-----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, De5y0CG+NnSCpYQIKjm1gjUxADuY84GAuCLhz+BvadP5fbgZZ3UB9XT7PrWQyf1V NrbLMi//3gdKEeS3tKTJtQ== 0000950148-98-000691.txt : 19980331 0000950148-98-000691.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950148-98-000691 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE 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: 98578972 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, 1997 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, 1997, there were 11,220,023 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 57 2 TABLE OF CONTENTS FINANCIAL STATEMENTS AND CURRENCY PRESENTATION ................................................... 2 PART I Item 1. Description of Business ............................................................. 3 Item 2. Properties .......................................................................... 20 Item 3. Legal Proceedings ................................................................... 21 Item 4. Control of the Company .............................................................. 22 Item 5. Nature of Trading Market ............................................................ 23 Item 6. Exchange Controls and Other Limitations Affecting Security Holders .................. 24 Item 7. Taxation ............................................................................ 24 Item 8. Selected Financial Data ............................................................. 25 Item 9. Management's Discussion and Analysis of Results of Operations and Financial condition 26 Item 10. Directors and Executive Officers of the Company .................................... 36 Item 11. Compensation of Directors and Officers ............................................. 37 Item 12. Options to Purchase Securities from the Company or its Subsidiaries ................ 37 Item 13. Interest of Management in Certain Transactions ..................................... 37 PART II Item 14. Description of Securities to be Registered ......................................... 38 PART III Item 15. Defaults Upon Senior Securities .................................................... 38 Item 16. Changes in Securities and Changes in Security For the Company's Securities.......... 38 PART IV Items 17 and 18. Financial Statements ....................................................... 38 Item 19. Financial Statements and Exhibits .................................................. 57 SIGNATURES ....................................................................................... 58 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) ................................ 59
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. See "Report of Independent Accountants" included elsewhere herein. The Company publishes its financial statements in United States dollars for the following reasons: (i) the Company is incorporated in the British Virgin Islands where the currency is the United States dollar; (ii) the Company conducts the majority of its business transactions in United States dollars; and (iii) the exchange rate between the Hong Kong dollar and the United States dollar has been fixed at approximately 7.80 Hong Kong dollars to $1.00 since 1983. See Note 1(f) of Notes to Consolidated Financial Statements appearing in Item 18. of this Report. - 2 - 3 PART I ITEM 1. DESCRIPTION OF BUSINESS THE COMPANY Nam Tai Electronics, Inc. (which together with its subsidiaries is hereafter referred to as the "Company" or "Nam Tai") was incorporated as a limited liability International Business Company under the laws of the British Virgin Islands in August 1987. The Company's corporate administrative matters are conducted in the British Virgin Islands through its registered agent, 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 at 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 is an independent provider of high quality manufacturing services to original equipment manufacturers ("OEMs") in the consumer electronics industry. All of the Company's manufacturing operations are based in China. Nam Tai assists OEMs in the design and development of products and furnishes full turnkey manufacturing services to its OEM customers 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 anistropic 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. The Company manufactures a broad line of finished products for its OEM customers, including personal organizers, linguistic products, calculators, integrated circuit ("IC") or smart card readers (referred to as "IC card readers"). It also manufactures electronic components and subassemblies for printed circuit boards ("PCBs"). These products include large scale integrated circuits ("LSI") bonded on PCBs that are used in the manufacture of products such as electronic toys, and subassemblies for liquid crystal display ("LCD") modules that are 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. The Company moved its manufacturing facilities to China in 1980 and finally moved to Shenzhen, China in 1987 to take advantage of lower overhead costs and competitive labor rates and to position itself to achieve low-cost, high volume manufacturing. The location of Nam Tai's factory in Shenzhen is about 30 miles from Hong Kong, providing the Company with close access to Hong Kong's infrastructure of communication and banking. This also facilitates transportation of the Company's products out of China through the port of Hong Kong. The Company 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. 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 - 3 - 4 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'S SUBSIDIARIES The Company is a holding company for Nam Tai Electronic & Electrical Products Limited and its subsidiaries, and Nam Tai Electronics (Canada) Ltd. The chart below illustrates the organizational structure of the Company and its principal operating subsidiaries. Nam Tai Electronics, Inc. (A British Virgin Islands International Business Company) / ------------------------------------------------------------------ / / 100% 100% Nam Tai Nam Tai Electronics Electronic & (Canada) Ltd. Electrical Products Ltd.---------------75% (A Canadian Federal (A Hong Kong / Company) Limited Liability / Company) / --------------------------/--------------- / / / / 100% 100% / Zastron Plastic & Namtai Electronic / Metal Products (Shenzhen) Co. Ltd. / (Shenzhen) Ltd. (A Limited Liability / (A Limited Liability of China Foreign / of China Foreign Operation) / Operation) / / -------------/ / 25% Shenzhen Namtek Co., Ltd. (A Limited Liability of China Foreign Operation)
- 4 - 5 Nam Tai Electronic & Electrical Products Limited Nam Tai Electronic & Electrical Products Limited ("NTE&E") 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 and customer relations are handled from NTEE as well as management operations. Namtai Electronic (Shenzhen) Co. Ltd. Namtai Electronic (Shenzhen) Co. Ltd. ("NTES") was established as Baoan (Nam Tai) Electronic Co. Ltd. in May 1989 as a joint venture company with limited liability pursuant to the relevant laws of China. The equity of NTES was owned 70% by NTE&E and 30% by a Chinese Governmental agency. During 1992, the joint venture was dissolved and the company changed its name to NTES. As part of such termination, the company returned to the Chinese Governmental agency its real property and investment, and NTES became a wholly owned subsidiary of NTE&E. NTES is the principal manufacturing arm of the Company and is engaged in 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. 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 offices in Vancouver, British Columbia, Canada. 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. 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: - 5 - 6 POLITICAL, LEGAL, ECONOMIC AND OTHER UNCERTAINTIES OF OPERATIONS IN CHINA AND HONG KONG Internal Political and Other Risks. The Company's single manufacturing complex is located in China. As a result, the Company's operations and assets are subject to significant political, economic, 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 thereof, confiscatory 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. Economic development may be limited as well by the imposition of austerity measures intended to reduce inflation 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 site 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. 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, even if covered by insurance, 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 Company's 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. - 6 - 7 Inherent Risks of Business in China. Conducting business in China is inherently risky. Corruption, extortion, bribery, pay-offs, theft, and other fraudulent practices are common in China. 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. 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 addition, these countries have experienced a number of bank failures and consolidations. Because virtually all of the Company's products are sold into developed countries not experiencing these declines, the Company does not believe that the declines in Southeast Asia will affect the demand for the Company's products. Moreover, because most of the Company's products are paid for in U.S. dollars, the Company believes that it is less susceptible to the 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. A devaluation in the renminbi could, however, adversely affect the Company's borrowing costs. Moreover, 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. While the Company's two principal competitors 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. The general election in Taiwan in 1996 heightened tensions between them. Although not directly a threat to Nam Tai, peaceful and normal relations between China and its neighbors reduces the potential for events which could have an adverse impact on the Company's business. Operations in Hong Kong. The Company's executive and sales office, and several of its customers and suppliers are located in Hong Kong, 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. -7- 8 The Hong Kong dollar and the United States dollars have been fixed at approximately 7.80 Hong Kong dollars to $1.00 since 1983. The Chinese government has expressed its intention to maintain the stability of the Hong Kong currency after the sovereignty of Hong Kong was transferred to China. There can be no assurance that this will continue and the Company could face increased currency risks if the current exchange rate mechanism is changed. See "Exchange Rate Fluctuations." CUSTOMER CONCENTRATION; DEPENDENCE ON ELECTRONICS INDUSTRY Sales to four major customers, Texas Instruments Incorporated, Sharp Corporation, Nintendo, Inc. (which orders through Sharp Corporation) and Seiko Instruments Inc. aggregated approximately 89.3%, 90.3% and 92.3% of the Company's total net sales during the years ended December 31, 1997, 1996 and 1995. Sales to each of these customers as a percentage of the Company's total net sales during the years ended December 31, 1997, 1996 and 1995 are set forth in Item 1. Description of Business -- Customers and Marketing. 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. Although management believes that any one of its OEM customers could be replaced eventually, the loss of any one of its major customers could have a material adverse effect on the Company's business. Virtually all 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. 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 or 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, possible future acquisitions, 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 affected by seasonality during the third quarter in anticipation of the Christmas buying season and in the first quarter resulting from both the closing of the Company's factory 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. -8- 9 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. RISKS FROM POSSIBLE ACQUISITIONS 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. While the Company has no current agreements or understandings with respect to any acquisitions, the Company may acquire businesses, products or technologies in the future. Future acquisitions by the Company could result in accounting charges, potentially dilutive issuance 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 effect 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, and potential loss of key employees of acquired organizations. Management has no experience in assimilating acquired organizations. There can be no assurance as to the ability of the Company to successfully integrate the products, technologies or personnel of any business that might be acquired in the future, and the failure of the Company to do so could have a material adverse effect 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 Japanese yen 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 23%, 28%, and 33% of Nam Tai's material costs have been in yen during the years ended December 31, 1997, 1996 and 1995. Sales made in yen accounted for approximately 6.3% of sales for the year ended December 31, 1997, 15% of sales for 1996 and 18% of sales for 1995. 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 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. -9- 10 Although only 12.5% of the Company's expenses were in Chinese renminbi in 1997, the 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 1.1% and 38.4%, 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 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. 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 the Company's borrowing costs in Hong Kong or creates other problems adversely affecting the Company's business. From time to time, the Company attempts to hedge its currency exchange risk. The Company's financial results have been affected in the past due to hedging activities and currency fluctuations, resulting in total foreign exchange gains of approximately $500,000 in 1997, $20,000 in 1996 and $52,000 in 1995. During 1997 and 1996, Nam Tai recorded no gain or loss from hedging transactions. In 1995 hedging activities resulted in foreign exchange gains of $52,000. The Company continually reviews its hedging strategy but there can be no assurance that Nam Tai will not suffer losses in the future as a result of currency hedging. As of December 31, 1997 the Company was not maintaining a hedge position in any currency. COMPETITION Competition in the contract electronic manufacturing industry is intense. 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., both of which have moved manufacturing operations that are competitive with those of the Company to China. While an OEM may prefer its approved suppliers, management believes that OEMs tend to order from several suppliers in order to lessen dependence on any one of them. Certain competitors may have substantially greater technical, financial and marketing resources than the Company. DEPENDENCE ON KEY PERSONNEL The Company depends to a large extent on the abilities and continued participation of Mr. M. K. Koo, its Chairman of the Board, and Mr. Tadao Murakami, its Vice-Chairman and Chief Executive Officer who is in charge of the Company's day-to-day manufacturing and marketing operations in China. The loss of the services of Mr. Koo or Mr. Murakami 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 -10- 11 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. 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. RISKS OF YEAR 2000 ISSUES Many existing computer programs, including some programs used by the Company, 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 by, at, or after the year 2000. Based on the Company's investigation to date, management does not anticipate that the Company will incur material operating expenses or be required to incur material costs to be 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, 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. -11- 12 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). 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. 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, general market trends both domestically and internationally, currency movements and other factors. 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. -12- 13 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, 1997, 1996 and 1995.
