss of key employees of acquired organizations, increased debt loads, and an increased risk of litigation. Management has limited experience in assimilating or managing acquired organizations. There can be no assurance as to the ability of the Company to successfully integrate the products, technologies or personnel of any acquired business now or in the future, and the failure of the Company to do so could have a material adverse affect on the Company's business, financial condition and results of operations. EXCHANGE RATE FLUCTUATIONS The Company sells most of its products in United States dollars and pays expenses in United States dollars, Japanese yen, Hong Kong dollars, Canadian dollars and Chinese renminbi. The Company is subject to a variety of risks associated with changes among the relative value of the United States dollar, Japanese yen, Hong Kong dollar, Canadian dollar and Chinese renminbi, but management believes the most significant exchange risk results from material purchases made in Japanese yen. Approximately 18%, 23%, and 28% of Nam Tai's material costs have been in yen during the years ended December 31, 1998, 1997 and 1996. Sales made in yen accounted for approximately 0.3% of sales for the year ended December 31, 1998, 6.3% of sales for the year ended December 31, 1997, and 15% of sales for 1996. The net currency exposure has increased as a result of decreased sales in yen not being fully offset by the decrease in material purchases in yen. Based on oral agreements with its customers which are customary in the industry, the Company believes its customers will accept an increase in the selling price of manufactured products if the exchange rate of the Japanese yen appreciates beyond a range of 5% to 10% although such customers may also request a decrease in selling price in the event of a depreciation of the Japanese yen. Based on close working relationships with its principal customers, and -10- 11 because management believes similar oral agreements exist between these OEMs and their other suppliers, the Company believes the oral nature of these agreements will not prevent its OEMs from honoring them. However, there can be no assurance that such agreements will be honored, and the refusal to honor such an agreement in the event of a severe adverse fluctuation of the Japanese yen at a time when sales made in yen are insufficient to cover material purchases in yen would materially and adversely affect the Company's operations. Although only 14.2% of the Company's expenses were in Chinese renminbi in 1998, an appreciation of the renminbi against the U.S. dollar increases the expenses of the Company when translated into U.S. dollars. While there has been recent pressure on the Chinese government to devalue the renminbi against the U.S. dollar, there can be no assurances that the renminbi will not increase significantly in value relative to the U.S. dollar in the future. Approximately 0.9% and 38.3%, respectively, of the Company's revenues and expenses are in Hong Kong dollars. The Hong Kong dollar is currently pegged to the U.S. dollar. At the end of 1997 and for most of 1998, in light of the currency turmoil experienced by many other Southeast Asian countries, there has been increasing pressure for a devaluation of the currencies of Hong Kong and China. While the Governments of Hong Kong and China have indicated they will support their currencies, possible devaluations may occur. Although the Company expects that it may initially benefit from such devaluations through their effect of reducing expenses when translated into U.S. dollars, such benefits could be outweighed if it causes a destabilizing downturn in China's economy, creates serious domestic problems in China, increases in borrowing costs, or creates other problems adversely affecting the Company's business. The Company's financial results have been affected this year and in the past by currency fluctuations, resulting in total foreign exchange gains of approximately $394,000 in 1998, $500,000 in 1997, and $20,000 in 1996. From time to time, the Company attempts to hedge its currency exchange risk. During 1998 the Company recorded a charge of $840,000 on the write-off of a premium for an option which was purchased as a hedge in the event that the Hong Kong dollar was allowed to depreciate against the U.S. dollar. After purchasing the option, the Company invested a portion of its cash surplus in short term Hong Kong dollar deposits which were earning interest rates between 10% and 14.175% - significantly higher than what was offered on U.S. dollar deposits. In 1997 and 1996, Nam Tai recorded no gain or loss from hedging transactions. The Company is continuing to review its hedging strategy and there can be no assurance that Nam Tai will not suffer losses in the future as a result of currency hedging. COMPETITION General competition in the contract electronic manufacturing industry is intense. The Company however has two primary competitors in the manufacture of its traditional product lines of calculators, personal organizers and linguistic products - Kinpo Electronics, Inc. (formerly Cal-Comp Electronics, Inc.) and Inventec Co. Ltd. While the Company is continually making efforts to improve its competitiveness the industry is intensely competitive and certain competitors may have substantially greater technical, financial and marketing resources than the Company. The Company desires to produce more advanced and specialized products as management believes that there is less competition in more advanced products due to the complexity involved in manufacturing and the lower number of direct competitors. There can be no assurance that the Company will be successful in obtaining business for such products and failure to move into more advanced products may result in the Company facing increasing competition and reduced profit margins. TECHNOLOGICAL CHANGES AND PROCESS DEVELOPMENT The market for the Company's manufacturing services is characterized by rapidly changing technology and continuing process development. The Company is continually evaluating the advantages and feasibility of new manufacturing processes, such as COB, MCM, SMT, TAB, OLB and ACF. The Company believes that its future success may depend upon its ability to develop and market manufacturing services which meet changing customer needs, maintain technological leadership and successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis. There can be no assurance that the Company's process development efforts will continue to prove successful. -11- 12 DEPENDENCE ON KEY PERSONNEL The Company depends to a large extent on the abilities and continued participation of Mr. Tadao Murakami, its Chairman of the Board and Mr. M. K. Koo, its Senior Executive Officer, Corporate Strategy, Finance and Administration. The loss of the services of Mr. Murakami or Mr. Koo could have a material adverse effect on the Company's business. ENFORCEABILITY OF CIVIL LIABILITIES The Company is a holding corporation organized as an International Business Company under the laws of the British Virgin Islands and its principal operating subsidiary is organized under the laws of Hong Kong, where the Company's principal executive offices are also located. It may be difficult for investors to enforce judgments against the Company obtained in the United States based on actions predicated upon civil liability provisions of Federal securities laws. In addition, all of the Company's officers and most of its directors reside outside the United States and nearly all of the assets of these persons and of the Company are located outside of the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons, or to enforce against the Company or such persons judgments predicated upon the liability provisions of U.S. securities laws. The Company has been advised by its Hong Kong counsel and its British Virgin Islands counsel that there is substantial doubt as to the enforceability against the Company or any of its directors and officers located outside the United States in original actions or in actions for enforcement of judgments of U.S. courts of liabilities predicated on the civil liability provisions of Federal securities laws. CERTAIN LEGAL CONSEQUENCES OF INCORPORATION IN THE BRITISH VIRGIN ISLANDS The Company is organized under the laws of the British Virgin Islands. Pursuant to the Company's Memorandum and Articles of Association and pursuant to the laws of the British Virgin Islands, the Board of Directors may amend the Company's Memorandum and Articles of Association without shareholder approval. This includes, but is not limited to, amendments increasing or reducing the authorized capital stock of the Company and increasing or reducing the par value of its shares. In addition, the Board of Directors may approve certain fundamental corporate transactions, including reorganizations, certain mergers or consolidations and the sale or transfer of assets, without shareholder approval. The ability of the Company to amend its Memorandum and Articles of Association without shareholder approval could have the effect of delaying, deterring or preventing a change in control of Nam Tai without any further action by the shareholders including, but not limited to, a tender offer to purchase the Common Shares at a premium above current market prices. Under U.S. law, management, directors and controlling shareholders generally have certain fiduciary responsibilities to the minority shareholders. Shareholder action must be taken in good faith and actions by controlling shareholders which are obviously unreasonable may be declared null and void. The British Virgin Islands law protecting the interests of minority shareholders differs from, and may not be as protective of shareholders as, the law protecting minority shareholders in jurisdictions in the United States. While British Virgin Islands law does permit a shareholder of a British Virgin Islands company to sue its directors derivatively, and to sue Nam Tai and its directors for his or her benefit and the benefit of others similarly situated, the circumstances in which any such action may be brought and the procedures and defenses that may be available in respect of any such action may result in the rights of shareholders of a British Virgin Islands company being more limited than those rights of shareholders in a company incorporated in a jurisdiction within the United States. Moreover, lawsuits brought in the British Virgin Islands appear, from the Company's experience, to take longer to reach interim or final resolution. -12- 13 RISKS OF INTERNATIONAL SALES The products of the Company are sold in the United States and internationally, principally in Japan, Europe and Hong Kong. International sales may be subject to political and economic risks, including political instability, currency controls and exchange rate fluctuations, and changes in import/export regulations, tariff and freight rates. Changes in tariffs or other trade policies could adversely affect the Company's customers or suppliers or decrease the cost of products for Nam Tai's competitors relative to such costs for the Company. VOLATILITY OF MARKET PRICE OF COMPANY'S SECURITIES The markets for equity securities have been volatile and the price of the Company's Common Shares has been and could continue to be subject to wide fluctuations in response to quarter to quarter variations in operating results, news announcements, trading volume, sales of Common Shares by officers, directors and principal shareholders of the Company, news issued from affiliated companies or other publicly traded companies, general market trends both domestically and internationally, currency movements and interest rate fluctuations. These same factors can be expected to affect the market price of the Company's Warrants that were publicly issued in late November 1997. Certain events, such as the issuance of Common Shares upon the exercise of the Warrants or other outstanding stock options or warrants of the Company could also adversely affect the prevailing market prices of the Company's securities. RISKS OF YEAR 2000 ISSUES Many existing computer programs, including some programs used by the Company, in its computer system and equipment use only two digits to identify a year in the date field. These programs were designed without considering the impact of the upcoming change in the century. If not corrected, these computer applications and systems could fail or create erroneous results before, during, or after the year 2000. The Company's investigations and efforts to date have included studies, investigations, inquiries to software and equipment suppliers, testing by internal management and outside consultants, and the purchase of certain replacement software and rewriting certain sections of existing programs. Based on these efforts, the cost of which was not material, management does not anticipate that the Company will incur any material operating expenses or be required to incur material costs as a result of the year 2000 issue. Despite management's effort to take reasonable precautions to be year 2000 ready, and its belief that it is currently year 2000 compliant, to the extent the Company's systems are not fully year 2000 compliant, or failed for any other reason, there can be no assurance that potential systems interruptions or the cost necessary to update software would not have a material adverse effect on the Company's business, financial condition, results of operations and business prospects. In addition to the internal preparations discussed above, to prepare for the year 2000 the Company has sent inquiry letters to its key suppliers and key customers to ensure that they do not expect any year 2000 problems to impact their business dealings with Nam Tai. In the event that the Company's significant customers and suppliers do not successfully and timely achieve year 2000 compliance, the Company's business or operations could be adversely affected. There is also a risk that year 2000 problems may cause regional or global problems for utility companies, transportation systems, the global banking system, or to the global economy. To the extent that these problems materialize Nam Tai expects that its business will be adversely impacted and to date the Company has not completed a year 2000 contingency plan. EXEMPTIONS UNDER THE EXCHANGE ACT AS A FOREIGN PRIVATE ISSUER The Company is a foreign private issuer within the meaning of rules promulgated under the Exchange Act. As such, and though its Common Shares and Warrants are registered under Section 12(g) of the Exchange Act, it is exempt from certain provisions of the Exchange Act applicable to United States public companies including: the rules under the Exchange Act requiring the filing with the Commission of quarterly reports on Form 10-Q or current reports on Form 8-K; the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations with respect to a security registered under the Exchange Act; and the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any "short-swing" trading transaction (i.e., a purchase and sale, or sale and purchase, of the issuer's equity securities within six months or less). -13- 14 Because of the exemptions under the Exchange Act applicable to foreign private issuers, shareholders of the Company are not afforded the same protections or information generally available to investors in public companies organized in the United States. PRODUCTS The following table sets forth the percentage of net sales of each of the Company's product lines for the years ended December 31, 1998, 1997, and 1996.
YEAR ENDED DECEMBER 31, ----------------------------- PRODUCT LINE 1998 1997 1996 --------------------------------------------------------------------------------------- Electronic calculators 60% 52% 35% Subassemblies, components and other products 24 22 28 Personal digital assistants and linguistic products 15 25 36 Silk screening 1 1 1 --- --- --- 100% 100% 100% === === ===
Electronic Calculators The Company manufactures a wide range of electronic calculators that include basic function calculators from small credit card size to desk top display style, printer display with tax function, scientific, and graphic calculators. Personal Digital Assistants and Linguistic Products The Company produces various types of electronic organizers and personal digital assistants ("PDAs"), particularly telephone directories and business card organizers with scheduler, clock, memo pad and calculator functions. The linguistic products manufactured by Nam Tai include electronic spell checkers, dictionaries and language translators, including some models with voice functions. Linguistic products generally include a built-in calculator. The Company has successfully developed its first ODM product, an electronic dictionary, and production is expected to begin in July 1999. It has also been appointed to manufacture a palm-sized PC with a Chinese version of Windows CE software pre-installed. Subassemblies, Components and Other Products In 1994, the Company began manufacturing and delivering subassemblies consisting of LSIs bonded on PCBs utilizing advanced technological processes. These products are used to manufacture components that are incorporated into such products as telecommunication products, electronic toys and games. In 1995, the Company expanded its subassembly manufacturing business into LCD modules. These subassemblies display information as part of such products as portable telephones, telephone systems, portable computers and facsimile machines. They employ the same bonding technologies as are used for the LSI bonded PCBs. -14- 15 In 1995, the Company delivered a sample run of IC card balance readers and in 1996 began volume shipments of these products. These readers are hand-held devices used to check information contained on the IC cards. (IC cards are being developed by certain major banks in Europe and North America as an alternative to the use of cash and are currently still undergoing market testing.) In 1996, the Company again expanded the component products it offers by completing development and shipping control panel modules for microwave ovens. These products are incorporated into microwave ovens manufactured by a division of Sharp Corporation, which, management believes, is a leading manufacturer of microwave ovens worldwide. In 1997, the Company began producing LCD modules for use in cellular (mobile) phones for Epson Precision (HK) Ltd. In 1997, the Company also began using ACF technology in the manufacture of LCD modules and advanced dictionaries with personal organizers. This new technology is a fine pitch heat sealing process for the connection of Tape Carrier Package ("TCP") onto the LCD with ACF in between using TAB processing. The Company has successfully developed its first ODM product, an electronic language translation product, and production is expected to begin in July 1999. Through Namtek, the Company offers its customers software development services principally for the design of personal organizers and linguistic products. Silk Screening Through Zastron, the Company provides manufacturing and silk screening to customers for plastic parts, PVC products and metal parts. This service is also supplied to other firms for incorporation into their finished products. MANUFACTURING Quality Control The Company maintains strict quality control programs for its products, including the use of total quality management ("TQM") systems and advance testing and calibration equipment. All incoming raw materials and components are checked by the Company's quality control personnel. During the production stage, Nam Tai's quality control personnel check all work in process at several points in the production process. Finally, after the assembly stage, the Company conducts random testing of finished products. In addition, the Company provides office space at its China manufacturing facility for representatives of its major customers to permit them to monitor production of their products and to provide direct access to the Company's manufacturing personnel. Manufactured products have a low level of product defect, as required by the Company's OEM customers. When requested, Nam Tai provides a limited warranty of six months to one year for products it manufactures. To date, claims under the Company's warranty program have been negligible. The Company's Hong Kong and China subsidiaries have maintained ISO 9002 Certification since December 1993 and ISO 9001 Certification since February 1996. The "ISO" or International Organization for Standardization, is a Geneva-based organization dedicated to the development of worldwide standards for quality management guidelines and quality assurance. ISO 9000, which was the first quality system standard to gain worldwide recognition, requires a company gather, analyze, document, monitor and make improvements where needed. The Company's receipt of ISO 9001 Certification demonstrates that the Company's manufacturing operations meet the most demanding of the established world standards. Management believes sophisticated customers are increasingly requiring their manufacturers to be ISO 9000 certified, and manufacturers that are not so qualified are increasingly looking to certified manufacturers like Nam Tai rather than undertaking the expensive and time-consuming process of qualifying their own operations. -15- 16 For three consecutive years the Company was awarded the prestigious Texas Instruments Supplier Excellence Award. The award recognizes suppliers who have achieved World class performance in the following categories: product quality; quality management; continuous on-time delivery of products; cycle times; leadership in product pricing and value; customer service; technology; and environmental leadership. To qualify for the award the first time requires very high scores in each of the categories. To receive the award in subsequent years requires continuous improvement over the high scores required for the first year. Component Parts and Suppliers The Company purchases over 3000 different component parts from more than 100 major suppliers and is not dependent upon any single supplier for any key component. The Company purchases components for its electronic products from suppliers in Japan and elsewhere. Orders for components are based on forecasts that Nam Tai receives from its OEM customers, which reflect anticipated shipments during the production cycle for a particular model. The major component parts purchased by the Company are integrated circuits or "chips", LCDs, solar cells, printer heads and batteries. The Company purchases both stock "off-the-shelf" chips and custom chips, the latter being the most expensive component parts purchased by Nam Tai. At the present time, the Company purchases most of its chips from Toshiba Corporation, Sharp Corporation and certain of their affiliates, although there are many additional suppliers from which the Company could purchase chips. LCDs are readily available from many manufacturers and the Company currently has two major suppliers, Epson Hong Kong Ltd. and Sharp Corporation. PCBs and other circuit boards are purchased from circuit board manufacturers in Hong Kong, China and solar cells are purchased from Matsushita Battery Industrial Company Ltd. Batteries are standard "off-the-shelf" items, generally purchased in Hong Kong from agents of Japanese manufacturers. The Company also purchases various mechanical components such as plastic parts, rubber keypads, PCBs and packaging materials locally in China. Management believes the low costs for locally supplied parts adds to the Company's competitive advantage. Certain components may be subject to limited allocation by certain of Nam Tai's suppliers. Although such shortages and allocations have not had a material adverse effect on the Company's results of operations, there can be no assurance that any future allocation or shortages would not have such an effect. CUSTOMERS AND MARKETING Approximate percentages of net sales to customers by geographic area based upon location of product delivery are set forth below for the periods indicated:
YEAR ENDED DECEMBER 31, ---------------------------- GEOGRAPHIC AREAS 1998 1997 1996 --------------------------------------------------- North America 47% 49% 34% Japan 22 23 28 Europe 18 15 12 Hong Kong 9 7 18 Other 4 6 8 --- --- --- 100% 100% 100% === === ===
-16- 17 The Company's Hong Kong based management personnel and sales staff is responsible for marketing products to existing customers as well as potential new customers. The Company places great emphasis on providing quality service to its customers and has, as a result, limited the number of companies for which it manufactures in an effort to ensure quality service. Customers The Company's OEM customers include the following entities which market Nam Tai's products under their own brand name or, where no brand name is shown, incorporate the Company's products into their products:
BRAND CUSTOMER CUSTOMER NAME PRODUCT SINCE - -------- ----- ------- ------- Canon, Inc. Canon Personal organizers and calculators 1988 Casio Computer (Hong Kong) Limited Casio Aluminum panels and PVC wallets 1994 Epson Precision (HK) Ltd. ----- LCD Modules for cellular (mobile) 1997 phones Matushita Electronics Corporation ----- IC card readers 1994 (Matsushita Battery Industrial Co. Ltd) Nitsuko (HK) Co. Ltd. ----- PCB modules for Telecommunications 1995 Systems Optrex Corporation ----- Assemblies for LCD modules 1994 Premier Precision Ltd. Citizen Silk screening and aluminum panel 1993 Sanyo Electric (H. K.) Ltd. Sanyo, Casio Silk screening 1988 Seiko Instruments Inc. Seiko, SII Personal organizers and linguistic 1991 products Sharp Corporation Sharp Personal organizers, calculators and 1989 control panel modules Texas Instruments Incorporated Texas Personal organizers and calculators 1989 Instruments Whirlpool Microwave Products Development Whirlpool Silk screening for microwave oven 1998 Ltd. control panels
-17- 18 At any given time, different customers account for a significant portion of Nam Tai's business. Percentages of total sales to customer vary from year to year and may fluctuate depending on the timing of production cycles for particular products. Sales to Nam Tai's four largest customers, aggregated approximately 92%, 89% and 90% of the Company's total net sales during the years ended December 31, 1998, 1997 and 1996, respectively. Sales to Texas Instruments Incorporated and Sharp Corporation, the only customers accounting for more than 10% of sales in 1998, were as follows:
YEAR ENDED DECEMBER 31 ----------------------------------- 1998 1997 1996 ---- ---- ---- Texas Instruments Incorporated 44.2% 38.0% 22.3% Sharp Corporation 32.0 35.3 38.4 ---- ---- ---- 76.2% 73.3% 60.7% ==== ==== ====
A number of products are made for its major customers such that the Company is not necessarily dependent on a single product for one customer. Although management believes any one of the Company's customers could be replaced with time, the loss of any of its largest customers, especially its principal customers, or a substantial reduction in orders from them would have a material adverse effect on the Company's business. See "--Risk Factors - Customer Concentration; Dependence on Electronics Industry." While each of the four largest customers is expected to continue to be a significant customer, the Company continually tries to lessen its dependence on large customers through efforts to diversify its customer and product base. The Company's sales to all of its OEM customers are based on purchase orders. Except for these purchase orders, the terms of which in a few cases are supplemented by basic agreements dependent upon the receipt of purchase orders, Nam Tai has no written agreements with its OEM customers. Often, the Company receives letters of credit to cover the next three months of orders and all the molds, tooling and development charges (including software design) are charged to the account of OEM customers prior to production. Some customers require COD terms and request the Company to bear the cost of molds, tooling and development charges. Many of Nam Tai's customers have a relationship that extends for a number of years and consequently the Company believes its relations with these customers are good. The Company encourages cooperation and communication with its most important customers. In particular, senior management includes a team of Japanese professionals who provide technical expertise and work closely with both the Company's Japanese component suppliers and its Japanese customers. Management also believes the risk of a sudden withdrawal by any of its major customers is diminished by: (i) the lengthy production cycle, typically over three years for each model, which is required to produce the products sold to customers; (ii) the fact that production cycles may begin while other products for the same customers are in progress; and (iii) the investment in molds, tooling and development charges (including software design) which is borne by some of the OEM customers. Sales are predominately denominated in U.S. dollars and in many cases are covered by standard letters of credit. Production Scheduling The typical cycle for a product to be manufactured and sold to an OEM customer is three to four years including the production period, the development period and the period for market research and data collection (which is undertaken primarily by Nam Tai's OEM customers). Initially an OEM customer gathers data from its sales personnel on products for which there is market interest, including features and unit costs. The OEM customer then contacts the Company, and possibly other prospective manufacturers, with forecasted total production quantities and design specifications or renderings. From that information, the Company in turn contacts its suppliers and determines estimated component costs. The Company later advises the OEM customer of the development costs, charges (including molds, tooling and development costs such as software design) and unit cost based on the forecasted production quantities desired during the expected production cycle. -18- 19 Once the Company and the OEM customer agree to the Company's quotation for the development costs and the unit cost, the Company begins the product development. This development period lasts approximately less than six months, longer if software design is included. During this time the Company completes all molds, tooling and software required to manufacture the product with the development costs reimbursed by the customer. Recently, some of the customers have started to request the Company to bear responsibility for paying development charges. Upon completion of the molds, tooling and software, the Company produces samples of the product for the customer's quality testing, and, once approved, commences mass production of the product. The production period usually lasts approximately 18 to 30 months. Typically, more advanced products have longer production runs. If total production quantities change, the OEM customer often provides six months notice before discontinuing orders for a product. At any point in time the Company is in different stages of the development and production periods for the various models it has under development or in production for OEM customers. The majority of the Company's production is based on forecasts received from OEM customers covering the next six month period, the first three months of which are scheduled shipments. These forecasts are reviewed and adjusted, where necessary, at the beginning of each month with confirmed orders covering the first three months. In many cases, confirmed orders are supported by letters of credit and may not be canceled once confirmed without the customer becoming responsible for all costs of the remaining components included in inventory for that order. During the years ended December 31, 1998 and 1997 the Company did not suffer a material loss resulting from the cancellation of an OEM customer confirmed order. For the year ended December 31, 1996, the Company elected to write-off the cost of certain components included in raw material inventory in the amount of $415,000. These components were not likely to be used in connection with future production, and due to the passage of time, could not be charged to customers who would have otherwise been responsible for the cost. Transportation Since the Company sells its products F.O.B. Hong Kong, its customers are responsible for the transportation of finished products from Hong Kong to their final destination. Transportation of components and finished products to and from Shenzhen is by truck. Component parts purchased from Japan are generally shipped by air. To date, the Company has not been materially affected by any transportation problems. RESEARCH AND DEVELOPMENT Between 1984 and 1994, the Company spent an average of approximately $360,000 per annum on research and development, chiefly to advance manufacturing technology. During the later half of this period Nam Tai concentrated on its OEM business and expenditures fell below the average by the end of the period. At that time the major responsibility of the Company's product design personnel was limited to the production to the satisfaction of and in accordance with the specifications provided by OEM customers. Since 1995, the Company has placed increased emphasis on research and development which provides greater service to OEM customers and assists in design and development of future products. As a result of decreased orders, research and development expenses decreased to $1,691,000 in 1998 from $1,909,000 in 1997, but remains significantly higher than the research and development expenses of $950,000 and $945,000 in 1996 and 1995, respectively as some of the Company's customers have requested the Company to bear responsibility for development charges. Namtek, the Company's software development subsidiary which began operations in early 1996, accounted for approximately 7%, 14% and 40% of the research and development expenses in 1998, 1997 and 1996 respectively and these expenses were substantially recovered from fees paid by third parties. ODM DEVELOPMENT In 1998, Nam Tai focused special attention on furthering the research and development capabilities of its engineering division. This included hiring two new senior executives, the Company's CEO Mr. Takizawa, and Mr. Koike, Vice General Manager Research and Development to oversee the development of Nam Tai's product development capabilities. -19- 20 The Company plans to continue acquiring state-of-the art design equipment and enhancing it technological expertise through continued education for all engineers and further recruiting of system engineers. Nam Tai hopes that by enhancing its capabilities it will be able to expand into Original Design Manufacturing ("ODM") of telecommunication products and personal computer accessories. In the ODM business, Nam Tai envisions being responsible for the design and development of new products, the rights to which it will own. The Company has successfully developed its first ODM product, an electronic dictionary and production is expected to begin in July 1999. Nam Tai plans to sell these products to OEM customers to be marketed to end users under the customer's brand name. Nam Tai hopes to augment its OEM business with ODM business in the future. There can be no assurance that Nam Tai's efforts to enter the OEM business will be successful or that it will achieve material revenue from its efforts. COMPETITION Competition in the contract electronic manufacturing industry is intense with numerous other companies in the contract electronic manufacturing industry. For Nam Tai's principal products, competition has been limited by OEMs to a small number of companies who satisfy the requirements to become approved suppliers. The Company's primary competitors in the manufacture of its principal product lines of calculators, personal organizers and linguistic products, are Kinpo Electronics, Inc. (formerly Cal-Comp Electronics, Inc.) and Inventec Co. Ltd., Taiwanese Companies manufacturing in China. While an OEM may prefer its approved suppliers, management believes OEMs tend to order from several suppliers in order to lessen dependence on any one of them. Competition for OEM sales is based primarily on unit price, product quality and availability, promptness of service, reputation for reliability and OEM confidence in the manufacturer. The Company believes it competes favorably in each of these areas. EMPLOYEES At December 31, 1998, Nam Tai employed approximately 1,755 people on a full-time basis, of which 1,719 were working in China, 21 in Hong Kong, and 15 in Canada. Of these, approximately 1,499 were engaged in manufacturing, 167 were engaged in clerical, research and development and marketing positions, and the balance in supporting jobs such as security, janitorial, food and medical services. The Company is not a party to any material labor contract or collective bargaining agreement. The Company has experienced no significant labor stoppages and believes relations with its employees are satisfactory. The nature of its arrangement with its manufacturing employees is such that it can increase or reduce staffing levels without significant difficulty, cost or penalty. The Company maintains an employee incentive compensation program in China whereby a regular bonus is paid to employees on the employee's return to work following the Chinese New Year holiday. Management believes this method has contributed to low employee turnover in the factory. PATENTS, LICENSES AND TRADEMARKS The Company has no patents, licenses, franchises, concessions or royalty agreements that are material to its business as a whole. Due to rapid technological change in the products manufactured, the Company does not believe the absence of patents has had or will have a material impact on its business. The Company has obtained trademark registrations in Hong Kong for the mark "FORTEC" and "SANTRON" in connection with electronic calculators. The Company has registered the trademark "NAMTAI" in connection with electronic calculators in Hong Kong, China, the United States, and Canada. -20- 21 ITEM 2. PROPERTIES British Virgin Islands As of January 17, 1997, the registered office of the Company was transferred to McNamara Chambers, P.O. Box 3342, Road Town, Tortola, British Virgin Islands. Only corporate administrative matters are conducted at this office, through Nam Tai's registered agent, McW. Todman & Co. The Company neither owns nor leases property in the British Virgin Islands. Hong Kong In February 1997, the Company leased new premises at Unit 9, 15/F., Tower 1, China Hong Kong City, 33 Canton Road, TST, Kowloon, Hong Kong for a term of three years. Rental is approximately $17,900 per month for the first two years, and will be reduced by 30% in the third year. The Company moved its principal executive and marketing offices into these new premises in late March 1997. The Company owns a residential flat in Hong Kong that was purchased for total consideration of $1,850,000. This property was occupied by the Chairman of the Company, Mr. Murakami until December 1998 and is now occupied by Mr. Takizawa, Chief Executive Officer and President and forms part of his overall compensation. See Item 11. Compensation of Directors and Officers. Since 1984 the Company owned approximately ten acres of land in Hong Kong carried on the books of the Company at its cost of approximately $523,000. Throughout 1997 the Company disposed of approximately six acres of its land holdings for net proceeds of $5,750,000 realizing a gain of $5,548,000. In 1998 the Company disposed of approximately 0.6 acres of its land holdings for net proceeds of $815,000 realizing a gain of $795,000. The remaining land that the Company plans to sell continues to be carried on the books of the Company at its cost of approximately $185,000. Shenzhen, China Nam Tai's manufacturing complex is located in Baoan County, Shenzhen, China. It includes the original facility and Phase I of the factory expansion completed in May 1996. The original facility consists of 150,000 square feet of manufacturing space under a 15 year lease expiring in 2007. The rental rate is approximately $38,400 per month due to increase by 20% in August 2002. Phase I of the complex expansion is located on 286,600 square feet of leasehold land adjacent to the original facility. The lease for this land was purchased for approximately $2,450,000 in 1994 and has a term of 50 years. The new facility consists of 160,000 additional square feet of manufacturing space, 39,000 square feet of offices, 212,000 square feet of new dormitories, 26,000 square feet of full service cafeteria and recreation facilities and a swimming pool. The total cost of the new factory complex, excluding land, was approximately $21,800,000. The Company also has a 26,000 square foot facility in Shenzhen, located approximately one mile from the manufacturing complex. This contains 28 apartment units to house certain factory managers who are married and have families. The Company purchased this building for approximately $1,000,000, paying the final installment in June 1993. Canada On September 28, 1998, Nam Tai Electronics (Canada) Ltd. moved its corporate office to new leased premises in Vancouver, British Columbia. The Company entered into a lease for 3,480 square feet of office space at an annual rental of $77,649. The lease expires in September 2003. General The Company believes its existing manufacturing and office facilities are adequate for the operation of its business for the foreseeable future. -21- 22 ITEM 3. LEGAL PROCEEDINGS The Company is not party to any legal proceedings other than routine litigation incidental to its business and there are no material legal proceedings pending with respect to the property of the Company, other than as described below. In September 1993, Tele-Art, Inc., a shareholder of Nam Tai, commenced an action against the Company seeking an injunction prohibiting the Company from proceeding with a rights offering which was contemplated at that time. Tele-Art's application was based on claims that Nam Tai may have violated British Virgin Islands and United States law. Among other claims, Tele-Art asserted the Company's rights offering was part of a scheme to enrich directors and management of Nam Tai and dilute the interest of minority shareholders. Within four days, a temporary injunction obtained by Tele-Art was discharged, permitting the Company to proceed with, and complete, its rights and standby offerings in October 1993. Tele-Art is pursuing claims in the British Virgin Islands against Nam Tai for damages. In November 1993, Tele-Art applied to the Court to include the Company's directors in the proceedings, and in March 1994 the application was granted. The Company continues to believe that Tele-Art's claims are without merit and plans, if necessary, to continue to vigorously defend against them as well as, if possible, to seek from Tele-Art and its agents compensation for the damage caused by the injunction and the proceedings that were brought to obtain it. In June 1997, Nam Tai Electronics, Inc. filed a petition with the High Court of Justice in the British Virgin Islands for the winding up of Tele-Art Inc. on account of an unpaid judgment debt owing to Nam Tai. The High Court of Justice granted an order to wind up Tele Art Inc. on July 17, 1998. The Caribbean Court of Appeal upheld the decision on January 25, 1999. On January 22, 1999, pursuant to its Articles of Incorporation, Nam Tai redeemed and cancelled 138,500 Common Shares of Nam Tai registered in the name of Tele-Art at a price of $11.19 per share to offset substantially all of the judgment debt, interest, and legal costs of approximately $1.6 million. On February 12, 1999 the liquidator of Tele-Art filed a summons seeking among other things, a declaration setting aside the redemption. The Company believes it has acted properly in this matter and will vigorously contest this application. The Bank of China Hong Kong branch is pursuing claims in Hong Kong seeking possession of 308,227 shares of the Company (including the 138,500 redeemed shares discussed in the above paragraph) allegedly beneficially owned by Tele-Art but pledged to the Bank of China. Management believes that this claim is without merit and will vigorously defend them. Management believes that the outcome of the above cases will not have a significant effect of the Company. -22- 23 ITEM 4. CONTROL OF THE COMPANY The Company is not directly owned or controlled by another corporation or by any foreign government. The following table sets forth, as of March 1, 1999, the beneficial ownership of the Company's Common Shares by each person known by the Company to own beneficially more than 10% of the Common Shares of the Company outstanding as of such date and by the officers and directors of the Company as a group.