YEAR ENDED DECEMBER 31, --------------------------- PRODUCT LINE 1997 1996 1995 - -------------------------------------------- ----- ----- ----- Electronic calculators 52% 35% 30% Personal organizers and linguistic products 25 36 47 Subassemblies, components and other products 22 28 22 Silk screening 1 1 1 ----- ----- ----- 100% 100% 100% ===== ===== =====
Electronic Calculators The Company manufactures a wide range of electronic calculators with a variety of features. These include calculators designed for different uses, including mini card, scientific, desk top, hand held, graphical and printer calculators. Personal Organizers and Linguistic Products The Company produces various types of electronic personal organizers, 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. 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 which are incorporated into such products as 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, portable computers and facsimile machines, and employ the same bonding technologies as are used for the LSI bonded PCBs. 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 which are being developed for use by certain major banks in Europe and North America as an alternative to the use of cash. 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 Anistropic Conductive Film in between using TAB processing. -13- 14 Silk Screening Services Through Zastron, the Company provides manufacturing and silk screening services to customers for plastic parts, PVC products and metal parts. This service is also supplied to other firms for incorporation into their finished products. MANUFACTURING Quality Control The Company maintains strict quality control programs for its products, including the use of total quality management ("TQM") systems. All incoming raw materials and components are checked by the Company's quality control personnel. During the production stage, Nam Tai's quality control personnel check all work in process at several points in the production process. Finally, after the assembly stage, the Company conducts random testing of finished products. In addition, the Company provides office space at its 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. In late 1997 the Company received confirmation that for a third consecutive year it has been 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 to support customer needs, cycle times, leadership 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 300 different component parts from more than 50 major suppliers and is not dependent upon any single supplier for any key component. The Company purchases components for its electronic products from suppliers in Japan and elsewhere. Orders for components are based on forecasts that Nam Tai receives from its OEM customers, which reflect anticipated shipments during the production cycle for a particular model. The major component parts purchased by the Company are ICs or "chips", LCDs, solar cells, printer heads and batteries. The Company purchases both stock "off the shelf" chips and custom chips, the latter being the most expensive component parts purchased by Nam Tai. At the present time, the Company purchases most of its chips from Toshiba Corporation, Sharp Corporation and certain of their affiliates, although there are many additional suppliers from which the Company could purchase chips. -14- 15 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. 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. In an effort to assure an adequate supply of competitively priced plastic components, the Company maintains an investment position in a Hong Kong supplier of plastic parts, Deswell Industries, Inc. ("Deswell") (see "Formation of Strategic Alliance"). CUSTOMERS AND MARKETING General 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 1997 1996 1995 --------- --------- --------- North America 49% 34% 30% Japan 23 28 34 Europe 15 12 13 Hong Kong 7 18 17 Other 6 8 6 --------- --------- --------- 100% 100% 100% ========= ========= =========
The Company's Hong Kong based management personnel and sales staff are responsible for marketing products to existing customers as well as potential new customers. Five of the Company's major customers have done business with the Company for six years or more, and management believes Nam Tai has a stable relationship with all of its customers. The Company places great emphasis on providing quality service to its customers and has, as a result, limited the number of companies for which it manufactures in an effort to ensure quality service. -15- 16 Major Customers The Company's OEM customers include the following entities. The OEM customers either market Nam Tai's products under their own brand name or, where no brand name is shown, incorporate the Company's products into their products:
BRAND CUSTOMER CUSTOMER NAME PRODUCT SINCE - -------- ---- ------- ----- 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 Matsushita Battery Industrial Co. Ltd._____ IC card readers 1994 Nintendo, Inc. (through Sharp Corp.) _____ Bonding on PCBs 1994 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
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 four major customers, Texas Instruments Incorporated, Sharp Corporation, Nintendo, Inc. (which orders through Sharp Corporation) and Seiko Instruments Inc., aggregated approximately 89%, 90% and 92% of the Company's total net sales during the years ended December 31, 1997, 1996 and 1995, respectively, as follows:
YEAR ENDED DECEMBER 31 ----------------------------------------------- CUSTOMER 1997 1996 1995 -------------- ------------- ------------- Texas Instruments Incorporated 38.0% 22.3% 13.2% Sharp Corporation 35.3 38.4 47.9 Seiko Instruments Inc. 9.7 13.5 13.2 Nintendo, Inc. (through Sharp Corporation) 6.3 16.1 18.0 -------------- ------------- ------------- 89.3% 90.3% 92.3% ============== ============= =============
-16- 17 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 one of its major customers, particularly one or more of its top four customers, could have a material adverse effect on the Company's business. While each of the companies listed above 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. There can be no assurance, however, that such efforts will prove successful. The Company's sales to all of its OEM customers are based on purchase orders. Except for these purchase orders, the terms of which in a few cases are supplemented by basic agreements dependent upon the receipt of purchase orders, Nam Tai has no written agreements with its OEM customers. Normally, 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 which extends for a number of years and consequently the Company believes its relations with these customers are good. The Company encourages cooperation and communication with its most important customers. In particular, senior management includes a team of Japanese professionals who provide technical experience 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 either U.S. dollars or Japanese yen, and in many cases are covered by standard letters of credit. Production Scheduling Including the development and production periods the typical cycle for a product to be manufactured and sold to an OEM customer is three to four years. 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 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 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. 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 one year, 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 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 -17- 18 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. 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. During the years ended December 31, 1997 and 1995 the Company did not suffer a material loss resulting from the cancellation of an OEM customer confirmed order. 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. Marketing Plans for China The Company has Chinese government approval to sell up to 30% of the products manufactured and 10% of the parts manufactured by the Company in China. The Company does not have any immediate plans to re-enter the China market and make domestic sales, however; the Company continually evaluates economic and other factors in China to determine whether doing so would be favorable to its operating results. Recently, the Company applied to the Chinese Government to cancel this approval. Formation of Strategic Alliance The Company strives to maintain stable sources for quality components it uses in its manufacturing operations. Suppliers of these components have from time to time, in periods of short supply, limited allocation of their production among their customers. The Company believes the formation of strategic alliances with certain of its suppliers assists the Company to satisfy its OEM customers' needs for timely delivery of high-quality products and permits Nam Tai to have greater control over the quality of its suppliers' components. Consistent with this strategy, 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. 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 approximately 2% of its shares reported outstanding at December 31, 1997. The Company realized a gain of approximately $5.5 million on sales of 390,000 shares. The Company plans to continue to maintain a close working relationship with Deswell. TECHNOLOGY DEVELOPMENT Between 1984 and 1994, the Company spent an average of approximately $360,000 per annum on research and development, chiefly to advance manufacturing technology. During the later half of this period Nam Tai concentrated on its OEM business and expenditures fell below the average by the end of the period. At that time the major responsibility of the Company's product design personnel was limited to the production to the satisfaction of and in accordance with the specifications provided by OEM customers. -18- 19 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. Research and development expenses increased significantly to $1,909,000 in 1997 from $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 14% and 40% of the research and development expenses in 1997 and 1996 respectively and these expenses were substantially recovered from fees paid by third parties. COMPETITION Competition in the contract electronic manufacturing industry is intense with numerous other companies in the contract electronic manufacturing industry. For Nam Tai 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, 1997, Nam Tai employed approximately 2,020 persons on a full-time basis, of which 1,984 were working in China, 27 in Hong Kong, and nine in Canada. Of these, approximately 1,756 were engaged in manufacturing, 203 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. -19- 20 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 renegotiated in the third year. The Company moved its principle executive and marketing offices into these new premises in late March 1997. The Company owns a residential flat in Hong Kong which was purchased for total consideration of $1,850,000. This property houses the Vice-Chairman and Chief Executive Officer of the Company and forms part of his overall compensation. See Item 11. Compensation of Directors and Officers. At the beginning of the year, the Company owned approximately ten acres of land in Hong Kong which it planned to sell. This land has been held since 1984 and is 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 or $5,750,000 realizing a gain of $5,548,000. The remaining land which the Company plans to sell continues to be carried on the books of the Company at its cost of approximately $220,000. 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 which was 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. Construction of the approximately 437,000 square feet new facility began in early 1995 and portions were completed in August 1995 to house new factory employees needed to expand production at that time. Nam Tai's Phase I complex expansion was completed on schedule in May 1996. The expanded 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. In 1997, the Company expended approximately $430,000 on factory improvements. 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 which the Company uses to house certain of its factory managers who are married and have families. The Company purchased this building for approximately $1,000,000, paying the final instalment in June 1993. During 1992, the Company purchased the development rights to a further parcel of leasehold land in Baoan County, Shenzhen, China. The purchase price was approximately $343,000. The land area consists of approximately 70,000 square feet of land in a developed area of commercial buildings and residences. The purchase of the leasehold land provides Nam Tai with the right to use the land for fifty years. The Company reviewed the construction of a high rise office building to house its corporate headquarters and subsequently decided to concentrate on its core contract -20- 21 manufacturing business. In January 1997, Nam Tai entered into a Land Development Agreement with Shenzhen Baoheng (Group) Co. Ltd. which resulted in the sale of the property for approximately $320,000 with the final payment being received in January 1998. Canada On November 1, 1995, Nam Tai Canada moved its corporate office to new leased premises in Vancouver, British Columbia. The Company entered into a lease for 2,637 square feet of office space at an annual rental of $26,000. The lease expires in August 1998. In 1995, the Company completed construction of a building in Burnaby, British Columbia, in which it intended to house both manufacturing operations and its Canadian administration and finance office. The two-story building consisted of approximately 7,000 square feet of office space and 8,000 square feet of manufacturing space. Construction was completed in mid 1995 at a cost of approximately $2,400,000, including the cost of land. The prospects for manufacturing were re-evaluated and the property was sold in May 1997 for approximately $1,791,000 resulting in a loss of approximately $558,000. General The Company believes its existing manufacturing and office facilities are adequate for the operation of its business for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company is not party to any legal proceedings other than routine litigation incidental to its 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 that the Company's rights offering was part of a scheme to enrich directors and management of Nam Tai and dilute the interest of minority shareholders. 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. In May 1996, the Court ordered the parties to make discovery by exchanging lists of documents and to-date this exchange has not occurred. The Company continues to believe that Tele-Art's claims are without merit and plans to continue to vigorously defend against them as well as to seek from Tele-Art and its agents compensation for the damage caused by the injunction and the proceedings that were brought to obtain it. 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. A stay on the winding up proceedings, granted on July 29, 1997, was removed on March 10, 1998. A date of May 28, 1998 has been fixed for the hearing of the petition. The judgment debt is not related to other litigation ongoing between the parties in the British Virgin Islands. -21- 22 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, 1998, 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 4,330,988(1) 35.3% Officers and directors as a 5,159,237(2) 41.4% group (six persons)
(1) Includes outstanding shares which are owned by Mr. Koo, 26,667 shares issuable to Mr. Koo upon exercise of options exercisable within 60 days of December 31, 1997 and 926,850 shares issuable to Mr. Koo upon exercise of Warrants exercisable within 60 days of December 31, 1997 and 293,332 Common Shares and 93,332 Warrants registered to Mars Yue Koo, Mr. Koo's son, as to which Mr. Koo disclaims beneficial ownership. (2) Includes shares owned, an aggregate up to 26,667 shares issuable to officers upon exercise of employee options exercisable within 60 days of December 31, 1997, and 1,219,276 shares issuable to officers and directors as a group upon exercise of Warrants exercisable within 60 days of December 31, 1997. -22- 23 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 under the symbol "NTAIF". 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, 1997.
QUARTER ENDED HIGH LOW ---- --- 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 December 31, 1996 10.63 7.25 September 30, 1996 11.50 8.63 June 30, 1996 13.88 10.50 March 31, 1996 13.13 9.25
Of the 11,220,023 Common Shares of the Company outstanding as of December 31, 1997, approximately 7,953,000 are held by approximately 1,100 holders of record in the United States. On December 12, 1996, the Company listed its shares on the Toronto Stock Exchange under the symbol "NMT." Pursuant to the Company's voluntary application to delist its Common Shares from the Toronto Stock Exchange, the Common Shares were delisted effective at the close of business on September 30, 1997. WARRANTS In November 1997, the Company completed a 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. -23- 24 The Company's Warrants are traded on The Nasdaq National Market under the symbol "NTAWF". The following table sets forth the high and low closing sale prices as reported by The Nasdaq National Market for the quarter ended December 31, 1997.
QUARTER ENDED HIGH Low - ------------- ---- ---- December 31, 1997 4.00 2.50
Of the 2,997,129 Warrants of the Company outstanding as of December 31, 1997, approximately 2,684,000 are held by approximately 125 holders of record in the United States. 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 the Nam Tai's securities. British Virgin Islands law and the Company's Memorandum and Articles of Association impose no limitations on the right of nonresident or foreign owners to hold or vote such securities of the Company. ITEM 7. TAXATION 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. -24- 25 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, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Income Statement Data(3) Net sales $132,854 $108,234 $121,240 $ 96,564 $ 70,844 Gross margin 34,724 22,185 23,152 17,223 14,098 Net income 30,839 9,416 11,419 8,099 5,197 Dividends paid 786 243 120 65 -- Per share amounts Basic earnings per share(1) $ 3.70 $ 1.17 $ 1.42 $ 1.17 $ 0.90 Diluted earnings per share(2) $ 3.68 $ 1.16 $ 1.40 $ 1.09 $ 0.87 Dividend paid 0.10 0.03 0.015 0.01 -- Balance Sheet Data(3) Current assets $133,022 $ 46,609 $ 47,011 $ 45,520 $ 31,247 Property, plant and equipment - net 32,442 36,487 27,635 14,624 7,396 Total assets 167,788 88,391 79,281 66,287 39,530 Current liabilities 19,552 21,401 19,108 17,838 10,644 Non-current liabilities -- -- -- -- 609 Shareholders' equity 148,236 66,990 60,173 48,449 28,162