NUMBER OF IDENTITY OF COMMON SHARES PERCENT OF PERSONS OR GROUPS BENEFICIALLY OWNED CLASS ----------------- ------------------ ---------- M. K. Koo 3,499,489 (1) 33.0% Officers and directors as a 4,325,884 (2) 40.0% group (eleven persons)
(1) Includes 2,519,306 shares which are owned by Mr. Koo, 53,333 shares issuable to Mr. Koo upon exercise of options exercisable within 60 days of March 1, 1999 and 926,850 shares issuable to Mr. Koo upon exercise of Warrants. (2) Includes 3,146,607 shares owned by officers and directors as a group, an aggregate of up to 53,333 shares issuable to officers upon exercise of employee options exercisable within 60 days of March 1, 1999, and 1,125,944 shares issuable to officers and directors as a group upon exercise of Warrants. -23- 24 ITEM 5. NATURE OF TRADING MARKET COMMON SHARES The Company's authorized capital consists of 20,000,000 Common Shares, $0.01 par value per share. The Company's Common Shares are traded on The Nasdaq National Market. Prior to March 12, 1999 the shares traded under the symbol "NTAIF" and after the symbol changed to "NTAI". The following table sets forth the high and low closing sale prices as reported by The Nasdaq National Market during each of the quarters in the two-year period ended December 31, 1998.
QUARTER ENDED HIGH LOW ------------- ----- ----- December 31, 1998 14.50 9.675 September 30, 1998 9.38 14.94 June 30, 1998 17.25 14.88 March 31, 1998 17.63 12.88 December 31, 1997 27.88 14.00 September 30, 1997 31.63 16.75 June 30, 1997 16.63 9.63 March 30, 1997 11.88 8.13
Of the 9,812,523 Common Shares of the Company outstanding as of December 31, 1998, 6,535,712 are held by 1,019 holders of record in the United States. WARRANTS In November 1997, the Company completed rights and standby offerings (the "1997 Offerings") selling 2,267,917 and 729,212 units at $17.00 and $16.75 respectively. Each Unit consisted of one Common Share and one Warrant. The Common Shares and the Warrants included in the Units were separately transferable immediately. Each Warrant is exercisable to purchase one Common Share at a price of $20.40 per share at any time until November 24, 2000. The Warrants are redeemable by the Company at $0.05 per Warrant on 30 days' written notice provided the closing sale price of the Common Shares for 20 consecutive trading days within the 30-day period preceding the date of the notice of redemption equals or exceeds $25.50. In the event the Company exercises the right to redeem the Warrants, a holder will be forced either to sell or exercise the Warrants within 30 days of the notice of redemption, or accept the redemption price. -24- 25 The Company's Warrants are traded on The Nasdaq National Market. Prior to March 12, 1999 the shares traded under the symbol "NTAWF" and after the symbol changed to "NTAIW". The following table sets forth the high and low closing sale prices as reported by The Nasdaq National Market during each of the quarters since the Listing of the warrants.
QUARTER ENDED HIGH LOW ------------- ---- --- December 31, 1998 1.69 0.88 September 30, 1998 1.94 0.75 June 30, 1998 3.44 1.88 March 31, 1998 3.50 2.44 December 31, 1997 4.00 2.50
Of the 2,997,129 Warrants of the Company outstanding as of December 31, 1998, 127 holders of record in the United States hold 2,706,070. ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS There are no exchange control restrictions on payments of dividends on the Company's Common Shares or on the conduct of the Company's operations in Hong Kong, where the Company's principal executive offices are located or the British Virgin Islands, where Nam Tai is incorporated. Other jurisdictions in which the Company conducts operations may have various exchange controls. Dividend distribution and repatriation by Nam Tai's subsidiaries in China are regulated by Chinese laws and regulations. To date these controls have not had a material impact on the Company's financial results as sales to customers are generally made in Hong Kong. There are no material British Virgin Islands laws which impose foreign exchange controls on the Company or that affect the payment of dividends, interest, or other payments to nonresident holders of Nam Tai's securities. British Virgin Islands law and the Company's Memorandum and Articles of Association impose no limitations on the right of nonresident or foreign owners to hold or vote such securities of the Company. ITEM 7. TAXATION No reciprocal tax treaty regarding withholding tax exists between the United States and the British Virgin Islands. Under current British Virgin Islands law, dividends, interest or royalties paid by the Company to individuals and gains realized on the sale or disposition of shares are not subject to tax as long as the recipient is not a resident of the British Virgin Islands. The Company is not obligated to withhold any tax for payments of dividends and shareholders receive gross dividends irrespective of their residential or national status. -25- 26 ITEM 8. SELECTED FINANCIAL DATA The selected financial information set forth below is derived from consolidated financial statements of the Company. The selected information is qualified in its entirety by reference to, and should be read in conjunction with, such consolidated financial statements, related notes and "Management's Discussion and Analysis of Results of Operations and Financial Condition" under Item 9. in this report. SELECTED FINANCIAL INFORMATION (In thousands of U.S. dollars except per share data)
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Income Statement Data (1) - ------------------------- Net sales $101,649 $132,854 $108,234 $121,240 $ 96,564 Gross margin 24,710 34,724 22,185 23,152 17,223 Net income 3,529 30,839 9,416 11,419 8,099 Dividends declared 2,829 786 243 120 65 Per share amounts - ----------------- Basic earnings per share (2) $ 0.34 $ 3.70 $ 1.17 $ 1.42 $ 1.17 Diluted earnings per share (3) $ 0.34 $ 3.68 $ 1.16 $ 1.40 $ 1.09 Dividend declared $ 0.28 $ 0.10 $ 0.03 $ 0.015 $ 0.01 Balance Sheet Data (1) - ---------------------- Current assets $ 97,015 $133,022 $ 46,609 $ 47,011 $ 45,520 Property, plant and equipment - net 32,445 32,442 36,487 27,635 14,624 Total assets 147,228 167,788 88,391 79,281 66,287 Current liabilities 19,476 19,552 21,401 19,108 17,838 Non-current liabilities 56 -- -- -- -- Shareholders' equity 127,696 148,236 66,990 60,173 48,449
- ------------ (1) Assets and liabilities are translated into United States dollars using the appropriate rates of exchange at the balance sheet date. Income and expenses are translated at the average exchange rate in effect during the year. (2) For purposes of calculating basic earnings per share, the weighted average number of common shares outstanding for the years ended December 31, 1998, 1997, 1996, 1995, and 1994 were 10,316,510, 8,324,320, 8,040,497, 8,018,252, and 6,934,098 respectively. (3) For purposes of calculating fully diluted earnings per share, the weighted average number of common shares outstanding for the years ended December 31, 1998, 1997, 1996, 1995, and 1994 were 10,351,100, 8,391,290, 8,142,131, 8,171,750, and 7,459,570 respectively. -26- 27 ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This section contains forward-looking statements involving risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the section of this Report entitled Item 1. Description of Business "Risk Factors". This section should be read in conjunction with the Company's Consolidated Financial Statements included elsewhere herein. RESULTS OF OPERATIONS General The Company derives its revenues principally from manufacturing consumer electronic products and subassemblies for OEM customers in the electronics industry. Products manufactured by Nam Tai include calculators, personal organizers, personal digital assistants, linguistic products, integrated circuit ("IC") or smart card readers (referred to as "IC card readers"), and various components including microwave oven control panel modules. During each of the years ended December 31, 1998, 1997, and 1996, sales to OEM customers accounted for 99% of total net sales. Management believes sales of personal organizers, linguistic products and calculators to its OEM customers will continue to be an important line of business for the Company for the next several years. Management expects subassemblies, components, and other products, along with new products contribute to an increasing proportion of total revenue in the future. See Item 1. Description of Business -- Customers and Marketing. The consumer electronics industry is very competitive and the Company is continuously under pressure to lower the selling price of its existing product lines. In response to these pressures, the Company seeks to reduce its material costs by negotiating lower prices on components and upgrading its technology and human resources in order to be capable of manufacturing more advanced and specialized products with higher unit margins. It also strives to improve customer relations and quality. The Company desires to produce more advanced and specialized products as management believes that there is less competition in more advanced products due to the complexity involved in manufacturing and the lower number of direct competitors. There can be no assurance that the Company will be successful in obtaining business for such products and failure to move into more advanced products may result in the Company facing increasing competition and reduced profit margins. The Company moved its manufacturing operations to China in 1987 and derives substantially all of its operating income from these operations. Nam Tai plans to continue increasing the scope of its operations and investment in China. Under current British Virgin Islands law, Nam Tai is not subject to tax on its income. Most of the Company's operating profits accrue in China, where its effective tax rate is 10%, and in Hong Kong, where the corporate tax rate on assessable profits is currently 16% in 1998. The Company receives tax credits in China related to its reinvestment of profits on China operations into share capital and tax benefits for being a "High and New Technology Enterprise". This reduces the overall tax payable by the Company. See Note 8 of Notes to Consolidated Financial Statements. The Company values its inventory at the lower of cost and market value. Until March 1997, the Company used a standard cost system to value its inventory, which is purchased in U.S. dollars, Japanese yen and Hong Kong dollars. Under this system, the Company revalued its inventory at the end of each quarter based upon actual costs and the resulting standard cost revaluation flowed through cost of sales when the inventory was sold. Since March 1997, the Company uses a cost system which is an actual cost system based on FIFO inventory flow. The Company completed the Albatronics' acquisition in November 1998. Due to the troubled financial condition of Albatronics at December 31, 1998, and the possibility Albatronics would be wound up within a relatively short period, Nam Tai did not consolidate Albatronics' financial statements in, or at December 31, 1998. Instead, Nam Tai wrote down its investment in Albatronics to a nominal value. See "The Company's Subsidiaries - Albatronics" and Note 1 of Notes to Consolidated Financial Statements. Currently, Nam Tai is seeking to work together with Albatronics' major trade creditor and Albatronics' bankers to try to support Albatronics. If any of these three parties refuses to provide the -27- 28 necessary support, Albatronics' directors will consider all available options including liquidating Albatronics. Nam Tai's financial statements included in this Report may be restated if a restructuring agreement for Albatronics is reached or is probable and Nam Tai continues with its investment in Albatronics. Under those circumstances Nam Tai would restate its 1998 financial statements to consolidate Albatronics' results since December 1, 1998 and its balance sheet as at December 31, 1998 with Nam Tai's financial statements for the year ended December 31, 1998 and would restate future financial statements that it issues before a decision requiring consolidation is made. This would mean in the case of its 1998 financial statements that Nam Tai would restate its 1998 financial statements to consolidate Albatronics' results since December 1, 1998 and its balance sheet at December 31, 1998 with Nam Tai's 1998 financial statements for the year ended December 31, 1998. Although Nam Tai's 1998 net income would not change materially from $3,529,000 reported in this Report (i.e., the provision for impairment in value of $8.27 million would not be reversed irrespective of consolidation), all of Albatronics' sales and expenses during December 1998 of $17.6 million and $19.3 million, respectively, would be included in Nam Tai's statements of income for the year ended December 31, 1998. In addition, Nam Tai's Consolidated Balance Sheet at December 31, 1998 would be materially altered to include Albatronics' assets and liabilities. Other financial ratios and measures, including gross profit margin, net profit margin, cash to current liabilities, total assets to total liabilities, and the amount of long-term debt, would be materially adversely affected upon a consolidation of results. A decision requiring consolidation which is made after future financial statements of the Company are issued would result in an additional restatement of previously issued financial statements and probably would have a material adverse impact on the Company's financial results and financial condition for periods subsequent to December 31, 1998. -28- 29 The first quarter is historically a slower sales period for the Company as its factories are closed for two weeks for the Chinese New Year holidays as is customary in China. First quarter sales, as a percentage of total sales, were stronger than usual in 1998 because the impact of the Asian Flu which had a more severe impact on the Company as the year progressed. The following table sets forth selected operating data for the quarters indicated. This information has been derived from the unaudited consolidated financial statements of the Company which, in the opinion of management, contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of such information. These operating results are not necessarily indicative of results for any future period and results may fluctuate significantly from quarter to quarter in the future.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER (In thousands of U.S. dollars except per share data) -------------------------------------------------------------------- 1998 - ---- Summary of operations Net sales $ 26,280 $ 30,857 $ 23,659 $ 20,853 Gross profit 6,591 7,465 5,513 5,141 Income from operations 3,321 2,432 1,838 793 Net income 5,865 2,802 2,565 (7,703) Basic earnings per share $ 0.53 $ 0.27 $ 0.26 $ (0.78) Diluted earnings per share $ 0.53 $ 0.27 $ 0.26 $ (0.78) 1997 - ---- Summary of operations Net sales $ 31,152 $ 40,444 $ 31,245 $ 30,013 Gross profit 7,246 12,594 7,536 7,348 Income from operations 3,630 8,005 3,878 3,503 Net income 5,570 7,763 8,751 8,755 Basic earnings per share $ 0.71 $ 0.98 $ 1.07 $ 0.93 Diluted earnings per share $ 0.71 $ 0.97 $ 1.06 $ 0.93 1996 - ---- Summary of operations Net sales $ 25,357 $ 24,885 $ 28,005 $ 29,987 Gross profit 5,036 4,907 6,344 5,898 Income from operations 2,007 1,201 2,893 2,432 Net income 2,333 1,409 3,318 2,356 Basic earnings per share $ 0.29 $ 0.17 $ 0.41 $ 0.30 Diluted earnings per share $ 0.29 $ 0.17 $ 0.41 $ 0.30
-29- 30 The following table presents selected consolidated financial information stated as a percentage of net sales for the years ended December 31, 1998, 1997, and 1996:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1998 1997 1996 ----- ----- ----- Net sales ............................................ 100.0% 100.0% 100.0% Cost of sales ........................................ 75.7 73.9 79.5 ----- ----- ----- Gross profit ......................................... 24.3 26.1 20.5 ----- ----- ----- Costs and expenses: Selling, general and administrative expenses........ 13.0 10.4 11.7 Research and development expenses .................. 1.6 1.4 0.9 Non-recurring expense .............................. 1.4 -- -- ----- ----- ----- 16.0 11.8 12.6 ----- ----- ----- Income from operations ............................... 8.3 14.3 7.9 Profit (loss) on disposal of fixed assets .......... 0.7 3.3 (0.1) Provision for impairment of value of investment..... (8.2) -- -- Other income - net ................................. 4.8 5.8 1.1 Interest expense ................................... -- -- (0.1) ----- ----- ----- Income from consolidated companies before income taxes and minority interests ............................. 5.6 23.4 8.8 ----- ----- ----- Net income ........................................... 3.5% 23.2% 8.7% ===== ===== =====
Year ended December 31, 1998 Compared to Year ended December 31, 1997 Nam Tai's sales decreased by 24% to $101,649,000 for the year ended December 31, 1998 compared to $132,854,000 for the year ended December 31, 1997, primarily due to the decrease in customer orders from all of its major customers. As a result of the Asian economic turmoil, both sales quantities and unit prices fell. Management believes that the quantity of products ordered by Asian OEM customers fell as a result of reduced demand by end users. Sales also declined as a result of reductions in unit prices. Management reduced unit prices to maintain market share as a result of the increasingly competitive environment, and it reduced unit prices to pass material and component cost savings resulting from currency depreciations on to its OEM customers. The Company's gross profit decreased to $24,710,000 for the year ended December 31, 1998 from $34,724,000 for the year ended December 31, 1997. The principal reason for the decrease in gross profit was the decrease in customer orders and lower unit prices. Nam Tai's gross profit margin decreased to 24.3% in 1998 from 26.1% in 1997.The major reasons for the decrease in profit margins was the lowering unit prices caused by the increasingly competitive environment, a changing product mix and the fact that fixed depreciation overhead costs accounted for a larger percentage of cost of sales. -30- 31 Selling, general and administrative expenses decreased to $13,190,000 or 13.0% of sales from $13,799,000 or 10.4% of sales in the year ended December 31, 1997. The decrease in absolute dollars principally reflected reduced direct selling expenses incurred as a result of the decrease in sales. The increase in such expenses as a percent of sales was the result of the Company having to cover fixed general and administrative expenses during a time of declining sales. Research and development expenses as a percentage of sales were essentially the same in 1998 and 1997 at 1.6% and 1.4% respectively. Research and development expenses decreased to $1,691,000 in 1998 from $1,909,000 in 1997 in part because there were fewer customer orders that involved non-reimbursable expenses for research and development work. Namtek, the Company's software development subsidiary which began operations in early 1996, accounted for approximately 7% of the research and development expenses in 1998 and 14% of the research and development expenses in 1997. These expenses were recovered from fees paid by third parties. Normally the Company does not have to pay custom duties in the PRC on foreign purchases which are incorporated into manufactured goods that are subsequently exported. During the last audit, PRC customs was not satisfied with supporting documentation provided by the Company for certain material purchases of prior years. As a result, a non-recurring expense of $1,445,000 was incurred relating to customs assessment in China in 1998. Loss on disposal of property, plant and equipment was $82,000 for the year ended December 31, 1998 as compared to $1,198,000 for the year ended December 31, 1997. The loss in 1998 related primarily to the relocation of the Canadian office and the write-off of the unamortized leasehold improvements. Gain on disposal of property, plant and equipment was $848,000 for the year ended December 31, 1998 as compared to $5,548,000 for the year ended December 31, 1997. The gains in both 1998 and 1997 related primarily to the sale of portions of the Company's landholdings in Hong Kong. (See the discussion regarding the sale in 1998 under Liquidity and Capital Resources below.) A provision for the impairment of value of $8,271,000 was made to reduce to a nominal carrying value Nam Tai's investment in Albatronics. (See the discussion regarding the Albatronics investment under Liquidity and Capital Resources below.) Other income decreased to $4,865,000 for the year ended December 31, 1998 compared to $7,791,000 for the year ended December 31,1997. Other income in 1998 consisted primarily of interest income of $5,047,000, a gain of $1,207,000 on the disposal of the Company's investment in Deswell Industries Inc. ("Deswell") and a gain of $394,000 on foreign exchange. Such gains were offset by the write-off of the $840,000 premium of an option purchased by Nam Tai as a hedge against the devaluation of the Hong Kong dollar against the U.S. dollar, unrealized losses of $468,000 incurred as a result of the decline in the market value of short-term investments and miscellaneous expenses of $266,000. Other income in 1997 derived principally from interest income of $1,847,000 and gains on the sale of shares of Deswell of $5,488,000. Interest income increased in 1998 as a result of interest earned on the proceeds received in November 1997 from the sale of securities in the Company's rights and standby offerings. Income from continuing operations from consolidated companies before income tax was $5,743,000 for the year ended December 31, 1998 compared to $31,118,000 for the year ended December 31, 1997. The decrease of 82% was primarily due to the 24% decrease in 1998 sales, tightening gross profit margins and the provisions for the impairment of value of Albatronics. The income tax expense of $1,040,000 for the year ended December 31, 1998 compares to an expense of $279,000 for the prior year. The income tax expense relates to income taxes on the Hong Kong and China operations. In the past the Company received 100% tax credits in China related to its reinvestment of profits into additional share capital of the China subsidiaries. This reduced the overall tax payable by the Company in China. For the years 1993 through 1995, the Company received a full refund of China taxes paid as a result of reinvesting its profits into share capital. As a result of its expectations that it would receive a full refund of income taxes attributable to China operations as it had in the past, the Company recorded tax payments in 1996 and 1997 as prepayments. In early 1999, the Company learned that for the 1996 and 1997 tax years it would not receive a 100% tax refund on taxes already paid, and was required to reduce the prepayment by the amount of the refund that was not obtained. For 1996, the Company received tax refunds of $484,000 on taxes paid of $917,000. -31- 32 For 1997, the Company now expects to receive a refund of $1,329,000 on taxes paid of $1,769,000. Only $6,000 of the expected refund had been received as of December 31, 1998. A full refund was denied for 1997 and 1996 because the large intercompany receivable between the China subsidiary and the Hong Kong subsidiary was not considered by the China Tax Authorities to be a reinvestment of profits. In January 1999, the Company's Shenzhen manufacturing facility received the recognition of was recognized as a "High and New Technology Enterprise" which entitles it to various tax benefits including lowering the corporate profits tax rate to 7.5% until January 7, 2004. Net income decreased $27,310,000 or 89% to $3,529,000 (3.5% of sales) for the year ended December 31, 1998 compared to $30,839,000 (or 23.2% of sales) for the year ended December 31, 1997. This resulted in diluted earnings per share for the year ended December 31, 1998 of $0.34 ($0.34 basic) compared to diluted earnings per share of $3.68 ($3.70 basic) for the year ended December 31, 1997. The decrease in net income and earnings per share is the result of: (i) a decrease in sales; (ii) lower operating margins; (iii) fixed general and administrative expenses; (iv) fewer gains from the disposal of fixed assets; (v) the provision for impairment of value for Albatronics; (vi) a non-recurring customs assessment; (vii) increased income tax expenses as a result of 1997 and 1996 tax refunds not being received as expected; (viii) Nam Tai's share of Albatronics' losses in December 1998 of $1,708,000; and (ix) an increase in the weighted average number of shares outstanding resulting from the issuance of approximately 3,000,000 additional shares in late November 1997. The decrease in net income was partially offset by Nam Tai's share of Group Sense (International) Limited's ("Group Sense") net income for the first six months of fiscal 1999 (ending September 30, 1998) of $534,000 and an increase in net interest income of $3,238,000 as a result of the increased amount of cash on hand throughout the year. The diluted weighted average number of common shares outstanding increased to 10,351,000 (basic 10,317,000) for the year ended December 31, 1998 from 8,391,000 (basic 8,324,000) for the year ended December 31, 1997, reflecting the issuance of approximately 3,000,000 additional shares around the end of November 1997 in the Company's Rights and Standby Offerings, offset by the repurchase during 1998 of shares pursuant to the Company's repurchase program. Year ended December 31, 1997 Compared to Year ended December 31, 1996 Nam Tai's sales increased by 23% to $132,854,000 for the year ended December 31, 1997 compared to $108,234,000 for the year ended December 31, 1996 primarily due to increased sales to Texas Instruments Incorporated and Sharp Corporation. The Company's gross profit increased to $34,724,000 for the year ended December 31, 1997 from $22,185,000 for 1996. The principal reason for the increase in gross profit was the increase in sales. Also contributing to the increase in gross profit were improved gross profit margins. Nam Tai's gross profit margin improved to 26.1% in 1997 from 20.5% in 1996. The major reasons for the increase in profit margin were (i) the production of new, higher margin products, (ii) improvements in quality control which resulted in the reduction of the scrap rate, (iii) lower cost of raw materials and components, in part the result of the weakness of the Japanese yen in relation to the U.S. dollar which benefitted the Company as it purchases a substantial volume of components from Japanese companies which are paid for in Japanese yen, and (iv) changes in materials used in production to reduce manufacturing costs. Selling, general and administrative expenses increased by 8.6% to $13,799,000 or 10.4% of sales in the year ended December 31, 1997 from $12,702,000 or 11.7% of sales for the year ended December 31, 1996. The increase in absolute dollars principally reflected additional staff and costs required to provide services to the Company as a result of the growth in sales. The decrease in such expenses as a percent of sales was the result of efficiencies obtained in general administrative expenses as the Company handled a greater level of activity with available resources. Research and development expenses increased to $1,909,000 in 1997 from $950,000 in 1996 as some of the Company's customers have requested the Company to bear responsibility for paying development charges. Namtek, the Company's software-development subsidiary which began operations in early 1996, accounted for approximately 14% of the research and development expenses in 1997 and 40% of the research and development expenses in 1996. -32- 33 These expenses were substantially recovered from fees paid by third parties. Loss on disposal of property, plant and equipment was $1,198,000 for the year ended December 31, 1997 as compared to $123,000 for the year ended December 31, 1996. The loss in 1997 related to the sale of certain of the Company's real property in Burnaby, British Columbia, Canada and the write-off of equipment. See the discussion regarding this sale under Liquidity and Capital Resources below. Gain on disposal of property, plant and equipment was $5,548,000 for the year ended December 31, 1997 as compared to nil for the year ended December 31, 1996. The gain in 1997 principally related to the sale of a portion of the Company's land holdings in Hong Kong. See the discussion regarding this sale under Liquidity and Capital Resources below. Other income (net) increased to $7,791,000 for the year ended December 31, 1997 from $1,253,000 for the year ended December 31, 1996. This income consisted of profit on the disposal of investments of $5,488,000, interest income of $1,847,000 on the Company's cash balances, foreign exchange gains of $500,000 and miscellaneous income of $650,000 net of bank charges of $343,000 and donations of $351,000. Interest expense decreased to $39,000 for the year ended December 31, 1997 from $89,000 for the year ended December 31, 1996 as a result of the reduction in the Company's utilization of trade credit facilities under its banking arrangements. Income from continuing operations before income tax was $31,118,000 for the year ended December 31, 1997 as compared to $9,574,000 for the year ended December 31, 1996. The increase of 225% was primarily due to increased 1997 sales, improved profit margins, and gains on the disposal of investments and gains on the disposal of fixed assets. The income tax expense of $279,000 for the year ended December 31, 1997 compares to an expense of $158,000 for the prior year. The income tax expense in 1997 relates to income taxes on Hong Kong operations and is comparable to 1996 income taxes paid with respect to Hong Kong operations. In 1995, the Company reversed a provision of $705,000 against income taxes owing from China operations following receipt of a refund of 1994 income taxes on China operations. The refund in 1995 from 1994 China income taxes resulted in an overall recovery of total income taxes paid for 1995. As a result of expected refunds of income taxes attributable to China operations, the Company made no provision for such income taxes in 1997, 1996 or 1995. The refund of 1995 income taxes on China operations was received in 1996 and the refund of 1996 and 1997 income taxes is expected in 1998. Net income increased by 228% to $30,839,000 (or 23.2% of sales) for the year ended December 31, 1997 compared to $9,416,000 (or 8.7% of sales) for the year ended December 31, 1996. This resulted in diluted earnings per share for the year ended December 31, 1997 of $3.68 ($3.70 basic) compared to diluted earnings per share of $1.16 ($1.17 basic) for the year ended December 31, 1996. The increase in net income and earnings per share is the result of (i) increase in sales; (ii) higher operating margins; (iii) increases in other income; and (iv) gains from the disposal of fixed assets. The weighted average number of common shares outstanding increased to 8,390,290 for the year ended December 31, 1997 from 8,142,131 for the year ended December 31, 1996, reflecting the repurchase of 1,000 shares through the facilities of the Toronto Stock Exchange, the issuance of 386,667 common shares upon exercise of stock options granted under the Company's stock option plan and issuance by the Company of 2,997,129 common shares in its 1997 Offerings of units, which was completed at the end of November 1997. In the 1997 Offerings, the Company sold a total of 2,997,129 units, each unit consisting of one common share and one common share purchase warrant. Each warrant is exercisable to purchase one common share at a price of $20.40 per share until November 24, 2000. The warrants are redeemable by the Company at any time at $0.05 per warrant if the average closing sale price of the common shares for 20 consecutive trading days within the 30-day period preceding the date the notice is given equals or exceeds $25.50 per share. -33- 34 LIQUIDITY AND CAPITAL RESOURCES Current assets decreased to $97,015,000 for the year ended December 31, 1998 compared to $133,022,000 for the year ended December 31, 1997. Cash and cash equivalents, consisting of cash and short-term term deposits, decreased to $71,215,000 for the year ended December 31, 1998 versus $102,411,000 for the year ended December 31, 1997. The principal reasons for the decrease in cash and cash equivalents were: (i) the repurchase of an aggregate of 1,407,500 common shares of the Company for $21,255,000; (ii) a strategic investment of approximately 20% of the common shares of Group Sense for $16,000,000; (iii) an acquisition of just over 50% control of Albatronics for $9,980,000; (iv) dividends paid of $2,141,000; and (v) additions to fixed assets of $4,699,000. Accounts receivable at December 31, 1998 decreased to $16,138,000 from $16,985,000 at December 31, 1997, in part because of a decrease in sales in 1998. Inventories at December 31, 1998 decreased by $5,483,000 or 56% from levels at December 31, 1997, reflecting an inventory turnover period of 21 days in 1998 versus 37 days in 1997. The decrease in inventory levels is a result of both decreased sales levels and improved inventory management. In December 1994, the Company invested $3,931,000 for approximately 14% of Deswell's then outstanding capital stock. In July 1995, Deswell completed an initial public offering of its securities in the United States and the Company's investment was diluted to approximately 10.5% of Deswell's outstanding shares as at December 31, 1995. In July 1996, the Company exercised warrants to purchase an additional 12,000 shares of Deswell for $119,000. As at December 31, 1996, this investment was shown at cost and was approximately 87% of the market value of Deswell common shares as reported on the Nasdaq National Market at December 31, 1996. In 1997, the market price of the Deswell shares rose substantially on the Nasdaq National Market and the Company elected to sell a portion of its investment in Deswell, reducing its stake in Deswell to below 2% of its shares reported outstanding at December 31, 1997 and realizing a gain of approximately $5.5 million on sales of 390,000 shares. In 1998 the Company sold the remainder of its Deswell holdings for $2,132,000, realizing a gain of approximately $1.3 million. On September 12, 1998, Nam Tai signed an agreement to acquire Albatronics by subscribing for slightly over 50% of the outstanding shares of Albatronics. The transaction was completed on November 30, 1998 for $9.98 million, including transaction fees. When Nam Tai announced the completion of the Albatronics acquisition on December 2, 1998, the Company indicated that it would take steps to support Albatronics depending on the results of a comprehensive study investigating opportunities for corporate restructuring and the streamlining of Albatronics' overhead expenses. Since that time, results from Albatronics' year-end audit show a company in financial difficulty with a deficiency in shareholders' equity of $45.2 million, up from the $22.6 million adjusted deficiency in shareholders' equity reported in Albatronics' unaudited August 31, 1998 accounts. The deficiency increased despite the capital injection from Nam Tai's share subscription, reflecting Albatronics' continuing losses, which for the month of December 1998 were $1.71 million. Under ordinary circumstances, Nam Tai, as the controlling shareholder, would consolidate Albatronics' financial statements with Nam Tai's. However, due to the troubled financial condition of Albatronics at December 31, 1998 and the possibility of Albatronics being wound up within a relatively short period, Nam Tai did not consolidate Albatronics' financial statements at December 31, 1998. Instead, Nam Tai accounted for Albatronics on an equity basis and recorded as separate line items on its Consolidated Statements of Income all of Albatronics' December 1998 losses of $1.71 million as "Share of losses of unconsolidated subsidiary" and also made a "Provision for impairment of value" of $8.27 million against the remaining carrying value of this investment. As a result, the carrying value of Nam Tai's investment in Albatronics has been recorded on Nam Tai's Consolidated Balance Sheet at December 31, 1998 at a nominal value as "Investment in unconsolidated subsidiary (less provision for impairment of value)." On May 27, 1998, Nam Tai completed a strategic investment of $16 million for approximately 20% of the outstanding shares of Group Sense, a publicly listed Hong Kong company (Hang Seng company #601). During 1998, the Company received dividend payments from Group Sense of $590,000 and earned $534,000 as its share of Group Sense's results (since its May 27, 1998 investment) for the six-month period ending September 30, 1998, which are the most recent results announced to date. Property, plant and equipment - net of $32,445,000 as at December 31, 1998 is virtually unchanged from $32,442,000 as at December 31, 1997. Depreciation on fixed assets for 1998 was $4,258,000 while additions to plant and equipment during 1998 were $4,699,000. New equipment and machines purchased in 1998 included four sets of SMT systems, five sets of ACF heat seal machines, and equipment for product development including a laser rapid prototyping machine and a Hast Chamber for product reliability testing. -34- 35 At December 31, 1998, 58% and 29% of the Company's identifiable assets were located in Hong Kong and China, respectively, as compared to 14.7% and 26.7%, respectively, at December 31, 1997. Cash and cash equivalents consisting of cash and short-term term deposits representing 23% of the total cash and cash equivalents of $71,215,000 was held by the Company in North America at December 31, 1998 compared to 93.2% of the $102,411,000 cash and cash equivalents at December 31, 1997. The decrease in the percentage of funds held in North America occurred because in the second half of 1998 the Company took advantage of the higher Hong Kong dollar interest rates by shifting a portion of its surplus funds from U.S. dollar deposits into Hong Kong dollar term deposits and purchased an option contract to hedge the risk of a devaluation of the Hong Kong dollar. As a result, identifiable assets in North America declined to 13% of total assets at December 31, 1998 compared to 58.6% of total assets at December 31, 1997. The Company expects that in the future the majority of its surplus funds will be held in North America. In the past, the Company used short-term bank borrowing to assist in meeting its working capital requirements and to provide funds for investments in property, plant and equipment; however, since 1996 the Company's capital requirements have been financed from internally generated funds, and short-term borrowing was reduced to nil at December 31, 1998 and 1997 respectively. The Company had working capital of $77,539,000 and $113,470,000 as of December 31, 1998 and 1997 respectively. At December 31, 1998, Nam Tai had in place general banking facilities with four financial institutions aggregating $50,100,000. For the three years ended December 31, 1998, banking facilities bore Nam Tai's corporate guarantee and there was an undertaking not to pledge any assets to any other banks without the prior consent of the Company's bankers. Such facilities, which are subject to annual review, permit the Company to obtain overdrafts, lines of credit for forward exchange contracts, letters of credit, import facilities, trust receipt financing, shipping guarantees and working capital, as well as fixed loans. As at December 31, 1998, the Company had utilized approximately $1,201,000 under such general credit facilities and had available unused credit facilities of $48,899,000. Interest on notes payable averaged 5.8% per annum during the year ended December 31, 1998. During the year ended December 31, 1998, the Company paid a total of $1,000 in interest on indebtedness. Accounts payable increased by 4.7% to $18,377,000 for the year ended December 31, 1998 from $17,551,000 for the year ended December 31, 1997, principally as a result of the extension of credit terms from suppliers. The Company had no long-term debt during either 1998 or 1997. Cash flow from operations for 1998 was $19,400,000, including net income of $3,529,000, depreciation of $4,258,000 and other non-working capital adjustments of $7,978,000. The net cash increase due to changes in working capital (excluding cash and bank borrowings) was $3,635,000. During 1998, the Company's net investment activities used $27,222,000. This principally includes proceeds on the disposal of shares of Deswell of $2,132,000 and proceeds from the disposal of land in Hong Kong of $815,000, less the investment in Group Sense (net of dividends received) of $15,819,000, the investment in Albatronics of $9,980,000 and additions to fixed assets of $4,699,000. Net cash used by financing activities was approximately $23,396,000 in 1998. Financing activities during 1998 included share repurchases of $21,255,000 and the payment of dividends of $2,141,000. The Company believes there are no material restrictions (including foreign exchange controls) on the ability of Nam Tai's non-China subsidiaries to transfer funds to the Company in the form of cash dividends, loans, advances or product/material purchases. With respect to the Company's China subsidiaries, there are restrictions on the payment of dividends and the removal of dividends from China due to the Company's reinvestment program for tax purposes and the 10% reserve fund. (See note 15 of the Notes to the Consolidated Financial Statements.) In the event that dividends are paid by the Company's China subsidiaries, they would reduce the amount available for the reinvestment program and accordingly taxes would be payable on the profits not reinvested. -35- 36 The Company believes such restrictions will not have a material effect on the Company's liquidity or cash flow. In 1994, the Company resumed paying annual dividends, paying shareholders aggregate dividends of $65,000 ($0.01 per share) in 1994. Since then dividends paid per share have increased annually to $120,000 ($0.015 per share) in 1995, $243,000 ($0.03 per share) in 1996, $786,000 ($0.10 per share) in 1997 and $2,141,000 or ($0.28 per share) in 1998. On February 15, 1999, the Company announced that it was increasing the annual dividend to $0.32 per share to be paid on a quarterly basis commencing with the first quarter 1999 dividend of $0.08 per share. It is the general policy of Nam Tai to determine the actual annual amount of future dividends based upon the Company's growth during the preceding year. In spite of the lower net sales and income in 1998 compared to 1997, the Company increased the dividends per share marginally to reflect its positive outlook for 1999, the continued strong cash flows from operations in 1998 and taking into account the reduced number of shares outstanding at December 31, 1998 compared to December 31, 1997. Future dividends will be in the form of cash or stock or a combination of both. There can be no assurance that any dividend on the Common Shares will be declared, or if declared, what the amounts of dividends will be or whether such dividends, once declared, will continue for any future period. Impact of Inflation Inflation in China and Hong Kong, estimated at -0.8% and 2.6% respectively, has not had a material effect on Nam Tai's past business. During times of inflation, the Company has generally been able to increase the price of its products in order to keep pace with inflation. Furthermore, increases in labor costs, which represent the most significant component of the Company's production costs (other than material costs), would not materially affect its business because of the Company's utilization of less expensive labor through its operations in China. Labor and overhead expenses related to Nam Tai's Chinese factory amounted to 13.7% of the Company's total expenses before operating income during the year ended December 31, 1998 and 10.9% during the year ended December 31, 1997. Exchange Rates The Company sells a majority of its products in U.S. dollars and pays for its material components in Japanese yen, U.S. dollars and Hong Kong dollars. It pays labor costs and overhead expenses in renminbi, the currency of China (the basic unit of which is the yuan), Hong Kong dollars and Canadian dollars. The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government since 1983 at approximately HK$7.80 to US$1.00 through the currency issuing banks in Hong Kong and accordingly has not in the past presented a currency exchange risk. At the end of 1997 and early 1998, in light of the currency turmoil experienced by many other Southeast Asian countries, there has been increasing pressure for a devaluation of the currencies of Hong Kong and China. While the governments of Hong Kong and China have indicated they will support their currencies, possible devaluations may occur. While the Company expects that it may initially benefit from such devaluations through their effect of reducing expenses when translated into U.S. dollars, such benefits could be outweighed if it causes a destabilizing downturn in China's economy, creates serious domestic problems in China or creates other problems adversely affecting the Company's business. Canadian operations are relatively small with the percentage of expense in Canadian dollars representing 2% of the total expenses for the year ended December 31, 1998. Management believes the Company's most significant foreign exchange risk results from material purchases made in Japanese yen. Approximately 18%, 23% and 28% of Nam Tai's material costs have been in Japanese yen during the years ended December 31, 1998, 1997 and 1996, respectively. Sales made in yen account for approximately 0.3% of sales for the year ended December 31, 1998, 6.3% of sales for the year ended December 31, 1997 and 15% of sales for the year ended December 31, 1996. The net currency exposure has increased as a result of the decision to price the majority of goods sold in U.S. dollars. The Company believes its customers will accept an increase in the selling price of manufactured products if the exchange rate of the yen appreciates beyond a range of 5% to 10%, although such customers may also request a decrease in selling price in the event of a depreciation of the Japanese yen. The Company's -36- 37 belief is based on oral agreements with its principal customers which management believes are customary between OEMs and their suppliers. However, there can be no assurance that such agreements will be honored, and the refusal to honor such an agreement in the event of a severe fluctuation of the yen at a time when sales made in yen are insufficient to cover material purchases in yen would materially and adversely affect the Company's operations. Effective January 1, 1994, China adopted a floating currency system whereby the official exchange rate equaled the market rate. Since the market and official renminbi rates were unified, the value of the renminbi against the dollar has been stable. This is in spite of significant inflation during 1994 and 1995 that placed devaluation pressure on the renminbi. The Chinese Government took steps to restrict credit to counteract these pressures, which taken together with the net inflow of capital into China, resulted in stability of the currency against the U.S. dollar. The Company believes that because its Chinese operations are presently confined to manufacturing products for export, any devaluation of the renminbi would benefit Nam Tai by reducing its costs in China, provided that devaluation or other economic pressures do not lead to fundamental changes in the present economic climate in China. Foreign exchange transactions involving the renminbi take place through the Bank of China or other institutions authorized to buy and sell foreign exchange or at an approved foreign exchange adjustment center (known as a "swap center"). In the past, when exchanging Hong Kong dollars for Chinese renminbi, the Company used a swap center to obtain the best possible rate. When translating the Chinese company account into U.S. dollars, the Company uses the same exchange rate as quoted by the Bank of China. Since January 1, 1994, when China adopted a floating currency system (whereby the official rate is equal to the market rate), swap centers and banks in China offer essentially the same market rates, facilitating the exchange of Hong Kong dollars for renminbi. The adoption of a floating currency system has had no material impact on the Company. Beginning on November 30, 1996, the Chinese renminbi has become fully convertible under the current accounts. There are no restrictions on trade-related foreign exchange receipts and disbursements in China. Capital account foreign exchange receipts and disbursements are subject to control, and organizations in China are restricted in foreign currency transactions which must take place through designated banks. The Company may elect to hedge its currency exchange risk when it judges such action may be required. In an attempt to lower the costs of expenditures in foreign currencies, management will periodically enter into forward contracts or option contracts to buy or sell foreign currency(ies) against the U.S. dollar through one of its banks. As a result, the Company may suffer losses resulting from the fluctuation between the buy forward exchange rate and the sell forward exchange rate, or from the price of the option premium. As at December 31, 1998 and December 31, 1997, the Company had no open forward contracts and no option contracts. During 1998, the Company recorded a charge of $840,000 on the write-off of a premium on an option which was purchased as a hedge in the event that the Hong Kong dollar was de-pegged and allowed to depreciate against the U.S. dollar. Under the terms of the option, Nam Tai had the right to purchase US$30 million at a fixed exchange rate of HK$7.8 for each U.S. dollar. After purchasing the option, the Company invested a portion of its cash surplus in short-term Hong Kong dollar deposits which were earning interest rates between 10% and 14.175%, significantly higher than what was offered on U.S. dollar deposits. In 1997 and 1996, Nam Tai recorded no gain or loss from hedging transactions. The Company is continuing to review its hedging strategy and there can be no assurance that Nam Tai will not suffer losses in the future as a result of currency hedging. Year 2000 Issue Many existing computer programs, including some programs used by the Company in its computer systems and equipment, use only two digits to identify a year in the date field. These programs were designed without considering the impact of the upcoming change in the century. If not corrected, these computer applications and systems could fail or create erroneous results before, during, or after the year 2000. The Company's investigations and efforts to date have included studies, investigations, inquiries to software and equipment suppliers, testing by internal management and outside consultants, and the purchase of certain replacement software and rewriting certain sections of existing programs. -37- 38 Based on these efforts, the cost of which has not been material to date, management does not anticipate that the Company will incur any material operating expenses or be required to incur material costs as a result of the year 2000 issue. Management believes that as a result of its efforts to date, the Company is year 2000 compliant. Despite management's effort to take reasonable precautions to be year 2000 ready, and its belief that it is currently year 2000 compliant, to the extent the Company's systems are not fully year 2000 compliant, there can be no assurance that potential systems interruptions or the cost necessary to update software would not have a material adverse effect on the Company's business, financial condition, results or operations and business prospects. In addition to the internal preparations discussed above, the Company has sent inquiry letters to its key suppliers and key customers to ensure that they do not expect any year 2000 problems to impact their business dealings with Nam Tai. In the event that the Company's significant customers and suppliers do not successfully and timely achieve year 2000 compliance, the Company's business or operations could be adversely affected. There is also a risk that year 2000 problems may cause regional or global problems for utility companies, transportation systems, banking systems, or the global economy. To the extent that these problems materialize, Nam Tai expects that its business will be adversely impacted and to date the Company has not completed a year 2000 contingency plan. New Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share. The new rule requires specific disclosure of both diluted earnings per share and earnings per common share calculated without the dilutive impacts of outstanding stock options or convertible securities. As disclosed in Note 1(e) of Notes to Consolidated Financial Statements appearing in Item 18 of this Report, the Company has adopted this method of accounting for earnings per share. In 1998, the Company adopted a new disclosure standard, SFAS No. 130, "Reporting Comprehensive Income." which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from non-owner sources. New Accounting Standards Not Yet Disclosed The Financial Accounting Standards Board has issued a new standard SFAS No. 133 "Derivative Instruments and Hedging Activities." Management has not yet completed the analysis of the impact this would have on the financial statements of the Company. -38- 39 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Management The directors and executive officers of the Company are as follows:
Name Position with Company - ---- --------------------- Tadao Murakami Chairman of the Board and Director Shigeru Takizawa Chief Executive Officer, President and Director M. K. Koo Senior Executive Officer and Director Hidekazu Amishima General Manager of NTSZ Y.C. Chang Vice General Manager of NTSZ Mamoru Koike Vice General Manager Research and Development Mark Waslen Treasurer Lorne Waldman Secretary Charles Chu Director Stephen Seung Director
TADAO MURAKAMI Mr. Murakami has served the Company in various executive capacities since 1984. He became Secretary and a Director of the Company in December 1989. From June 1989, he has been employed as the President of the Company's Hong Kong subsidiary. In July 1994, Mr. Murakami succeeded Mr. Koo as President and in June 1995 became the Company's Chief Executive Officer. Mr. Murakami assumed the position of Vice-Chairman in January 1996 and is in charge of the manufacturing and marketing operations of the Company. In September 1998, Mr. Murakami succeeded Mr. Koo as the Chairman of the Board of Directors. Mr. Murakami graduated from Japan Electronic Technology College in 1964. SHIGERU TAKIZAWA Mr. Takizawa joined the Company in September 1998 after a forty year career with Toshiba Corporation holding various senior management and executive positions. He assumed the positions of President and Chief Executive Officer of the Company, succeeding Mr. Murakami. Mr. Takizawa is responsible for the management and direction of all business operations and technological development of the Nam Tai group of companies. He is also a director. M.K. KOO Mr. Koo had served as Chairman of the Board and a Director of Nam Tai and its predecessor companies since inception. Mr. Koo assumed the role as Chief Financial Officer of the Company from April 1997 until January 1998 and again in February 1998 to May 1998. Mr. Koo assumed the newly created position of Senior Executive Officer, Corporate Strategy, Finance and Administration when Mr. Murakami succeeded him as Chairman of the Board. Mr. Koo also serves on the Company's audit committee. Mr. Koo received his Bachelor of Laws degree from National Taiwan University in 1970. HIDEKAZU AMISHIMA Mr. Amishima joined the Company in August 1996 as Vice General Manager and assumed the responsibility for overseeing day-to-day factory operations of the Company's Shenzhen, China manufacturing complex as General Manager in November 1996. From 1964 until joining the Company, Mr. Amishima was employed by Kanda Tsushin Industrial Co. Ltd., a Japanese electronics manufacturer. -39- 40 Y.C. CHANG Mr. Chang joined the Company in 1991 and assumed the position of Assistant General Manager of Production before being promoted to Vice General Manager of the Company's principal manufacturing facility in late 1997. Mr. Chang is in charge of production at the Company's Shenzhen, China manufacturing facility. Prior to joining Nam Tai he was Assistant Production Manager for Inventec Co. Ltd. and Production and Quality Control Manager for Supercom Co. Ltd. MAMORU KOIKE Mr. Koike joined Nam Tai in April 1998 as Vice General Manager of Nam Tai's Research and Development Department in charge of design and development. Before joining Nam Tai, Mr. Koike serve Sharp Corporation for thirty-five years since his graduation from Osaka Electric Communication High School in 1963. MARK WASLEN Mr. Waslen first joined Nam Tai in July 1990 to oversee Nam Tai's financial reporting and accounting. In June 1993 Mr. Waslen was appointed the Company's Financial Controller. From the end of 1995 to May 1998 Mr. Waslen worked for Deloitte Touche Tohmatsu where he pursued further training in the area of tax before rejoining Nam Tai in June 1998 as Treasurer. Mr. Waslen is both a Chartered Accountant ("C.A"). and a Certified Public Accountant ("C.P.A"). He earned his Bachelor of Commerce degree at the University of Saskatchewan in 1982. LORNE WALDMAN Mr. Waldman joined Nam Tai in December 1996 as in-house counsel for Nam Tai Electronics (Canada) Ltd. He was appointed Secretary of Nam Tai Electronics, Inc. in October 1997. Mr. Waldman received a Bachelor of Commerce Degree from the University of Calgary in 1990. In 1994 he received his LL.B. and MBA degrees from the University of British Columbia. CHARLES CHU Mr. Chu originally served as Secretary and a Director of the Company from August 1987 to September 1989. He was reappointed a Director in December 1992. Since July 1988, Mr. Chu has been engaged in the private practice of law in Hong Kong. Mr. Chu serves on Nam Tai's audit committee. Mr. Chu received his Bachelor of Laws degree and Post-Graduate Certificate of Laws from the University of Hong Kong in 1980 and 1981, respectively. STEPHEN SEUNG Mr. Seung was appointed a Director of Nam Tai in 1995. Mr. Seung is an attorney and C.P.A. and has been engaged in the private practice of law in New York since 1981. Mr. Seung received a B.S. degree in Engineering from the University of Minnesota in 1969, an M.S. degree in Engineering from the University of California at Berkeley in 1971, an MBA degree from New York University in 1973 and a J.D. degree from New York Law School in 1979. Mr. Seung serves on Nam Tai's audit committee and acts as Nam Tai's authorized agent in the United States. No family relationship exists among any of the named directors, executive officers or key employees. No arrangement or understanding exists between any such director or officer and any other persons pursuant to which any director or executive officer was elected as a director or executive officer of the Company. Directors of the Company are elected each year at its annual meeting of shareholders and serve until their successors take office or until their death, resignation or removal. Executive officers serve at the pleasure of the Board of Directors of the Company. ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS The aggregate amount of compensation paid by Nam Tai and its subsidiaries during the year ended December 31, 1998 to all directors and officers as a group for services in all capacities was approximately $1,903,000. The includes compensation in the form of housing in Hong Kong for its Chairman and Chief Executive Officer consistent with the practice of other Companies in Hong Kong. Directors who are not employees of the Company nor any of its subsidiaries are paid $1,000 per month for services as a director, $750 per meeting attended in person, and $500 per meeting attended by telephone. In addition they are reimbursed for all reasonable expenses incurred in connection with services as a director. ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY OR ITS SUBSIDIARIES At March 1, 1999, the Company had outstanding options to purchase an aggregate of 353,333 Common Shares, all of which were granted under the Company's 1993 Stock Option Plan including; 53,333 options granted on January -40- 41 12, 1996 and exercisable at $10.50 per share and expiring on January 11, 2001; 3500 options granted on March 16, 1998 with an exercise price of $15.75 and expiring March 15, 2001; and 296,500 options were granted on August 27, 1998 and are exercisable after August 27, 1999 at $10.50 per share and expire on March 15, 2001. All options are granted with an exercise price equal to or exceeding the average of the daily per share high and low prices on the 10 consecutive trading days immediately preceding the grant date. At March 1, 1999, the Company had outstanding warrants to purchase an aggregate of 3,427,129 Common Shares. Of these, 2,997,129 warrants which were issued to the public in the 1997 Offering (the "Warrants") are exercisable to purchase 2,997,129 Common Shares at $20.40 per share until November 24, 2000; 130,000 warrants are exercisable beginning November 30, 1998 to purchase 130,000 Units (consisting of one Common Share and one Warrant) at $20.40 per Unit until November 24, 2000; and 300,000 warrants issued on October 5, 1998 are exercisable to purchase 300,000 Commons Shares at $10.25 per share until October 4, 2001. ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS Not Applicable -41- 42 PART II ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED Not Applicable. PART III ITEM 15. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR THE COMPANY'S SECURITIES Not Applicable. PART IV ITEM 17. FINANCIAL STATEMENTS Not Applicable. ITEM 18. FINANCIAL STATEMENTS The following financial statements are filed as part of this Report:
Page No. -------- Report of Deloitte Touche Tohmatsu....................................................................... 43 Report of PricewaterhouseCoopers......................................................................... 44 Consolidated Statements of Income for the years ended December 31, 1998, December 31, 1997 and December 31, 1996.................................................................45 Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997.................................46 Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1998, December 31, 1997 and December 31, 1996........................................47 Consolidated Statements of Cash Flows for the years ended December 31, 1998, December 31, 1997 and December 31, 1996.................................................................48 Notes to Consolidated Financial Statements................................................................49
In accordance with Rule3-09 of Regulation S-X the Company believes that it is required to file the Consolidated Financial Statements of Albatronics (Far East) Company Limited, a majority owned unconsolidated subsidiary. Such financial statements will be filed by amendment by June 30, 1999. 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. -42- 43 [LETTERHEAD OF DELOITTE TOUCHE TOHMATSU] INDEPENDENT AUDITORS' REPORT To the Shareholders and the Board of Directors of Nam Tai Electronics, Inc. We have audited the accompanying consolidated balance sheet of Nam Tai Electronics, Inc. and subsidiaries as of December 31, 1998, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Nam Tai Electronics, Inc. and subsidiaries at December 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /S/ Deloitte Touch Tohmatsu - --------------------------- DELOITTE TOUCHE TOHMATSU March 12, 1999 Hong Kong -43- 44 [LETTERHEAD OF PRICE WATERHOUSE] REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF NAM TAI ELECTRONICS, INC. We have audited the accompanying consolidated balance sheet of Nam Tai Electronics, Inc. and its subsidiaries as of December 31, 1997 and the related statements of income, shareholders' equity, and cash flows for each of the two years ended December 31, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nam Tai Electronics, Inc. and its subsidiaries as of December 31, 1997 and the results of their operations and their cash flows for each of the two years ended December 31, 1997 and 1996 in conformity with accounting principles generally accepted in the United States of America. /S/Price Waterhouse - ------------------- PRICE WATERHOUSE Certified Public Accountants HONG KONG March 11, 1998 -44- 45 NAM TAI ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 --------- --------- --------- Net sales $ 101,649 $ 132,854 $ 108,234 Cost of sales 76,939 98,130 86,049 --------- --------- --------- Gross profit 24,710 34,724 22,185 --------- --------- --------- Selling, general and administrative expenses 13,190 13,799 12,702 Research and development expenses 1,691 1,909 950 Non-recurring expense (Note 4) 1,445 -- -- --------- --------- --------- 16,326 15,708 13,652 --------- --------- --------- Income from operations 8,384 19,016 8,533 Net gain (loss) on disposal of property, plant and equipment 766 4,350 (123) Provision for impairment of investment in an unconsolidated subsidiary (Note 1) (8,271) -- -- Other income - net (Note 5) 4,865 7,791 1,253 Interest expense (1) (39) (89) --------- --------- --------- Income before income taxes and equity in results of an affiliated company and unconsolidated subsidiary 5,743 31,118 9,574 Income taxes (Note 8) (1,040) (279) (158) --------- --------- --------- Income before equity interest 4,703 30,839 9,416 Equity in income of an affiliated company, less amortization of goodwill 534 -- -- Equity in loss of an unconsolidated subsidiary (Note 1) (1,708) -- -- --------- --------- --------- Net income $ 3,529 $ 30,839 $ 9,416 ========= ========= ========= Basic earnings per share (Note 9) $ 0.34 $ 3.70 $ 1.17 ========= ========= ========= Diluted earnings per share (Note 9) $ 0.34 $ 3.68 $ 1.16 ========= ========= =========
See accompanying notes to consolidated financial statements. -45- 46 NAM TAI ELECTRONICS, INC. CONSOLIDATED BALANCE SHEETS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, -------------------- 1998 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 71,215 $102,411 Marketable securities (Note 10) 513 -- Accounts receivable, net 16,138 16,985 Inventories (Note 11) 4,355 9,838 Prepaid expenses and deposits 4,794 3,788 -------- -------- Total current assets 97,015 133,022 Long-term investments (Note 12) -- 833 Investment in an unconsolidated subsidiary (Note 1) 1 -- Investment in an affiliated company (Note 13) 16,223 -- Property, plant and equipment - net (Note 14) 32,445 32,442 Other assets 1,544 1,491 -------- -------- Total assets $147,228 $167,788 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 329 $ 1,814 Accounts payable and accrued expenses 18,377 17,551 Dividend payable 665 -- Income taxes payable 105 187 -------- -------- Total current liabilities 19,476 19,552 Deferred income taxes 56 -- -------- -------- Total liabilities 19,532 19,552 -------- -------- Commitments and contingencies (Note 17) Shareholders' equity: Common shares ($0.01 par value - authorized 20,000,000 shares; shares issued and outstanding at December 31, 1998 - 9,812,523 December 31, 1997 - 11,220,023) 98 112 Additional paid-in capital 80,044 80,044 Retained earnings 47,509 68,050 Accumulated other comprehensive income 45 30 -------- -------- Total shareholders' equity 127,696 148,236 -------- -------- Total liabilities and shareholders' equity $147,228 $167,788 ======== ========
See accompanying notes to consolidated financial statements. -46- 47 NAM TAI ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (U.S. DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
ACCUMULATED TOTAL COMMON COMMON ADDITIONAL STOCK OTHER SHARE - SHARES SHARES PAID-IN OPTION RETAINED COMPREHENSIVE HOLDERS' OUTSTANDING AMOUNT CAPITAL GRANTS EARNINGS INCOME EQUITY ----------- ----------- ----------- ----------- ----------- ------------- ----------- Balance at January 1, 1996 8,063,177 $ 80 $ 28,182 $ 467 $ 31,417 $ 27 $ 60,173 Share buy-back program (273,500) (3) -- -- (2,583) -- (2,586) Shares issued on exercise of options 47,550 1 390 (91) -- -- 300 Options cancelled -- -- -- (71) -- -- (71) Comprehensive income: Net income -- -- -- -- 9,416 -- 9,416 Foreign currency translation -- -- -- -- -- 1 1 Dividends ($0.03 per share) -- -- -- -- (243) -- (243) --------- ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1996 7,837,227 78 28,572 305 38,007 28 66,990 Share buy-back program (1,000) -- -- -- (10) -- (10) Shares issued on exercise of options 386,667 4 3,802 (305) -- -- 3,501 Shares and warrants issued on rights offering 2,997,129 30 47,670 -- -- -- 47,700 Comprehensive income: Net income -- -- -- -- 30,839 -- 30,839 Foreign currency translation -- -- -- -- -- 2 2 Dividends ($0.1 per share) -- -- -- -- (786) -- (786) --------- ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1997 11,220,023 112 80,044 -- 68,050 30 148,236 Share buy-back program (1,407,500) (14) -- -- (21,241) -- (21,255) Issue of options -- -- -- 75 -- -- 75 Options cancelled -- -- -- (75) -- -- (75) Comprehensive income: Net income -- -- -- -- 3,529 -- 3,529 Foreign currency translation -- -- -- -- -- 15 15 Dividends ($0.28 per share) -- -- -- -- (2,829) -- (2,829) --------- ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1998 9,812,523 $ 98 $ 80,044 $ -- $ 47,509 $ 45 $ 127,696 ========= =========== =========== =========== =========== =========== ===========
Accumulated other comprehensive income represents foreign currency translation adjustments. The comprehensive income of the Company was $3,544, $30,841 and $9,417 for the years ended December 31, 1998, 1997 and 1996, respectively. See accompanying notes to consolidated financial statements. -47- 48 NAM TAI ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net income $ 3,529 $ 30,839 $ 9,416 --------- --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,258 4,331 2,675 Net (gain) loss on disposal of property, plant and equipment (766) (4,350) 123 Gain on disposal of long-term investments (1,299) (5,488) -- Unrealized loss on decline of market value of marketable securities 468 -- -- Equity in income of an affiliated company less dividend received and amortization of goodwill (404) -- -- Equity in loss of an unconsolidated subsidiary 1,708 -- -- Provision for impairment of investment in an unconsolidated subsidiary 8,271 -- -- Changes in current assets and liabilities: Increase in marketable securities (981) -- -- Decrease (increase) in accounts receivable 824 (396) 1,110 Decrease (increase) in inventories 5,483 673 (86) Increase in prepaid expenses and deposits (1,006) (2,020) (243) Decrease in notes payable (1,485) (3,372) (134) Increase in accounts payable and accrued expenses 826 1,330 2,776 (Decrease) increase in income taxes payable (26) 156 (76) --------- --------- --------- Total adjustments 15,871 (9,136) 6,145 --------- --------- --------- Net cash provided by operating activities 19,400 21,703 15,561 --------- --------- --------- Cash flows from investing activities: Purchase of interest in an affiliated company (15,819) (12) (119) Purchase of interest in an unconsolidated subsidiary (9,980) -- -- Purchase of property, plant and equipment (4,699) (3,602) (11,650) Purchase of other assets (53) (246) (541) Proceeds from disposal of long-term investments 2,132 8,717 -- Proceeds from disposal of property, plant and equipment 1,197 7,666 -- --------- --------- --------- Net cash (used in) provided by investing activities (27,222) 12,523 (12,310) --------- --------- --------- Cash flows from financing activities: Share buy-back program (21,255) (10) (2,583) Dividends paid (2,141) (749) (243) Decrease in short-term bank loans and overdraft -- -- (273) Proceeds from shares issued in rights offering, net -- 47,700 -- Additional shares issued, net -- 3,501 226 --------- --------- --------- Net cash (used in) provided by financing activities (23,396) 50,442 (2,873) --------- --------- --------- Foreign currency translation adjustments 22 2 1 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (31,196) 84,670 379 Cash and cash equivalents at beginning of period 102,411 17,741 17,362 --------- --------- --------- Cash and cash equivalents at end of period $ 71,215 $ 102,411 $ 17,741 ========= ========= ========= Supplemental schedule of cash flow information: Interest paid $ 1 $ 39 $ 89 --------- --------- --------- Income taxes paid $ 161 $ 123 $ 234 --------- --------- ---------