- ----------- (1) For purposes of calculating basic earnings per share, the weighted average number of common shares outstanding for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 were 8,324,320, 8,040,497, 8,018,252, 6,934,098 and 5,717,551 respectively. (2) For purposes of calculating fully diluted earnings per share, the weighted average number of common shares outstanding for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 were 8,391,290, 8,142,131, 8,171,750, 7,459,570, and 5,976,136, respectively. (3) 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. -25- 26 ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This section contains forward-looking statements that involve 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. The Company manufactures a broad line of finished products for its OEM customers, including personal organizers, linguistic products, calculators and IC card readers. In addition, it manufactures electronic components and subassemblies. During each of the years ended December 31, 1997, 1996 and 1995, 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, although Nam Tai is also considering expanding into the production of communication products in the future. In 1997 calculator sales increased as a proportion of total sales. Sales of personal organizers, linguistic products, subassemblies and components and other products declined marginally. Management expects these products, particularly LCD modules and IC card readers, to 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 and therefore reduce the gross profit margin of its existing product lines. In response to these pressures, the Company seeks to upgrade 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 believes there is less competition in more advanced and specialized products due to the complexity involved in manufacturing and the lower number of direct competitors. Since the Company moved its manufacturing operations to China in 1987, Nam Tai has derived substantially all of its operating income from its China operations. The Company plans to continue increasing the scope of its operations and investment in China. Under current British Virgin Islands law, Nam Tai is not subject to tax on its income. Most of the Company's operating profits accrue in China, where its effective tax rate is 10%, and in Hong Kong, where the corporate tax rate on assessable profits is currently 16.5% in 1997. The Company receives tax credits in China related to its reinvestment of profits on China operations, which 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 has used a cost system which is effectively an actual cost system. -26- 27 The first quarter is typically the Company's slowest sales period because the Company's factories are closed for two weeks for the Chinese New Year holidays as is customary in China. The following table sets forth certain 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) ---------------------------------------------------- 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 1995 Summary of operations Net sales $22,443 $30,065 $35,514 $33,218 Gross profit 4,256 5,987 6,967 5,942 Income from operations 1,609 2,880 3,736 2,541 Net income 1,556 3,210 4,637 2,016 Basic earnings per share $ 0.19 $ 0.40 $ 0.58 $ 0.25 Diluted earnings per share $ 0.19 $ 0.40 $ 0.56 $ 0.25
-27- 28 The following table presents selected consolidated financial information stated as a percentage of net sales for the years ended December 31, 1997, 1996 and 1995:
YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 -------- -------- -------- Net sales 100.0% 100.0% 100.0% Cost of sales........................................ 73.9 79.5 80.9 -------- -------- -------- Gross profit......................................... 26.1 20.5 19.1 -------- -------- -------- Costs and expenses: Selling, general and administrative expenses.... 10.4 11.7 9.4 Research and development expenses.............. 1.4 0.9 0.8 -------- -------- -------- 11.8 12.6 10.2 -------- -------- -------- Income from operations............................... 14.3 7.9 8.9 Profit (loss) on disposal of fixed assets.......... 3.3 (0.1) 0 Other income - net................................. 5.8 1.1 0.2 Interest expense................................... 0.0 (0.1) (0.2) -------- -------- -------- Income from consolidated companies before income taxes and minority interests......... 23.4 8.8 8.9 -------- -------- -------- Net income........................................... 23.2% 8.7% 9.4% ======== ======== ========
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 -28- 29 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. 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 of 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. -29- 30 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 30-day period preceding the date the notice is given equals or exceeds $25.50 per share. On September 9, 1996 Nam Tai announced a repurchase program in accordance with SEC Rule 10b-18 which was continued on January 10, 1997 through the facilities of the Toronto Stock Exchange until terminated on May 1, 1997. In total, from September 9, 1996 to May 1, 1997, 274,500 shares were repurchased, 1,000 of which were repurchased in 1997, at an average price of $9.49 per share. On January 13, 1998, the Company announced its intention to repurchase up to 1,000,000 common shares over the next three months from time to time at prevailing market prices in accordance with Rule 10b-18. As of March 13, 1998 Nam Tai purchased 251,698 shares at an average price of $15.75. Year ended December 31, 1996 Compared to Year ended December 31, 1995 Nam Tai's sales declined by 11% to $108,234,000 for the year ended December 31, 1996 compared to $121,240,000 for the year ended December 31, 1995. A reduction in orders from certain OEM customers, particularly Sharp Corporation, caused the decline in sales. Management believes the reduction in orders was the result of forecasts of year-end sales levels by certain of the Company's OEM customers which had caused them to place extensive orders with the Company for production during the third and fourth quarters of 1995. Lower than expected year-end 1995 sales by these OEM customers caused them to curtail orders for production in 1996. The decline in orders from Sharp Corporation during 1996 did not offset a substantial increase in sales to certain other OEM customers, particularly Texas Instruments Incorporated. The Company's gross profit decreased to $22,185,000 for the year ended December 31, 1996 from $23,152,000 for 1995. The principal reason for the decrease in gross profit was the decrease in sales. Also contributing to the decrease in gross profit was an increase in the cost of sales resulting from a net write-off of $415,000 of inventory. During the course of the audit of its financial statements for the year ended December 31, 1996, the Company confirmed that certain components included in its raw material inventory 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 reimbursement of cost. After consulting with its auditors, the Company elected to write-off the cost of such inventory. Despite the reduction in sales and additions to costs of sales, Nam Tai's gross profit margin improved to 20.5% in 1996 from 19.1% in 1995. This was principally because of lower component costs and efficiencies implemented to reduce manufacturing costs. Lower component costs were attributable to the general decline in the cost of certain components as well as the decline in the value of the yen relative to the U.S. dollar. The latter benefitted the Company as it purchases a substantial volume of components from Japanese companies which are paid in yen. Selling, general and administrative expenses increased by 11.0% to $12,702,000 or 11.7% of sales in the year ended December 31, 1996 from $11,441,000 or 9.4% of sales for the year ended December 31, 1995. The increase in absolute dollars was principally the result of costs associated with the addition of management personnel to the Company's operations in China, Hong Kong and Canada, plus certain one-time expenses relating to the opening of Phase I of the Company's the new factory. Research and development expenses increased marginally to $950,000 in 1996 from $945,000 in 1995. Namtek, the Company's software-development subsidiary which began operations in early 1996, accounted for approximately 40% of the research and development expenses in 1996. These expenses were substantially recovered from fees paid by third parties. Loss on disposal of property plant and equipment was $123,000 in the year ended December 31, 1996 as compared to zero for the year ended December 31, 1995. The loss in 1996 principally related to $120,000 of leasehold improvements Nam Tai had made to its former principal executive offices in Hong Kong under a lease which was -30- 31 prematurely terminated as of the end of 1996. See the discussion regarding this lease, its termination and Nam Tai's relocation of its principal executive offices in Hong Kong to new premises under Item 9. Liquidity and Capital Resources below. Other income (net) increased to $1,253,000 for the year ended December 31, 1996 from $225,000 for the year ended December 31, 1995. This income consisted chiefly of interest income of $1,092,000 on the Company's cash balances and $294,000 of income from dividends paid by Deswell to the Company as a shareholder. In 1995, other income was reduced as a result of fourth quarter charges totaling $936,000 in regard to a provision for the Company's compensation for loss of office arrangement and a one-time bonus to workers. Interest expense decreased to $89,000 for the year ended December 31, 1996 from $161,000 for the year ended December 31, 1995 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 $9,574,000 for the year ended December 31, 1996 as compared to $10,830,000 for the year ended December 31, 1995. The decrease of 11.6% was primarily due to decreased 1996 sales. The income tax expense of $158,000 for the year ended December 31, 1996 compares to a recovery of $589,000 for the prior year. The income tax expense in 1996 relates to income taxes on Hong Kong operations and is comparable to 1995 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 of 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 either 1996 or 1995. The refund of 1995 income taxes on China operations was received in 1996 and the refund of 1996 income taxes from such operations is expected in 1998. Net income decreased by 17.5% to $9,416,000 (or 8.7% of sales) for the year ended December 31, 1996 compared to $11,419,000 (or 9.4% of sales) for the year ended December 31, 1995. This resulted in diluted earnings per share for the year ended December 31, 1996 of $1.16 ($1.17 basic) compared to diluted earnings per share of $1.40 ($1.42 basic) for the year ended December 31, 1995. The decrease in net income and earnings per share was in line with the decrease in sales taking into consideration the higher operating margins. The weighted average number of common shares outstanding decreased to 8,142,131 for the year ended December 31, 1996 from 8,171,750 for the year ended December 31, 1995, reflecting the repurchase by the Company of 273,500 shares through its share repurchase program in effect from September 11, 1996 to December 4, 1996. LIQUIDITY AND CAPITAL RESOURCES Current assets increased to $133,022,000 for the year ended December 31, 1997 compared to $46,609,000 for the year ended December 31, 1996. Cash and cash equivalents, consisting of cash and short term term deposits, increased to $102,411,000 for the year ended December 31, 1997 versus $17,741,000 for the year ended December 31, 1996. The principal reasons for the increase in cash and cash equivalents were: (i) proceeds from the 1997 Offerings; (ii) proceeds from the sale of land holdings; (iii) cash received from the proceeds of the sale of a portion of the Company's equity interest in Deswell; (iv) increased interest income; and (v) increased cash generated from operations resulting from increased sales and higher profit margins. Accounts receivable at December 31, 1997 increased by 2.4% from the level at December 31, 1996, as a result of increased sales in 1997. Inventories at December 31, 1997 decreased by 6.4% from levels at December 31, 1996, reflecting an inventory turnover period of 37 days in 1997 versus 45 days for 1996. Current assets remained relatively stationary at $46,609,000 for the year ended December 31, 1996 compared to $47,011,000 for the year ended December 31, 1995. Cash and cash equivalents consisting of cash and short term term deposits, were also relatively stationary at $17,741,000 for the year ended December 31, 1996 versus $17,362,000 for the year ended December 31, 1995. Accounts receivable at December 31, 1996 decreased by 6.3% from the level at December 31, 1995, essentially corresponding to the decrease in sales during 1996. Inventories at December 31, 1996 -31- 32 increased by 0.8% from levels at December 31, 1995, reflecting an inventory turnover period of 45 days in 1996 versus 37 days for 1995. The increase in the inventory turnover was principally the result of Nam Tai's transfer of responsibility for accounts payable on China deliveries from the Hong Kong office to personnel at the Company's China factory complex. 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. The Company realized a gain of approximately $5.5 million on sales of 390,000 shares. The decrease in property, plant and equipment -- net to $32,442,000 as at December 31, 1997 from $36,487,000 as at December 31, 1996 principally reflects the expenditures of $2,648,000 on new equipment, improvements to the factory of approximately $430,000 and depreciation of $4,331,000 during 1997. New equipment purchased in 1997 included three new systems for SMT, 14 sets of ACF equipment, six sets of fine pitch heat seal machines, and 30 sets of heat seal machines. In accordance with an expansion schedule, Nam Tai intends to establish production lines and purchase additional equipment through 1998 as required by growth in its business. The increase in property, plant and equipment - net to $36,487,000 for the year ended December 31, 1996 from $27,635,000 for the year ended December 31, 1995 principally reflects the expenditure of capital on new plant facilities. A total of $9,904,000 was expended finalizing the construction of the new manufacturing facility, resulting in a total expenditure, excluding land and production equipment, of $21,812,000. In addition, $1,100,000 of new production equipment costs were incurred during 1996. At December 31, 1997, 14.7% and 26.7% of the Company's identifiable assets were located in Hong Kong and China, respectively, as compared to 28% and 51%, respectively, at December 31, 1996. In 1996, the Company implemented a new policy of holding surplus funds in Canada. Consequently, cash and cash equivalents consisting of cash and short term term deposits and representing 93.2% of the total cash and cash equivalents of $102,411,000 was held by the Company in Canada at December 31, 1997. At December 31, 1996 54% of the $17,741,000 cash and cash equivalents total was held in Canada. As a result, identifiable assets in Canada represented 58.6% of total assets at December 31, 1997 compared to 21% of total assets at December 31, 1996. In the past, the Company used short-term bank borrowing to assist in meeting its working capital requirements and to provide funds for investment in property, plant and equipment. Short-term bank borrowing totaled $273,000 as at December 31, 1995. During 1997 and 1996, the Company's capital requirements were financed from internally generated funds and short-term borrowing were reduced to nil at December 31, 1997 and 1996 respectively. The Company had working capital of $113,470,000, and $25,208,000 as of December 31, 1997 and 1996 respectively. At December 31, 1997, Nam Tai had in place general banking facilities with four financial institutions aggregating $43,200,000. Such facilities, which are subject to annual review, permit the Company to obtain overdrafts, lines of credit for forward exchange contracts, letters of credit, import facilities, trust receipt financing, shipping guarantees and working capital, as well as fixed loans. As at December 31, 1997, the Company had utilized approximately $3,318,000 under such general credit facilities and had available unused credit facilities of $39,882,000. Interest on notes payable averaged 6.6% per annum during the year ended December 31, 1997. During the year ended December 31, 1997, the Company paid a total of $39,000 in interest on indebtedness. Accounts payable increased by 8.4% to $17,551,000 for the year ended December 31, 1997 from $16,184,000 for the year ended December 31, 1996, principally as a result of increases in purchases to support the growth in sales. The Company had no long term debt during either 1997 or 1996. -32- 33 Cash flow from operations for 1997 included net income of $30,839,000 and depreciation of $4,331,000. The net cash decrease due to changes in working capital (excluding cash and bank borrowings) was $3,629,000. During 1997, the Company's net investment activities provided $12,523,000. This principally includes $3,602,000 invested in equipment and plant upgrading, proceeds of $7,541,000 from the sale land in Hong Kong and the Burnaby factory, and proceeds from the sale of Deswell shares of $8,717,000. Net cash provided by financing activities was approximately $50,442,000 in 1997. Financing activities during 1997 included the issuances of Common Shares upon exercise of stock options, share repurchases in 1997, payment of dividends, and the issuance of 2,997,129 shares and warrants in the 1997 Offerings which was completed at the end of November 1997. 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. 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. 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, $120,000 (0.015 per share) in 1995, $243,000 ($0.03 per share) in 1996 and $786,000 ($0.10 per share) in 1997. On March 23, 1998 the Company announced that it was increasing the annual dividend to $0.28 per share to be paid on a quarterly basis commencing with the first quarter 1998 dividend of $0.07 per share. It is the current policy of Nam Tai to determine the actual annual amount of future dividends based upon the Company's growth during the preceding year. 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 are estimated at 0.8% and 5.7% respectively. The Company believes inflation has not had a material effect on its past business. The Company has generally been able to increase the price of its products in order to keep pace with inflation. The Company believes increases in labor costs, which represent the most significant component of the Company's production costs (other than material costs), will not materially affect its business because of the Company's utilization of less expensive labor through its operations in China. Labor and overhead expenses related to Nam Tai's Chinese factory amounted to 10.9% of the Company's total expenses before operating income during the year ended December 31, 1997 and 8.7% during the year ended December 31, 1996, the increase principally resulting from the expansion of the facility. 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 United States dollar has been fixed by the Hong Kong government since 1983 at approximately HK$7.80 to $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 -33- 34 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 the Company's borrowing costs in Hong Kong or creates other problems adversely affecting the Company's business. Canadian operations are relatively small with the percentage of expense in Canadian dollars representing 1.4% of the total expenses for the year ended December 31, 1997. Management believes the Company's most significant foreign exchange risk results from material purchases made in Japanese yen. Approximately 23%, 28% and 33% of Nam Tai's material costs have been in Japanese yen during the years ended December 31, 1997, 1996 and 1995, respectively. Sales made in yen account for approximately 6.3% of sales for the year ended December 31, 1997, 15% of sales for 1996 and 18% of sales for 1995. 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. The Company also 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 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 which 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 United States dollar. The Company believes because its Chinese operations presently are confined to manufacturing products for export, any devaluation of the renminbi would benefit Nam Tai by reducing its costs in China provided that action or other economic pressures do not lead to fundamental changes in the present economic climate in China. Foreign exchange transactions involving the renminbi take place through the Bank of China or other institutions authorized to buy and sell foreign exchange or at an approved foreign exchange adjustment center (known as a "swap center"). In the past, when exchanging Hong Kong dollars for 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. On April 1, 1996, new regulations on foreign exchange were implemented by the government of China. Trade-related foreign exchange receipts and disbursements are generally not subject to restriction in accordance with the provisions on settling, selling or buying foreign exchange. 