See accompanying notes to consolidated financial statements. -48- 49 NAM TAI ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. ACQUISITIONS On December 2, 1998, the Company acquired 50.00025% of the outstanding shares of Albatronics (Far East) Company Limited ("Albatronics"), a Hong Kong public listed company, for cash of $9,980 including transaction fees. Albatronics and its subsidiaries are engaged in the trading of electronic components and manufacturing of consumer electronics products. On the completion of the Albatronics acquisition on December 2, 1998, the Company indicated that it would take steps to support Albatronics depending on the results of a comprehensive study investigating opportunities for corporate restructuring and streamlining of overhead expenses in Albatronics. Despite the Company's cash investment, Albatronics' financial position has weakened dramatically since the agreement to invest in Albatronics was signed in September 1998. Currently, the Company is seeking to work together with Albatronics' major trade creditor and bankers to try to support Albatronics. If any of these three parties refuses to provide the necessary support, Albatronics' directors will consider all available options including putting Albatronics into liquidation. Due to the troubled financial condition of Albatronics at December 31, 1998, and the possibility of Albatronics being wound up within a relatively short period, the Company has not consolidated Albatronics' financial statements at December 31, 1998 or for the year then ended. Instead, the Company recorded as separate line items on its consolidated statements of income Albatronics' loss for the month of December 1998 of $1,708 as "equity in loss of an unconsolidated subsidiary" and a "provision for impairment of investment in an unconsolidated subsidiary" of $8,271 against the remaining carrying value of this investment. As a result, the carrying value of the Company's investment in Albatronics has been recorded on the consolidated balance sheet at December 31, 1998 as "investment in an unconsolidated subsidiary" at a nominal value of $1. On May 27, 1998, the Company acquired 20% of the outstanding shares of Group Sense (International) Limited ("Group Sense"), a Hong Kong public listed company, for cash of $16,279. Group Sense and its subsidiaries manufacture consumer electronics products. Group Sense has been accounted for as an affiliated company and the results of Group Sense have been included in the consolidated financial statements from the date of acquisition to September 30, 1998 (interim announcement date of Group Sense, the date of latest available results) as permitted by Accounting Principles Board ("APB") Opinion No. 18 "The equity method of accounting for investments in common stock". The following table sets out certain proforma information for the years ended December 31, 1998 and 1997 to reflect the acquisition of Albatronics as though it had occurred on January 1, 1997:
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 ---------- ---------- Provision for impairment of investment in an unconsolidated subsidiary $ -- $ -- Equity in results of an unconsolidated subsidiary, less amortization of goodwill (11,525) 1,545 Proforma net income 1,343 31,685 Proforma basic earnings per share 0.13 3.81 Proforma diluted earnings per share 0.13 3.78
-49- 50 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of Nam Tai Electronics, Inc. (the "Company") and all its subsidiaries, excluding Albatronics. Intercompany accounts and transactions have been eliminated on consolidation. The details of the Company's subsidiaries are described in Note 15. The Company's investments in Group Sense and Albatronics, 20% and 50.00025% owned companies, respectively, in which it has the ability to exercise significant influence over operating and financial policies, are accounted for by the equity method. Accordingly, the Company's share of the earnings of these companies is included in consolidated net income. B GOODWILL The excess of the purchase price over the fair value of net assets acquired is recorded on the consolidated balance sheet as goodwill and is amortized to expense on a straight line basis. C USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. D CASH AND CASH EQUIVALENTS Cash and cash equivalents include all cash balances and certificates of deposit having a maturity date of three months or less upon acquisition. E INVENTORIES Inventories are stated at the lower of cost and market value. Cost is determined on the first-in, first-out basis. F MARKETABLE SECURITIES All marketable securities are classified as trading securities and are stated at fair market value. Market value is determined by the most recently traded price of the security at the balance sheet date. Net realized and unrealized gains and losses on trading securities are included in other income. The cost of securities sold is based on the average cost method and interest earned is included in other income. G LONG-TERM INVESTMENTS Long-term investments are stated at the lower of cost and market value. H PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost and include interest on funds borrowed to finance construction in Canada. Capitalized interest was nil, nil and $13 for the years ended December 31, 1998, 1997 and 1996, respectively. The cost of major improvements and betterments is capitalized whereas the cost of maintenance and repairs is expensed in the year incurred. Gains and losses from the disposal of property, plant and equipment are included in income. All land in the Hong Kong Special Administration Region ("Hong Kong") of the People's Republic of China (the "PRC") is owned by the government of Hong Kong which leases the land at public auction to nongovernmental entities. With the exception of those leases which expire after June 30, 1997 and before June 30, 2047 with no right of renewal, the Sino-British Joint Declaration extends the terms of all currently existing land leases for another 50 years beyond June 30, 1997. Thus, all of the Company's land leaseholds in Hong Kong are considered to be medium-term assets. The cost of such land leaseholds is amortized on the straight-line basis over the respective terms of the leases. -50- 51 H PROPERTY, PLANT AND EQUIPMENT - CONTINUED All land in other regions in the PRC is owned by the PRC government. The government in the PRC, according to PRC law, may sell the right to use the land for a specified period of time. Thus all of the Company's land purchases in the PRC are considered to be land leaseholds and are amortized on the straight-line basis over the respective term of the right to use the land. Depreciation rates computed using the straight-line method are as follows:
CLASSIFICATION RATE Medium-term leasehold buildings 2.0% - 4.5% Freehold buildings 3.3% - 4.0% Furniture and fixtures 18.0% - 25.0% Machinery and equipment 9.0% - 25.0% Molds and tools 18.0% - 25.0% Motor vehicles 18.0% - 25.0% Leasehold improvements 18.0% - 33.0%
In 1996, management reassessed the useful life of certain plant and equipment assets and changed their estimated useful life from four to five years effective January 1, 1996. As a result of this change, the 1998, 1997 and 1996 depreciation expenses were lower by $899, $835 and $860, respectively, than they would have been had an estimated life of four years been used. I. IMPAIRMENT The Company review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. An impairment loss, measured based on the fair value of the assets, is recognized if expected future non-discounted cash flows are less than the carrying amount of the assets. J REVENUE RECOGNITION Revenue from sales of products is generally recognized upon shipment to customers. K RESEARCH AND DEVELOPMENT COSTS Research and development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. The amounts charged against income were $1,691, $1,909 and $950 for the years ended December 31, 1998, 1997 and 1996, respectively. L STAFF RETIREMENT PLAN COSTS The Company's contributions to the staff retirement plan (Note 6) are charged to the consolidated statement of income as incurred. M DEFERRED COMPENSATION ARRANGEMENT COSTS For the years 1990 through 1994, the liability relating to the Deferred Compensation Arrangement (Note 7) was provided ratably over the future employment periods of the beneficiaries of the plan until their dates of retirement or earlier departure from the Company. At December 31, 1995, the remaining balance was fully provided for. Consequently, for the three years ended December 31, 1998, no further provision was made. -51- 52 N INCOME TAXES The Company provides for all taxes based on income whether due at year end or estimated to become due in future periods but based on profits earned to date. However, under the current tax legislation in the PRC, the Company has reasonable grounds to believe that income taxes paid in respect of any year would be refunded after the profits earned in that year are reinvested in the business by way of subscription for new shares. Accordingly, any PRC tax paid during the year is recorded as an amount receivable at year end when an application for reinvestment of profits has been filed and a refund is expected unless there is an indication from the PRC tax authority that the refund will be refused. Deferred income taxes are provided to recognize the effect of the difference between the financial statement and income tax bases of measuring assets and liabilities. O FOREIGN CURRENCY TRANSLATIONS The consolidated financial statements have been stated in U.S. dollars, the official currency used in the British Virgin Islands (the Company's place of incorporation). Although the operating facilities are located in Hong Kong and the PRC, the U.S. dollar is the currency of the primary economic environment in which the Company's consolidated operations are conducted. The exchange rate between the Hong Kong dollar and the U.S. dollar has been pegged (HK$7.80 to US$1.00) since October 1983. All transactions in currencies other than functional currencies during the year are translated at the exchange rates prevailing on the respective transaction dates. Related accounts payable or receivable existing at the balance sheet date denominated in currencies other than functional currencies are translated at the exchange rates existing on that date. Exchange differences arising are dealt with in the consolidated statement of income. The financial statements of all subsidiaries with functional currencies other than the U.S. dollar are translated in accordance with SFAS No. 52, "Foreign Currency Translation." With the exception of Namtai Electronic (Shenzhen) Co. Ltd. ("NTES"), Zastron Plastic & Metal Products (Shenzhen) Ltd. ("Zastron") and Shenzhen Namtek Co. Ltd. ("Namtek"), which are companies established in the PRC, all assets and liabilities are translated at the rates of exchange ruling at the balance sheet date and all income and expense items are translated at the average rates of exchange over the year. Also with the exception of the above named PRC companies, all exchange differences arising from translation of subsidiaries' financial statements are dealt with as a separate component of equity. As NTES, Zastron and Namtek act as production centers for the Company, the Company controls their operations and the majority of their transactions are made in Hong Kong dollars. Therefore, the Hong Kong dollar has been determined to be the functional currency of NTES, Zastron and Namtek. Accordingly, all monetary assets and liabilities are translated at the rates of exchange ruling at the balance sheet date, non-monetary assets and liabilities are translated at the historical rate, all income and expense items are translated at the average rates of exchange over the year and all translation adjustments resulting from the conversion of NTES, Zastron and Namtek's financial statements to Hong Kong dollars are taken to the consolidated statement of income. Exchange rates used to translate and remeasure transactions and balances of NTES, Zastron and Namtek are the rates quoted by the Bank of China. -52- 53 P EARNINGS PER SHARE Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period. The weighted average number of common shares outstanding is adjusted to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In computing the dilutive effect of potential common shares, the average stock price for the period is used in determining the number of treasury shares assumed to be purchased with the proceeds from exercise of warrants and options. Q CURRENCY CONTRACTS The Company enters into forward currency contracts in its management of foreign currency exposures. Since the forward currency contracts are not intended to hedge identifiable foreign currency commitments, generally accepted accounting principles require that the contracts are marked to market with the net realized or unrealized gains or losses recognized in other income - net. (Note 5). R STOCK OPTIONS SFAS No. 123 allows companies which have stock-based compensation arrangements with employees to adopt a new fair value basis of accounting for stock options and other equity instruments or to continue to apply the existing accounting rules under APB Opinion No. 25, "Accounting for Stock Issued to Employees," but with additional financial statement disclosure. The Company plans to continue to account for stock-based compensation arrangements under APB Opinion No. 25 and provides additional disclosure to that effect in Note 19(a). S COMPREHENSIVE INCOME In 1998, the Company adopted a new disclosure standard SFAS No.130, "Reporting Comprehensive Income" which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from non-owner sources. T NEW ACCOUNTING STANDARD NOT YET ADOPTED The Financial Accounting Standards Board has issued a new standard SFAS No.133 "Derivative Instruments and Hedging Activities". Management has not yet completed the analysis of the impact this would have on the financial statements of the Company. -53- 54 3. FINANCIAL INSTRUMENTS The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of its cash equivalents, term deposits and trade receivables. The Company's cash and cash equivalents and term deposits are high-quality deposits placed with banking institutions with high credit ratings. This investment policy limits the Company's exposure to concentrations of credit risk. The trade receivable balances largely represent amounts due from the Company's principal customers who are generally international organizations with high credit ratings. Letters of credit are the principal security obtained to support lines of credit or negotiated contracts from a customer. As a consequence, concentrations of credit risk are limited. All of the Company's significant financial instruments at December 31, 1998 are reported in current assets or current liabilities in the consolidated balance sheet at carrying amounts which approximate their fair value. From time to time, the Company hedges its currency exchange risk, which primarily arises form materials purchased in currencies other than U.S. dollar, through the purchase and sale of forward currency contracts. Such contracts typically allow the Company to buy or sell currencies at a fixed price for up to one year, but the Company normally books forward six months. At December 31, 1998 and 1997 there were no open forward currency contracts. 4. NON-RECURRING EXPENSE The amount represents the provision relating to a non-recurring customs assessment in the PRC in 1998. 5. OTHER INCOME - NET Other income - net consists of:
YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 ------- ------- ------- Interest income $ 5,047 $ 1,847 $ 1,092 Gain on disposal of securities, net 1,207 5,488 -- Foreign exchange gains 394 500 20 Currency option premium written off (840) -- -- Unrealized loss on decline of market value of marketable securities (468) -- -- Bank charges (252) (343) (406) Miscellaneous (expense) income (196) 650 547 Donations (27) (351) -- ------- ------- ------- $ 4,865 $ 7,791 $ 1,253 ======= ======= =======
6. STAFF RETIREMENT PLANS The Company maintains staff contributory retirement plans (defined contribution pension plans) which cover certain of its employees. The cost of the Company's contributions amounted to $79, $55 and $92 for the years ended December 31, 1998, 1997 and 1996, respectively. -54- 55 7. DEFERRED COMPENSATION ARRANGEMENT In August 1990, the Company agreed to provide compensation in the event of loss of office, for whatever reason, for two officers. The amount of compensation to be ultimately provided is $500 for Mr. M. K. Koo, the senior executive officer of the Company and $300 for Mr. T. Murakami, the Chairman of the Company. During the year ended December 31, 1996, pursuant to an agreement between Mr. Koo and the Company, Mr. Koo elected to apply an amount of $450 payable to him under the provision for compensation for loss of office against an amount receivable from him. In July 1997, Mr. Koo reversed the election and retained his right to receive the sum of $500 for the compensation of loss of office (Note 16). 8. INCOME TAXES The components of income before income taxes and equity in results of an affiliated company and unconsolidated subsidiary are as follows:
YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 -------- -------- -------- PRC, excluding Hong Kong $ 8,207 $ 17,241 $ 10,339 Hong Kong (2,843) 5,768 3,079 Other 379 8,109 (3,844) -------- -------- -------- $ 5,743 $ 31,118 $ 9,574 ======== ======== ========
Under the current British Virgin Islands law, the Company's income is not subject to taxation. Subsidiaries, primarily operating in Hong Kong and the PRC, are subject to income taxes as described below. The provision for current income taxes of the subsidiaries operating in Hong Kong has been calculated by applying the current rate of taxation of 16% (1997 and 1996: 16.5%) to the estimated taxable income earned in or derived from Hong Kong during the period. Deferred tax, where applicable, is provided under the liability method at the rate of 16% (1997 and 1996: 16.5%), being the effective Hong Kong statutory income tax rate applicable to the ensuing financial year, on the difference between the financial statement and income tax bases of measuring assets and liabilities. The basic corporate tax rate for Foreign Investment Enterprises ("FIEs") in the PRC, such as NTES, Zastron and Namtek, is currently 33% (30% state tax and 3% local tax). However, because NTES, Zastron and Namtek are located in the designated Special Economic Zone ("SEZ") of Shenzhen and are involved in production operations, they qualify for a special reduced state tax rate of 15%. In addition, the local tax authorities in the Shenzhen SEZ are not currently assessing any local tax. Since NTES, Zastron and Namtek have agreed to operate for a minimum of 10 years in the PRC, a two-year tax holiday from the first profit making year is available, following which in the third through fifth years there is a 50% reduction to 7.5%. In any event, for FIEs such as NTES, Zastron and Namtek which export 70% or more of the production value of their products, a reduction in the tax rate is available; in all cases apart from the years in which a tax holiday is available, there is an overall minimum tax rate of 10%. For the years ended December 31, 1990 and 1991, NTES qualified for a tax holiday; tax was payable at the rate of 7.5% on the assessable profits of NTES for the years ended December 31, 1992, 1993 and 1994, and 10% in 1995, 1996, 1997 and 1998. On January 8, 1999, NTES received the recognition of "High and New Technology Enterprise" which entitles it to various tax benefits including a lower income tax rate of 7.5% until January 7, 2004. For the years ended December 31, 1992 and 1993, Zastron qualified for a tax holiday; tax was payable at the rate of 7.5% on the assessable profits of Zastron for the years ended December 31, 1994, 1995 and 1996 and 10% for the years ended December 31, 1997 and 1998. In 1996 and 1997, Namtek qualified for a tax holiday. For the year ended December 31, 1998, tax was payable at the rate of 7.5% on the assessable profit. -55- 56 8. INCOME TAXES - CONTINUED Notwithstanding the foregoing, an FIE whose foreign investor directly reinvests by way of subscription for new shares its share of profits obtained from that FIE in establishing or expanding an export-oriented or technologically advanced enterprise in the PRC for a minimum period of five years may obtain a refund of the taxes already paid on those profits. NTES qualified for such refunds of its 1994 and 1995 taxes as a result of reinvesting its profits earned in those years. Zastron qualified for such refunds of its 1994 and 1995 taxes as a result of reinvesting its profits earned in those years. As a result of expected refunds of income taxes attributable to the PRC operations, the Company recorded tax payments in 1996 and 1997 as prepayments. In early 1999 the Company learned that for the 1996 and 1997 tax years it would not receive a 100% tax refund on taxes already paid for NTES and was required to reduce the prepayments by the amount of the refund that was not obtained. The full refund was denied for the 1996 and 1997 tax years because the large intercompany receivable between NTES and a Hong Kong subsidiary was not considered by the tax authorities to be a reinvestment of profits. The Company has accordingly made a provision of $700 in the year ended December 31, 1998 and is continuing to work with tax consultants in the PRC to determine what can be done to minimize the impact of the PRC tax and will consider increasing its tax provision in the future. For Zastron, as the management fee expense charged by the Hong Kong subsidiary for the years ended December 31, 1996 and 1997 was not allowed for PRC tax purposes, the related tax charge for the 1996 and 1997 tax years was paid during the year. Zastron intends to apply for tax refund after reinvestment of profits. The tax refunds received or receivable during the three years ended December 31, 1998, 1997 and 1996 were as follows:
Related to Company tax year Paid Refunded Date Received ------- ----------- ---- -------- -------------------- NTES 1995 $ 919 $919 December 1996 1996 $ 895 $484 April 1998, balance awaiting refund 1997 $ 1,709 -- Awaiting refund 1998 $ 1,243 -- Application for reinvestment of profits in progress Zastron 1995 $ 31 $ 31 August 1997 1996 $ 22 - Application for reinvestment of profits in progress 1997 $ 60 $ 6 July 1998, balance awaiting refund
The amounts stated above include the amounts denied by the PRC tax authorities for refund. The current and deferred components of the income tax expense appearing in the consolidated statements of income are as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 ------- ------- ------- Current tax $ (984) $ (279) $ (158) Deferred tax (56) -- -- ------- ------- ------- $(1,040) $ (279) $ (158) ======= ======= =======
The deferred income tax represents the tax effect of timing differences attributable to the excess of tax allowances over depreciation. -56- 57 8. INCOME TAXES - CONTINUED A reconciliation of the income tax (expense) benefit to the amount computed by applying the current tax rate to the income before income taxes in the consolidated statements of income is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 -------- -------- -------- Income before income taxes $ 5,743 $ 31,118 $ 9,574 PRC minimum tax rate 10.0% 10.0% 10.0% Income tax expense at PRC minimum tax rate on income before income tax $ (574) $ (3,112) $ (957) Effect of difference between Hong Kong and PRC tax (325) (375) (180) rates applied to Hong Kong income Effect of Canadian net profits (losses) for which no income tax expense (benefit) is payable (available) 38 811 (384) Effect of PRC tax concessions, giving rise to no PRC tax liability 720 1,712 1,034 Tax benefit (expense) arising from items which are not assessable/deductible for tax purposes: Gain on disposal of land in Hong Kong 125 899 -- Provision for impairment of investment in an unconsolidated subsidiary (827) -- -- Underprovision of income tax in previous year (833) (80) (27) Other 636 (134) 356 -------- -------- -------- $ (1,040) $ (279) $ (158) ======== ======== ========
No income tax arose in the United States of America in any of the periods presented. -57- 58 9. EARNINGS PER SHARE The calculations of basic earnings per share and diluted earnings per share are in accordance with SFAS No.128 and are computed as follows:
Per share YEAR ENDED DECEMBER 31, 1998 Income Shares amount ---------------------------- ---------- ---------- ---------- Basic earnings per share Income available to common shareholders $ 3,529 10,316,510 $ 0.34 Effect of dilutive securities - Stock options -- 23,162 - Warrants -- 11,428 ---------- ---------- ---------- Diluted earnings per share Income available to common shareholders $ 3,529 10,351,100 $ 0.34 ========== ========== ==========
Stock options to purchase 3,500 shares of Common shares at $15.75 and warrants to purchase 2,997,129 shares of common shares at $20.40 and 130,000 shares of common shares plus 130,000 warrants at $20.40 were outstanding at December 31, 1998 but were not included in the computation of diluted earnings per share because the redeemable price of the share options and warrants was greater than the average market price of the common shares during the relevant period.
Per share YEAR ENDED DECEMBER 31, 1997 Income Shares amount ---------------------------- ---------- --------- ---------- Basic earnings per share Income available to common shareholders $ 30,839 8,324,320 $ 3.70 Effect of dilutive securities - Stock options -- 66,970 ---------- --------- ---------- Diluted earnings per share Income available to common shareholders $ 30,839 8,391,290 $ 3.68 ========== ========= ==========
Warrants to purchase 2,997,129 shares of common shares at $20.40 were outstanding at December 31, 1997 but were not included in the computation of diluted earnings per share because the redeemable price of the warrants was greater than the average market price of the common shares during the relevant period.
Per share YEAR ENDED DECEMBER 31, 1996 Income Shares amount ---------------------------- ---------- --------- ---------- Basic earnings per share Income available to common shareholders $ 9,416 8,040,497 $ 1.17 Effect of dilutive securities - Stock options -- 101,634 ---------- --------- ---------- Diluted earnings per share Income available to common shareholders $ 9,416 8,142,131 $ 1.16 ========== ========= ==========
-58- 59 10. MARKETABLE SECURITIES During 1998, the Company acquired equity securities listed in Hong Kong and all of them were classified as trading securities and included in current assets at December 31, 1998.
AT DECEMBER 31, ----------------- 1998 1997 ----- ----- Cost $ 981 -- Unrealized loss on decline of market value (468) -- ----- ----- Market value $ 513 -- ===== =====
Proceeds and realized loss from sale of securities for the year ended December 31, 1998 were $620 and $92, respectively. For the purposes of determining realized gains and losses, the cost of securities sold was ascertained based on the average cost method. 11. INVENTORIES Inventories consist of:
AT DECEMBER 31, ----------------------- 1998 1997 ------ ------ Raw materials $3,324 $7,198 Work-in-progress 863 1,399 Finished goods 168 1,241 ------ ------ $4,355 $9,838 ====== ======
12. LONG-TERM INVESTMENTS In December 1994, the Company purchased 14.04% or 477,370 of the outstanding common shares of Deswell Investment Holding Limited which later changed its name to Deswell Industries, Inc. ("Deswell"), a supplier of plastic parts to the Company, for a total consideration of $3,931. In 1995, Deswell completed its initial public offering which reduced the Company's ownership to approximately 10.5% at December 31, 1995. In July 1996, the Company elected to exercise warrants which increased its holdings by 12,000 shares to 489,370 or 10.6% of the outstanding common shares of Deswell. In February 1997, the Company elected to exercise warrants which increased its holdings by 1,152 shares to 490,522 or 10.2% of the outstanding common shares of Deswell at March 31, 1997. During the year ended December 31, 1997, the Company sold 390,000 shares of Deswell realizing a net gain of $5,488 and the Company sold the remaining 100,522 shares for $2,132 during the year ended December 31, 1998, realizing a net gain of $1,299. 13. INVESTMENT IN AN AFFILIATED COMPANY The Company's investment in Group Sense includes the unamortized excess of the Company's investment over its equity in Group Sense's assets. The excess was approximately $2,331 at December 31, 1998 and is being amortized on a straight-line basis over the estimated economic useful life of 10 years. The amortization charge for the year ended December 31, 1998 was $80. At December 31, 1998, the aggregate market value of the Company's investment in Group Sense as quoted on The Stock Exchange of Hong Kong Limited was $10,501. During 1998, the Company received dividend payments from Group Sense of $590 ($460 pre-acquisition dividend and $130 post acquisition dividend). Retained earnings at December 31, 1998 included undistributed earnings less amortization of goodwill of affiliates of $534. -59- 60 14. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
AT DECEMBER 31, 1998 1997 -------- -------- At cost Land and buildings $ 22,288 $ 22,661 Machinery and equipment 15,801 14,106 Leasehold improvements 7,558 5,881 Automobiles 1,198 675 Furniture and fixtures 1,167 885 Tools and molds 105 87 -------- -------- Total 48,117 44,295 Less: accumulated depreciation and amortization (15,672) (11,853) -------- -------- Net book value 32,445 32,442 ======== ========
15. INVESTMENT IN SUBSIDIARIES
Percentage of ownership Place of Principal as at December 31 incorporation activity 1998 1997 ----------------------------------------------------------------------------------------------------- Consolidated subsidiaries: Nam Tai Electronic & Electrical Products Ltd. Hong Kong Trading 100% 100% Nam Tai Electronics (Canada) Ltd. Canada Services 100% 100% Namtai Electronic (Shenzhen) Co. Ltd. PRC Manufacturing 100% 100% Zastron Plastic & Metal Products (Shenzhen) Ltd. PRC Manufacturing 100% 100% Shenzhen Namtek Co. Ltd. PRC Software development 100% 100% Unconsolidated subsidiary: Albatronics Hong Kong Trading and 50.00025% -- manufacturing
Retained earnings are not restricted as to the payment of dividends except to the extent dictated by prudent business practices. The Company believes that there are no material restrictions, including foreign exchange controls, on the ability of its non-PRC subsidiaries to transfer surplus funds to the Company in the form of cash dividends, loans, advances or purchases. With respect to the Company's PRC subsidiaries, there are restrictions on the purchase of materials by these companies, the payment of dividends and the removal of dividends from the PRC. In the event that dividends are paid by the Company's PRC subsidiaries, such dividends will reduce the amount of reinvested profits (Note 8) and accordingly, the refund of taxes paid will be reduced to the extent of tax applicable to profits not reinvested. However, the Company believes that such restrictions will not have a material effect on the group's liquidity or cash flows. -60- 61 16. RELATED PARTY TRANSACTIONS In June 1995, the Company completed the construction of a residential property pursuant to an agreement dated January 13, 1995. As the property had not been sold to a third party by December 31, 1995, Mr. M.K. Koo, the then Chairman of the Company, purchased the property for $2,620 being the higher of the market value and the book value of the property as required by the contract. At December 31, 1995 this amount was included in accounts receivable. In March 1996, Mr. Koo elected to apply $450 available from his compensation for loss of office against the account receivable. The balance outstanding of the accounts receivable at December 31, 1996 amounting to $2,120 was repayable by Mr. Koo on or before December 31, 1997. In July 1997, Mr. Koo reversed his election and retained his right to receive the sum of $500 for the compensation for loss of office and agreed to pay the full purchase price of $2,620 for the property. This amount was paid by Mr. Koo in full in August 1997. 17. COMMITMENTS AND CONTINGENCIES A As at December 31, 1998, the Company has entered into commitments for capital expenditures of approximately $846 for plant and machinery which are expected to be disbursed during the year ending December 31, 1999. B Lease commitments At December 31, 1998, the Company was obligated under operating leases, which relate to land and buildings, requiring minimum rentals as follows:
Year ending December 31, - 1999 $ 756 - 2000 569 - 2001 470 - 2002 501 - 2003 503 - 2004 and thereafter 1,520 -------- $ 4,319 ========
C Significant legal proceedings i. Tele-Art, Inc., a shareholder of the Company, is pursuing claims in a court in the British Virgin Islands for damages allegedly suffered as a result of the rights offering completed in 1993. ii. In June 1997, the Company filed a petition in the British Virgin Islands for the winding up of Tele-Art Inc. on account of an unpaid judgement debt owing to the Company. The High Court of Justice granted an order to wind up Tele Art Inc. and the Caribbean Court of Appeal upheld the decision on January 25, 1999. On January 22, 1999, pursuant to its Articles of Association, the Company redeemed and cancelled 138,500 shares of the Company registered in the name of Tele-Art, Inc. at a price of US$11.19 per share to offset substantially all of the judgement debt, interest and legal costs of approximately US$1,600. On February 12, 1999, the liquidator of Tele-Art Inc. filed a summons in the British Virgin Islands on its behalf seeking among other things, a declaration setting aside the redemption. The Courts of the British Virgin Islands have yet to fix a specific date for the hearing of the substantive application. iii. Bank of China Hong Kong branch is pursuing claims in Hong Kong seeking the possession of 308,227 shares of the Company allegedly beneficially owned by Tele-Art, Inc. and allegedly pledged to the Bank of China Hong Kong branch for the debt mentioned in (ii) above. Management believes that the above claims are without merit and will vigorously defend them and believes that the outcome of the cases will not have a significant effect on the consolidated financial statements. -61- 62 18. BANKING FACILITIES The Company has credit lines with various banks representing trade acceptances and overdrafts. At December 31, 1998 and 1997 these facilities totalled $50,100 and $43,200, of which $1,201 and $3,318 were utilized at December 31, 1998 and 1997, respectively. The maturity of these facilities is generally up to 90 days. Interest rates are generally based on the banks' usual lending rates in Hong Kong and the credit lines are normally subject to annual review. For the three years ended December 31, 1998, banking facilities bore the corporate guarantee of Nam Tai Electronics, Inc., and there was an undertaking by Nam Tai Electronics, Inc. not to pledge any assets to any other banks without the prior consent of the Company's bankers. The notes payable, which include trust receipts and shipping guarantees, may not agree to utilized banking facilities due to a timing difference between the Company receiving the goods and the bank issuing the trust receipt to cover financing of the purchase. The Company recognizes the outstanding letter of credit as a note payable when the goods are received, even though the bank may not have issued the trust receipt. However, this will not affect the total bank facility utilization, as an addition to trust receipts will be offset by a reduction in the same amount of outstanding letters of credit.
AT DECEMBER 31, ---------------------- 1998 1997 ------- ------- Outstanding letters of credit $ 1,174 $ 2,429 Usance bills pending maturity 27 889 ------- ------- Total banking facilities utilized 1,201 3,318 Less: Outstanding letters of credit (1,174) (2,429) Plus: Goods received but trust receipts not issued by the bank 302 925 ------- ------- Notes payable per balance sheets $ 329 $ 1,814 ======= =======
-62- 63 19. COMMON SHARES A STOCK OPTIONS In August 1993, the Board of Directors approved a stock option plan which authorized the issuance of 300,000 vested options to key employees of the Company at an exercise price of $5.35. The options expired in September 1998. Because the option's exercise price was less than the market value of the Company's common shares on the date of grant, the Company recorded compensation expense of $690 reflecting the excess of the fair value of the underlying stock over the exercise price. In December 1993 and January 1996, the option plan was amended and the maximum number of shares to be issued pursuant to the exercise of options granted was increased to 650,000 and 1,000,000, respectively. A summary of stock option activity during the three years ended December 31, 1998 is as follows:
Number of Option price per share with the weighted options average option price in parenthesis --------- ---------------------------------------- Outstanding at January 1, 1996 570,850 $5.35, $11.00 &11.375 $(9.03) Exercised (47,550) $5.35 & $11.00 $(6.30) Granted 170,000 $10.50 Cancelled (156,000) $5.35 & $11.00 $(9.95) -------- Outstanding at December 31, 1996 537,300 $5.35, $10.50, $11.00 & $11.375 $(9.47) Exercised (386,667) $5.35, $10.50, $11.00 & $11.375 $(9.06) Cancelled (97,300) $5.35, $10.50, & $11.00 $(10.52) -------- Outstanding at December 31, 1997 53,333 $10.50 Granted 596,500 $10.50 & $15.75 $(13.14) Cancelled (296,500) $15.75 -------- Outstanding at December 31, 1998 353,333 $10.50 & $15.75 $(10.55) --------
Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net income and diluted earnings per share would have been reduced to the pro forma amounts indicated below:
Year ended December 31, ------------------------------------------------- 1998 1997 1996 --------- ---------- --------- Net Income As reported $ 3,529 $ 30,839 $ 9,416 Pro forma 3,273 30,583 9,081 Diluted earnings per share As reported $ 0.34 $ 3.68 $ 1.16 Pro forma 0.32 3.65 1.12
There were no stock options granted during the year ended December 31, 1997. The weighted average fair value of options granted during 1998 and 1996, and taking into account outstanding stock options at January 1, 1996, was $3.24 and $4.52, respectively, using the Black-Scholes option-pricing model based on the following assumptions:
1998 1996 -------------------------- --------------------------------------------- $15.75 $10.50 $11.00 $11.375 $10.50 Options Options Options Options Options ------- ------- ------ ------- ------- Risk-free interest rate 5.5% 5.0% 6.0% 5.4% 5.3% Expected life 3/15/01 3/15/01 8/1/98 12/1/98 1/12/00 Expected volatility 61.1% 60.9% 44.0% 49.0% 48.0% Expected dividends .070 .070 .030 .030 .030
The weighed average remaining contractual life of the stock options outstanding at December 31, 1998 was 2.18 years. -63- 64 19. COMMON SHARES - CONTINUED B SHARE BUY - BACK PROGRAM During 1998, the Company bought back 1,407,500 common shares of its outstanding capital stock at an average price of $15.10 per share. C SHARES AND WARRANTS ISSUED ON RIGHTS OFFERING On October 10, 1997, the Company distributed to each holder of its common shares nontransferable rights (the "Rights") to subscribe for one unit for every three common shares owned at that date (referred to as the "Rights Offering"). The subscription price was $17.00 per unit. Each unit consisted of one common share and one redeemable common share purchase warrant. Each warrant is exercisable to purchase one common share at a price of $20.40 per share at any time from the date of their issuance until November 24, 2000. The common shares and the warrants included in the units will be separately transferable immediately on issuance of the common shares. The warrants are redeemable by the Company at any time at $0.05 per warrant if the average closing sale price of the common shares for 20 consecutive trading days within the 30-day period preceding the date the notice is given equals or exceeds $25.50 per share. The terms of the Rights Offering include an over subscription privilege available to shareholders subject to certain conditions and a Standby Purchase Commitment made by the Standby Underwriters to the Rights Offering, subject to the terms and conditions of a Standby Underwriting Agreement made between the Company and the Standby Underwriters, and which includes purchase by the Standby Underwriters of units not subscribed for by shareholders of the Company. Pursuant to the Rights Offering, 3,000,000 units were offered, with a subscription expiry date of November 24, 1997. During the period of the Rights Offering, shareholders of the Company exercised Rights to purchase a total of 2,267,917 units at $17.00 per unit and the Standby Underwriters purchased a total of 729,212 units at a price of $16.75, being the lower of the subscription price per unit and the closing bid price per common share as reported on The Nasdaq National Market on the subscription expiry date, as provided for under the Standby Underwriting Agreement. The gross proceeds raised amounted to $50,769 and the net proceeds raised after deduction of expenses associated with the Rights Offering amounted to $47,700. D ADVISORS' WARRANTS On December 2, 1997, the Company issued 130,000 units to its advisors. The holder of each unit is entitled to purchase from the Company at the purchase price of $20.40 per unit one common share and one warrant exercisable to purchase one common share at $20.40 per share for the period from November 30, 1998 to November 24, 2000. On October 5, 1998, the Company issued 300,000 warrants to an advisor as consideration of advisory services under a service contract for a period of 3 years. The holder of each warrant is entitled to purchase from the Company one common share at $10.25 per share for the period from October 5, 1998 to October 4, 2001. The fair value of the warrants, using the Black-Scholes option-pricing model, was $780 and is amortized over the life of the contract commencing October 1998. -64- 65 20. BUSINESS SEGMENT INFORMATION The Company operates principally in only one segment of the consumer electronic products industry. A summary of the net sales, income (loss) from operations and identifiable assets by geographic areas and net sales to major customers is as follows:
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Net sales from operations within: - Hong Kong: Unaffiliated customers $100,081 $ 131,052 $105,170 -------- --------- -------- - PRC, excluding Hong Kong: Unaffiliated customers 1,568 1,802 3,064 Intersegment sales 93,556 123,115 95,669 -------- --------- -------- 95,124 124,917 98,733 -------- --------- -------- - Intersegment eliminations (93,556) (123,115) (95,669) -------- --------- -------- Total net sales $101,649 $ 132,854 $108,234 ======== ========= ======== Income (loss) from operations within: - PRC, excluding Hong Kong 7,272 17,229 10,339 - Hong Kong (4,122) 5,501 2,921 - Canada 379 8,109 (3,844) -------- --------- -------- Total net income $ 3,529 $ 30,839 $ 9,416 ======== ========= ======== AT DECEMBER 31, -------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Identifiable assets by geographic area: - PRC, excluding Hong Kong $ 42,690 $ 44,781 $ 44,975 - Hong Kong 85,419 24,738 24,564 - Canada 19,119 98,269 18,852 -------- --------- -------- Total assets $147,228 $ 167,788 $ 88,391 ======== ========= ========
Intersegment sales arise from the transfer of finished goods between subsidiaries operating in different areas. These sales are generally at estimated market prices. At December 31, 1998, the identifiable assets in Hong Kong included the investment in an affiliated company of $16,223.
YEAR ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Net sales to customers by geographic area: -North America $ 48,204 $ 65,432 $ 36,595 - Japan 21,839 30,972 30,483 - Europe 18,770 19,105 13,187 - Hong Kong 8,731 9,835 19,404 - Other 4,105 7,510 8,565 -------- --------- -------- Total net sales $101,649 $ 132,854 $108,234 ======== ========= ========
The Company's sales to the customers which accounted for more than 10% of its sales are as follows: Customer A $ 44,975 $ 50,510 $ 24,138 B 32,478 46,868 41,569 C (through Customer B) N/A N/A 17,395 D N/A N/A 14,642 -------- --------- -------- $ 77,453 $ 97,378 $ 97,744 ======== ========= ========
21. COMPARATIVE AMOUNTS Certain comparative amounts have been reclassified to conform with the current year's presentation. -65- 66 ITEM 19. FINANCIAL STATEMENT 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 are incorporated herein by reference:
Exhibit Number Exhibit - ------- ------- 2.1 Nam Tai Electronics, Inc. Amended Memorandum and Articles of Association. 2.2 Subscription Agreement between Nam Tai Electronics, Inc. and Albatronics (Far East) Company Limited dated September 11, 1998. 2.3 Employment contract between Nam Tai Electronics (Canada) Ltd. and Edward K. W. Chan dated April 26, 1998. 2.4 Termination Agreement between Nam Tai Electronics (Canada) Ltd. and Edward K. W. Chan dated January 11, 1999. 2.5 Agreement dated January 11, 1999 between Nam Tai Electronics, Inc. and Edward K. W. Chan to negotiate settlement of dispute. 2.6 Agreement dated October 5, 1998 between Nam Tai Electronics, Inc. and National Securities Corporation for financial advisory services. 2.7 Warrant Certificate issued to National Securities Corporation dated October 5, 1998. 2.8 Diagram of the Company's operating subsidiaries. See page 4 of this report.
-66- 67 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: March 29, 1999 By: /S/ Tadao Murakami ---------------------- Tadao Murakami -67- 68 [Deloitte Touch Tohmatsu Letterhead] INDEPENDENT AUDITORS' CONSENTS We hereby consent to the incorporation by reference of our report dated March 12, 1999 relating to the consolidated financial statements of Nam Tai Electronics, Inc. (the "Company") for the year ended December 31, 1998 appearing in this annual report on Form 20-F in (1) the Registration Statement on Form S-8 of the Company (file no. 33-73954); (2) the Registration Statement on Form S-8 of the Company (file no. 333-27761; and (3) the Registration Statement on Form F-3 of the Company (file no. 333-36135). /S/ Deloitte Touch Tohmatsu - --------------------------- DELOITTE TOUCH TOHMATSU Hong Kong March 29, 1999 -68- EX-2.1 2 EXHIBIT 2.1 1 EXHIBIT 2.1 TERRITORY OF THE BRITISH VIRGIN ISLANDS INTERNATIONAL BUSINESS COMPANIES ACT, 1984 A M E N D E D MEMORANDUM OF ASSOCIATION OF NAM TAI ELECTRONICS, INC. 1. The name of the Company is Nam Tai Electronics, Inc. 2. The Registered Office of the Company is McNamara Chambers, P.O. Box 3342, Road Town, Tortola, British Virgin Islands or at such other place within the British Virgin Islands as the Directors may from time to time determine. 3. The Registered Agent of the Company in the British Virgin Islands is McNamara Corporate Services Limited, whose address is P.O. Box 3342, Road Town, Tortola, British Virgin Islands. 4. The object or purpose for which the Company is established is to engage in any act or activity that is not prohibited under any law for the time being in force in the British Virgin Islands. 5. Without prejudice to the generality of clause 4 hereof and subject thereof, the Company has power to do any and all acts to carry on any business or businesses whatsoever and to engage in any activities which may conveniently be carried on with or be conducive to the attainment of the Company's objects or purposes, including the power to enter into any contract or undertaking whether directly or indirectly for the benefit or profit of the Company and to settle the Company's assets or property or any part thereof in trust or transfer the same to any other Company whether for the protection of its assets or not, and with respect to the transfer, the Directors may provide that the Company, its creditors, its members or any person having a direct or indirect interest in the Company or any of them may be the beneficiaries, creditors, members, certificate holders, partners or holders of any other similar interest. 6. The Company has no power to - (i) carry on business with persons resident in the British Virgin Islands except as provided by the Act, 2 (ii) own an interest in real property situate in the British Virgin Islands, or other than a lease of property for use as an office from which to communicate with members or where books and records of the Company are prepared or maintained, (iii) accept banking deposits, (iv) accept contracts of insurance. 7. Shares in the Company shall be issued in the currency of the United States dollar. 8. The Company shall have an authorized capital of US200,000.00 divided into 20,000,000 shares with a par value of US$0.01 each. 9. The Company shall have one class of one series comprising ordinary common shares of US$0.01 par value. 10. In as much as more than one class or more than one series of shares are authorized to be issued, the Directors shall have the authority and the power to fix by a resolution of directors the designations, powers, preferences, rights, qualifications, imitations and restrictions if any appertenant to that class or series of shares. 11. The number of shares into which the share capital is divided may be issued as registered nominative shares or as shares issued to bearer. 12. Registered nominative shares may be exchanged and converted into shares issued to bearer and shares issued to bearer may be exchanged and converted into registered nominative shares.. 13. Any notice or other information required by the Act to be given to the holder of shares issued to bearer shall be given by publishing the same in a newspaper of general circulation in the British Virgin Islands or in such other newspaper if any as the Company may from time to time by resolution of directors determine. 14. The Memorandum and Articles of Association of the Company may be amended by a resolution of members or a resolution of directors. 2 3 We, Tortola Corporation Company Limited of P.O. Box 662, Citco Building, Wickhams Cay, Road Town, Tortola for the purpose of incorporating an International Business Company under the laws of the British Virgin Islands hereby subscribe our name to this Memorandum of Association this 12th day of August, 1987 in the presence of: Witness (Sgd.) J. Caminada Tortola Corporation Company Limited Daphne Wattley Road Town, Tortola British Virgin Islands Secretary (Sgd.) D. Wattley 3 4 TERRITORY OF THE BRITISH VIRGIN ISLANDS THE INTERNATIONAL BUSINESS COMPANIES ACT 1984 A M E N D E D ARTICLES OF ASSOCIATION OF NAM TAI ELECTRONICS, INC. 1. The following Regulations constitute the Regulations of the Company. In these Articles words and expressions defined in the Intentional Business Companies Act ("the Act") shall have the same meaning and, unless otherwise required by the context, the singular shall include the plural and vice-versa, the masculine shall include the feminine and neuter and references to persons shall include corporations and all legal entities capable of having a legal existence. SHARES 2. Subject to the provisions of these Articles the unissued shares of the Company (whether forming part of the original or any increased authorized capital) shall be at the disposal of the Directors who may offer, allot, grant options over or otherwise dispose of them to such persons at such times and for such consideration and upon such terms and conditions as the directors may determine. 3. No shares hall be issued except as fully paid up. 4. The name and address for every person being the holder of registered nominative shares, their class or series and the date when they became or ceased to become a member shall be entered as a member in the share register. 5. Every person whose name is entered as a member in the share register being the holder of registered nominative shares, shall, without payment, be entitled to a certificate specifying the share or shares held and the par value thereof, provided that in respect of a registered nominative share, or shares, held jointly be several persons the Company shall not be bound to issue more than one certificate, and delivery of a certificate for a share to one of several joint holders shall be sufficient delivery to all. 6. In the case of shares issued to bearer, the share register shall contain the total number of each class and series of shares so issued and with respect to each certificate therefor, the identifying number, the number of each class or series of shares issued to bearer specified therein and the date of issue of the certificate. 5 7. Every person to whom shares to bearer must hold a certificate specifying the share or shares and the par value thereof. 8. Registered nominative shares may pursuant to a resolution of directors be exchanged and converted into shares issued to bearer. 9. Shares issued to bearer may pursuant to a resolution of directors and on the giving of such indemnity as the Company be resolution of directors may reasonably require be exchanged and converted into registered nominative shares. 10. The bearer of a certificate representing shares issued to bearer shall for all purposes be deemed to be the owner of the shares comprised in such certificate. 11. If a certificate is worn out or lost it may be renewed on production of the worn out certificate, or on satisfactory proof of its loss together with such indemnity as the directors may reasonably require. Any member receiving a share certificate shall indemnify and hold the Company and its officers harmless from any loss or liability which it or they may incur by reason of wrongful or fraudulent use or representation may by any person by virtue of the possession such certificate. SHARE CAPITAL AND VARIATION OF RIGHTS 12. Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, any share in the Company may be issued with such preferred, deferred or other special rights or such restrictions, whether in regard to dividend, voting, return of capital or otherwise as the directors may from time to time determine. 13. Subject to the provisions of the Act, any shares may be purchased, redeemed or acquired by the Company on such terms and in such manner as the directors may determine. 13.1 (a) For the purposes of Regulation 13.1 of these Articles the following defined terms have the meanings indicated: "Beneficial owner," "beneficial ownership" or "beneficially owned," in the context of a Person whose shares may be redeemed shall be ascertained in accordance with Rule 13d-3 of Regulation 13D promulgated by the U.S. Securities and Exchange Commission pursuant to the U.S. Securities Exchange Act of 1934, as amended, or any successor to that Rule. "Date Fixed for Redemption" shall have the meaning specified in Regulation 13.1(b) of these Regulations. 2 6 "Fair Market Value" of the shares to be redeemed means the product of the number of shares redeemed multiplied by the Redemption Price. "Judgment" means a judgment (i) for a liquidated amount in a civil matter; (ii) that is final and conclusive and has not been stayed or satisfied in full; (iii) that is not directly or indirectly for the payment of taxes, penalties, fines or charges of a like nature; (iv) that is not obtained by actual or constructive fraud or duress; (v) in which the rendering court has taken jurisdiction on grounds that are recognized by the common law rules of the British Virgin Islands; (vi) in which proceedings it was obtained were not contrary to natural justice or the public policy of the British Virgin Islands; (vii) in which the Person against whom the judgment is given is subject to the jurisdiction of the court rendering the judgment; and (viii) is not on a claim for contribution in respect of damages awarded by a judgment which does not satisfy the foregoing. "Judgment Amount" means the sum of (i) the liquidated amount of the Judgement, (ii) interest thereon at the legal rate of the jurisdiction in which it was entered from the date of such entry through the Date Fixed for Redemption, and (iii) reasonable expenses of the Company (including its reasonable attorney fees, court costs, administration and overhead costs, and any other related expenses) of enforcing the Judgment and/or redeeming its shares to satisfy the same, less the sum of any amounts thereto fore paid on, or credited against, the Judgment. "Notice" shall have the meaning specified in Regulation 13.1(b) of these Regulations. "Person" means any natural person, corporation, company incorporated under the International Business Companies Act of the British Virgin Islands, limited liability company, general partnership, limited partnership, proprietorship, other business organization, trust, union, association or other "person" defined in the International Business Companies Act of the British Virgin Islands. 3 7 "Redemption Price" means (i) if the class of shares to be redeemed is traded in the over-the-counter market in the U.S. and not in The Nasdaq National Market nor on any national securities exchange in the U.S., the average of the per share closing bid prices of the shares on the 20 consecutive trading days immediately preceding the Date Fixed for Redemption, as reported by The Nasdaq Small Cap Market (or an equivalent generally accepted reporting service if quotations are not reported on The Nasdaq Small Cap Market), or (ii) if the class of shares to be redeemed is traded in The Nasdaq National Market or on a national securities exchange in the U.S., the average for the 20 consecutive trading days immediately preceding the Date Fixed for Redemption of the daily per share closing prices of the shares in The Nasdaq National Market or on the principal stock exchange in the U.S. on which they are listed, as the case may be. For purposes of clause (i) above, if trading in the shares is not reported by The Nasdaq Small Cap Market, the bid price referred to in said clause shall be the lowest bid price as reported in the Nasdaq Electronic Bulletin Board or, if not reported thereon, as reported in the "pink sheets" published in the U.S. by National Quotation Bureau, Incorporated, and, if such shares are not so reported shall be the price of a share determined by the directors in good faith. The closing price referred to in clause (ii) above shall be the last reported sale price or, in the case no such reported sale takes place on such day, the average of the reported closing bid and asked prices, in either case in The Nasdaq National Market or on the national securities exchange in the U.S. on which the class of shares is then listed. "U.S." shall mean the United States of America. (b) Without limiting the generality of Regulation 13 of these Articles, in the furtherance thereof and in addition to any other rights or remedies available to the Company at law or in equity, the Company may at any time and from time to time redeem, at the Redemption Price per share, all or any of its outstanding shares beneficially owned by any Person, or registered in the name of any Person whose name is entered as a member in the share register, against whom the Company has a Judgment. At least 30 calendar days before the date fixed for redemption as determined by resolution of the directors (the "Date Fixed for Redemption"), a written redemption notice (the "Notice") shall be sent to each beneficial owner and registered holder (if different, from the beneficial owner) whose shares are to be redeemed by first-class mail, postage prepaid, at the address of the beneficial owner and registered holder (if different, from the beneficial owner) as shown on the records of the Company, stating: (i) the class(es) of shares 4 8 and the number of shares in each such class to be redeemed from the beneficial owner, (ii) the Date Fixed for Redemption, (iii) information on the method to be used to determine Redemption Price in accordance with Regulation 13.1(a) of these Articles, (iv) the Judgment Amount and (v) the address of the place where the certificates for the shares to be redeemed shall be surrendered for redemption. On or before the Date Fixed for Redemption, each beneficial owner and registered holder (if different, from the beneficial owner) of the shares to be redeemed shall surrender the certificates representing these shares to the Company at the place so designated therefor in the Notice unless the Judgment Amount has theretofore been satisfied in full. On the Date Fixed for Redemption the Company shall pay the Redemption Price for the shares redeemed by offsetting the Fair Market Value of the shares redeemed against the Judgment Amount. If the Fair Market Value of the shares redeemed exceeds the Judgment Amount, then new certificates representing the number of shares determined by dividing such excess by the Redemption Price (and rounding the quotient down to the nearest whole share) shall be issued to the Person whose shares were redeemed. In lieu any fractional shares otherwise issuable, the Company shall pay an amount equal to the Redemption Price multiplied by the fraction. If the Fair Market Value of the shares redeemed is insufficient to fully satisfy the Judgment Amount, the Company shall retain the right to pursue all of its rights and remedies otherwise available to satisfy the deficiency. If the Notice is given in the manner provided in this Regulation, whether or not the certificates covering these shares are surrendered, all rights with respect to the redeemed shares shall terminate except for the right of the Person whose shares are so redeemed to receive credit by offset against the Judgment Amount as herein provided. Unless the certificates covering these shares are received by the company at the place so designated the Judgment Amount will not be deemed to have been satisfied in full. 14. If at any time the authorised share capital is divided into different classes or series of shares, the rights attached to any class or series (unless otherwise provided by the terms of issue of the shares of that class or series) may, whether or not the Company is being wound up, be varied with the consent in writing of the holders of not less than three fourths of the issued shares of any other class or series of shares which may be affected by such variation. 15. The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith. 5 9 16. No notice of a trust, whether expressed, implied or constructive, shall be entered on the share register. TRANSFER OF SHARES 17. Subject to any limitations in the Memorandum, registered share sin the Company may be transferred by a written instrument of transfer signed by the transferor and containing the name and address of the transferee, in the absence of such written instrument of transferor the directors may accept such evidence of a transfer of shares as they consider appropriate. 18. Shares issued to bearer may be transferred by delivery of the certificate representing such shares. 19. The directors shall have power to close the Share Register for such period as they shall think fit, but not exceeding 90 days in any one year. TRANSMISSION OF SHARES 20. (i) The personal representatives, guardian or trustee as the case may be deceased, incompetent or bankrupt sole holder of a registered nominative share shall be the only persons recognised by the Company as having any title to the share. In the case of a share registered in the names of two or more holders, the survivor or survivors, and the personal representative, guardian or trustee as the case may be of the deceased, incompetent or bankrupt, shall be the only persons recognised by the company as having any title to the share but they shall not be entitled to exercise any rights as a member of the Company until they have proceeded as set forth in the following Regulations. (ii) Any person becoming entitled by operation of law or otherwise to a share or shares in consequence of the death, incompetence or bankruptcy of any member may be registered as a member upon such evidence being produced as may reasonably be required by the directors. An application by any such person to be registered as a member for all purposes shall be deemed to be a transfer of shares of the deceased, incompetent or bankrupt member and the directors shall treat it a such. 21. Any person who has become entitled to a share or shares in consequence of the death, incompetence or bankruptcy of any member may, instead of being registered himself, request in writing that some person to be named by him be registered as a transferee of such share or shares and such request shall likewise be treated as it were a transfer. 6 10 ACQUISITION OF OWN SHARES 22. Subject to the provisions of the Act, the Company may purchase, redeem or otherwise acquire any of its own shares for such consideration as the Company by resolution of directors considers fit, and either cancel or hold such shares as treasury shares. The Company may dispose of any shares held as treasury shares on such terms and conditions as the Company by a resolution of directors may from time to time determine. Shares may be purchased or otherwise acquired by the Company in exchange for newly issued shares in the Company. 23. Subject to the provisions of the Act as to reduction of capital the Company may be resolution of directors amend its Memorandum of Association to increase or reduce its authorised capital. 24. Any capital raised by the creation of new shares shall be considered as part of the original capital, and shall be subject to the same provisions as if it had been part of the original capital. 25. The Company may amend its Memorandum of Association to (a) consolidate all or any of its share capital into shares of larger amount than its existing shares; (b) cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of its authorised share capital by the amount of the shares so cancelled; (c) sub-divide its shares or any of them into shares of smaller amount than is fixed by the Memorandum of Association and so that subject to the provisions of Regulation 14 the resolution whereby any share is sub-divided may determine that as between the holders of the shares resulting from such sub-division one or more of the shares may have such preferred or other special rights over or may have such qualified or deferred rights or be subject to any such restrictions as compared with the other or others as the Company has power to attach to unissued or new shares; (d) subject to the provisions of the Act, reduce its issued share capital or any capital represented by the capital redemption reserve fund or by the share premium account in any manner. 26. Where any difficulty arises in regard to any consolidation and division under Regulation 25, the Company by a resolution of directors may settle the same as it thinks expedient. 7 11 MEETINGS OF MEMBERS 27. The directors may convene meetings of the members of the Company at such times and in such manner and places as the directors consider necessary or desirable, and they shall convene such a meeting upon the written request of members holding more than 30 percent of the votes of the outstanding voting shares in the Company. 28. At least seven days notice specifying the place, the day and the hour of the meeting and the general nature of the business to be conducted shall be given to such persons whose names on the date the notice is given appear as members in the share register of the Company. 29. In the case of shares issued to bearer, the directors shall at least 14 days prior to the date of the meeting cause notice of the same, specifying the place, the day and the hour of the meeting and the general nature of the business to be conducted, to be published in the manner prescribed by the Memorandum of Association. 30. A meeting of the members shall be deemed to have been validly called, notwithstanding that is called in contravention of the requirement to give notice in Regulations 28 and 29 if shorter notice of the meeting is agreed by members holding not less than 90 percent of the total number of shares having a right to attend and vote at the meeting, or if all such members have waived notice of the meeting. Presence at the meeting shall be deemed to constitute waiver. 31. The inadvertent failure of the directors to give notice of a meeting to a member or to the agent or attorney as the case may be, or the fact that a member or such agent or attorney has not received the notice, does not invalidate the meeting. 32. A member may be represented at a meeting of members by proxy. The instrument appointing a proxy shall be in such form as the Chairman of the meeting shall accept and shall be produced at the place appointed for the meeting before the time for holding the meeting at which the person named in such instrument proposes to vote. 33. In the case of shares issued to bear, the holder of such shares may vote: in person, by producing the Certificate representing such shares to the Chairman of the meeting at which the holder proposes to vote; by proxy, by depositing the certificate with a law firm appointed in writing by the Company or with a recognised bank or trust company which shall give a certificate of deposit and voting instructions in the form below:- 8 12 CERTIFICATE OF DEPOSIT AND VOTING INSTRUCTIONS The Undersigned hereby declares and certifies that bearer-share certificate(s), representing shares of the share capital of (the "Company"), an International Business Company organised under the laws of the British Virgin Islands, is/are being held by the Undersigned on behalf of the owner(s) of the said shares, who have authorised the Undersigned to represent the said share with full power of substitution at a shareholder's meeting to be held with the following agenda: ( ) In the transaction of such other business as may properly come before meeting. To cast their votes on each of the above mentioned agenda matters at the meeting, and to designate any third party to act in and on its behalf as the representatives of the said shareholders and these shares at the meeting; and the Undersigned with continue to keep the said shares in safekeeping until the date indicated above. In accordance with this power authority, the Undersigned hereby designates and appoints Messrs........................................ ................................. and each of them with full power of substitution to represent the Undersigned and said shareholders and to so vote the said shares at the meeting of shareholders of the Company to be held at IN WITNESS WHEREOF, the Undersigned has caused this certificate to be duly executed this _____ day of ________ __, 19__. ------------------------------------ NAME OF BANK OR TRUST COMPANY NAME OF LAW FIRM PROCEEDINGS AT MEETINGS OF MEMBERS 34. No business shall be transacted at any meeting of members unless a quorum of members is present at the time when the meeting proceeds to business. A quorum shall consist of one or more members present in person or by proxy representing at least one half of the votes of the shares of each class or series of share entitled to vote as a class or series and the same proportion of the votes of the remaining shares entitled to vote. 9 13 35. If within one hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of members, shall be dissolved; in any other case it shall stand adjourned to the next business day at the same time and place or to such other time and place as the directors may determine, and if at the adjourned meeting there are present within one hour from the time appointed for the meeting in person or by proxy not less than one third of the votes of the shares or each class or series of shares entitled to vote on the resolutions to be considered by the meeting, those present shall constitute a quorum but otherwise the meeting shall be dissolved. 36. The Chairman, if any, of the board of directors shall preside as Chairman at every general meeting of the Company. 37. If there is no such Chairman, or if at any meeting he is not present within fifteen minutes after the time appointed for holding the meeting, the members present shall choose someone of their number to be chairman. 38. The Chairman may, with the consent of the meeting, adjourn any meeting from time to time, and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. 39. All shares vote as one class and each whole share has one vote. If two or more persons are jointly entitled to a registered nominative share and if more than one of such persons is desirous of voting at the meetings whether in person or by proxy, the vote of that person whose name appears first among such voting joint holders in the share register alone shall be counted. 40. A member may be present at a meeting if he participates by telephone or other electronic means and all members participating at the meeting are able to hear each other. 41. At any meeting of the members the Chairman shall be responsible for deciding in such manner as he shall consider appropriate whether a resolution has been carried or not and the result of his decision shall be announced to the meeting and recorded in the minutes thereof. If the Chairman shall have any doubt as to the outcome of any resolution put to the vote, he shall cause a poll to be taken of all votes cast upon such resolution, but if the Chairman shall fail to take a poll then any member present in person or by proxy who disputes the announcement by the Chairman of the result of any vote may immediately following such announcement demand that a poll be taken and the Chairman shall thereupon cause a poll to be taken. If a poll is taken at any meeting, the result thereof shall be duly recorded in the minutes of that meeting by the Chairman. 10 14 42. Unless a poll be so demanded, a declaration by the Chairman that a resolution has, on a show of hands, been carried, and an entry to that effect in the book containing the minutes of the proceedings of the Company, shall be sufficient evidence of the fact, without proof of the number or proportion of the votes recorded in favour of or against such resolution. 43. If a poll demanded it shall be taken in such manner as the Chairman directs, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The demand for a poll may be withdrawn. 44. A resolution which has been notified to all members for the time being entitled to vote and which has been approved by a majority of the votes of those members in the form of one or more documents in writing by telex, telegram, cable or other written electronic communication shall without the need for any notice, become effectual as at the dates thereof as a resolution of the members. 45. Any person other than an individual shall be regarded as one member and subject to Regulation 46 the right of any individual to speak for or represent such member shall be determined by the law of the jurisdiction where, and by the documents by which, the person is constituted or derives its existence. In case of doubt, the directors may in good faith seek legal advice from any qualified person and unless and until a court of competent jurisdiction shall otherwise rule, the directors may rely and act upon such advice without incurring any liability to any member. 46. Any person other than an individual which is a member of the Company may by resolution of its directors or other governing body authorise such person as it thinks fit to act as its representative at any meeting of the Company or of any class of members of the Company, and the person so authorised shall be entitled to exercise the same powers on behalf of the person which he represents as that person could exercise if it were an individual member of the Company. DIRECTORS 47. The first director or directors shall be elected by the subscriber to the Memorandum of Association. Thereafter, the directors, other than in the case of a vacancy, shall be elected by the members for such term as the members may determine and may be removed by them. 48. The number of the directors shall be not less than one nor more than eight. 49. Each director holds office according to the terms of his appointment until his successor takes office or until his earlier death, resignation or removal. 50. A vacancy in the board of directors may be filled by the appointment of a new director pursuant to a resolution of members or of a majority of the remaining directors. 11 15 51. A director shall not require a share qualification, but nevertheless shall be entitled to attend and speak at any meeting of the members and at any separate meeting of the holders of any class of shares in the Company. 52. A director by writing under his and deposited at the Registered Office of the Company may from time to time appoint another director or any other person to be his alternate. Every such alternate shall be entitled to be given notice of meetings of the directors and to attend and vote as a director at any such meeting at which the director appointing him is not personally present and generally at such meeting to have and exercise all the powers, rights, duties and authorities of the director appointing him. Every such alternate shall be deemed to be an officer of the Company and shall not be deemed to be an agent of the director appointing him. If undue delay or difficulty would be occasioned by giving notice to a director of a resolution of which his approval is sought in accordance with Regulation 80 his alternate (if any) shall be entitled to signify approval of the same on behalf of that director. A director by writing under his hand deposited at the Registered Office of the company may at any time revoke the appointment of an alternate appointed by him. If a director shall die or cease to hold the office of director, the appointment of his alternate shall thereupon cease and terminate. 