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. Beginning on November 30, 1996, the Chinese renmimbi has become fully convertible under the current accounts. There are now no restrictions on trade-related foreign exchange receipts and disbursements in China. 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 to buy or sell foreign currency(ies) against the U.S. dollar through one of its banks. A buy contract allows Nam Tai to buy a targeted currency at a fixed price for up to one year, but which the Company will normally books forward six months. Conversely, a sale contract allows the Company to sell the currency at a fixed price during the contract -34- 35 period. The type of contract and currency the Company enters into depends on whether management believes the currency will rise or fall against the dollar in the succeeding period. Nam Tai will enter into buy forward contracts if it appears the currency will rise, and sell forward contracts if it appears the currency will fall against the dollar. If there is a fluctuation in the two currencies a gain or loss occurs between the buy forward exchange rate and the sell forward exchange rate. The Company enters into foreign currency contracts in order to manage foreign exchange exposures. However, since the foreign currency contracts are not intended to hedge identifiable foreign currency commitments, as required by generally accepted accounting principles, the contracts are marked to the market with any realized and unrealized gains or losses recorded as other income (loss) - net. As at December 31, 1997 and December 31, 1996, the Company had no open forward contracts while at December 31, 1995 there were open forward contracts amounting to $60,000. During 1997 and 1996, Nam Tai recorded no gain or loss from hedging transactions. During 1995 the Company realized a gain of $52,000 from hedging activities. These exchange gains were caused by the difference between the buy forward rate and sell forward rate for exchange contracts between the foreign currencies entered into by the Company. The Company is continuing to review its hedging strategy and there can be no assurance that Nam Tai will not suffer losses in the future as a result of currency hedging. YEAR 2000 ISSUE Many existing computer programs, including some programs used by the Company, 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 by, at, or after the year 2000. Based on the Company's investigation to date, management does not anticipate that the Company will incur material operating expenses or be required to incur material costs to be 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, 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. 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. -35- 36 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 - ---- --------------------- M. K. Koo Chairman of the Board, Chief Financial Officer and Director Tadao Murakami Chief Executive Officer, Vice-Chairman and Director Hidekazu Amishima General Manager of NTES Y.C. Chang Vice General Manager of NTES Charles Chu Director Stephen Seung Director
M. K. KOO. Mr. Koo has served as Chairman of the Board and a Director of Nam Tai and its predecessor companies since inception. Mr. Koo assumed the role as Chief Financial Officer of the Company from April 1997 until January 1998 and again in February 1998 and to date continues to serve in that position. The Company is in the process of seeking to recruit a new Chief Financial Officer. Mr. Koo also serves on the Company's audit committee. Mr. Koo received his Bachelor of Laws degree from National Taiwan University in 1970. TADAO MURAKAMI. Mr. Murakami has served the Company in various executive capacities since 1984. He became Secretary and a Director of the Company in December 1989. From June 1989, he has been employed as the President of the Company's Hong Kong subsidiary. In July 1994, Mr. Murakami succeeded Mr. Koo as President and in June 1995 became the Company's Chief Executive Officer. Mr. Murakami assumed the position of Vice-Chairman in January 1996 and is in charge of the manufacturing and marketing operations of the Company. Mr. Murakami graduated from Japan Electronic Technology College in 1964. 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. 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 NTES 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. CHARLES CHU. Mr. Chu originally served as Secretary and a Director of the Company from August 1987 to September 1989. He was reappointed a Director in December 1992. Since July 1988, Mr. Chu has been engaged in the private practice of law in Hong Kong. Mr. Chu serves on Nam Tai's audit committee. Mr. Chu received his Bachelor of Laws degree and Post-Graduate Certificate of Laws from the University of Hong Kong in 1980 and 1981, respectively. STEPHEN SEUNG. Mr. Seung was appointed a Director of Nam Tai in 1995. Mr. Seung is an attorney and Certified Accountant and has been engaged in the private practice of law in New York since 1981. Mr. Seung received a B.S. degree in Engineering from the University of Minnesota in 1969, an M.S. degree in Engineering from the University of California at Berkeley in 1971, an MBA degree from New York University in 1973 and a J.D. degree from -36- 37 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, 1997 to all directors and officers as a group for services in all capacities was approximately $1,697,000. The Company also provides additional compensation in the form of housing for its Chief Executive Officer in Hong Kong. In August 1990, the Company fixed compensation for loss of office at $500,000 for Mr. M. K. Koo and $300,000 for Mr. Tadao Murakami. The Company also fixed the age of retirement for directors at age 65 years. At December 31, 1995, the Company had accrued the entire $800,000. In March 1996, Mr. Koo agreed to release the Company from its obligation to pay compensation for loss of office in exchange for the Company's agreement to reduce the final purchase price of the property purchased by Mr. Koo from the Company by $450,000. This agreement was subsequently reversed in July 1997 when Mr. Koo agreed to pay the full purchase price without applying the $450,000 discount. The amount owing in respect of the purchase of the property was fully paid by Mr. Koo in August 1997. See Item 13. Interest of Management in Certain Transactions. 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, 1998, the Company had outstanding options to purchase an aggregate of 53,333 Common Shares. These options were granted under the Company's 1993 stock option plan on January 12, 1996 and vest, in equal annual installments on January 12, 1998 and January 12, 1999 and are exercisable at $10.50 per share (which was the fair market value on the date of grant) and expire on January 11, 2001. At March 1, 1998, the Company had outstanding warrants to purchase an aggregate of 3,127,129 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 and 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. ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS In January 1995, Nam Tai entered into an arrangement with Mr. M. K. Koo, Chairman of the Company, requiring him to purchase a residential property in West Vancouver, British Columbia, Canada no later than December 31, 1995 at the higher of book value or market value. At December 29, 1995, Mr. Koo purchased the property for book value in the amount of $2,620,445 delivering to the Company a promissory note due on December 31, 1997. In March 1996, Mr. Koo agreed to release the Company from its obligation to pay $500,000 compensation for loss of office in exchange for the Company's agreement to reduce the final purchase price of the property purchased by Mr. Koo from the Company by $450,000. This agreement was subsequently reversed in July 1997 when Mr. Koo agreed to pay the full purchase price without the $450,000 discount. In August 1997, Mr. Koo paid the promissory note in full to the Company. It is the Company's policy that all future transactions between the Company and any interested director or executive officer be approved by a majority of the disinterested directors and on terms no more favorable than would be available from an independent third party. -37- 38 PART II ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED Not Applicable. PART III ITEM 15. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR THE COMPANY'S SECURITIES Not Applicable. PART IV ITEM 17. FINANCIAL STATEMENTS Not Applicable. ITEM 18. FINANCIAL STATEMENTS The following financial statements are filed as part of this Report:
Page No. -------- Report of Independent Accountants .......................................... 39 Consolidated Statements of Income for the years ended December 31, 1997, December 31, 1996 and December 31, 1995 .................................. 40 Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996 .. 41 Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1997, December 31, 1996 and December 31, 1995 ......... 42 Consolidated Statements of Cash Flows for the years ended December 31, 1997, December 31, 1996 and December 31, 1995 .................................. 43 Notes to Consolidated Financial Statements ................................. 44
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. -38- 39 PRICE WATERHOUSE [LOGO] REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF NAM TAI ELECTRONICS, INC. We have audited the accompanying consolidated balance sheets of Nam Tai Electronics, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the related statements of income, shareholders' equity, and cash flows for each of the three years ended December 31, 1997, 1996 and 1995. 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 1996, and the results of their operations and their cash flows for each of the three years ended December 31, 1997, 1996 and 1995 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1(e) to the consolidated financial statements, the Company changed its method of accounting for earnings per share in 1997. /s/PRICE WATERHOUSE - ---------------------- PRICE WATERHOUSE Certified Public Accountants HONG KONG March 11, 1998 -39- 40 NAM TAI ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands of U.S. Dollars except share data)
Year ended December 31, ------------------------------------------- 1997 1996 1995 --------- --------- --------- Net sales $ 132,854 $ 108,234 $ 121,240 Cost of sales 98,130 86,049 98,088 --------- --------- --------- Gross profit 34,724 22,185 23,152 --------- --------- --------- Costs and expenses Selling, general and administrative expenses 13,799 12,702 11,441 Research and development expenses 1,909 950 945 --------- --------- --------- 15,708 13,652 12,386 ========= ========= ========= Income from operations 19,016 8,533 10,766 Net gain/(loss) on disposal of property, plant and equipment 4,350 (123) 0 Other income - net (Note 5) 7,791 1,253 225 Interest expense (39) (89) (161) --------- --------- --------- Income from consolidated companies before income taxes 31,118 9,574 10,830 Income tax (expense) benefit (Note 8) (279) (158) 589 --------- --------- --------- Net income $ 30,839 $ 9,416 $ 11,419 ========= ========= ========= Basic earnings per share $ 3.70 $ 1.17 $ 1.42 ========= ========= ========= Diluted earnings per share $ 3.68 $ 1.16 $ 1.40 ========= ========= =========
See accompanying notes to consolidated financial statements. -40- 41 NAM TAI ELECTRONICS, INC. CONSOLIDATED BALANCE SHEETS (In thousands of U.S. Dollars)
As at December 31, -------------------------- 1997 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents (Note 12) $ 102,411 $ 17,741 Accounts receivable, net 16,985 16,589 Inventories (Note 3) 9,838 10,511 Prepaid expenses and deposits 3,788 1,768 --------- --------- Total current assets 133,022 46,609 --------- --------- Long term investments (Note 4) 833 4,050 --------- --------- Property, plant and equipment, at cost 44,295 46,751 Less: Accumulated depreciation and amortization (11,853) (10,264) --------- --------- 32,442 36,487 --------- --------- Other assets 1,491 1,245 --------- --------- Total assets $ 167,788 $ 88,391 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 1,814 $ 5,186 Accounts payable and accrued expenses 17,551 16,184 Income taxes payable 187 31 --------- --------- Total current liabilities 19,552 21,401 --------- --------- Shareholders' equity: Common shares (Note 13) 112 78 Additional paid-in capital 80,044 28,572 Stock option grants (Note 13(b)) 0 305 Retained earnings 68,050 38,007 Foreign currency translation adjustment 30 28 --------- --------- Total shareholders' equity 148,236 66,990 ========= ========= Total liabilities and shareholders' equity $ 167,788 $ 88,391 ========= =========
Commitments and contingencies (Note 11) See accompanying notes to consolidated financial statements. -41- 42 NAM TAI ELECTRONICS, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands of U.S. Dollars except shares outstanding)
Common Shares Foreign Total ------------------------- Additional Stock Currency Share- Shares Paid-in Option Retained Translation holders' Outstanding Amount Capital Grants Earnings Adjustment Equity ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1994 7,993,027 $ 80 $ 27,645 $ 631 $ 20,118 $ (25) $ 48,449 Shares issued on exercise of options 70,150 -- 537 (161) -- -- 376 Options cancelled -- -- -- (3) -- -- (3) Net income -- -- -- -- 11,419 -- 11,419 Dividends -- -- -- -- (120) -- (120) Foreign currency translation adjustments -- -- -- -- -- 52 52 ----------- ----------- ----------- ----------- ----------- ------------ ----------- Balance at December 31, 1995 8,063,177 $ 80 $ 28,182 $ 467 $ 31,417 $ 27 $ 60,173 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) Net income -- -- -- -- 9,416 -- 9,416 Dividends -- -- -- -- (243) -- (243) Foreign currency translation adjustments -- -- -- -- -- 1 1 ----------- ----------- ----------- ----------- ----------- ------------ ----------- 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 Net income -- -- -- -- 30,839 -- 30,839 Dividends -- -- -- -- (786) -- (786) Foreign currency translation adjustments -- -- -- -- -- 2 2 ----------- ----------- ----------- ---------- ----------- ------------ ----------- Balance at December 31, 1997 11,220,023 $ 112 $ 80,044 $ 0 $ 68,050 $ 30 $ 148,236 =========== =========== =========== =========== =========== ============ ===========
See accompanying notes to consolidated financial statements. -42- 43 NAM TAI ELECTRONICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of U.S. Dollars)
Year ended December 31, ------------------------------------------- 1997 1996 1995 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 30,839 $ 9,416 $ 11,419 --------- --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,331 2,675 2,560 (Gain)/loss on disposal of property, plant and equipment (4,350) 123 -- (Gain)/loss on disposal of long term investment (5,488) -- -- Changes in current assets and liabilities: (Increase) decrease in accounts receivable (396) 1,110 (5,955) Decrease (Increase) in inventories 673 (86) (1,338) (Increase) in prepayments and deposits (2,020) (243) (517) (Decrease) in notes payable (3,372) (134) (797) Increase in accounts payable and accrued expenses 1,330 2,776 2,876 Increase (decrease) in income taxes payable 156 (76) (519) --------- --------- --------- Total adjustments (9,136) 6,145 (3,690) --------- --------- --------- Net cash provided by operating activities 21,703 15,561 7,729 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from disposal of property, plant and equipment 7,666 -- 12 Proceeds from disposal of long term investment 8,717 -- -- Additions to property, plant and equipment (3,602) (11,650) (13,696) Additions to other assets (246) (541) (379) Purchase of long term investment (12) (119) -- --------- --------- --------- Net cash provided by (used in) investing activities 12,523 (12,310) (14,063) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Share buy-back program (10) (2,583) -- (Decrease) in short-term bank loans and overdraft -- (273) (290) Additional shares issued, net 3,501 226 373 Proceeds from shares issued on rights offering, net 47,700 -- -- Dividends paid (749) (243) (120) --------- --------- --------- Net cash provided by (used in) financing activities 50,442 (2,873) (37) --------- --------- --------- Foreign currency translation adjustments 2 1 52 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 84,670 379 (6,319) Cash and cash equivalents at beginning of period 17,741 17,362 23,681 --------- --------- --------- Cash and cash equivalents at end of period $ 102,411 $ 17,741 $ 17,362 ========= ========= ========= SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Interest paid $ 39 $ 89 $ 186 ========= ========= ========= Income taxes paid $ 123 $ 234 $ 47 ========= ========= =========
See accompanying notes to consolidated financial statements. -43- 44 NAM TAI ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In U.S. Dollars) 1 Summary of Significant Accounting Policies a Basis of presentation The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. b Principles of consolidation The consolidated financial statements include the financial statements of Nam Tai Electronics, Inc. ("the Company") and all its subsidiaries. Intercompany accounts and transactions have been eliminated on consolidation. Minority interest is recognized in respect of earnings of less than wholly-owned subsidiaries. The details of the Company's subsidiaries are described in Note 9. c Inventories Inventories are stated at the lower of cost and market value. Cost is determined on the first-in, first-out basis. d 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, $12,650 and $12,650 for the years ended December 31, 1997, 1996 and 1995 respectively. The cost of major improvements and betterments is capitalized whereas the cost of maintenance and repairs is expensed in the year incurred. All land in Hong Kong is owned by the government which leases the land at public auction to nongovernmental entities. With the exception of those leases which expire after June 30, 1997 and before June 30, 2047 with no right of renewal, the Sino-British Joint Declaration extends the terms of all currently existing land leases for another 50 years beyond June 30, 1997. Thus, all of the Company's land leaseholds in Hong Kong are considered to be purchased long-term assets. The cost of such land leaseholds is amortized on the straight-line basis over the respective terms of the leases. All land in the PRC is owned by the government. The government in the PRC, according to PRC law, may sell the right to use the land for a specified period of time. Thus all of the Company's land purchases in the PRC are considered to be land leaseholds and are amortized on the straight line basis over the respective term of the right to use the land. Depreciation and amortization rates computed using the straight-line method are as follows:
Classification Rate -------------- ---- Long-term leasehold buildings ........................................... 2%-4.5% Freehold buildings ................................................... 3.3%-4% Furniture and fixtures................................................... 18%-25% Machinery and equipment.................................................. 9%-25% Molds and tools ................................................... 18%-25% Motor vehicles ................................................... 18%-25% Leasehold improvements................................................... 18%-33%
-44- 45 1 Summary of Significant Accounting Policies (cont'd) d Property, plant and equipment (cont'd) 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 1997 and 1996 depreciation expenses were lower by $835,000 and $860,000 respectively, than they would have been had an estimated life of four years been used. e Per share amounts In 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS 128 requires that entities present basic and diluted per share amounts for income from continuing operations and net income on the face of the statement of income, regardless of the magnitude of their difference. 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. f Foreign currency translations The financial statements have been stated in United States dollars, the official currency used in the British Virgin Islands (the Company's place of incorporation). Although the operating facilities are located in Hong Kong and the PRC, the United States dollar is the currency of the primary economic environment in which the Company's consolidated operations are conducted. The exchange rate between the Hong Kong dollar and the United States dollar has been pegged (HK$7.80 to US$1.00) since October 1983. All transactions in currencies other than functional currencies during the year are translated at the exchange rates existing on the respective transaction dates. Related accounts payable or receivable existing at the balance sheet date denominated in currencies other than functional currencies are translated at the exchange rates existing on that date. Exchange differences arising are dealt with in the statement of income. The financial statements of all subsidiaries with functional currencies other than the United States dollar are translated in accordance with Statement of Financial Accounting Standards 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 incorporated 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 abovenamed PRC companies, all exchange differences arising from translation of subsidiaries' financial statements are dealt with as a separate component of equity. -45- 46 1 Summary of Significant Accounting Policies (cont'd) f Foreign currency translations (cont'd) 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 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. g Income taxes The Company provides for all taxes based on income whether due at year end or estimated to become due in future periods but based on profits earned to date. However, under the current tax legislation in the People's Republic of China ("PRC"), the Company has reasonable grounds to believe that income taxes paid in respect of any year would be refunded after the profits earned in that year are reinvested in the business 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 refund is expected. 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. h Staff retirement plan costs The Company's contributions to the staff retirement plan (Note 6) are charged to the statement of income as incurred. i 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 years ended December 31, 1997 and 1996, no further provision was made. j Cash and cash equivalents Cash equivalents include certificates of deposit having a maturity date of three months or less upon acquisition. k 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. (Note 2). l Long term investments Long term investments are stated at the lower of cost and market value. -46- 47 1 Summary of Significant Accounting Policies (cont'd) m 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 $1,909,168, $949,941 and $945,333 for the years ended December 31, 1997, 1996 and 1995 respectively. n 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 Accounting Principles Board ("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 13 (b). 2 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 concentration of credit risk. The trade receivable balances largely represent amounts due from the Company's principal customers who are generally international organizations with high credit ratings. 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, 1997 are reported in current assets or current liabilities in the consolidated balance sheet at carrying amounts which approximate their fair value. From time to time, the Company hedges its currency exchange risk, which primarily arises from materials purchased in currencies other than the United States dollar, through the purchase and sale of forward currency contracts. Such contracts typically allow the Company to buy or sell currency at a fixed price for up to one year, but the Company normally books forward six months. At December 31, 1997 and at December 31, 1996, there were no open forward currency contracts. 3 Inventories Inventories consist of (in thousands):
As at December 31, ----------------------------- 1997 1996 ------- ------- Finished goods ..................... $ 1,241 $ 576 Work-in-progress ................... 1,399 2,548 Raw materials ...................... 7,198 7,387 ------- ------- $ 9,838 $10,511 ======= =======
4 Long Term Investments In December 1994, the Company purchased 14.04% or 477,370 of the outstanding common shares of Deswell Investment Holdings Limited ("Deswell"), a supplier of plastic parts to the Company, for a total consideration of $3,931,284. In 1995, Deswell changed its name to Deswell Industries, Inc. and completed its initial public offering which reduced the Company's ownership to approximately 10.5% at December 31, 1995. 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 Industries, Inc. 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 $5,487,675. -47- 48 5 Other Income - Net Other income - net consists of (in thousands):
As at December 31, -------------------------------------- 1997 1996 1995 -------- ------- ------- Foreign exchange gains................................... $ 500 $ 20 $ 52 Interest income.......................................... 1,847 1,092 1,548 Bank charges............................................. (343) (406) (490) Gain on disposal of investments.......................... 5,488 - - Offering costs written off............................... - - (334) Full provision for Deferred Compensation Arrangement (Note 7).................................... - - (560) Special bonus............................................ - - (376) Donations................................................ (351) Miscellaneous income .................................... 650 547 385 -------- ------- ------- $ 7,791 $ 1,253 $ 225 ======== ======= =======
6 Staff Retirement Plan The Company maintains staff retirement plans (defined contribution pension plans) which cover certain of its employees. The cost of the Company's contributions amounted to $55,050, $92,399 and $80,545 for the years ended December 31, 1997, 1996 and 1995 respectively. 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 $500,000 for Mr. M. K. Koo, the Chairman of the Company and $300,000 for Mr. T. Murakami, the Vice Chairman and Chief Executive Officer of the Company. A provision of $40,000 was made in each of the years ended December 31, 1995 and 1994. At December 31, 1995, the balance of the deferred compensation arrangement, which amounted to $560,000, was provided for. For the year ended December 31, 1996, pursuant to an agreement between Mr. Koo and the Company, Mr. Koo elected to apply an amount of $450,000 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 $500,000 for the compensation of loss of office.(Note 10). 8 Income Taxes 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 16.5% (1996 and 1995: 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 16.5% (1996 and 1995: 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 ("FIE's") in the PRC, such as the Company's subsidiary companies 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%. -48- 49 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 ten years in the PRC, a two year tax holiday from the first profit making year is available, following which in the third through fifth years there is a 50% reduction to 7.5%. In any event, for FIE's such as NTES, 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 years in which a tax holiday is available, there is an overall minimum tax rate of 10%. In 1990 and 1991, NTES qualified for a tax holiday; tax was payable at the rate of 7.5% on the assessable profits of NTES in 1992, 1993 and 1994, and 10% in 1995, 1996 and 1997. In 1992 and 1993, Zastron qualified for a tax holiday; tax was payable at the rate of 7.5% on the assessable profits of Zastron in 1994, 1995 and 1996 and 15% in 1997. In 1996 and 1997, Namtek qualified for a tax holiday. 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. The Company has gained reasonable assurance through previous experience that when profits are reinvested, PRC taxes paid are refunded in full. 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 refund of its 1994 and 1995 taxes as a result of reinvesting its profits in those years. The tax refunds received or receivable during the three years ended December 31, 1995, 1996 and 1997 were as follows (in thousands):
Taxation Date Company Year Paid Refunded Received ------- ---- ---- -------- -------- NTES 1994 $ 714 $ 714 Aug 1995 1995 $ 919 $ 919 Dec 1996 1996 $ 835 - Awaiting refund 1997 $ 1,725 - Application for reinvestment of profits in progress Zastron 1994 $ 68 $ 68 Aug 1995 1995 $ 31 $ 31 Aug 1997 1996 $ - - 1997 $ 2 -
The current and deferred components of the income tax (expense) benefit appearing in the statements of income are as follows (in thousands):
Year ended December 31, --------------------------- 1997 1996 1995 ----- ----- ----- Current tax............................................... $(279) $(158) $589 Deferred tax.............................................. - - - ----- ----- ---- $(279) $(158) $589 ===== ===== ====
A reconciliation of the income tax (expense) benefit to the amount computed by applying the current tax rate to the income from continuing operations before taxes in the consolidated statements of income is as follows (in thousands except tax rate):
Year ended December 31, ---------------------------------- 1997 1996 1995 -------- ------- ------- Profit before tax........................................... $ 31,118 $ 9,574 $10,830 PRC minimum tax rate........................................ 10.0% 10.0% 10.0% Income tax expense at PRC minimum tax rate on income from consolidated companies before income taxes ...................................... $ (3,112) $ (957) $(1,083)
-49- 50
Year ended December 31, ---------------------------------- 1997 1996 1995 -------- ------- ------- Effect of difference between Hong Kong and PRC tax rates applied to Hong Kong income................................................. (375) (180) (265) Effect of Canadian net (losses) profits for which no income tax (benefit) expense is required or (available) payable..................................... 811 (384) (323) Effect of PRC tax concessions, giving rise to no PRC tax liability....................................... 1,712 1,034 974 Reversal of subsidiary's tax provision...................... 0 0 314 Income tax refund........................................... 0 0 391 Tax (expense)benefit arising from items which are not assessable for tax purposes: Gain on disposal of lands in Hong Kong..................... 899 0 0 Other....................................................... (214) 329 581 -------- ------- ------- $ (279) $ (158) $ 589 ======== ======= =======
No income tax arose in the United States of America in any of the periods presented. In prior years, the purchase cost of patents and trademarks and certain expenses incurred by a subsidiary, Nam Tai Supplies Ltd., were claimed as tax deductible expenses. The Hong Kong Inland Revenue Department ("IRD") has taken issue on the deductibility of these expenses and issued revised assessments to recover taxes of $995,000. In January 1994, the IRD petitioned the Hong Kong court to wind up the subsidiary for non-payment of assessed taxes. A winding up order was made on March 9, 1994, and the Official Receiver was appointed as liquidator. In 1995, the tax provision of $314,000 for this subsidiary was reversed as the subsidiary is in the process of liquidation pursuant to the winding up order and is insolvent. 9 Investment in Subsidiaries
Percentage of Ownership ------------------ Consolidated Country of Principal As at December 31, Subsidiaries Incorporation Activity 1997 1996 ------------ ------------- --------- ---- ---- 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%
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. -50- 51 10 Related Party Transactions In June 1995, the Company completed the construction of a residential property pursuant to an agreement dated January 13, 1995. As the property had not been sold to a third party by December 31, 1995, Mr. M.K. Koo, the Chairman of the Company, purchased the property for book value of $2,620,000 being the higher of the market value and book value of the property as required by the contract. At December 31, 1995 this amount was included in accounts receivable. In March 1996, Mr. Koo elected to apply $450,000 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 $2,120,000 was repayable by Mr. Koo on or before December 31, 1997. In July 1997, Mr. Koo reversed his election and retained his rights to receive the sum of $500,000 for compensation for loss of office and agreed to pay the full purchase price of $2,620,000 for the property. This amount was paid by Mr. Koo in full in August 1997. 11 Commitments and Contingencies a Pursuant to a land purchase and development agreement dated August 17, 1992 between NTES and Baoan County City Development Foundation, NTES was required to construct a multi-purpose business building of seven floors or more in Baoan City, Shenzhen, PRC. At December 31, 1997, the Company had invested $452,000 in land purchase cost and in capitalized design fees, net of accumulated amortisation of $36,000 in respect of the land use right. In January 1998, the Company disposed of its interest in the property for $320,000, realizing a loss on disposal of $132,000. The loss on disposal has been accounted for in the statement of income for the year ended December 31, 1997. b Lease commitments At December 31, 1997, there were annual commitments under operating leases which relate to land and buildings as follows (in thousands):
- 1998 ................................................. $ 808 - 1999 ................................................. 523 - 2000 ................................................. 443 - 2001 ................................................. 443 - 2002 and thereafter................................... 2,731 ------- $ 4,948 =======
c The Company has been advised that Tele-Art, Inc., a shareholder of the Company, intends to pursue claims in a court in the British Virgin Islands for damages allegedly suffered as a result of the rights offering completed in 1993. Management believes that the claim is without merit and will vigorously defend it and believes that the outcome of the case will not have a significant effect on the financial statements. 12 Banking Facilities General banking facilities amounted to $43,200,000 at December 31, 1997, (December 31, 1996 - $49,200,000), with interest charged based on the Hong Kong prime rate for Hong Kong dollar transactions and banks' cost of funds rate for transactions in other currencies (effectively 9.50% and 1.625%, respectively at December 31, 1997). The total amount of banking facilities utilized as at December 31, 1997 was $3,318,000 (December 31, 1996: $7,629,000). 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. -51- 52
As at December 31, ---------------------- 1997 1996 ------- ------- Outstanding letters of credit .................... $ 2,429 $ 3,688 Usance bills pending maturity .................... 889 619 Trust receipts and shipping guarantees ........... 0 3,322 ------- ------- Total banking facilities utilized ................ 3,318 7,629 Less: Outstanding letters of credit .................. (2,429) (3,688) Plus: Goods received but trust receipts not issued by the bank .................................. 925 1,245 ------- ------- Notes payable per balance sheets ................. $ 1,814 $ 5,186 ======= =======
The trust receipts normally have terms from 90 to 100 days. The interest rate for the above facilities is normally prime plus 3/4% for all currencies. In the third quarter of 1995, the Company's bankers agreed to release the charges on previously pledged assets and to provide banking facilities with only the corporate guarantee from Nam Tai Electronics, Inc., the parent company, and its undertaking not to pledge any assets to any banks without the prior consent of the Company's bankers. For the years 1996 and 1997, banking facilities bore the corporate guarantee of Nam Tai Electronics, Inc. 13 Common Shares a Authorized shares In July 1994, the Board of Directors increased the number of authorized common shares to 20,000,000. The par value of each common share is $0.01. b 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 expire 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 $690,000 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 is as follows:
Number of Option Price Options Per Share ------- --------- Outstanding at December 31, 1994 ......... 615,250 $5.35 & $11.00 Reissued ................................. 40,750 $11.00 Exercised ................................ (70,150) $5.35 Cancelled ................................ (25,000) $11.00 Reissued ................................. 10,000 $11.375 ------- Outstanding at December 31, 1995 ......... 570,850 $5.35 & $11.00 & $11.375 Exercised ................................ (47,550) $5.35 & $11.00 Granted .................................. 170,000 $ 10.50 Cancelled ................................ (156,000) $5.35 & $11.00 -------
-52- 53
Number of Option Price Options Per Share ------- --------- Outstanding at December 31, 1996 ......... 537,300 $5.35, $10.50, $11.00 &$11.375 Exercised ................................ (386,667) $5.35, $10.50, $11.00 & $11.375 Granted .................................. 0 Cancelled ................................ (97,300) $5.35, $10.50, & $11.00 ------- Outstanding at December 31, 1997 ......... 53,333 $10.50 =======
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 earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1996 ------ ----- Net Income As Reported ................ 30,839 9,416 Pro forma .................. 30,583 9,081 Earnings per share As Reported ................ 3.68 1.16 Pro forma .................. 3.65 1.12
There were no stock options granted during the year. The weighted average fair value of options granted during 1996 was $4.52, using the Black-Scholes option-pricing model based on the following assumptions:
$11.00 $11.375 $10.50 Options Options Options ------- ------- ------- Risk-free interest rate 6.0% 5.4% 5.3% Expected life 8/01/98 12/01/98 1/12/00 Expected volatility 44.0% 49.0% 48.0% Expected dividends .030 .030 .030
c Share buy-back program During 1997, the Company bought back 1,000 common shares of its outstanding capital stock at an average price of $9.49 per share. d 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 oversubscription 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. Gross proceeds raised amounted to $50,768,890 and net proceeds raised after deduction of expenses associated with the Rights Offering amounted to $47,700,000. -53- 54 14 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 (in thousands except shares and per share amounts):
Year ended December 31, 1997 ------------------------------------- Per Share 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 ...................... 0 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.