53. The directors may, by resolution of directors, fix the emoluments of directors in respect of services rendered or to be rendered in any capacity to the company. The directors may also be paid such travelling, hotel and other expenses properly incurred by them in attending and returning from meetings of the directors, or any committee of the directors or meetings of the members, or in connection with the business of the Company as shall be approved by resolution of directors. 54. Any director who, by request, goes or resides abroad for any purposes of the Company or who performs services which in the opinion of the Board go beyond the ordinary duties of a director, may be paid such extra remuneration (whether by way of salary, commission, participation in profits or otherwise) as shall be approved by resolution of directors. 55. The Company may pay to a director who at the request of the Company holds any office (including a directorship) in, or renders services to any company in which the Company may be interested, such remuneration (whether by way of salary, commission, participation in profits or otherwise) in respect of such office or services as shall be approved by resolution of directors. 56. The office of director shall be vacated if the director:- (a) is removed from office by resolution of members or (b) becomes bankrupt or makes any arrangement or composition with his creditors generally, or 12 16 (c) becomes of unsound mind, or of such infirm health as to be incapable of managing his affairs, or (d) resigns his office by notice in writing to the Company. 57. A director may hold any other office or position of profit under the Company (except that of auditor) in conjunction with his office of director, and may act in a professional capacity to the Company on such terms as to remuneration and otherwise as the directors shall arrange. 58. A director may be or become a director other officer of, or otherwise interested in any company promoted by the Company, or in which the Company may be interested, as a member or otherwise, and no director shall be accountable for any remuneration or other benefits received by him as director or officer or from his interest in such other company. The directors may also exercise the voting powers conferred by the shares in any other company held or owned by the Company in such manner in all respects as they think fit, including the exercise thereof in favour of any resolutions appointing them, or any of their number, directors or officers of such other company, or voting or providing for the payment of remuneration to the directors or officers of such other company. A director may vote in favour of the exercise of such voting rights in manner aforesaid, notwithstanding that he may be, or be about to become, a director or officer of such other company, and as such in any other manner is, or may be, interested in the exercise of such voting rights in manner aforesaid. 59. No director shall be disqualified by reason of his office from contracting with the Company, either as vendor, purchase or otherwise, nor shall any such contract or arrangement entered into by or on behalf of the Company in which any director shall be in any way interested by avoided, nor shall nay director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract or arrangement, by reason of such director holding that office or of the fiduciary relationship thereby established. The nature of a director's interest must be declared by him at the meeting of the directors at which the question of entering into the contract or arrangement is first taken into consideration, and if the director was not at the date of that meeting interested in the proposed contract or arrangement, or shall become interested in a contract or arrangement after it is made, he shall forthwith after becoming so interested advise the Company in writing of the fact and nature of his interest. A general notice to the directors by a director that he is a member of a specified firm or company, and is to be regarded as interested in any contract or transaction which may, after the date of notice, be made with such firm or company shall (if such director shall give the same at a meeting of the directors, or shall take reasonable steps to secure that the same is brought up and read at the next meeting of directors after it is given) be a sufficient declaration of interest in relation to such contract or transaction with such firm or company. 13 17 60. A director may be counted as one of a quorum upon a motion in respect of any contract or arrangement which he shall make with the Company, or in which he is so interested as aforesaid, and may vote upon such motion. However, if the agreement or transaction cannot be approve by a resolution of directors without counting the vote or consent of any interested director the agreement or transaction may only be validated by approval or ratification by a resolution of members. OFFICERS 61. (i) The Company may, by a resolution of directors, appoint officers of the Company at such times as shall be considered necessary or expedient, and such officers may consist of a President one or more Vice-Presidents, a Secretary and a Treasurer and such other officers as may from time to time be deemed desirable. The officers shall perform such duties as shall be prescribed at the time of their appointment subject to any modification in such duties as may be prescribed by the directors thereafter, but in the absence of any specific allocation of duties it shall be the responsibility of the President to manage the day to day affairs of the Company, the Vice-Presidents to act in order of seniority in the absence of the President but otherwise to perform such duties as may be delegated to them by the President, the Secretary to maintain the registers, minute books and records (other than financial records) of the Company and to ensure compliance with all procedural requirements imposed on the Company by applicable law, and the Treasurer to be responsible for the financial affairs of the Company. (ii) Any person may hold more than one office and officer need be a director or member of the Company. The officers shall remain in office until removed from office by the directors whether or not a successor is appointed. 62. Any officer who is a body corporate may appoint any person its duly authorised representative for the purpose of representing it and transacting any of the business of the officers. 63. The Registered Agent may certify to whom it may concern the names and addresses of the directors and officers of the Company and the terms of their encumbency. 14 18 POWERS OF DIRECTORS 64. The business and affairs of the Company shall be managed by the directors who may pay all expenses incurred preliminary to and in connection with the formation and registration of the Company, and may exercise all such powers of the Company as are not by the Act or by these Regulations required to be exercised by the members subject to any delegation of such powers as may be authorised by these Regulations and to such requirements as may be prescribed by resolution of the members; but no requirement made by resolution of the members shall invalidate any prior act of the directors which would have been valid if such requirement had not been made. Notwithstanding the generality of the foregoing the Company may by resolution of directors exercise the several powers granted to it by Section 9 of the Act and by the Memorandum of Association to inter alia transfer any of its assets in trust. 65. The Board may entrust to and confer upon any director or officer any of the powers exercisable by it upon such terms and conditions and with such restrictions as it thinks fit, and either collaterally with, or to the exclusion of, its own powers, and may from time to time revoke, withdraw, alter or vary all or any of such powers. The directors may delegate nay of their powers to committees consisting of such member or members of their body as they think fit; any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on it by the directors. 66. The Company may from time to time and at any time by resolution of directors appoint any company, firm or person or body of persons, whether nominated directly or indirectly by the directors, to be the attorney or attorneys of the Company for such purposes and with such powers, authorities any discretions (not exceeding those vested in or exercisable by the directors under these Regulations) and for such period and subject to such conditions as they may think fit, and any such powers of attorney may contain such provisions for the protection and convenience of persons dealing with any such attorney as the directors may think fit and may also authorise any such attorney to delegate all or any of the powers, authorities and discretions vested in him. 67. Any director who is a body corporate may appoint any person its duly authorised representative for the purpose of representing it at Board Meetings and of transacting any of the business of the directors. 68. All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments and all receipts for monies paid to the Company, shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as the Company shall from time to time by resolution of directors determine. 15 19 69. The directors may by resolution of directors exercise all the powers of the Company to borrow money and to mortgage or charge its undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the Company or of any third party. 70. Subject to Regulation 48 the continuing directors may act notwithstanding any vacancy in their body. PROCEEDINGS OF DIRECTORS 71. The directors may meet together for the despatch of business, adjourn and otherwise regulate their meetings as they think fit. Questions arising at any meeting shall be decided by a majority of votes; in case of an equality of votes the Chairman shall have a second or casting vote. A director may at any time summon a meeting of directors. 72. Provided that there shall be more than one director the quorum for directors' meetings shall be one third of the total number of directors and a minimum of 7 days notice (exclusive of the day of the meeting) shall be given to all directors and alternate directors of any meeting of the board unless all the directors or their alternates on their behalf shall waive such notice for any particular meeting or any director shall waive his right to receive notice. Presence at the meeting shall be deemed to constitute waiver. 73. A sole director shall have full power to represent the Company notwithstanding the reference in these Regulations to a Board of Directors consisting of more than one person. 74. The directors may elect a chairman of their meeting and determine the period for which he is to hold office, but if no such chairman is present at the time appointed for holding the same, the directors present shall choose one of their number to be the chairman of such meeting. 75. The directors may, subject to the Act, delegate any of their powers to committees consisting of such of their body as they think fit; any committee so formed shall, in the exercise of the powers so delegated conform to any regulations that may be imposed on it by the directors. 76. A committee may elect a chairman of its meeting; if no such chairman is elected, or if he is not present at the time appointed for holding the meeting the members of the committee present shall choose one of their number to be chairman of such meeting. 16 20 77. A committee may meet and adjourn as it thinks proper. Questions arising at any meeting shall be determined by a majority of votes of its members present, and in case of an equality of votes, the chairman shall have a second casting vote. 78. All acts done by any meeting of the directors or of a committee of directors, or by any person acting as a director, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such directors or persons acting as aforesaid, or that they or any of them were disqualified are hereby ratified and shall be as valid as if every such person had been duly appointed and was qualified to be a director. 79. The directors shall cause the following books to be kept: (a) minutes of all meetings of directors, members and committees appointed by them; (b) copies of all resolutions consented to by directors, members and committees appointed by them; (c) such other books and records as may be necessary or desirable in their opinion to reflect the financial position of the Company. 80. A resolution approved by all the directors or members of a committee for the time being entitled to receive notice of a meeting of the directors or of a committee of the directors and taking the form of one or more documents in writing or messages transmitted by teleprinter from a duly authenticated source shall be as valid and effectual as if it had been passed at a meeting of the directors of such committee duly convened and held. Any one or more members of the board of directors or any committee thereof may participation a meeting of such board or committee by means of a conference telephone or similar communication equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. INDEMNITY 81. Subject to the provisions of the Act every director or other officer of the Company shall be entitled to be indemnified out of the assets of the Company against all losses or liabilities which he may sustain or incur in or about the execution of the duties of his office or otherwise in relation thereto, and no director or other officer shall be liable for any loss, damage or misfortune which may happen to, or be incurred by the Company in the execution of the duties of his office, or in relation thereto provided he acted honestly and in good faith with a view to the best interest of the Company and except for his own wilful mis-conduct or negligence. 17 21 SEAL 82. The directors shall provide for the safe custody of the seal, and every instrument to which the seal shall be affixed shall be signed by one or more persons so authorised from time to time by the directors. If so authorised by resolution of directors, a facsimile of the seal and of the signatures of any authorised signatory as is herein provided may be reproduced by printing or other means on any instrument and shall have the same force and validity as if the seal had been affixed to such instrument and the same had been signed as hereinbefore described. DIVIDEND AND RESERVES 83. The directors may from time to time declare and pay a dividend whether interim or final and whether in money or in specie, but no dividend shall be declared and paid:- (1) except out of surplus; (2) unless the directors determine that immediately after payment of the dividend; (a) the Company will be able to satisfy its liabilities as they become due in the ordinary course of its business and (b) the realisable value of the assets of the Company will not be less than the sum of its total liabilities (other than deferred taxes) as shown in the books of account and of its capital. 84. The directors may, before declaring any dividend, set aside out of the profits of the Company such sum as they think proper as a reserve fund for whatever purpose, and may invest the sum so set apart as a reserve fund upon such securities as they may select. 85. The directors may deduct from the dividends payable to any shareholder all such sums of money as may be due from him to the Company. 86. Notice of any dividend that may have been declared shall be given to each shareholder in manner hereinafter mentioned and all dividends unclaimed for three years after having been declared may be forfeited by the directors for the benefit of the Company. 87. No dividends shall bear interest as against the Company. 88. Any one of the joint holders of a share may give a valid receipt to the Company, for dividends paid thereon. 18 22 ACCOUNTS 89. The books of account shall be kept at the registered office of the Company, or at such other place or places as the directors think fit. 90. The directors may be required by a resolution of members to cause to be made out and lay before the Company in a meeting of members at some date not later than eighteen months after incorporation of the Company and subsequently once at least every calendar year a profit and loss account for a period in the case of the first account since incorporation of the Company and in any other case, since the preceding account, made to a date not earlier than the date of the meeting by more than twelve months, and a balance sheet as at the date to which the profit or loss of the Company for that financial period, and a true and fair view of the state of the affairs of the Company as at the end of that fiscal period. 91. If so required by the members, a copy of such profit and loss account and balance sheet shall be served on every member in the manner to that prescribed herein for calling a meeting. AUDIT 92. The directors may call for the accounts to be examined by an auditor or auditors and shall do so if required by a resolution of members. 93. The auditors shall be appointed by the directors, unless otherwise appointed by a resolution of members. 94. The auditors may be shareholders of the Company but no director or other officer shall be eligible to be an auditor of the Company during his continuance in office. 95. The remuneration of the auditors of the Company:- (a) in the case of auditors appointed by the directors, may be fixed by the directors, (b) subject to the foregoing, shall be fixed by the company by a resolution of members. 96. The auditors shall examine each profit and loss account and balance sheet required to be laid before the Company in accordance with Regulation 90 and shall state in a written report whether or not:- (a) in their opinion the profit and loss account and balance sheet give a true and fair view respectively of the profit and loss for the period covered by the accounts, and of the state of affairs of the Company at the end of that period; 19 23 (b) all the information and explanations required by the auditors have been obtained. 97. The report of the auditors shall be annexed to the accounts and shall be read at the meeting, if any, at which the accounts are laid before the Company. 98. Every auditor of the company shall have a right of access at all times to the books of account and vouchers of the Company, and shall be entitled to require from the officers of the Company such information and explanations as he thinks necessary for the performance of the duties of the auditors. 99. The auditors of the Company shall be entitled to receive notice of, and to attend any meeting of members of the Company at which the Company's profit and loss account and balance sheet are to be presented in accordance with Regulation 90. CAPITALISATION OF PROFITS AND BONUS SHARES 100. The directors may resolve that it is desirable to capitalise any part of the amount for the time being standing to the credit of the Company's surplus account or otherwise available for distribution as a dividend and accordingly that such sum be set free for distribution amongst the members who would have been entitled thereto if distributed by way of dividend and in the same proportions on condition that the same be not paid in cash but applied either in or towards paying up in full unissued shares or debentures of the Company to be allotted and distributed credited as fully paid to and amongst such members. 101. A share allotted in accordance with Regulation 100 hereof shall be treated for all purposes as having been issued for money equal to the surplus that is transferred to capital upon the issue of the share. 102. In the case of an allotment of authorised but unissued shares with par value, an amount equal to the aggregate par value of the shares shall be transferred from surplus to capital at the time of the allotment. 103. In the case of an allotment of authorised but unissued shares without par value, the amount designated by the directors shall be transferred from surplus to capital at the time of the allotment, except that the Company by resolution of directors must designate as capital an amount that is at least equal to the amount that the shares are entitled to as preference if any in the assets of the Company upon liquidation of the Company. 104. The allotment of bonus shares shall for the purposes of the Act be treated as a dividend of shares. 20 24 105. The directors shall make all appropriations and applications of the surplus thereby resolved to be capitalised and all allotments and issues of fully-paid shares or debentures if any, and generally shall do all acts and thinks required to give effect thereto, with full power to the directors to ignore fractions altogether or to determine that payment be made in cash or otherwise as they think fit in the case of shares or debentures becoming distributable in fractions, and also to authorise any person to enter on behalf of all the members entitled thereto into an agreement with the Company providing for the allotment to them respectively, credited as fully paid, of any further shares or debentures to which they may be entitled upon such capitalisation, and any agreement made under such authority shall be effective and binding on all such shareholders. The directors may appoint any person to sign on behalf of the person entitled to participate in the distribution any contract necessary or desirable for giving effect thereto and such appointment shall be effective and binding upon the shareholders. NOTICES 106. A notice may be served by the Company upon any registered nominative shareholder either personally or by posting it by airmail service in a prepaid letter addressed to him at his address as shown in the share register or by cable or by telex should the directors think it appropriate and in the case of the holders of shares issued to bearer notice may be served by the Company in the manner prescribed by the Memorandum. 107. All notices directed to be given to the shareholders shall, with respect to any share to which persons are jointly entitled, be given to whichever of such persons is named first in the Register of Shareholders, and notice so given shall be sufficient notice to all the holders of such share. 108. Any notice, if served post, shall be deemed to have been served within ten days of posting and in proving such service, it shall be sufficient to prove that the letter containing the notice was properly addressed and put into the Post Office. Notices by cable or by telex shall be deemed to have been served 24 hours after despatch. 109. Notice may be served on the Company by posting it by prepaid service addressed to the Company at its Registered Office or to its Registered Agent. 21 25 PENSION AND SUPERANNUATION FUNDS 110. The directors may establish and maintain or procure the establishment and maintenance of any non-contributory or contributory pension or superannuation funds for the benefit of, and give or procure the giving of donations, gratuities pensions, allowances or emoluments to any persons who are or were at any time in the employment or service of the Company or any Company which is a subsidiary of the Company or is allied to or associated with the Company or with any such subsidiary or who are or were at any time directors or officers of the Company or of any such other Company as aforesaid or who hold or held any salaried employment or office in the Company or such other Company, or any persons in whose welfare the Company or any such other company as aforesaid is or has been at any time interested, and to the wives, widows, families and dependants of any such person, and may make payments for or towards the insurance of any such persons as aforesaid, and may do any of the matters aforesaid either alone or in conjunction with any such other company as aforesaid. Subject always if the Act shall so require to particulars with respect thereto being disclosed to the shareholders, and to the proposals being approved by the company by resolution of members, a director holding any such employment or office shall be entitled to participate in and retain for his own benefit any such donation, gratuity, pension, allowance or emolument. WINDING UP 111. The Company may commence winding up and dissolve by resolution of members save that if the Company has never issued shares, by resolution of directors. The Company and its liquidator shall wind up the affairs of the Company pursuant to the provisions of the Act. ARBITRATION 112. Whenever any differences arise between the Company on the one hand and any of the shareholders, their executors, administrators or assigns on the other hand touching the true intent and construction or the incidence or consequences of these presents or of the Act, touching anything then or thereafter done or executed, omitted or suffered in pursuance of the Act or touching any breach or alleged breach or otherwise relating to the premises or to these presents or to any Act affecting the Company or to any of the affairs of the Company, such difference shall unless the parties agree to refer the same to a single arbitrator be referred to two arbitrators shall before entering on the reference appoint an umpire. 22 26 113. If either party to the reference makes default in appointing an arbitrator either originally or by way of substitution (in the event that an appointed arbitrator shall dies, be incapable of acting or refuse to act) for ten days after the other party has given him notice to appoint the same, such other party may appoint an arbitrator to act in the place of the arbitrator of the defaulting party. AMENDMENT TO ARTICLES 114. The Company may by resolution of directors or by resolution of members alter or modify these Regulations as originally drafted or as amended from time to time. UNDER FOREIGN LAW 115. The Company may by a resolution of directors or a resolution of members continue as a company incorporated under the laws of another jurisdiction which may permit such continuation and in the manner provided by those laws and may by a resolution of directors or of members amend its Memorandum and Articles to be consistent therewith. 23 27 We, Tortola Corporation Company Limited of P.O. Box 662, Citco Building, Wickhams Cay, Road Town, Tortola for the purposes of incorporating an International Business Company under the Laws of the British Virgin Islands hereby subscribe our name to these Articles of Association in the presence of:- Witness (Sgd.) J. Caminada Tortola Corporation Company Limited Subscriber Daphne Wattley Road Town, Tortola British Virgin Islands (Sgd.) D. Wattley 24 EX-2.2 3 EXHIBIT 2.2 1 EXHIBIT 2.2 DATED 1998 ---- ALBATRONICS (FAR EAST) COMPANY LIMITED (1) NAM TAI ELECTRONICS, INC. (2) AND THE PERSONS WHOSE NAMES ARE LISTED IN SCHEDULE 1 (3) -------------------------------------------- SUBSCRIPTION AGREEMENT RELATING TO SHARES OF ALBATRONICS (FAR EAST) COMPANY LIMITED -------------------------------------------- J O H N S O N S T O K E S & M A S T E R in association with Norton Rose Solicitors & Notaries 17th Floor, Prince's Building 10 Chater Road Hong Kong (PJS-Ewin-771150/1-Nam Tai-Subscription Agt) 2 CONTENTS
Clause Page - ------ ---- 1. Interpretation..........................................................................1 2. Conditions..............................................................................4 3. Subscription............................................................................5 4. Completion..............................................................................6 5. The Press Announcement..................................................................7 6. Warranties..............................................................................7 7. NT's Rights.............................................................................11 8. Period between Exchange and Completion..................................................11 9. Costs and Expenses......................................................................12 10. Time of the Essence.....................................................................12 11. Announcements...........................................................................12 12. Notices.................................................................................12 13. Governing Law...........................................................................14 Execution........................................................................................14 Schedule 1 - Names and Addresses of Warrantors...................................................16 Schedule 2 - Details of the Company..............................................................17 Schedule 3 - Warranties..........................................................................19
3 THIS AGREEMENT is made on , 1998 BETWEEN: (1) ALBATRONICS (FAR EAST) COMPANY LIMITED a company incorporated in Hong Kong with limited liability and having its registered office at Unit No.4, 5th Floor, Block A, Po Lung Centre, No.11 Wang Chiu Road, Kowloon Bay, Hong Kong (the "Company"); (2) NAM TAI ELECTRONICS, INC. a company incorporated in the British Virgin Islands with limited liability and having its registered office at McW. Todman & Co., McNamara Chambers, P.O. Box 3342, Road Town, Tortola, the British Virgin Islands ("NT"); and (3) The parties whose names and addresses are set out in Schedule 1 (the "Warrantors"). WHEREAS: (A) The Company was incorporated with limited liability under the Companies Ordinance (Cap.32 of the laws of Hong Kong). Full details of the Company are set out in Schedule 2. (B) The Company has at the date of this Agreement an authorised share capital of HK$30,000,000 divided into 300,000,000 Shares of which 200,000,000 Shares have been issued and are fully paid. (C) All of the issued Shares are currently listed on the Stock Exchange. (D) NT and the Company have agreed that the Company will issue and NT (either directly or through up to two of its wholly-owned subsidiaries) shall subscribe for the New Shares on and subject to the terms and conditions hereinafter appearing. NOW IT IS HEREBY AGREED as follows: 1. INTERPRETATION 1.01 In this Agreement (including the Recitals hereof) unless specifically provided otherwise or the context otherwise requires: (a) the following expressions shall have the following meanings: "Accounts" means the audited consolidated balance sheet of the Company as at 31st March 1998, the audited consolidated profit and loss account of the Company for the year ended 31st March 1998 and the consolidated cash flow statement of the Company for the year ended 31st March 1998; "business day" means a day, excluding a Saturday, when commercial banks are generally open for business in Hong Kong SAR; 4 "Code" means the Code on Takeovers and Mergers; "Conditions" means the conditions set out in Clause 2.01; "Completion" means completion of the allotment and issue of the New Shares in accordance with Clause 4 under this Agreement; "Circular" means the circular to shareholders of the Company in relation to, inter alia, the Subscription and the Placing; "Disclosure Letter" means the letter of even date from the Warrantors to NT handed over by the Company to NT immediately prior to entry into this Agreement containing disclosures against the Warranties; "Executive" means the Executive Director of the Corporate Finance Division of the SFC or any delegate of the Executive Director (in each case acting in the capacity of "Executive" under the Code); "Group" means the Company and its subsidiaries; "Hong Kong SAR" means the Hong Kong Special Administrative Region of the PRC; "HK$" means the local currency of Hong Kong SAR; "Listing Rules" means the Rules Governing the Listing of Securities on the Stock Exchange; "Management Accounts" means the unaudited management accounts of the Group for the financial period ended 31st July, 1998 and initialled by the Company and NT for identification purpose; "New Shares" means the 200,002,000 new Shares to be allotted and issued to the Subscriber(s) pursuant to the terms of this Agreement; "PRC" means People's Republic of China; "Placing" means the placing of the Placing Shares by the Company on the terms set out in the Placing Agreement; "Placing Agreement" means the agreement of even date between, inter alia, the Company, the Warrantors and Standard Capital Brokerage Limited; "Placing Shares" means the 43,306,000 Shares to be placed pursuant to the Placing; 5 "Press Announcement" means the press announcement pertaining to the Subscription and the Placing and to be released jointly by the Company and NT, in the agreed form; "SFC" means the Securities and Futures Commission; "Share(s)" means share(s) of HK$0.10 each in the capital of the Company; "Stock Exchange" means The Stock Exchange of Hong Kong Limited; "Subscriber(s)" means NT and/or such one or more wholly-owned subsidiaries of NT as NT shall nominate to subscribe for the New Shares by notice in writing given to the Company at least 3 business days prior to the date of Completion (if more than one such wholly-owned subsidiary shall be nominated, each such subsidiary shall be a "Subscriber" and all such subsidiaries (together with NT, if relevant) shall together be the "Subscribers"); "Subscription" means the subscription of the New Shares by the Subscriber(s) under this Agreement; "Taxation" means all forms of tax, duty, rate, levy or other imposition whenever and by whatever authority imposed and whether of the PRC (including Hong Kong SAR), Japan or elsewhere, including (without limitation) profits and income tax (whether required to be deducted or withheld from or accounted for in respect of any payment) salaries tax, property tax, estate duty, capital gains tax including PRC Capital Gains Tax), capital transfer tax, development land tax, value added tax, customs duties, excise duties, rates, stamp duty, capital duty and any other taxes, levies, duties, charges, imposts or withholdings corresponding to, similar to, replaced by or replacing any of them together with any interest, penalty or fine in connection with any such taxation and regardless of whether any such taxes, levies, duties, imposts, charges, withholdings, penalties or interest are chargeable directly or primarily against or attributable directly or primarily to the company concerned or any other person and of whether any amount in respect of any of them is recoverable from any other person (and including any liability in relation to failure to meet any withholding tax obligation for any third party's PRC Capital Gains Tax liability); and 3. "Warranties" means the representations and warranties contained in Schedule 3. 1.02 References to clauses and schedules are to the clauses of and schedules to this Agreement. 1.03 In this Agreement, unless the context requires otherwise:- 6 (a) the index and clause and schedule headings are inserted for convenience only and do not affect its interpretation; (b) the schedules form part of this Agreement and have the same force and effect as if expressly set out in the body of this Agreement and any reference to this Agreement shall include the schedules; (c) words in the singular include the plural, and vice versa; (d) a reference to a person includes a reference to a firm, a body corporate, an unincorporated association or authority; (e) a reference to a person includes a reference to his executors, administrators, successors (including, but not limited to, persons taking by novation) and assigns; (f) a reference to a document in an agreed form means a form initialled by or on behalf of the parties simultaneously with the execution of this Agreement; and (g) a reference to a balance sheet or profit and loss account or cash flow statement includes a reference to any note forming part of or attached to it. 1.04 Where any of the Warranties is qualified by the expression "to the best of the knowledge, information and belief of the Warrantors" or any similar expression, that Warranty is deemed to include an additional representation that it has been made after due, diligent and careful inquiry and that each of the Warrantors has used all his reasonable endeavours to ensure that all information given in the Warranty is true, complete and accurate in all material respects. 2. CONDITIONS 2.01 Completion of this Agreement is conditional upon on or before 30th November 1998 (or such later date as may be agreed in writing between the parties): (a) the Listing Committee of the Stock Exchange granting listing of and permission to deal in the New Shares (subject only to issue); (b) the authorised share capital of the Company being increased from HK$30,000,000 to HK$100,000,000 by the addition of 700,000,000 new Shares; (c) the passing of an ordinary resolution (on a poll) by an independent vote (as defined in Note 1 of Notes on dispensation from Rule 26 of the Code) of the shareholders at an extraordinary general meeting of the Company, authorising the allotment and issue of the New Shares and approving the "white-wash waiver" referred to in Clause 2.01(d) below; 7 (d) following a vote of the independent shareholders at an extraordinary general meeting of the Company referred to in Clause 2.01(c) above, the Executive granting a "white-wash waiver" waiving any obligation on the part of NT and parties acting in concert with it to make a general offer under Rule 26 of the Code as a result of the Subscription; (e) the Placing Agreement becoming unconditional save in relation to any matter which is conditional or contingent upon Completion; (f) the Shares remaining listed and traded on the Stock Exchange on the day immediately before the date of Completion; (g) no notification being received by the Company prior to the date of Completion from the Stock Exchange or the SFC to the effect that the listing of the Shares on the Stock Exchange will or is likely to be withdrawn as a result of completion of the Subscription and/or of the Placing Agreement and NT being reasonably satisfied on the date immediately prior to the date of Completion that such listing will not be withdrawn for any reason including (without limiting the generality of the foregoing) by reason of an inadequate percentage of the Company's issued share capital being in public hands as a result of completion of the Subscription and/or of the Placing Agreement; (h) confirmation in terms reasonably satisfactory to NT being obtained from the banking and financial institutions to whom more than 50% of the Group's indebtedness outstanding as at the date of this Agreement that they will continue after Completion to extend banking facilities to the Group and will not seek to terminate such facilities or demand immediate repayment of any such facilities before or immediately after Completion; (i) confirmation in terms reasonably satisfactory to NT being obtained from Sony Electronics Device Hong Kong Company Limited that Completion will not materially adversely affect its continuing business relationship with the Group and if such conditions have not been fulfilled or in the case of conditions (d), (f), (g), (h) and (i) waived by NT then this Agreement and all rights and obligations hereunder will cease and terminate and no party shall have any liability under them (without prejudice to the rights of any such parties in respect of any antecedent breaches). 2.02 The Company and NT shall use their respective reasonable endeavours to procure that the Conditions are satisfied not later than the date specified in sub-clause 2.01 and no party is entitled to withdraw from this Agreement before the date unless the Conditions have become incapable of fulfillment. 3. SUBSCRIPTION 8 3.01 NT shall subscribe (or procure up to 2 of its wholly-owned subsidiaries which have been duly nominated to be the Subscriber(s) by notice in writing given to the Company at least 3 business days prior to the date of Completion) and the Company shall allot and issue such New Shares fully paid and free from all liens, charges, security interests, encumbrances and adverse claims and the New Shares shall rank pari passu in all respects with the Shares in issue at the date hereof including ranking for payment of any dividend declared after the date hereof. 3.02 The subscription price of each of the New Shares shall be HK$0.35 per Share aggregating HK$70,000,700. 4. COMPLETION 4.01 Completion shall take place at 10/F., Hutchison House, 10 Harcourt Road, Central, Hong Kong at 12:00 noon on the second Business Day after the Conditions shall have become fulfilled (save as regards fulfillment or waiver of conditions (f) and (g) and provided all the other Conditions have been fulfilled or waived by then) and is subject to completion of the Placing taking place simultaneously with Completion. 4.02 At Completion, in addition to the events set out in Clause 4.03 below, the Company shall procure that a board meeting of the Company shall be held at which such number of persons nominated by NT by notice in writing given to the Company at least 2 business days prior to the date of Completion as will comprise a majority on the board of the Company shall be appointed as directors of the Company with effect from Completion. 