Year ended December 31, 1996 ------------------------------------- Per Share 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 ...................... 0 101,634 --------- --------- Diluted earnings per share Income available to common shareholders .............. $ 9,416 8,142,131 $1.16 ========= =========
Year ended December 31, 1995 ------------------------------------- Per Share Income Shares Amount --------- --------- ----- Basic earnings per share Income available to common shareholders .............. $ 11,419 8,018,252 $1.42 Effect of dilutive securities Stock options ...................... 0 153,498 --------- --------- Diluted earnings per share Income available to common shareholders .............. $ 11,419 8,171,750 $1.40 ========= =========
-54- 55 15 Business Segment Information The Company operates principally in the consumer electronic products industry. The following is a summary of sales, income from continuing operations, assets by geographic area, sales by geographic area and sales to major customers (in thousands):
Year ended December 31, ------------------------------------------- 1997 1996 1995 --------- --------- --------- Net sales from operations within Hong Kong: Unaffiliated customers $ 131,052 $ 105,170 $ 119,417 Related parties -- -- -- Intersegment sales -- -- 353 --------- --------- --------- 131,052 105,170 119,770 People's Republic of China: Unaffiliated customers 1,802 3,064 1,445 Intersegment sales 123,115 95,669 112,804 --------- --------- --------- 124,917 98,733 114,249 Canada: Unaffiliated customers -- -- 378 Intersegment eliminations (123,115) (95,669) (113,157) --------- --------- --------- Total net sales $ 132,854 $ 108,234 $ 121,240 ========= ========= ========= Income (loss) from operations within: - - People's Republic of China 17,229 10,339 10,448 - - Hong Kong 5,501 2,921 4,196 - - Canada 8,109 (3,844) (3,225) --------- --------- --------- Net income $ 30,839 $ 9,416 $ 11,419 ========= ========= ========= Identifiable assets by geographic area: - - People's Republic of China 44,781 44,975 42,416 - - Hong Kong 24,738 24,564 25,505 - - Canada 98,269 18,852 11,360 --------- --------- --------- Total assets $ 167,788 $ 88,391 $ 79,281 ========= ========= =========
Intersegment sales arise from the transfer of finished goods between subsidiary companies operating in different areas. These sales are generally at estimated market prices.
Year ended December 31, ------------------------------------------- 1997 1996 1995 --------- --------- --------- Net sales to customers by geographic area: - North America $ 65,432 $ 36,595 $ 36,730 - Japan 30,972 30,483 41,532 - Europe 19,105 13,187 16,003 - Hong Kong 9,835 19,404 20,544 - Other 7,510 8,565 6,431 --------- --------- --------- Total net sales $ 132,854 $ 108,234 $ 121,240 ========= ========= ========= The Company had sales to four major customers as follows: Customer A $ 50,510 $ 24,138 $ 16,022 B 46,868 41,569 58,124 C 12,851 14,642 15,962 D (through customer B) 8,409 17,395 21,805 --------- --------- --------- $ 118,638 $ 97,744 $ 111,913 ========= ========= =========
-55- 56 16 Comparative Amounts Certain comparative amounts have been reclassified to conform to the current year presentation. -56- 57 ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements. See list under Item 18. of this Report. (b) Exhibits. The following documents are filed as exhibits herewith, unless, otherwise specified and are incorporated herein by this reference:
Exhibit Number Exhibit - ------ ------- 2.1 Letter of Agreement dated August 15, 1997 renewing existing facilities with Credit Commercial De France. 2.2 Letter of Agreement dated 9 January 1998 renewing banking facilities with The Hongkong and Shanghai Banking Corporation Limited. 2.3 Standby Underwriting Agreement, dated October 30, 1997 between Nam Tai Electronics, Inc. and Joseph Charles & Associates, Inc. 2.4 Representative's Warrant Agreement, dated December 2, 1997 between Nam Tai Electronics, Inc. and Joseph Charles & Associates, Inc. 2.5 Counsel's Warrant Agreement, dated December 2, 1997 between Nam Tai Electronics, Inc. and Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation 2.6 Letter of Agreement dated August 29, 1996 revising banking facilities with The Sanwa Bank Limited Filed as Exhibit 2.5 to the Company's Form 20-F for the fiscal year ended December 31, 1996 and hereby incorporated by reference. 2.7 Letter of Agreement dated September 18, 1996 making available credit facilities with Banque Worms Hong Kong Bank. - Filed as Exhibit 2.6 to the Company's Form 20-F for the fiscal year ended December 31, 1996 and hereby incorporated by reference. 2.8 Contract of Purchase and Sale dated December 29, 1995 with Mr. Koo regarding residential property in West Vancouver - Filed as Exhibit 2.8 to the company's Form 20-F for the fiscal year ended December 31, 1995 and hereby incorporated by reference. 3.1 Diagram of the Company's operating subsidiaries. See page 4 of this Report.
-57- 58 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 27, 1998 By: /s/ M. K. Koo ------------------------ M. K. Koo Chairman of the Board -58- 59 PRICE WATERHOUSE [LOGO] CONSENT OF PRICE WATERHOUSE We hereby consent to the incorporation of our report dated March 11, 1998 relating to the consolidated financial statements of Nam Tai Electronics, Inc. (the "Company") appearing in this annual report on Form 20-F into (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). We hereby further consent to the reference to us under the heading "Experts" in the Prospectus included as part of the aforementioned Registration Statement on Form F-3 (file number 333-36135). /s/ PRICE WATERHOUSE - ---------------------------- PRICE WATERHOUSE Certified Public Accountants HONG KONG, March 27, 1998 EX-2.1 2 EXHIBIT 2.1 1 EXHIBIT 2.1 CREDIT COMMERCIAL DE FRANCE August 15, 1997 Nam Tai Electronic & Electrical Products Ltd. Unit 9, 15/F., Tower 1, China Hong Kong City, 33 Canton Road, TST, Kowloon Hong Kong Attn: Mr. Tadao Murakami, Vice Chairman and Chief Executive Officer ------------------------------------------------------------- Dear Sirs, We are pleased to confirm that Credit Commercial de France, Hong Kong Branch (the "Bank") is prepared to renew the existing revolving short term credit facility repayable on demand for amount of US$2 million to Nam Tai Electronic & Electrical Products Limited (the "Borrower") subject to the terms and conditions as stipulated in this letter (the "Facility Letter"). The facility as contained in our letter dated June 11, 1996 will be superseded by this Facility upon acceptance. The US$3 million 3-year loan facility shall continue to be governed by the loan agreement dated June 11, 1996. THE REVOLVING SHORT TERM TRADE CREDIT FACILITY ("THE FACILITY") 1. BORROWER Nam Tai Electronic & Electrical Products Limited. 2. FACILITY US$2 million revolving short term trade credit facility for:- - Opening sight import letter of credit and trust receipt refinancing up to 120 days; - Issuance of shipping guarantee under letter of credit; - Negotiation of export letter of credit with discrepancies under letter of guarantee; 2 - Discounting of documents against payment and documents against acceptance; and - Sublimit of HK$1 million for overdraft. 3. PURPOSE Trade and working capital financing. 4. PRICING L/C opening commission First US$50,000 : 1/4% US$50,001 to US$100,000 : 1/12% Balance : 1/24% Collection commission and Commission in-lieu-of exchange First US$50,000 : 1/8% US$50,0001 to US$250,000 : 1/24% Balance : 1/48% Interest rate Trust receipt & Transit financing : Cost of funds + 1/2% p.a. Overdraft : HK$ Prime Rate Other commissions and charges Hong Kong Association of Banks' rules to be observed. 5. GUARANTEE Corporate guarantee executed by Nam Tai Electronics, Inc. (the "Guarantor") for US$2 million. 6. AVAILABILITY a) No obligation to grant accommodation under the Facility shall commence until the Bank has received as conditions precedent the following documents duly executed in form and substance satisfactory to the Bank:- From the Borrower i) A signed copy of this letter; and ii) Board resolution to authorise acceptance of the Facility. From the Guarantor i) Endorsement on this letter. 2 3 b) Notwithstanding (a) above, accommodation under this Facility remains the entire discretion of the Bank. 7. DOCUMENTS WITH THE BANK The following documents which have been executed by the Borrower and the Guarantor and are presently held by the Bank will remain true and valid for the purpose of the Facility. From the Borrower i) Mandate for Limited Company; ii) Letter of Set Off; iii) General Security and Credit Agreement; iv) Trust Receipt Agreement; v) Account Opening Documents; and vi) Constitutive Documents. From the Guarantor i) A duly executed Continuing Guarantee for US$2 million; and ii) Constitutive Documents. 8. INTEREST AND CHARGES Interest and banking charges shall accrue and be payable in respect of accommodation provided under the Facility on the basis, at the rates and on dates agreed between the Borrower and the Bank, or upon failure in agreement, as determined by the Bank from time to time. 9. PAYMENTS All payments by the Borrower to the Bank in respect of liabilities under the Facility shall be made free and clear of all taxes, withholdings and deductions whatsoever. If the Borrower is ever required to make any withholding, deduction or otherwise, the amount payable by the Borrower shall be grossed-up so that the Bank receives the full amount which would have been payable if there had been no withholding or deduction. 3 4 10. REPRESENTATIONS AND WARRANTIES The Borrower and the Guarantor hereby represent and warrant that:- a) The Borrower and the Guarantor are duly incorporated and validly existing under the respective laws of their countries of incorporation; b) The Borrower has full power and authority to execute, deliver and perform the terms of this letter; c) All such documents required have been duly authorized by all necessary corporate actions and constitute or will constitute valid and binding obligations on the Borrower enforceable in accordance with their terms; d) The Borrower and the Guarantor are not in default under any other agreement nor are they the subject of any actual or threatened legal proceedings or claims; e) The financial statement of the Borrower and the Guarantor and all other financial and other information delivered to the Bank are true and accurate and reflect the true condition of the affairs of the Borrower and the Guarantor as of a recent date; f) The Borrower and the Guarantor have good title to all properties and assets referred to in its audited accounts; g) The Borrower and the Guarantor have arranged all necessary insurance policies to cover business risks on properties, trading assets and executive management; h) Each request for an advance shall operate as a warranty that these representations and warranties will remain unaltered and that there has not been and there is not likely to be any material adverse change; and i) All necessary tax returns have been filed and all assessments which are due and payable have been paid. 11. UNDERTAKING The Borrower and the Guarantor hereby undertake with the Bank:- a) To ensure that the obligations of the Borrower and the Guarantor under this letter are not subordinated to and will at all times rank at least pari passu and all existing and future short term obligations of the Borrower and the Guarantor. b) Not to create any mortgages or charges on the undertaking, property and assets of the Borrower and the Guarantor whatsoever and wheresoever both present and future without the Bank's prior consent. Exception is allowed if and only if the Borrower or the Guarantor are to obtain financing to purchase certain assets and needs to pledge these assets as a pre-requisite collateral; 4 5 c) To make available such information, financial or otherwise, for which the Bank may reasonably request; d) To provide the Bank with audited financial statements of the Borrower and the audited consolidated financial statements of the Guarantor within 150 days after the end of the relevant financial years; e) To inform the Bank promptly of any material adverse change; and f) To inform the Bank promptly of any significant event of default under any other agreement. 12. EVENT OF DEFAULT If the Borrower fails to pay the Bank any amount on any due date or if any information delivered by the Borrower or the Guarantor shall be shown to have been wrong or misleading in any respect or if there is any material adverse change about which the Bank has not been informed or for which the Bank's acceptance has not been given, or fails to comply with any undertaking, the Bank will be entitled to declare the Facility cancelled whereupon all amounts and commitments outstanding under the Facility shall become immediately due and payable, and the Bank shall be under no further obligation to make available any further advances under the Facility. 13. REPAYABLE ON DEMAND All indebtedness and liabilities of the Borrower under the Facility shall be subject to the Bank's customary overriding right to call for repayment on demand and the Bank's continuos satisfaction of the business affairs and financial conditions of the Borrower and the Guarantor. The Bank also reserves the right to freeze the utilization of the Facility after a demand for repayment is made. 14. REVIEW The Facility is subject to the Bank's on-going reviews. 15. ASSIGNMENT AND WAIVER The Borrower may not assign any of their rights or obligations in respect of the Facility without the Bank's prior written agreement. No time or indulgence granted by the Bank or failure or delay in exercising any right hereunder shall operate as a waiver by the Bank. 16. COSTS, FEES, AND COMMISSIONS The Borrower and the Guarantor will reimburse the Bank promptly for all commissions, fees, charges and expenses including legal fees incurred by the Bank in respect of the maintenance or enforcement of the terms of the Facility and/or other documents referred to herein. 5 6 17. LAW AND JURISDICTION The Facility shall be governed by Hong Kong Law. The Borrower hereby submits to the non-exclusive jurisdiction of the Hong Kong Courts. Please signify your acceptance of the terms and conditions of the Facility be executing and returning the documents as stipulated under paragraph 6 within 45 days from the date of this letter. We are delighted to be able to work with you and look forward to establishing a mutually beneficial relationship between our two institutions. Yours faithfully, For and on behalf of CREDIT COMMERCIAL DE FRANCE HONG KONG BRANCH (s.d.) Alfred Leung (s.d.) Alain Cany - --------------------------------- --------------------------- Assistant General Manager General Manager Accepted by: Endorsed by: (s.d.) Tadao Murakami (s.d.) M. K. Koo - -------------------------------- ---------------------------- Nam Tai Electronic & Electrical Nam Tai Electronics, Inc. Products Limited 6 EX-2.2 3 EXHIBIT 2.2 1 EXHIBIT 2.2 Hongkong Bank The Hongkong and Shanghai Banking Corporation Limited Hong Kong Main Office: 3 Queen's Road Central, Hong Kong Ref: CORPORATE & INSTITUTIONAL BANKING TOYS & ELECTRONICS DIVISION CONFIDENTIAL Nam Tai Electronic & Electrical Products Ltd. Suite 6B-9, 15/F Tower 1 China Hong Kong City 33 Canton Road Tsimshatsui Kowloon Attention: Mr. M. K. Koo 9 January 1998 Dear Sirs BANKING FACILITIES A/C NO. 600-848972 With reference to our recent discussions, we are pleased to advise that we have reviewed your banking facilities and offer a renewal within the following limits which will be made available on the specific terms and conditions outlined below. These facilities are subject to review at any time and, in any event by 31 August 1998, and also subject to our overriding right of withdrawal and repayment on demand, including the right to call for cash cover on demand for prospective and contingent liabilities. Overdraft HKD500,000.- Interest on the overdraft facility will continue to be charged on daily balances at 1/2% per annum over our best lending rate, (currently 9-1/2% per annum, but subject to fluctuation at our discretion) and payable monthly in arrears to debit of your current account. Import/Export Facilities HKD60,000,000.- Documentary Credits with import finance up to 90 days, less any usance/credit periods granted by your suppliers, and/or D/P bills purchased on approved drawees. Within Which (HKD60,000,000.-) Goods under your control and/or Trust Receipts. Interest on your import loans will be charged on a daily basis at 1% (previously at 3/4%) per annum over HIBOR or SIBOR as appropriate, and is payable monthly in arrears to the debit of your current account. 2 Nam Tai Electronic & Electrical Products Ltd. 9 January 1998 - 2 - - -------------------------------------------------------------------------------- Please note that the aforementioned Import/Export Facilities carry the following concessionary rates: DC Opening Commission and Commission in Lien of Exchange (CILE) :- First USD50,000.- 1/4% USD50,001 to USD300,000.- 1/16% Balance in excess of USD300,000.- 1/32% Export Bills for Collection Commission:- First USD75,000.- 1/8% Balance in excess of USD75,000.- 1/24%