4.03 At Completion:- (a) NT will pay to the Company, or procure the payment to the Company of the sum of HK$70,000,700 such payment to be made by banker's cashier order or by RTGS (real time gross settlement) or via CHATS (Clearing House Automated Transfer System operated for the time being by Hong Kong Interbank Clearing Limited) (or in such form as may be agreed between the parties); (b) NT will deliver to the Company a duly executed written application by the Subscriber(s) to subscribe for the New Shares in a form reasonably satisfactory to the Company; (c) NT will deliver to the Company a certified copy of resolutions of the board of directors of NT (in a form reasonably satisfactory to the Company) of its authority for the execution and performance of this Agreement; and (d) the Company will deliver to NT :- (i) a certified copy of resolutions of the board of directors of the Company (or a duly authorised committee thereof) duly approving the allotment 9 and issue of the New Shares (subject to payment of the subscription moneys in accordance with Clause 4.03 (a)) and appointing as directors of the Company the persons nominated by NT as referred to in Clause 4.02; (ii) evidence reasonably satisfactory to NT that conditions set out in sub-clause 2.01(a), (b), (c), (d), (e) , (h) and (i) have been fulfilled (unless if relevant waived by NT); and (iii) a share certificate or certificates for the New Shares in the name(s) of the Subscriber(s). 5. THE PRESS ANNOUNCEMENT The parties hereby authorise the release for publication of the Press Announcement subject to Clause 11 and each of the Stock Exchange and the SFC confirming that it has no further comments thereon, immediately following signing by all the parties this Agreement. 6. WARRANTIES 6.01 The Warrantors jointly and severally represent and warrant to NT in the terms set out in Schedule 3 and accept that NT is entering into this Agreement in reliance upon the terms of the Warranties. 6.02 Each Warranty: (a) shall be construed as a separate Warranty and (save as expressly provided to the contrary) shall not be limited or restricted by reference to or inference from the terms of any other Warranty or any other terms of this Agreement; and (b) shall be given subject to the matters fairly disclosed in the Disclosure Letter, and this Clause 6 and shall be deemed to be repeated as at Completion with reference to the facts and circumstances then existing. 6.03 The Warrantors undertake that: (a) they will from time to time, forthwith disclose in writing to NT any event, fact or circumstance which may become known to any of them after the date hereof and which is materially inconsistent with any of the Warranty or which could reasonably be expected materially to affect a subscriber for value of any of the New Shares or which may entitle NT to make any claim under this Agreement; and 10 (b) they will not, and will procure that no company in the Group will, do or omit to do anything which may cause any of the Warranties to be untrue at any time prior to or on Completion. 6.04 The rights and remedies of NT in respect of a breach of any of the Warranties shall not be affected by Completion, by any investigation made by or on behalf of NT into the affairs of any member the Group, by the giving of any time or other indulgence by the NT to any person, by the NT rescinding or not rescinding this Agreement, or by any other cause whatsoever except a specific waiver or release by the NT in writing; and any such waiver or release shall not prejudice or affect any remaining rights or remedies of the NT. 6.05 NT acknowledges to and agrees with each of the Warrantors that:- (a) the Warranties are the only representations, warranties or other assurances of any kind given by or on behalf of the Warrantors or any of them and on which NT may rely in entering into and performing this Agreement; (b) no other representation, warranty, statement, promise, forecast or projection made by or on behalf of the Warrantors or any of them may be relied on or form the basis of, or be pleaded in connection with, any claim by NT under or in connection with this Agreement; (c) any claim by NT in connection with the Warranties (a "Warranty Claim") shall be subject to the following provisions of this Clause 6; and (d) at the time of entering into this Agreement, various pieces of information have been provided to NT pursuant to the information request dated 10th September, 1998 prepared by Johnson Stokes & Master which information has not been reviewed by NT or by its advisers. Subject to the contents of such information, NT is not aware of any matter or thing which is not disclosed or mentioned in the Disclosure Letter or in this Agreement or the Press Announcement and which is inconsistent with the Warranties or constitutes a breach of any of them. 6.06 NT shall not be entitled to make any Warranty Claim:- (a) in respect of any fact which has been fully, fairly and specifically disclosed to NT in the Disclosure Letter or would have been disclosed by a search made before the date of this Agreement at the Hong Kong Companies Registry or any other public office or registry in Hong Kong; (b) if NT knew prior to entry into this Agreement that the Warranty in question was untrue, misleading or had been breached; (c) to the extent that provision, reserve or allowance for the matter or liability which would otherwise give rise to the claim in question has been made in 11 the Accounts or the Management Accounts or is otherwise taken account of in the Accounts or the Management Accounts; (d) if the Warranty Claim would not have arisen but for a change in legislation announced or enacted after the date of its Agreement (whether relating to taxation, rates of taxation or otherwise) whether or not the change purports to be effective retrospectively in whole or in part; (e) to the extent that the Warranty Claim arises as a result of any change after Completion in the accounting bases on which the Company values its assets; or (f) to the extent occasioned by any act or omission of NT after Completion; and to the extent that any Warranty Claim is increased as a result of any of the matters set out in this Clause 6.06, the Warrantors shall not be liable in respect of any amount by which such Warranty Claim is so increased. 6.07 The Warrantors shall have no liability for breach of any Warranty which may have an effect on the consolidated net asset value of the Company unless (a) as a result of the breach of one or more of the Warranties the consolidated shareholders funds (i.e. the consolidated net assets) of the Company as at 31st July 1998 is reduced (as a result of a breach of any of the Warranties) by more than HK$250,000,000; or (b) the claim relates to the period after 31st July 1998 but before Completion, when no claim will be made unless all such claims relating to such period aggregate at least HK$500,000. 6.08 Any liability of the Warrantors under or in respect of the Warranties shall be reduced by an amount equal to: (a) the value or additional value of any fixed assets held by the Company at Completion which are not included in the Accounts or the Management Accounts; (b) the amount of or by which any Taxation for which the Company is or would otherwise be accountable is reduced or extinguished as a result of a Warranty Claim giving rise to such liability of the Warrantors; (c) the amount by which any provision, reserve or allowance for Taxation (not being a provision, reserve or allowance for deferred Taxation), bad or doubtful debts or contingent or other liabilities in the Accounts proves after Completion to have been excessive, save by reason of a reduction in rates of Taxation; and 12 (d) the amount of any credits, recoveries or other benefits which have been or will be received or obtained by the Company because of or arising from any transaction, matter or thing giving rise to such liability of the Warrantors. 6.09 If NT becomes aware of a matter or thing which could give rise to a Warranty Claim, NT will use all reasonable endeavours to the Warrantors as soon as reasonably practicable after NT becoming aware of those facts if the Warranty Claim in question is as a result of or in connection with a liability and NT shall procure that the Company makes available to the Warrantors at the cost of the Warrantors) all such information as the Warrantors may reasonably require for the purpose of avoiding, contesting, disputing, resisting, appealing or comprising any such liability. 6.10 The Warrantors shall cease to have any liability under or in respect of the Warranties on the first anniversary of the Completion Date save in respect of a Warranty Claim of which NT gives notice to the Warrantors before such anniversary. 6.11 Nothing in this Agreement shall (or shall be construed to) release NT from its duty to mitigate its loss in respect of any breach of the Warranties. 6.12 If NT receives from the Warrantors an amount pursuant to any claim in respect of a breach of any of the Warranties and NT subsequently recovers from a third party a sum which is referable directly to such a claim, NT shall forthwith pay to the Warrantors the sum it has recovered from the third party to the extent that the aggregate of the sum received from the Warrantors and the sum received from the third party exceeds the aggregate of (i) the amount of the loss suffered by NT with respect to such claim and (ii) any costs and expenses incurred by NT in obtaining such sum from the third party. 6.13 The provisions of this Clause 6 shall have effect notwithstanding any other provision of this Agreement. 6.14 NT hereby represents and warrants that:- (a) as at the date of this Agreement and at the Completion Date, NT is and shall remain an independent third party not connected with the Company or any of the directors, chief executives or substantial shareholders of the Company or any of its subsidiaries or their respective associates (as defined in the Listing Rules). NT hereby agrees and acknowledges that the Company is entering into the Agreement in reliance upon the representation and warranty made by it under this Clause 6.14; and (b) neither NT nor any person acting in concert (as defined in the Code) with it has acquired voting rights (as defined in the Code) in the Company in the 6 months prior to the date hereof. 13 7. NT'S RIGHTS 7.01 If before Completion (i) NT becomes aware that any of the Warranties was at the date of this Agreement, or has since become, untrue or misleading in any material respect or that the Warrantors are in breach of any term of this Agreement in any material respect; or (ii) that the Placing Agreement has been amended or any term of the Placing Agreement waived without the prior written consent of NT; NT shall be entitled to rescind this Agreement without liability to the Company or the Warrantors. 7.02 Subject to the provisions of Clause 7.01, the rights, including rights of rescission, conferred on NT by this Agreement are in addition and without prejudice to all other rights and remedies available to NT; and no exercise or failure to exercise a right under this Agreement or otherwise or to invoke a remedy shall constitute a waiver of that right or remedy by NT. 8. PERIOD BETWEEN EXCHANGE AND COMPLETION 8.01 The Warrantors undertake, unless and until this Agreement lapses or unless specifically contemplated by this Agreement, that until Completion that they will use their respective reasonable endeavours (where a Warrantor is a director of the Company, subject to his fiduciary duties) to procure that except with the prior written approval of NT, which approval shall not be unreasonably withheld or delayed:- (a) the business of the Group will be carried on in the ordinary and normal course and that no amendment will be made to the Company's constitutional documents; (b) no alteration will be made to the Company's authorised and issued share capital and no options or rights shall be granted in respect of the same under the Company's executive share option scheme or otherwise; (c) no member of the Group will enter into any service agreement with any director of a member of the Group and no amendment will be made to any such existing agreement; (d) no dividend, distribution or bonus will be declared, paid or made in respect of the profits or capital of the Company or any of its non-wholly owned subsidiaries; (e) other than in the ordinary course of business, no disposal of the business or any property or assets of any member of the Group of a value in excess of HK$500,000 or its equivalent will be made to any person or third party and no interest in a mortgage or charge thereon to secure obligations in aggregate exceeding HK$500,000 or its equivalent will be made or effected; (f) save for any expenses incurred by the Company in connection with this Agreement, the Placing Agreement and related transactions, no material 14 liability (including contingent liability) will be assumed or incurred by a member of the Group and no contract of an onerous or long term nature will be entered into by a member of the Group; and (g) such meetings of the directors or members of the Company as may be necessary to pass such resolutions as may be required to enable this Agreement to become unconditional will be convened. 8.02 The Warrantors shall procure that as from the date of this Agreement NT and any persons authorised by it shall be given reasonable access to the officers, employees, premises, plant, machinery, books of account, records and documents of all members of the Group and the Warrantors shall use all reasonable endeavours to procure that the officers and employees of the Group shall give promptly to NT and any persons authorised by it all information in relation to the Group that NT may reasonably request after giving reasonable notice therefor. 9. COSTS AND EXPENSES Each of the parties to this Agreement will bear its or his own costs and expenses incurred in relation to the preparation of this Agreement and the Subscription except that the Company shall bear all capital duty in relation to the allotment and issue of the New Shares and the reasonable costs of obtaining the confirmation from the SFC referred to in Clause 2.01(d). 10. TIME OF THE ESSENCE Time will be of the essence of this Agreement. 11. ANNOUNCEMENTS Save as otherwise required by the Stock Exchange or the SFC, none of the parties shall make any public announcement or communication other than the Press Announcement and the Circular in relation to the Subscription without the prior written approval of the other parties to this Agreement. 12. NOTICES 12.01 A notice, approval, consent or other communication in connection with this Agreement: (a) must be in writing; 15 (b) in the case of NT, must be marked for the attention of Mr. Tadao Murakami and in the case of the Company, must be marked for the attention of Mr. Nakahara Fukumori; (c) must be left at the address of the addressee, or sent by prepaid ordinary post (airmail if posted to or from a place outside Hong Kong) to the address of the addressee or sent by facsimile to the facsimile number of the addressee which is specified in this clause or if the addressee notifies another address or facsimile number in Hong Kong then to that address or facsimile number. The facsimile number of each party is: Company Facsimile: 2750 4362 NT Facsimile: 2341 4164 Warrantors Facsimile: 2750 4362 12.02 A notice, approval, consent or other communication shall take effect from the time it is received (or, if earlier, the time it is deemed to be received in accordance with sub-clause 12.03) unless a later time is specified in it. 12.03 Subject to sub-clause 12.04 below, a notice is deemed to be received: (a) in the case where it is left at the address of the addressee, upon delivery at that address; (b) in the case of a posted letter, on the first business day after posting of, if posted to or from a place outside Hong Kong, the third business day after posting; (c) in the case of facsimile, on production of a transmission report from the machine from which the facsimile was sent which indicates that the facsimile was sent in its entirety to the facsimile number of the recipient provided that a confirmatory copy of such facsimile shall have been sent by post or by hand in accordance with the above provisions within 24 hours of such transmission. 12.4 A notice received or deemed to be received in accordance with sub-clause 12.3 above on a day which is not a business day or after 5 p.m. on any business day, shall be deemed to be received on the next following Business Day. 16 12.7 Each party undertakes to notify all of the other parties by notice served in accordance with this clause if the address specified herein is no longer an appropriate address for the service of notice. 13. GOVERNING LAW 13.01 This Agreement shall be governed by and construed in accordance with the law of the Hong Kong. The parties hereto hereby submits to the non-exclusive jurisdiction of the Courts of Hong Kong. 13.02 NT hereby appoints Nam Tai Electronic & Electrical Products Limited whose registered office is at Unit 9, 15/F., Tower 1, China Hong Kong City, 33 Canton Road, Tsimshatsui, Kowloon, Hong Kong as its process agent to accept service of process in the HK SAR. 13.03 If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect, the legality, validity and enforceability of the remaining provisions of this Agreement shall not be affected or impaired thereby, unless the primary purpose of the Agreement shall be frustrated thereby. 13.04 This Agreement constitutes the whole agreement between the parties hereto and supersede all previous agreements between the parties relating to these transactions and it is expressly declared that no variations hereof shall be effective unless made in writing and signed by all the parties hereto. 13.05 Each of the parties hereto shall do and execute or procure to be done and executed all such further acts, deeds, things and documents as may be necessary or desirable to give effect to the terms of this Agreement. 13.06 This Agreement may be executed in one or more counterparts, each of which shall be binding on each party by whom or on whose behalf it is so executed, but which together shall constitute a single instrument. 13.07 NT undertakes that it will not acquire voting rights (as defined in the Code), save for the New Shares, in the Company for the period commencing from the date hereof and ending on the date of the shareholders' meeting of the Company where the resolutions referred to in Clause 2.01(c) are passed (both dates inclusive). IN WITNESS whereof this Agreement has been entered into the day and year first above written. SIGNED by ) ) ) ) 17 duly authorised for and on behalf ) of ALBATRONICS (FAR EAST) ) COMPANY LIMITED ) SIGNED by ) ) ) ) duly authorised for and on behalf ) of NAM TAI ELECTRONICS, ) INC. ) SIGNED by ) NAKAHARA FUKUMORI ) in the presence of : ) SIGNED by ) WAKAKI KAIZO ) in the presence of: ) 18 Schedule 1 Names and addresses of Warrantors (i) The Company whose registered office is at Unit No.4, 5th Floor, Block A, Po Lung Centre, No.11 Wang Chiu Road, Kowloon Bay, Kowloon, Hong Kong. (ii) NAME ADDRESS NAKAHARA Fukumori 16C Emperor Height 5 Cox's Road Tsimshatsui Kowloon Hong Kong WAKAKI Kaizo Room 45, 22/F Tower 6, Hong Kong Parkview 88 Tai Tam Reservoir Road Hong Kong 19 Schedule 2 Details of the Company 1. Name: Albatronics (Far East) Company Limited 2. Place of Incorporation: Hong Kong 3. Authorised Share capital: HK$30,000,000 divided into 300,000,000 shares of HK$0.10 each Name Address ---- ------- 4. Directors: NAKAHARA Fukumori 16C Emperor Height 5 Cox's Road Tsimshatsui Kowloon Hong Kong WAKAKI Kaizo Room 45, 22/F Tower 6, Hong Kong Parkview 88 Tai Tam Reservoir Road Hong Kong YASUKAWA Yoshihiro Flat A, 14/F., Block 5 Cavendish Heights 33 Perkins Road Hong Kong MAH Hoon Hai 7/F., Flat A, Block 10 Pacific Palisades 1 Braemar Hill Road Hong Kong OGURA Keiichi 7/F., Flat C, Block 11, Site 10 Whampoa Garden Hung Hom Kowloon Hong Kong NON-EXECUTIVE DIRECTOR LAI Wing Leung 17th Floor, Flat B Albron Court 99 Caine Road Hong Kong 20 INDEPENDENT NON-EXECUTIVE DIRECTORS CHAN Ching Cheung, Edward Flat D, 27th Floor, Block 4 City Garden 231-233 Electric Road North Point Hong Kong LUI Tat Ming Room 8, 26/F., Block D Shan Tsui Court 200 Tai Tam Road Chai Wan Hong Kong 5. Secretary: Keith Hung Kwok Keung 6. Auditors: Deloitte Touche Tohmatsu 7. Financial year end date: 31st March 21 Schedule 3 Warranties The Warrantors hereby jointly and severally warrant and represent to NT that:- 1. All information contained in the recitals to and in Schedule 2 of this Agreement is correct and to the best of the knowledge, information and belief of the Warrantors all information relating to the Group which is known to any of the Warrantors and which would be material to a subscriber for value of the New Shares (in particular information relating to any material contract or commitment of an unusual or onerous nature) has been fully and fairly disclosed to NT and all information provided to NT pursuant to the information request dated 10th September, 1998 prepared by Johnson Stokes & Master is complete and accurate in all respects; 2. There is no option, warrant, right to subscribe on, over or affecting any shares or debenture or registered capital or securities of any member of the Group and no agreement or commitment is outstanding which calls for the allotment or issue of any shares or debentures in any member of the Group; 3. The financial or business information and all statements of fact concerning the Group as contained in the information publicly disclosed by any member of the Group at any time prior to the date hereof and/or as contained in the Press Announcement and all statements of opinion, intention or expectation of the directors in relation to the Company or any of its subsidiaries contained in any such document and/or in the Press Announcement are truly and honestly held and have been made after due and careful consideration, and there is no fact or matter omitted from such document and/or the Press Announcement the omission of which would make any statement in the such document and/or the Press Announcement misleading or which is otherwise material in the context of the Subscription do not contain any material misrepresentation of fact or omit to state a fact necessary to make the information contained therein not materially misleading; 4. The Accounts show a true and fair view in all respects of the state of affairs of the Company and of the Group as at 31st March 1998 and of the profit for the year then ended that date and except as stated in the Accounts, were prepared in accordance with generally accepted accounting principles in Hong Kong consistently applied; 5. The Management Accounts were prepared in accordance with the same accounting policies and practices as the Accounts and represent a true and fair view of the state of affairs and financial position of the Group as at 31st July 1998 and of the results of the Group for the financial period ended on such date; 6. Except as stated in the Accounts the Group owns all of its assets shown or comprised in the Accounts as owned assets and has a good title to such assets and all such assets and all documents necessary to prove the Group's title to such assets are in its possession or under its control; 22 7. As at the date of this Agreement and as at Completion no member of the Group has or will have guaranteed the liability of any third party which is not a member of the Group save and except shipping guarantees entered into in the ordinary course of business of the Group. 8. To the best of the knowledge, information and belief of the Warrantors, there is no order, decree or judgment of any court or governmental agency or regulatory body outstanding or anticipated against any member of the Group nor is there any investigation or enquiry by any governmental agency or regulatory body outstanding or against any member of the Group which in such case may reasonably be expected to have or has had a material adverse effect upon the financial position of the Group; 9. To the best of the knowledge, information and belief of the Warrantors, in relation to any release, omission, disposal or other fact or circumstance which causes or might cause pollution of the environment or harm to human health, no past or present member of the Group has, in any manner, to an extent which is material in the context of the Group taken as a whole (i) committed any violation of any laws, statutes, ordinances, regulations or other requirements of any relevant governmental authority in the PRC (including the Hong Kong SAR) or Japan; and/or (ii) incurred any liability (whether actual or contingent) with respect thereto; 10. To the best of the knowledge, information and belief of the Warrantors, no member of the Group is in material breach or in material default (nor any event occurred which, with the giving of notice or the lapse of time or both would result in a material default) under any law, agreement, licence, certificate, instrument or authorisation which is binding upon or affects it or any of its assets or revenues or operation of its business or is in breach or violation of its memorandum and articles of association or other constitutive document which is likely to have a material adverse effect on the Group taken as a whole; 11. Since 31st March 1998, except as publicly announced by the Company prior to the date hereof and as disclosed in the Press Announcement: (a) there has been no adverse change in the business, financial or trading position or profits or prospects of any other member of the Group which in any such case is material in the context of the Group taken as a whole; (b) to the best of the knowledge, information and belief of the Warrantors, no litigation, arbitration proceedings, prosecution or other legal proceedings have been instituted, announced or threatened by or against or remaining outstanding against any member of the Group which in any such case could have a material affect on the Group taken as a whole ); (c) each member of the Group has carried on its business in the ordinary course and so as to maintain it in a going concern in the same manner as previously carried on; 23 (d) no member of the Group has declared, paid or made or proposed to declare, pay or make any bonus in respect of shares, dividends or other distribution other than to members of the Group; (e) no member of the Group has issued or proposed to the issue of any debentures or incurred any indebtedness or liabilities or commitments, whether actual, contingent or deferred, which is material in the context of the Group taken as a whole other than in the ordinary course of business of the relevant company; (f) no member of the Group has disposed of or transferred, mortgaged or encumbered any asset or any right, title or interest in any asset in a manner which is material in the context of the Group taken as a whole; (g) no member of the Group has entered into any contract or commitment (whether in respect of capital expenditure or otherwise) which is of a long-term or unusual nature or involves or could involve an obligation of a nature or magnitude, in either case which is material in the context of the Group taken as a whole; (h) no transaction has taken place which might give rise to a claim for Taxation for any member of the Group other than transactions in respect of or arising in the ordinary course of business of the Group; (i) no member of the Group has authorised or proposed or announced its intention to propose any merger or demerger or acquisition or disposal of assets or shares which are material in the context of the Group taken as a whole (other than in the ordinary course of trading) or any such material change in its share or loan capital; (j) no member of the Group has entered into any reconstruction, amalgamation, transaction or arrangement (otherwise than in the ordinary course of business of the relevant company) which is material in the context of the Group taken as a whole; (k) no member of the Group has taken any corporate action or had any order for its winding up, dissolution or reorganisation or for the appointment of a receiver, administrator, administrative receiver, trustee or similar officer of all or as substantial part of its assets and revenues; (l) no member of the Group has entered into or varied any terms of any service agreement with any of its directors; (m) no member of the Group has entered into any agreement or commitment or passed any resolution with respect to any of the transactions or events referred to in this paragraph. 24 12. There is no provision in any arrangement, agreement, licence or other instrument to which any member of the Group is a party or to which any of their assets may be bound, entitled or be subject which, in consequence of the Subscription and/or the Placing, would or might to an extent which is material in the context of the Group taken as a whole, result in: (a) any monies borrowed by, or other indebtedness , actual or contingent of, any member of the Group being or becoming repayable or being capable of being declared repayable immediately or prior to their stated maturity; (b) the creation of any mortgage, charge or other security interest over the whole or any part of the business, property or assets of such member or any such security (whenever arising or having arisen) becoming enforceable; (c) cause any breach of such arrangement, agreement, licence or instrument or any limits, restrictions, obligations or commitments contained therein being infringed or exceeded, or such arrangement, agreement, licence or instrument being terminated or adversely affected or any actions being taken of an adverse nature or any obligation arising thereunder; (d) any assets of any such member being disposed of other than in the ordinary course of business; (e) the interest or business of any such member in or with any firm or body or person or any arrangements relating to such interests or business, being terminated or adversely modified or affected; (f) any such member ceasing to be able to carry on business under any name under which it presently does so; or (g) the creation of liabilities by such member. EX-2.3 4 EXHIBIT 2.3 1 EXHIBIT 2.3 [Letterhead of Nam Tai Electronics (Canada) Ltd.] April 28, 1998 PRIVATE & CONFIDENTIAL Mr. Edward K.W. Chan 601 West Hastings Street Suite 1600 Vancouver, B.C. V6B 5A5 Dear Mr. Chan: Re: Offer for Chief Financial Officer Position: On behalf of Nam Tai Electronics, Inc. and its subsidiary companies (the "Nam Tai group") I am pleased to offer you a position as the Chief Financial Officer of the Nam Tai group to be based in Vancouver, B.C. as an employee of Nam Tai Electronics (Canada) Ltd. (the "Company"). You will also be appointed to the Board of Directors of Nam Tai Electronics, Inc. at the earliest possible opportunity. This is a ten year full time appointment located in Vancouver and subject to the following terms and conditions: 1. POSITION As Chief Financial Officer of the Nam Tai group, you will report to the Chairman and the Chief Executive Officer and be responsible for the management and direction of the financial, investor relations and administration affairs of the Nam Tai group and the business and affairs of the Company in North America. In the Vancouver office the financial, accounting, control and systems staff will report directly to you. The senior financial officers of each subsidiary and affiliate in the Nam Tai group will have a functional responsibility to you. 2. TERM OF EMPLOYMENT AND TERMINATION Your employment will be for a fixed term of ten years commencing on Monday, May 4, 1998, or earlier subject to your final confirmation, and lasting until May 3, 2008. Should you wish to resign from this position you will be required to provide three months written notice to the Company. If your employment is terminated by the Company during the 10 year term, you will not be 2 obligated to mitigate your damages in respect of seeking other employment or otherwise to reduce any loss. However, if your employment is terminated for just cause based on criminal activities, then the Company shall have no obligation after the termination of employment. 3. REMUNERATION (a) Salary You will be paid a salary of CAD $350,000 per annum, payable every two weeks in arrears. This amount is to be paid directly to you, or partially to you and the residue to such persons or entities as you may from time to time direct. Your salary will be subject to review on an annual basis every January to determine if an increase is warranted. (b) Options Before the end of January 1999, you will be granted 30,000 employee stock options to purchase the common stock of Nam Tai Electronics, Inc. This amount will be reduced on a pro rata basis depending the your commencement date in the calender year. For example, if you start on May 4, 1998 with two thirds of a year remaining you will receive 20,000 options. Further employee stock options will be granted in future years in amounts determined by the Board of Directors. The exercise price of the options will be fixed at the fair market value of the common stock on the date the options are granted as defined in the Employees' Stock Option Plan. The value of the options granted shall be determined based on the fair value at the grant date consistent with the method of FASB No. 123 and as reported in Nam Tai Electronics, Inc.'s audited financial statements. (c) Guaranteed Total Income In consideration of you commencing employment with the Company, the Company, first, and second Mr. M. K. Koo personally, guarantees that your total yearly remuneration, which shall include both your salary, including any money paid to persons or entities designated by you, and the value of the employee stock options granted to you will not be less than CAD $400,000 per annum until the end of this contract in year 2008, unless you resign on your own accord. For the first year of this agreement the guaranteed amount will be reduced pro rata based upon your commencement date in the calender year. For the last year of the contract in 2008 the guaranteed amount will be reduced pro rata based upon your departure date in the calender year. 4. EMPLOYMENT BENEFITS (a) General Benefits You will be entitled to participate in a program of employee benefits which are comparable to those offered to executives of comparable companies located in Canada including medical coverage, a dental program and accidental death coverage, all described in the Company Policy, 3 and long term and short term disability coverage to cover the guaranteed total income amount. If you become disabled during the 10 year term of this contract and if the long term disability insurers refuse to cover you, or continue to cover you, the Company will re-employ you at your full guaranteed total income for the balance of the 10 year term. (b) Golf Membership The Company will provide you with a golf club membership at a golf club determined by the Company. (c) Pension Contribution The Company will make monthly contributions based on $13,500 per annum to a pension fund on your behalf. Alternatively, at your option, the Company will consider contributing a similar amount to your Registered Retirement Savings Plan. (d) Life Insurance The Company will purchase a life insurance policy which will provide total compensation of CAD $3,000,000. Half of this amount will be paid to the Company and half will be paid to your designated beneficiaries. 5. ANNUAL HOLIDAY You will be entitled to five weeks holidays (25 days) per annum. This offer will remain valid until the close of business on April 30, 1998. To accept the offer please execute and return one of the enclosed signed copies to the Company. Yours truly, In respect of the guarantee of income - ----------------------------------- --------------------------- M. K. Koo M. K. Koo Chairman, Nam Tai Electronics, Inc. I agree to the terms and conditions contained in this letter of employment and, to the extent that it is not in conflict with this agreement, the attached Nam Tai Electronics (Canada) Ltd. Company 4 Policy and where there is a conflict between the two, the terms of this agreement will prevail. Name:_____________________________ Date:_____________________________ EX-2.4 5 EXHIBIT 2.4 1 EXHIBIT 2.4 Termination Agreement made January 11, 1999. Between: Nam Tai Electronics (Canada) Ltd. ("NTC") And: Edward K.W. Chan ("Chan") WHEREAS Chan is employed by NTC pursuant to a contract of employment dated April 28, 1998 (the "Contract") and NTC and Chan have agreed to terminate the Contract on the terms and conditions set forth in this Agreement. NOW THEREFORE in consideration of the premises and the mutual covenants and agreements hereinafter contained, and for other good and valuable consideration (the receipt and sufficiency of which is hereby acknowledged by the parties hereto), it is agreed by and between the parties hereto as follows: 1. Chan will sign and deliver to NTC, concurrent with the execution of this Agreement, the irrevocable written resignation which is attached hereto as Schedule "A". 2. The Contract, including all past and future rights and obligations in it, will 2 terminate in full and all respects as of the date of this Agreement. 3. From the date of this Agreement to and including June 30, 1999, Chan will not attend at work during normal office hours or perform any of the duties or responsibilities of the Chief Financial Officer position. 4. NTC will pay to Chan the following monies: (a) upon signing of this Agreement NTC will pay to Chan $5,635.17 ($8,826.92 less $3,191.75 in Governmental deductions as set out in Schedule "C"), representing RRSP contributions owing to December 31, 1998; and (b) until June 30, 1999, NTC will pay to Chan an annual salary rate of $350,000 plus $13,500 in annual RRSP contribution (pro rated), less Governmental and Health Care Deduction, all paid by regular salary payments every two weeks. The total net pay to be received by Ed Chan for the period up to and including June 30, 1999 will be $88,419.17 as set out in Schedule "D" of this Agreement. (c) No other benefits or money will be due to Chan under this Agreement other than what is specified in paragraphs (a) and (b) above. 2 3 5. Chan hereby releases and forever discharges NTC, Nam Tai Electronics, Inc. and all other Companies in the Nam Tai Group and all of their directors, officers, employees and agents and M.K. Koo from all manner of actions, causes of action, claims or demands whatsoever, including all manner of actions, causes of action, claims or demands arising out of: (a) Facts or events, known or unknown, which have occurred up to and including the date of this Agreement; (b) Chan's employment with NTC, Nam Tai Electronics, Inc. and all other Companies in the Nam Tai Group and the termination of that employment; and (c) The Contract and the termination of the Contract, including all manner of actions, causes of action, claims or demands with respect to stock options, insurance, guaranteed total income, golf membership, holiday pay or any other monies or benefits which may be payable or owing under the Contract. 6. NTC, Nam Tai Electronics, Inc. and all other Companies in the Nam Tai Group hereby release and forever discharge Chan from all manner of actions, causes of action, claims or demands whatsoever, including all manner of actions, causes of 3 4 action, claims or demands arising out of: (a) Facts or events, known or unknown, which have occurred up to and including the date of this Agreement; (b) Chan's employment with NTC, Nam Tai Electronics, Inc. and all other Companies in the Nam Tai Group and the termination of that employment; and (c) The Contract and the termination of the Contract. 7. Chan will maintain in complete secrecy and not disclose to anyone, any of the confidential business information of NTC, Nam Tai Electronics, Inc. and the Companies in the Nam Tai Group. 8. Chan agrees to deliver to NTC all documents, records, photographs, notebooks, computer disks and CD ROMs or similar repositories of or containing the confidential business information of NTC, Nam Tai Electronics, Inc. and the other Companies of the Nam Tai Group, including without limitation, all copies thereof, then in his possession, whether prepared by him or not, and will permanently erase (without making copies thereof) all such confidential business information 4 5 from any form of electronic storage being retained by Chan including, without limitation, computer hard drives and memory chips. 9. NTC will sign and deliver on Nam Tai Electronics, Inc. letterhead paper the letter of reference which is attached hereto as Schedule "B" and give all future references requested regarding Chan in the future in a manner consistent with the wording of Schedule "B". Chan will indemnify Nam Tai Electronics, Inc. from all costs, damages or liabilities arising from his use of the letter of reference. Chan will agree not to use the letter of reference for any purpose other than seeking new employment without written consent of NTC. 10. Chan's name will not be used in any document, announcement or information regarding NTC, Nam Tai Electronics, Inc. or any other Company in the Nam Tai Group without the express consent of Chan except that Nam Tai Electronics, Inc. will be permitted to list Chan's name as the Chief Financial Officer in its 1998 Form 20 F and Annual Report and in the press release announcing Chan's intention to resign notwithstanding the fact that Chan shall assume no responsibility nor liability over the preparation and content of the 1998 Form 20 F and annual report. No statements shall be made in any company document under Chan's name, or attributed to Chan, without his express consent. 11. Chan will indemnify NTC with respect to any claims made by Alice Tang in 5 6 connection with the termination of her employment by NTC with two weeks' severance pay. 12. No representations have been made except such representations as are specifically set forth in this Agreement and any statements or representations that may have previously been made by any of them to the other have not been relied on in connection with this Agreement and are of no effect. 13. This Agreement has been executed by the parties in consideration of the mutual premises and covenants herein contained, and for good and valuable consideration the receipt and sufficiency of which is acknowledged. Any and all defences relating to an alleged failure or lack of consideration in connection with this Agreement are waived. 14. The terms of this Agreement shall be kept confidential by Chan and NTC, Nam Tai Electronics, Inc. and the Companies in the Nam Tai Group except that: (a) Chan may discuss its terms with his immediate family and legal and accounting advisers; and (b) The directors, officers, managers and legal and accounting advisers of NTC, Nam Tai Electronics, Inc. and the Companies in the Nam Tai Group 6 7 may together discuss its terms. 15. Both Chan and NTC (and the Nam Tai Group of Companies and its directors and officers) will avoid making any negative or derogatory comments verbally or in writing that could reasonably be expected to cause any damage to the other. 16. Nam Tai Electronics (Canada) Ltd. will continue to provide the same indemnification to Chan against any claim or liability which might arise as a result of Chan acting as director and President of Nam Tai Electronics ( Canada) Ltd., 17. Chan shall bear no future responsibility or liability for any matters relating to the finance, administration, and accounting of Nam Tai Electronics, Inc. and its subsidiaries in the Nam Tai Group, 18. The provisions of this Agreement shall enure to the benefit of and be binding upon Chan and his heirs, executors, administrators and assigns and NTC, Nam Tai Electronics, Inc. and all other Companies in the Nam Tai Group. 19. Both Chan and NTC acknowledge that they have sought and received independent legal advice prior to the signing of this agreement. 7 8 IN WITNESS WHEREOF this Agreement has been executed by the parities hereto as of the day, month and year first above written. Nam Tai Electronics (Canada) Ltd. Per: _______________________________________ SIGNED AND DELIVERED BY) EDWARD K.W. CHAN in the presence of: ) ) _____________________________________ ) __________________________ Name ) Edward K.W. Chan. ) _____________________________________ ) Address ) ) _____________________________________ ) Occupation 8 9 Schedule "A" to Termination Agreement dated January 11, 1999 between Edward Chan and Nam Tai Electronics (Canada) Ltd. Edward Chan 1467 West 53rd Avenue Vancouver, B.C. Canada V6P 1L1 January 11, 1999 CONFIDENTIAL Nam Tai Electronics (Canada) Ltd. 1500 - 999 West Hastings Street Vancouver, B.C. V6C 2W2 ATTENTION: M.K. KOO Dear Mr. Koo: RE: RESIGNATION FROM EMPLOYMENT I hereby irrevocably tender my resignation from all employment with you and all other Companies in the Nam Tai Group, including my employment as Chief Financial Officer of the Nam Tai Group and President and Director of Nam Tai Electronics (Canada) Ltd., effective June 30, 1999 on the condition that I shall continue to receive payments specified in paragraph 4 of the Termination Agreement. Yours truly, Edward Chan 9 10 SCHEDULE "B" TO TERMINATION AGREEMENT DATED JANUARY 11, 1999 BETWEEN EDWARD CHAN AND NAM TAI ELECTRONICS (CANADA) LTD. [To be printed on Nam Tai Electronics, Inc. letterhead] January 11, 1999 To Whom It May Concern EDWARD K. W. CHAN For your information, Edward K. W. Chan has been the Group Chief Financial Officer of the Nam Tai Group of companies since May 1, 1998. He has been requested to be in charge of administration for the Group and has also acted as the President of our subsidiary Nam Tai Electronics (Canada) Ltd. since July 1,1998. As Group Chief Financial Officer, Mr. Chan's responsibilities and duties include the following: - - to manage, control and plan all aspects of operation of Finance Department, - - to provide leadership, guidance and advice to all Finance staff, including coordination of all activities undertaken, - - to prescribe roles, responsibilities, and reporting structure for all staff, - - to set policies, priorities and agenda for Finance and Administration Departments, - - to offer advice to and liaise with Chairman and other senior executives on Finance and other business operational matters, - - to attend directors' meetings and participate in corporate decision making process, - - to participate in top level consideration of mergers and acquisitions, - - to take charge of all matters relating to quarterly financial reporting and annual general meeting, - - to deal with analysts, lawyers, bankers, auditors, consultants and other outside parties on significant finance and administrative matters, - - to review and approve correspondence, documents and reports and releases with significant financial implications, - - to negotiate and approve expenditures for significant services, purchases, and disbursements, - - to participate in hiring of senior staff, and - - to make presentations on behalf of the Nam Tai Group. In addition to the above, it is noteworthy that Mr. Chan initiated a program involving our Year 2000 computer and operational issues and supported making necessary preparations to avoid potential negative repercussions arising from such issues. Since our company acquired a major subsidiary operating in China in December 1998, the Group 10 11 CFO has to discharge his duties and responsibilities principally outside of Canada. Mr. Chan has decided that he does not wish to be absent from Canada for extended periods without relocating to Asia and has agreed to resign voluntarily for that reason. The Company basically agrees without any problem that Mr. Chan has worked diligently on the aforementioned responsibilities and duties for which he had been in charge. I have no hesitation in recommending Mr. Edward K.W. Chan, especially since he was also a former partner with Price Waterhouse, to a position involving responsibilities in finance, accounting, and administration. Yours Truly, M.K.Koo Senior Executive Officer, Corporate Strategy, Finance and Administration 11 EX-2.5 6 EXHIBIT 2.5 1 EXHIBIT 2.5 Agreement made January 11, 1999 Between: Nam Tai Electronics, Inc. ("NTEI") And: Edward K. W. Chan ("Chan") WHEREAS NTEI wishes to retain Chan to negotiate a resolution of a dispute between it and Price Waterhouse (Hong Kong) regarding the statement of account submitted by Price Waterhouse (Hong Kong) and the services performed by Price Watehouse (Hong Kong), in connection with the Albatronics project. NOW THEREOFE the parties agree as follows: 1. Chan will travel to Hong Kong and engage in settlement discussions with Price Waterhouse (Hong Kong) regarding the Price Waterhouse (Hong Kong) statement of account and the services rendered by them, in connection with the Albatronics project and potential litigation between NTEI and Price Waterhouse (Hong Kong). 2 2. In connection with all trip expenses, NTEI will provide Chan with a non-refundable allowance of $6,000 (CDN). 3. NTEI will provide to Chan a non-refundable payment of $250,000.00 (CDN) in connection with the matter described in paragraph 1 hereof. 4. Chan will not enter into any agreement with Price Waterhouse (Hong Kong) on behalf of NTEI in connection with the matter described in paragraph 1 hereof or any other matters, without first obtaining the consent of NTEI to the agreement. 5. Chan will be paid an additional amount of $50,000.00 (CDN) if he is able to negotiate, on behalf of NTEI, an agreement with Price Waterhouse (Hong Kong) which results in NTEI paying to Price Waterhouse (Hong Kong) at most $500,000.00 (HK) inclusive of all monies already paid by NTEI or any subsidiary company, in connection with the statement of account rendered by Price Waterhouse (Hong Kong) regarding the Albatronics project. 6. Chan will be responsible for paying all taxes and other moneys which may be owed to any Governmental jurisdiction in connection with the payments described in paragraphs 2, 3 and 5 of this Agreement. Chan hereby agrees to indemnify NTEI and all the other Companies in the Nam Tai Group and all of their directors, officers, employees and agents with respect to any taxes or other moneys which may be claimed by a 3 Governmental jurisdiction with respect to the payments described in paragraph 2, 3 and 5 of this Agreement. 7. In respect of payments described in paragraphs 2 and 3, NTEI will wire transfer before Monday, January 18, 1999 at 5:00 p.m. Hong Kong time $256,000 (CND) to the following bank account: Standard Chartered Bank Account Name: Chan Ka Hung Account Number: 413-1-007511-2 Canadian dollar account 8. It is agreed that the Termination Agreement (including the resignation letter) between Chan and Nam Tai Electronics (Canada) Ltd. dated January 11, 1999 shall be void if the payments specified in paragraph 7 above are not made as required. IN WITNESS WHEREOF this Agreement has been executed by the parties hereto as of the day, month and year first above written. Nam Tai Electronics, Inc. Per: _____________________________________ SIGNED AND DELIVERED BY ) EDWARD K. W. CHAN in the presence of: ) ) _____________________________________ _________________________ Name ) Edward K. W. Chan _____________________________________ ) _____________________________________ ) Address ) ) _____________________________________ ) Occupation EX-2.6 7 EXHIBIT 2.6 1 EXHIBIT 2.6 October 5, 1998 Nam Tai Electronics, Inc c/o 999 West Hastings Street Suite 1500 Vancouver, B.C. V6C 2W2 CANADA Attention: Mr. M.K. Koo Chairman Gentlemen: This agreement ("Agreement") is made and entered into effective this 5th day of October, 1998 (the "Effective Date") between NAM TAI ELECTRONICS, INC. (the "Company") and National Securities Corporation (the "Consultant"). In consideration of and for the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Purpose. The Company hereby retains the Consultant on a non-exclusive basis during the term specified to render consulting advice to the Company relating to financial and similar matters, upon the terms and conditions as set forth herein. 2. Term and Compensation. This Agreement shall be effective for a period of three years commencing on the Effective Date (the "Engagement Period"). The Company shall issue to Consultant 300,000 common stock purchase warrants (the "Warrants") exercisable for a period of three (3) years, with an exercise price equal to the average daily closing price of the Company's common stock for the twenty (20) business days immediately preceding execution of this agreement. The Warrants shall be in such form as may be agreed upon between the parties, which agreement shall be evidenced by the signature of the respective parties thereto. 3. Duties of Consultant. During the term of this Agreement, the Consultant will provide the Company with such regular and customary consulting advice as is reasonably requested by the Company, provided that the Consultant shall not be required to undertake duties not reasonably within the scope of the consulting advisory services contemplated by this Agreement. In performance of these duties, the Consultant shall provide the Company with the benefits of its best judgment and efforts. It is understood and acknowledged by the parties that the value of the Consultant's advice is not measurable in any quantitative manner. The Consultant's duties may include, but not necessarily be limited to: 1 2 A. Providing sponsorship and exposure in connection with the dissemination of corporate information regarding the Company to the investment community at large. B. Assisting in the Company's financial public relations, including discussions between the Company and the financial community. C. Advice regarding the financial structure of the Company and its divisions or subsidiaries or any programs and projects, as such issues relate to the public market for the Company's equity securities. D. Rendering advice with respect to any acquisition program of the Company, as such program relates to the public market for the Company's equity securities. E. Rendering advice regarding the public market for the Company's securities and the timing and structure of any future public offering or private placement of the Company's equity securities. 5. Relationships with others. The Company acknowledges that the Consultant or its affiliates is in the business of providing financial service and consulting advice (of all types contemplated by this Agreement) to others. Nothing herein contained shall be construed to limit or restrict the Consultant in conducting such business with respect to others, or in rendering such advice to others. In connection with the rendering of services hereunder, Consultant has been or will be furnished with confidential information concerning the Company including, but not limited to, financial statements and information, cost and expense data, production data, trade secrets, marketing and customer data, and such other information not generally obtained from public or published information or trade sources. Such information shall be deemed "Confidential Material" and, except as specifically provided herein, shall not be disclosed by Consultant without prior written consent of the Company. In the event Consultant is required by applicable law or legal process to disclose any of the Confidential Material, it is agreed that Consultant will deliver to the Company prompt notice of such requirement prior to disclosure of same to permit the Company to seek an appropriate protective order and/or waive compliance of this provision. If, in the absence of a protective order or receipt of written waiver, Consultant is nonetheless, in the written opinion of counsel, compelled to disclose any Confidential Material, Consultant may do so without liability hereunder provided that notice of such prospective disclosure is delivered to the Company prior to actual disclosure. Following the termination of this Agreement, Consultant shall deliver to the Company all Confidential Material. 6. Consultant's Liability. In the absence of gross negligence or willful misconduct on the part of the Consultant or the Consultant's breach of this Agreement, the Consultant shall not be liable to the Company or to any officer, director, employee, stockholder or creditor of the Company, for any act or omission in the course of or in connection with the rendering or providing of advice hereunder. Except in those cases where the gross negligence or willful misconduct of the Consultant or the breach by the Consultant of this Agreement is alleged and proven, the Company agrees to defend, indemnify and hold the Consultant harmless from and against any and all claims, liabilities and reasonable costs and expenses (including attorneys' fees paid in the defense of the Consultant) which may in any way result from services rendered by the Consultant pursuant to or in any connection with this Agreement. 7. Expenses. The Company, upon receipt of appropriate supporting documentation, shall reimburse the Consultant for any and all reasonable out-of-pocket expenses incurred in connection with 2 3 the consulting services provided to the Company under this Agreement, subject to prior approval of the Company. 9. Limitation Upon the Use of Advice and Services. (a) No person or entity, other than the Company or any of its subsidiaries or directors or officers of each of the foregoing, shall be entitled to make use of or rely upon the advice of the Consultant to be given hereunder, and the Company shall not transmit such advice to, or encourage or facilitate the use or reliance upon such advice by others without the prior consent of the Consultant. (b) Use of the Consultant's name in annual reports or any other report of the Company or releases by the Company must have the prior approval of the Consultant unless the Company is required by law to include Consultant's name in such annual reports, other report or release of the Company, in which event Consultant will be furnished with copies of such annual reports or other reports or releases using Consultant's name in advance of publication by the Company. 10. Severability. Every provision of this Agreement is intended to be severable. If any term or provision hereof is deemed unlawful or invalid for any reason whatsoever, such unlawfulness or invalidity shall not affect the validity of this Agreement. 11. Miscellaneous. (a) Any notice or other communication between parties hereto shall be sufficiently given if sent by certified or registered mail, postage prepaid, or faxed and confirmed if to the Company, addressed to it at Nam Tai Electronics, Inc., 999, West Hastings Street, Suite 1500, Vancouver BC, V6C2W2, Canada, or if to the Consultant, addressed to it at National Securities Corporation, 1001 Fourth Avenue, Suite 2200, Seattle, Washington 98154. Such notice or other communication shall be deemed to be given on the date of receipt. (b) If the Consultant shall cease to do business, the provisions hereof relating to duties of the Consultant and compensation by the Company as it applies to the Consultant shall thereupon cease to be in effect, except for the Company's obligation of payment for services rendered prior thereto. This Agreement shall survive any merger of, acquisition of, or acquisition by the Consultant and after any such merger or acquisition shall be binding upon the Company and the corporation surviving such merger or acquisition. (c) This Agreement embodies the entire agreement and understanding between the Company and the Consultant and supersedes any and all negotiations, prior discussions and preliminary and prior agreements and understandings related to the central subject matter hereof. (d) This agreement has been duly authorized, executed and delivered by and on behalf of the Company and the Consultant. (e) This Agreement shall be construed and interpreted in accordance with the laws of the State of California, without giving effect to conflicts of laws. (f) There is no relationship of partnership, agency, employment, franchise or joint venture 3 4 between the parties. Neither party has the authority to bind the other or incur any obligation on its behalf. (g) This Agreement and the rights hereunder may not be assigned by either party (except by operation of law) and shall be binding upon and inure to the benefit of the parties and their respective successors, assigns and legal representatives. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date hereof. NAM TAI ELECTRONICS, INC. By: /S/ M. K. Koo ---------------------------- Name: Mr. M.K. Koo Title: Senior Executive Officer NATIONAL SECURITIES CORPORATION By: /S/ Steven A. Rothstein ---------------------------- Name: Steven A. Rothstein Title: Chairman 4 EX-2.7 8 EXHIBIT 2.7 1 EXHIBIT 2.7 THIS WARRANT AND ANY SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), NOR UNDER ANY STATE SECURITIES LAW AND SUCH SECURITIES MAY NOT BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED, OR OTHERWISE TRANSFERRED UNTIL (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAW OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED, OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE HEREOF IS RESTRICTED AS DESCRIBED HEREIN. NAM TAI ELECTRONICS, INC. WARRANT FOR THE PURCHASE OF 300,000 SHARES OF COMMON STOCK, $0.01 PAR VALUE PER SHARE No. NS1 2 THIS CERTIFIES that, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, National Securities Corporation (the "Holder"), is entitled to subscribe for and purchase from Nam Tai Electronics, Inc., a corporation organized under the laws of the British Virgin Islands (the "Company"), upon the terms and conditions set forth herein, at any time or from time to time, during the period commencing on October 5, 1998 and expiring at 5:00 p.m. on October 4, 2001 (the "Exercise Period"), 300,000 shares of the Company's common stock, $0.01 par value per share ("the Common Stock"), at a price (the "Exercise Price") per share of Common Stock equal to $10.25. As used herein, the term "this Warrant" shall mean and include this Warrant and any Warrant or Warrants hereafter issued as a consequence of the exercise or transfer of this Warrant in whole or in part. As used herein, the term "Holder" shall include any transferee to which this Warrant has been transferred in accordance with the terms hereof. The number of shares of Common Stock issuable upon exercise of the Warrants (the "Warrant Shares") and the Exercise Price may be adjusted from time to time as hereinafter set forth. 1. Subject to the provisions of Section 2, this Warrant may be exercised during the Exercise Period, as to the whole or in any lesser number exceeding 25,000 whole Warrant Shares, by transmission by telecopy of the Election to Exercise, followed within three (3) business days by the surrender of this Warrant (with the Election to Exercise attached hereto duly executed) to the Company at its office at c/o 999 West Hastings Street, Suite 1500, Vancouver, B.C., Canada, V6C 2W2, or at such other place as is designated in writing by the Company, together with a certified or bank cashier's check payable to the order of the Company in an amount equal to the product of the Exercise Price and the number of Warrant Shares for which this Warrant is being exercised (the "Aggregate Exercise Price"). 2. Upon each exercise of the Holder's rights to purchase Warrant Shares, the Holder shall be deemed to be the holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the transfer books of the Company shall then be closed or certificates representing such Warrant Shares shall not then have been actually delivered to the Holder. Within five (5) business days after each such exercise of this Warrant and receipt by the Company of this Warrant, the Election to Exercise and the Aggregate Exercise Price, the Company shall issue and deliver to the Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the right of the Holder to purchase the balance of the Warrant Shares (or portions thereof) subject to purchase hereunder. 2 3 3. Any Warrants issued upon the transfer or exercise in part of this Warrant shall be numbered and shall be registered in a warrant register (the "Warrant Register") as they are issued. The Company shall be entitled to treat the registered holder of any Warrant on the Warrant Register as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other person, and shall not be liable for any registration of transfer of Warrants which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with the actual knowledge of the general counsel of the Company that a fiduciary or nominee is committing a breach of trust in requesting such registration of transfer. In all cases of transfer by an attorney, executor, administrator, guardian, or other legal representative, duly authenticated evidence of his or its authority shall be produced. Upon any registration of transfer, the Company shall deliver a new Warrant or Warrants to the person entitled thereto. This Warrant may be exchanged, at the option of the Holder thereof, for another Warrant, or other Warrants of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Warrant Shares (or portions thereof), upon surrender to the Company or its duly authorized agent. Notwithstanding anything contained herein to the contrary, the Company shall have no obligation to cause Warrants to be transferred on its books to any person if, in the opinion of counsel to the Company, such transfer does not comply with the provisions of the Act and the rules and regulations thereunder. 4. The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of providing for the exercise of the rights to purchase all Warrant Shares granted pursuant to the Warrants, such number of shares of Common Stock as shall, from time to time, be sufficient therefor. The Company covenants that all shares of Common Stock issuable upon exercise of this Warrant, upon receipt by the Company of the full Exercise Price therefor, shall be validly issued, fully paid, nonassessable, and free of preemptive rights. 5. The Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the happening of certain events as detailed in Section 5(a) below: (a) In case the Company shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock, in each case, in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the denominator of which shall be the number of shares of Common Stock 3 4 outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action. Such adjustment shall be made successively whenever any event listed above shall occur. (b) Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 5, the number of Warrant Shares issuable upon the exercise at the adjusted Exercise Price of each Warrant shall be adjusted to the nearest number of whole shares of Common Stock by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. (c) For the purpose of this Warrant, the term "Common Stock" shall mean (i) the class of stock designated as Common Stock in the Articles of Incorporation of the Company as amended as of the date hereof, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. (d) In case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), the corporation formed by such consolidation or merger shall execute and deliver to the Holder a supplemental warrant agreement providing that the Holder of this Warrant shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or merger by a holder of the number of shares of Common Stock for which such Warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments which shall be identical to the adjustments provided in this Section 5. The above provision of this subsection shall similarly apply to successive consolidations or mergers. (e) No adjustment in the number of Warrant Shares shall be required if such adjustment is less than one share; provided, however, that any adjustments which by reason of this Section 5(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 5 shall be made to the nearest one-thousandth of a share. (f) In any case in which this Section 5 shall require that an adjustment in the number of Warrant Shares be made effective as of a record date for a specified event, the Company may elect to defer, until the occurrence of such event, issuing to the Holder, if the 4 5 Holder exercised this Warrant after the record date, the Warrant Shares, if any, issuable upon such exercise over and above the Warrant Shares, if any, issuable upon such exercise prior to such adjustment; provided, however, that the Company shall deliver to the Holder a due bill or other appropriate instrument evidencing the Holder's right to receive such additional Warrant Shares upon the occurrence of the event requiring such adjustment. (g) Whenever there shall be an adjustment as provided in this Section 5, the Company shall promptly cause written notice thereof to be sent by certified mail, postage prepaid, to the Holder, at its address as it shall appear in the Warrant Register, which notice shall be accompanied by an officer's certificate setting forth the number of Warrant Shares issuable upon the exercise of this Warrant if such Warrant were exercisable on the date of such notice, and setting forth a brief statement of the facts requiring such adjustment and the computation thereof, which officer's certificate shall be conclusive evidence of the correctness of any such adjustment absent manifest error. 6. In case at any time the Company shall propose (a) to pay any dividend or make any distribution on shares of Common Stock in shares of Common Stock or make any other distribution (other than regularly scheduled cash dividends which are not in a greater amount per share than the most recent such cash dividend) to all holders of Common Stock; or (b) to issue any rights, warrants, or other securities to all holders of Common Stock entitling them to purchase any additional shares of Common Stock or any other rights, warrants, or other securities; or (c) to effect any reclassification or change of outstanding shares of Common Stock, or any consolidation or merger, described in Section 5; or (d) to effect any liquidation, dissolution, or windingup of the Company, then, and in any one or more of such cases, the Company shall give written notice thereof, by facsimile, registered mail, or postage prepaid, to the Holder at the Holder's address as it shall appear in the Warrant Register, mailed at least 15 days prior to (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividend, distribution, rights, warrants, or other securities are to be determined, or (ii) the date on which any such reclassification, change of outstanding shares of Common Stock, consolidation, merger, liquidation, dissolution, or windingup is expected to become effective, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such 5 6 reclassification, change of outstanding shares, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution, or windingup. 7. The issuance of any shares or other securities upon the exercise of this Warrant, and the delivery of certificates or other instruments representing such shares or other securities, shall be made without charge to the Holder for any tax or other charge in respect of such issuance, other than applicable transfer taxes. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 8.1(a) If, at any time during the Exercise Period, the Company proposes to register any of its Common Stock under the Securities Act (otherwise than in connection with (i) the registration of Common Stock issuable pursuant to an employee stock option, stock purchase or similar plan, pursuant to a merger, exchange offer or a transaction of the type specified in Rule 145(a) under the Securities Act or (ii) the registration of (x) rights granted by the Company pro rata to all existing holders of Common Stock or (y) the securities issuable upon exercise of such rights, or (iii) the registration of Common Stock issuable upon the exercise of outstanding publicly-held warrants) ) it will give written notice, at least ten (10) days prior to the filing of each such registration statement, to the Holders of this Warrant or the Warrant Shares of its intention to do so. At the written request of the Holder delivered to the Company within five (5) days after the receipt of the notice from the Company, which request shall state the number of Warrant Shares that the Holder wishes to sell or distribute publicly under the registration statement proposed to be filed by the Company, the Company shall use its commercially reasonable efforts, subject to Section 8.1(b) hereof, to register under the Securities Act such Warrant Shares. (the "Piggyback Registration"). The Company shall not be obligated to so use its commercially reasonable efforts more than two (2) times. (b) If a Piggyback Registration is to be an underwritten offering, the Company shall so advise the Holder as a part of the written notice given pursuant to Section 8.1(a). In such event, the right of the Holder to registration pursuant to Section 8.1(a) shall be conditioned upon the Holder's participation in such underwriting and the inclusion of the Holder's Warrant Shares in the underwriting to the extent provided herein. If the Holder intends to distribute its securities through such underwriting, the Holder shall (together with the Company and the other holders distributing their securities though such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. Notwithstanding any other provision of this Section 8.1, if the lead underwriter or representative of the underwriters advises the Holder in writing 6 7 that marketing factors require a limitation on the number of shares to be underwritten, the number of shares to be included in the underwriting or registration shall be allocated: first, the securities the Company proposes to sell; second, the shares proposed to be sold by the Holder and any other party having piggyback registration rights which, in the opinion of such lead underwriter or representative can be sold, allocated pro rata among the holders of piggyback registration rights on the basis of the total number of shares of Common Stock requested to be included therein by each such holder, and third, the shares to be sold by any other holder of securities which the Company permits to participate in such registration or underwriting up to the number or dollar amount which, in the opinion of the lead underwriter or representative, can be sold. For purposes of the allocation provided in this Section 8.1(b), any officer, director, employee or consultant of the Company who owns any capital stock of the Company as of the date notice is given by the Company in accordance with Section 8.1(a) and who participates in the Piggyback Registration shall be deemed to have piggyback registration rights. 8.2(a) From January 1 through March 31 of each year during the Exercise Period, but not prior to February 28, 1999, the Holders of a majority Warrant and Warrant shares shall have the right, exercisable by written notice to the Company, to have the Company prepare and file with the Securities and Exchange Commission, on one occasion, a registration statement and such other documents, including a prospectus, as may be necessary in the opinion of both counsel for the Company and counsel for the Holder, in order to comply with the provisions of the Act, so as to permit a public offering and sale by the Holder of the Warrant Shares. The Company shall use its commercially reasonable efforts to have such registration statement filed with the Commission within sixty (60) days and declared effective by the Commission within one hundred twenty (120) days after the March 31st closest to the date such notice is received by the Company. (b) Notwithstanding the provisions of Section 8.2(a), if (i) in the good faith judgment of the Board of Directors of the Company, such registration would be seriously detrimental to the Company and the Board of Directors of the Company concludes, as a result, that it is essential to defer the filing of such registration statement at such time, and (ii) the Company shall furnish to the Holder a certificate signed by the principal executive officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company for such registration statement to be filed in the near future and that it is, therefore, essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing for the period during which such disclosure would be seriously detrimental, provided that the Company may not defer the filing for a period of more than ninety (90) days after receipt of the request of the 7 8 Holder, and, provided further, that the Company shall not defer its obligation in this manner more than once in any twelve-month period. 8.3 Holder hereby agrees that if so requested by the Company or any lead underwriter or representative of the underwriters in connection with any registration of the offering of any securities of the Company under the Securities Act , the Holder shall not sell or otherwise transfer any Warrant Shares or other securities of the Company during the 90-day period following the effective date of a registration statement of the Company. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restriction until the end of such 90-day period. 8.4 The Company may require the Holder of Warrant Shares to be sold pursuant to any Registration Statement to furnish to the Company such information regarding the Holder and the distribution of such Warrant Shares as may be required by applicable law or regulation for inclusion in such Registration Statement and the Company may exclude from such registration the Warrant Shares of any Holder that fails to furnish such information within 15 days after receiving such request and refuse to file such registration statement if holders of a majority of the Warrant Shares fail to furnish such information within 15 days after receiving such request. 8.5(a) Upon the registration of the Warrant Shares, the Company shall indemnify and hold harmless the Holder and each underwriter, selling agent or other securities professional, if any, which facilitates the disposition of the Warrant Shares, and each of their respective officers and directors and each person who controls the Holder, underwriter, selling agent or other securities, professional within the meaning of Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act")(each such person being sometimes referred to as an "Indemnified Person") against any losses, claims, damages or liabilities, joint or several, to which such Indemnified Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Registration Statement under which such Warrant Shares are registered under the Securities Act, or any Prospectus contained therein or furnished by the Company to any Indemnified Person, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company hereby agrees to reimburse such Indemnified Person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable to any such Indemnified Person in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or 8 9 omission or alleged omission made in such Registration Statement or Prospectus, or amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by such Indemnified Person expressly for use therein. (b) Holder agrees, as a consequence of, and as a condition to, the inclusion of any of Holder's Warrant Shares in such Registration Statement, and each underwriter, selling agent or other securities professional, if any, which facilitates the disposition of Warrant Shares shall agree (or the Holder shall cause to agree), as a consequence of facilitating such disposition of Warrant Shares to (i) indemnify and hold harmless the Company, its directors, officers who sign any Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities to which the Company or such other persons may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such Registration Statement or Prospectus, or any amendment or supplement, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such holder, underwriter, selling agent or other securities professional expressly for use therein, and (ii) reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. Unless such alleged untrue statement of material fact or alleged omission is proven true the indemnity shall not exceed the gross proceeds in the offering. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under this Section 8.5, notify such indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8.5. In case any such action shall be brought against any indemnified party and it shall notify an indemnifying party of the commencement thereof, such indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may 9 10 be sought hereunder unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act, by or on behalf of any indemnified party. (d) If the indemnification provided for in this Section 8.5 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the indemnifying party and the indemnified party in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such indemnifying party or by such indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 9. Unless registered as contemplated by Section 8 hereof, the Warrant Shares issued upon exercise of the Warrants shall be subject to a stop transfer order and the certificate or certificates evidencing such Warrant Shares shall bear the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT, OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT. SUCH SHARES ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER CONTAINED IN A WARRANT, DATED OCTOBER ___, 1998, A COPY 10 11 OF WHICH ARE ON FILE WITH THE SECRETARY OF THE COMPANY." 10. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction, or mutilation of any Warrant (and upon surrender of any Warrant if mutilated), and upon reimbursement of the Company's reasonable incidental expenses and, if reasonably requested, an indemnity reasonably acceptable to the Company, the Company shall execute and deliver to the Holder thereof a new Warrant of like date, tenor, and denomination. 11. The Holder of any Warrant shall not have, solely on account of such status, any rights of a stockholder of the Company, either at law or in equity, or to any notice of meetings of stockholders or of any other proceedings of the Company, except as provided in this Warrant. 12. This Warrant shall be construed in accordance with the laws of the State of California applicable to contracts made and performed within such State, without regard to principles of conflicts of law. Dated: October 5th, 1998 NAM TAI ELECTRONICS, INC. By: /s/ M. K. Koo ----------------------------- Name: M. K. Koo Title: Senior Executive Officer Agreed and Accepted: NATIONAL SECURITIES CORPORATION By: /s/ Steven A. Rothstein ----------------------------- Name: Steven A. Rothstein Title: Chairman 11 12 FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the attached Warrant.) FOR VALUE RECEIVED, _______________________________________________ hereby sells, assigns, and transfers unto __________________ a Warrant to purchase __________ shares of Common Stock, $____ par value per share, of Nam Tai Electronics, Inc. (the "Company"), together with all right, title, and interest therein, and does hereby irrevocably constitute and appoint___________ attorney to transfer such Warrant on the books of the Company, with full power of substitution. Dated:_________________________ Signature_________________________ Signature Guaranteed: NOTICE The signature on the foregoing Assignment must correspond to the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatsoever. 12 13 To: Nam Tai Electronics, Inc. 999 West Hastings Street Suite 1500 Vancouver, B.C. Canada V6C 2WC ELECTION TO EXERCISE The undersigned hereby exercises his or its rights to purchase _______ Warrant Shares covered by the within Warrant and tenders payment herewith [in the amount of $_________] in accordance with the terms thereof, certifies that he owns this Warrant free and clear of any and all claims, liens and/or encumbrances and requests that certificates for such securities be issued in the name of, and delivered to: (Print Name, Address and Social Security or Tax Identification Number) and, if such number of Warrant Shares shall not be all the Warrant Shares covered by the within Warrant, that a new Warrant for the balance of the Warrant Shares covered by the within Warrant be registered in the name of, and delivered to, the undersigned at the address stated below. Dated:_________________________ Name:_________________________ (Print) Address: _________________________ (Signature) -----END PRIVACY-ENHANCED MESSAGE-----