Foreign Exchange Line HKD10,000,000.- Total Forward Contract Limit up to 6 months. Unless by prior arrangement, contracts entered into under this facility are not to exceed six months in duration. Terms & Conditions Contracts may only be entered into to cover trade related exchange exposure incurred in the normal course of business. Foreign Exchange facilities remain subject to our overriding right to call for cash cover on demand if in the Bank's view a negative foreign exchange position requires such cover. Further, the Bank may, after having discussed the position with yourselves, close out any or all of your outstanding forward foreign exchange contracts and demand settlement of the balance due. Foreign exchange contracts continue to be governed by the conditions appearing on the reverse of the standard contract form. These contract forms should be checked upon receipt and the copy issued and returned to the Bank. Security As security for the existing facilities, we continue to hold:- 1) A Corporate Guarantee together with a supporting board resolution dated 8 August 1995 for HKD65,000,000.- from Nam Tai Electronics Inc. 2) A Negative Pledge together with a supporting board resolution dated 8 August 1995 from Nam Tai Electronics, Inc. not to pledge any of its assets with any banks as security without our prior consent. 3 Nam Tai Electronic & Electrical Products Ltd. 9 January 1998 - 3 - - -------------------------------------------------------------------------------- Please be advised that this letter supercedes our previous facility letter dated 1 December 1997 on the understanding that additional volume of import and export business will be channelled to us in 1998. Please arrange for the authorized signatories of your company, in accordance with the terms of the mandate given to the Bank, to sign and return to us the duplicate copy of this letter to signify your confirmation as to the correctness of the security held, and your continued understanding and acceptance to the terms and conditions under which these facilities are granted. These facilities will remain open for acceptance until the close of business on 30 January 1998 and if not accepted by the date will be deemed to have lapsed. We are pleased to be of continued assistance. Yours faithfully, (s.d.) Tony K. C. Ng - ------------------------------- Corporate Relationship Manager ad/NAMTAI Enc. EX-2.3 4 EXHIBIT 2.3 1 EXHIBIT 2.3 NAM TAI ELECTRONICS, INC. ----------------- STANDBY UNDERWRITING AGREEMENT October 30, 1997 Joseph Charles & Associates, Inc. 9701 Wilshire Blvd. Beverly Hills, California 90212 Dear Sirs: Nam Tai Electronics, Inc., a British Virgin Islands international business company (the "Company") is distributing to each holder of its Common Shares, par value $0.01 per share, on October 10, 1997 (the "Record Date"), nontransferable rights (the "Rights") to subscribe for one Unit (individually, a "Unit" and collectively, the "Units") for every three Common Shares outstanding on the Record Date. Each shareholder who exercises the Rights granted to him will have the right to oversubscribe for Units (the "Oversubscription Right") in an amount not exceeding forty percent (40%) of the number of Units initially subscribed for by that shareholder subject to reduction to an amount not less than 15% of the Units initially subscribed for by that Shareholder upon the election (the "Standby Underwriters' Oversubscription Cutback") of Joseph Charles & Associates, Inc., as representative (the "Representative") of each of the persons, firms and corporations listed on Schedule A hereto (herein collective called the "Standby Underwriters") and, in any event, subject to pro rata allocation among all oversubscribers if there are insufficient Units to fill all oversubscriptions. The right to subscribe for Units, including the Oversubscription Right, is hereinafter referred to as the "Rights Offering." The Company proposes to issue and sell to the several Standby Underwriters that number of Units equal to 3,000,000 Units less the number of Units purchased by the Company's shareholders in the Rights Offering and to sell to you, individually, and not as Representative, at a price of $0.001 per warrant, warrants (the "Representative's Warrants") to purchase 120,000 Units, which sale of Representative's Warrants will be consummated in accordance with the terms and conditions of the Representative's Warrant Agreement (the "Representative's Warrant Agreement") filed as an exhibit to the Registration Statement described below. The Company has also agreed to sell to Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, at a price of $0.001 per warrant, warrants (the "Counsel's Warrants") to purchase 10,000 Units, which sale of Counsel's Warrants will be consummated in accordance with the terms and conditions of the Counsel's Warrant Agreement (the "Counsel's Warrant Agreement") filed as an exhibit to the Registration Statement described below. Each Unit shall consist of one Common Share, par value $0.01 of the Company (each, a "Common Share" and collectively, the "Common Shares") and one three-year Common Share purchase warrant (the "Warrants") exercisable on or before November 24, 2000 in accordance with the terms and conditions of the Warrant Agreement (the "Warrant Agreement") in the form attached as an exhibit to the Registration Statement described below. The Units to be purchased by the Standby Underwriters pursuant to this Standby Underwriting Agreement will be referred to herein as the "Underwritten Units." Unless the context otherwise provides, references in this Agreement to "Unit" shall refer to the Units issuable upon exercise of the Rights and the Units issuable upon exercise of the Representative's Warrants; references to "Warrants" shall refer to the Warrants, the Representative's Warrants and the Counsel's Warrants, references to "Common Shares" shall refer to the Common Shares of the Company outstanding on the Record Date or underlying the Units and the Warrants as the context indicates and "Securities" shall refer to the Units, the Warrants and the Common Shares. This is to confirm the agreement concerning the Standby Underwriters' purchase of the Underwritten Units from the Company. 1. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to, and agrees with, the Underwriter that: 2 (a) A registration statement on Form F-3 (File No. 333-36135) with respect to (i) the Rights, (ii) the Units, (iii) the Representative's Warrants, (iv) the Counsel's Warrants, and (v) the Common Shares issuable upon exercise the Warrants, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933 (the "Securities Act"), and the rules and regulations of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. Copies of such registration statement and any amendments, and all forms of the related prospectuses contained therein, have been delivered to you or will be delivered to you concurrently with their filing with the Commission. Such registration statement, including the prospectus constituting a part thereof, Part II and all financial schedules and exhibits thereto, and any documents incorporated by reference therein, as amended at the time when it becomes effective, is herein referred to as the "Registration Statement," and the prospectus included as part of the Registration Statement on file with the Commission that discloses all the information that was omitted from the prospectus on the effective date pursuant to Rule 430A of the Rules and Regulations (as defined below), with any changes contained in any prospectus filed with the Commission by the Company with your consent after the effective date of the Registration Statement, is herein referred to as the "Final Prospectus." The prospectus included as part of the Registration Statement on the date when the Registration Statement became effective and the prospectus included in any post-effective amendment to such Registration Statement is referred to herein as the "Effective Prospectus"; any prospectus included in the Registration Statement and in any amendments thereto prior to the effective date of the Registration Statement is referred to herein as a "Pre-Effective Prospectus." The Pre-Effective Prospectus, the Effective Prospectus and the Final Prospectus may sometimes hereinafter be referred to collectively as the "Prospectus." For purposes of this Agreement, "Rules and Regulations" means the rules and regulations adopted by the Commission under either the Securities Act or the Securities Exchange Act of 1934 (the "Exchange Act"), as applicable. (b) No order preventing or suspending the use of any Pre-Effective Prospectus has been issued by the Commission, and each Pre-Effective Prospectus, at the time of filing thereof, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that the foregoing shall not apply to statements in, or omissions from, any Pre-Effective Prospectus in reliance upon, and in conformity with, written information furnished to the Company by you or on your behalf specifically for use in the preparation thereof. (c) When the Registration Statement becomes effective, and at all times subsequent thereto, the Registration Statement, any post-effective amendment thereto and the Effective Prospectus and the Final Prospectus, each as amended or supplemented, shall comply in all material respects with the requirements of the Securities Act and the Rules and Regulations. No such document shall contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of circumstances under which they were made, not misleading, except that the foregoing shall not apply to statements in, or omissions from, any such document in reliance upon, and in conformity with, written information furnished to the Company by you or on your behalf, specifically for use in the preparation thereof. There is no contract or document required to be described in the Registration Statement or the Prospectus, or to be filed as an exhibit to the Registration Statement, which is not described or filed as required. (d) Price Waterhouse, whose report appears in the Effective Prospectus, are independent public accountants as required by the Securities Act and the Rules and Regulations. The consolidated financial statements (including the related notes) included in the Registration Statement or any Prospectus, present fairly, on the basis stated therein, the financial condition, the results of the operations and statements of cash flows of the entities purported to be shown thereby at the dates and for the periods indicated and have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"), applied on a consistent basis throughout the periods indicated. The selected consolidated financial data and summary consolidated financial information included in the Registration Statement and any Prospectus present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements included in the Registration Statement and the Prospectus. 2 3 (e) Each of the Company and its Subsidiaries (as defined in Section 12 hereof) has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its organization, with full power and authority (corporate and other) to own or lease its properties and conduct its business as described in the Prospectus, and is duly qualified to do business and is in good standing in each jurisdiction in which the character of the business conducted by it or the location of the properties owned or leased by it makes such qualification necessary, except to the extent that the failure to so qualify will not have a material adverse effect upon the business, condition (financial or other), operations or prospects upon the Company and its Subsidiaries taken as a whole (a "Material Adverse Effect"), and each of the Company and its Subsidiaries holds all material licenses, certificates, permits, consents, orders and approvals or other authorizations from governmental authorities necessary to lease or own, as the case may be, and to operate their property and conduct their business as now conducted. Except as set forth in the Prospectus, the expiration of any such licenses, certificates and permits would not materially affect the operation of the Company and its Subsidiaries, taken as a whole. None of the activities or businesses of the Company or any of its Subsidiaries is in violation of any law, rule, regulation or order of the United States, Canada, the Special Administrative Region of Hong Kong, the British Virgin Islands, the People's Republic of China, or any state, county, province, municipality or locality thereof, or of any agency or body of the United States, Canada, the Special Administrative Region of Hong Kong, the British Virgin Islands, the People's Republic of China, or of any state, county, province, municipality or locality thereof or of any other foreign jurisdiction of which the Company or any of its Subsidiaries may be subject, other than violations which would not have a Material Adverse Effect. (f) The capitalization of the Company as of June 30, 1997 is as set forth under the caption "Capitalization" in the Prospectus, and the Rights, the Units, the Warrants and the Common Shares conform to the descriptions thereof contained under the caption "Description of Securities" in the Final Prospectus; the outstanding Common Shares of the Company have been, and the Common Shares underlying the Warrants, upon issuance and delivery to the holders thereof and payment therefor in the manner described in the Effective and Final Prospectus will be, duly authorized, validly issued, fully paid and nonassessable, free and clear of any liens, encumbrances, equities and claims. Except as disclosed in or contemplated by this Agreement or the Lock-Up Agreement (as defined in Section 4(f) hereof), there are no preemptive rights or other rights to subscribe for or to purchase from the Company, or any restriction upon the voting or transfer of, any Common Shares of the Company pursuant to the Company's Memorandum of Association, Articles of Association or other governing documents or any agreement or other instrument to which the Company is a party or by which it is bound. Except as contemplated by this Agreement, the Warrant Agreement, the Representative's Warrant Agreement or the Counsel's Warrant Agreement, none of the filing of the Registration Statement, the distribution of the Rights nor the offering or sale of the Securities as contemplated by this Agreement, the Warrant Agreement, the Representative's Warrant Agreement or the Counsel's Warrant Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of capital stock of the Company, or any warrants, options or rights to acquire such capital stock. The Company owns directly or indirectly all of the issued and outstanding shares of capital stock of each of the Subsidiaries and there are no rights to subscribe for or to purchase from the Company or any of its Subsidiaries any shares of capital stock of any of the Subsidiaries. Each of the Company's Subsidiaries is a Significant Subsidiary (as defined in Section 12 hereof) except for Nam Tai Electronics (Canada) Ltd., a Canadian Federal Company. (g) Except as described in or contemplated by the Effective and Final Prospectus, there has not been any material adverse change in, or any adverse development that materially affects, the business, properties, financial condition, results of operations or prospects of the Company and its Subsidiaries, taken as a whole, from the date as of which information is given in the applicable Prospectus; and except as described in or contemplated by the Effective and Final Prospectus, neither the Company nor any Subsidiary has, directly or indirectly, incurred any material liabilities or obligations, direct or contingent, not in the ordinary course of business, other than obligations related to the offer and sale of the Securities, or entered into any transactions not in the ordinary course of business, which are material to the business of the Company or such Subsidiary and required to be disclosed in the Prospectus. Except as described in or contemplated by the Final Prospectus, there has not been any material change in the capital stock of, or any incurrence of long-term debt by, the Company or its Subsidiaries, or any issuance or grant of options, 3 4 warrants or rights to purchase the capital stock of the Company, or any declaration or payment of any dividend on the capital stock of the Company from the date as of which information is given in the Prospectus. (h) Neither the Company nor any of its Subsidiaries is, nor with the giving of notice or lapse of time or both would be, in violation of or in default under, nor will the execution or delivery of this Agreement, the Warrant Agreement, the Representative's Warrant Agreement or the Counsel's Warrant Agreement or consummation of the transactions contemplated hereby or thereby result in a violation of, or constitute a default under, the Memorandum of Association, Articles of Association or other governing documents of the Company or any of its Subsidiaries, or any agreement, indenture or other instrument, to which the Company or any of its Subsidiaries is a party or by which any of them is bound, or to which any of their respective properties is subject, nor will the performance by the Company of its obligations hereunder, under the Warrant Agreement, the Representative's Warrant Agreement or the Counsel's Warrant Agreement violate any law, rule, administrative regulation or decree of any court or any governmental agency or body have jurisdiction over the Company, its Subsidiaries or any of their properties, or result in the creation or imposition of any lien, charge, claim or encumbrance upon any property or asset of the Company or any of its Subsidiaries, other than a lien, claim or encumbrance that would not have a Material Adverse Effect. Except for permits and similar authorizations required under the Securities Act and the securities or "blue sky" laws of certain jurisdictions and the determination by the National Association of Securities Dealers, Inc. (the "NASD") that it has no objection to the terms and conditions of the Rights Offering or the sale of the Representative's Warrants pursuant to this Agreement and that the Standby Underwriters meet the "net capital" requirements to effectuate the transactions contemplated by this Agreement, and for such permits and authorizations which have been obtained, no consent, approval, authorization or order of any court, governmental agency or body or financial institution is required in connection with the consummation of the transactions contemplated by this Agreement, the Warrant Agreement, the Representative's Warrant Agreement or the Counsel's Warrant Agreement. (i) Each of this Agreement, the Warrant Agreement, the Representative's Warrant Agreement and the Counsel's Warrant Agreement has been duly authorized by the Company; this Agreement has been duly executed and delivered by the Company; this Agreement constitutes and, when executed and delivered, the Warrant Agreement, the Representative's Warrant Agreement and the Counsel's Warrant Agreement will constitute, the valid and binding agreement of the Company and each are enforceable against the Company in accordance with their respective terms except as rights to indemnity and/or contribution may be limited by federal or state securities laws or the public policy underlying such laws, and except as enforcement (i) may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting creditor's rights generally and (ii) is subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (j) The Company and its Subsidiaries have good and marketable title to all real and personal property owned by them free and clear of all liens, encumbrances and defects except such as are described or referred to in the Prospectus or such as do not materially affect the value of such property or do not materially interfere with the use made or proposed to be made of such property by the Company or such Subsidiaries. Any real property and buildings held under lease by the Company or any of its Subsidiaries and which are material to the business of the Company are held by them under valid and existing and enforceable leases subject to such exceptions as are not material or do not interfere with the use made or proposed to be made of such property and buildings by the Company or such Subsidiaries or such exceptions that take into account the inherent difficulties of enforcing them because of the nature of the legal system governing the leases. (k) The Company and the Subsidiaries, taken as a whole, have not sustained since June 30, 1997 any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Effective Prospectus and the Final Prospectus; and, since the respective dates as of which information is given in the Registration Statement and the Effective Prospectus and the Final Prospectus, there has not been any material adverse change, or any development 4 5 involving a prospective material adverse change, in or affecting the general affairs, management, business prospects, financial position, shareholders' equity or results of operations of the Company and the Subsidiaries, taken as a whole, otherwise than as set forth or contemplated in the Effective Prospectus and the Final Prospectus. (l) Except as described in the Prospectus, there is no litigation or governmental proceeding to which the Company or any of its Subsidiaries is a party or to which any property of the Company or such Subsidiaries is subject or which is pending in which the Company has been served or, to the knowledge of the Company, is otherwise pending or threatened against the Company or any of its Subsidiaries which would have a Material Adverse Effect, or which is required to be disclosed in the Prospectus, and to the Company's knowledge no labor disturbance by the employees of the Company or any of its Subsidiaries exists or is imminent which would have a Material Adverse Effect, or which is required to be disclosed in the Effective Prospectus and the Final Prospectus. (m) Neither the Company nor any Subsidiary is in violation of any law, ordinance, governmental rule or regulation or court decree to which any of them may be subject which violation would have a Material Adverse Effect. (n) The Company has not taken and shall not take, directly or indirectly, any action resulting in a violation of Regulation M under the Exchange Act, or designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Shares of the Company to facilitate the sale of or resale of the Units or Securities covered thereby. (o) The Company and its Subsidiaries have timely (giving effect to permitted extensions) and properly prepared and filed all necessary income, franchise and other required tax returns whether required by the United States, Canada, the British Virgin Islands, the Special Administrative Region of Hong Kong or the People's Republic of China or any other jurisdiction, and has paid all taxes shown as due thereon (other than such taxes, if any, owing by certain of the Subsidiaries that are dormant and without assets, the nonpayment of which would not have a Material Adverse Effect), and the Company has no knowledge of any tax deficiency that has been or might be asserted against the Company or its Subsidiaries which would have a Material Adverse Effect. (p) None of the Company, any of its Subsidiaries, nor to the Company's knowledge any officer, director, employee or agent acting on behalf of the Company or any of its Subsidiaries has at any time (i) made any contributions to any candidate for political office in violation of applicable law, or failed to disclose fully any contributions to any candidate for political office in accordance with any applicable statute, rule, regulation or ordinance requiring such disclosure, (ii) made any payment to any local, state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or allowed by applicable law, (iii) made any payment outside the ordinary course of business to any purchasing or selling agent or person charged with similar duties of any entity to which the Company or any of its Subsidiaries sells or from which the Company or any of its Subsidiaries buys products for the purpose of influencing such agent or person to buy products from or sell products to the Company or any of its Subsidiaries, or (iv) except as set forth in the Prospectus, engaged in any transaction, maintained any bank account or used any corporate funds except for transactions, bank accounts and funds which have been and are reflected in the normally maintained books and records of the Company. (q) Except as set forth in the Prospectus, the Company does not know of any claims for services in the nature of a finder's fee, consulting fee or brokerage fee with respect to this offering for which the Company, its Subsidiaries or the Standby Underwriter may be responsible. (r) The properties of the Company and its Subsidiaries are adequately insured against loss or damage by fire and there is maintained on such properties such other insurance as is prudent or customarily maintained by companies in the same or similar business and in the same or similar locality. 5 6 (s) Except as described in the Effective and Final Prospectus, the Company or its Subsidiaries owns or possesses adequate rights to use all material patents, patent rights, inventions, trademarks, service marks, trade names and copyrights necessary for the conduct of its business as described in the Effective and Final Prospectus; except as set forth in the Effective and Final Prospectus, neither the Company nor such Subsidiaries have received any notice of infringement of or conflict with, and to the best knowledge of the Company neither the Company nor its Subsidiaries is infringing or in conflict with, asserted rights of others with respect to any patents, patent fights, inventions, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect. (t) The Warrants, the Representative's Warrants and the Counsel's Warrants have been duly and validly authorized by the Company and upon delivery to you in accordance herewith will be duly issued and legal, valid and binding obligations of the Company. (u) The Common Shares underlying the Warrants, the Representative's Warrants and the Counsel's Warrants have been duly authorized and reserved for issuance upon the exercise of the Warrants, the Representative's Warrants and the Counsel's Warrants and when issued upon payment of the exercise price therefor will be validly issued, fully paid and nonassessable Common Shares, free and clear of all liens, encumbrances, equities and claims. (v) There are no outstanding loans or advances or guarantees of indebtedness by the Company or any of its Subsidiaries to or for the benefit of any of the officers or directors of the Company or any of its Subsidiaries, or any of the members of the families of any of them, which are required by the Rules and Regulations to be described in the Registration Statement, Effective Prospectus and Final Prospectus except such that are so described. (w) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorizations; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 2. PURCHASE BY THE UNDERWRITERS. (a) On the basis of the representations, warranties, covenants and agreements herein contained, and subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Standby Underwriters and the Standby Underwriters agree to purchase from the Company, the Underwritten Units, at a price per Underwritten Unit equal to the lesser of (x) $17.00 per Unit, and (y) the per share closing bid price of the Common Shares on the Nasdaq National Market System on November 24, 1997, the Expiration Date of the Rights Offering (the "Expiration Date") provided, however, if the Representative exercises the Standby Underwriters' Oversubscription Cutback, the purchase price per Underwritten Unit shall be $17.00 per Unit. The Standby Underwriters agree to offer the Underwritten Units to the public as set forth in the Final Prospectus. (b) On the Closing Date, simultaneously with the purchase of the Underwritten Units, if any, by the Standby Underwriters, the Company shall pay to the Standby Underwriters a standby fee equal to four percent (4%) of the total gross proceeds (before payment of any fees or commissions payable hereunder or to any other third party) received by the Company from the sale of Units in the Rights Offering and from the sale of the Underwritten Units pursuant to this Agreement. 3. DELIVERY OF AND PAYMENT FOR UNITS. Delivery of certificates for the securities composing the Units to be purchased by the Standby Underwriters from the Company and payments therefor, shall be made at the offices of Joseph Charles & Associates, Inc., 9701 Wilshire Boulevard, 9th Floor, Beverly Hills, California 90212 (or such 6 7 other place as mutually may be agreed upon), before 7:00 A.M., California time, on the fourth full Business Day following the Expiration Date or at such other date, not later than ten Business Days after such date, as shall be determined by agreement of the Company and the Standby Underwriter (the "Closing Date"). Delivery of certificates representing the securities composing the Underwritten Units shall be made by or on behalf of the Company to you, against payment of the purchase price therefor by certified or official bank check or wire transfer payable immediately available funds. The certificates shall be registered in such names and denominations as you shall have requested at least two full Business Days prior to the Closing Date, and shall be made available for checking and packaging at a location as may be designated by you at least one full Business Day prior to the Closing Date. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Standby Underwriters. 4. COVENANTS. The Company covenants and agrees with the Standby Underwriters that: (a) The Company shall use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to the Rules and Regulations and to notify you promptly (in writing, if requested) of all such filings. The Company shall notify you promptly of any request by the Commission for any amendment of or supplement to the Registration Statement or the Effective or Final Prospectus or for additional information; the Company shall prepare and file with the Commission, promptly upon your request, any amendments of or supplements to the Registration Statement or Effective or Final Prospectus which, in your reasonable opinion, may be necessary or advisable in connection with the distribution of the Units; the Company shall prepare and file with the Commission from time to time any amendments of or supplements to the Registration Statement or Effective or Final Prospectus (or in lieu thereof, at the Company's option, a separate registration statement) which may be necessary or advisable to comply with the requirements imposed upon it by the Securities Act, as now and hereafter amended, and by the Rules and Regulations as from time to time in force, so far as is necessary to permit the continuance of sales of Common Shares upon exercise of the Warrants and Standby Underwritten Warrants, until such time as all of the Warrants have been exercised or redeemed and all of the Units underlying the Representative's Warrants and Counsel's Warrants have been issued and sold (but not more than three years, six months after the Closing Date); and the Company shall not file any amendment of or supplement to the Registration Statement or the Effective or Final Prospectus which is not approved by you after reasonable notice thereof, such approval not to be unreasonably withheld or delayed. The Company shall advise you promptly of the issuance by the Commission or any state or other regulatory body of and stop order or other order suspending the effectiveness of the Registration Statement, suspending or preventing the use of any Pre-Effective Prospectus or the Effective or Final Prospectus or suspending the qualification of the Securities for offering or sale in any jurisdiction, or of the institution of any proceedings for any such purpose, and the Company shall use its best efforts to prevent the issuance of any stop order or other such order and, should a stop order or other such order be issued, to obtain as soon as possible the lifting thereof. (b) The Company shall furnish to the Standby Underwriter, from time to time and without charge, a reasonable number of copies of the Registration Statement of which one for the Standby Underwriter and one for counsel to the Standby Underwriter shall be signed and shall include exhibits and all amendments and supplements to any such Registration Statement, in each case as soon as available and in such quantities as you may from time to time reasonably request. (c) Within the time during which a Final Prospectus relating to the Securities is required to be delivered under the Securities Act, the Company shall comply with all requirements imposed upon it by the Securities Act, as now and hereafter amended, and by the Rules and Regulations as from time to time in force, so far as is necessary to permit the continuance of sales of or dealings in the Securities as applicable, as contemplated by the provisions hereof and the Final Prospectus. If during such period any event occurs as a result of which the Final Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances then existing, not misleading, or if during such period it is necessary to amend the Registration Statement or supplement the Final Prospectus to comply with Securities Act, the Company shall promptly notify you and the Company shall amend the Registration Statement or supplement the Final Prospectus (at 7 8 the expense of the Company) so as to correct such statement or omission or effect such compliance. (d) The Company shall take or cause to be taken all necessary action and furnish to whomever you may direct such information as may be required in qualifying the Securities for sale under the laws of such jurisdictions which you shall designate and to continue such qualifications in effect for as long as may be necessary for the distribution of the Securities, except that in no event shall the Company be obligated in connection therewith to qualify as a foreign corporation, or to execute a general consent for service of process, or subject itself to taxation as doing business in such jurisdiction. (e) The Company shall make generally available to its security holders, in the manner contemplated by Rule 158(b) under the Securities Act, as soon as practicable but in any event not later than 45 days after the end of its fiscal quarter in which the first anniversary date of the effective date of the Registration Statement occurs, an earnings statement satisfying the requirements of Section 11(a) of the Securities Act covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement. (f) At or before the Closing Date, you shall receive from the directors of the Company, a written agreement (the "Lock-Up Agreement") not to offer, sell, transfer or otherwise dispose of, directly or indirectly, any of the Common Shares or other equity securities of the Company now owned, for a period of 90 days following the Closing Date, without your prior written consent or as required to satisfy such person's obligations under a margin loan entered into prior to the date of this Agreement; provided, however, that such persons may make private dispositions or gifts of such securities if such securities constitute "restricted securities" within the meaning of Rule 144 of the Rules and Regulations, in the hands of the acquiring persons, and if the acquiring persons agree in writing to be bound by the foregoing restrictions on transfer. (g) The Company shall not solicit Warrant exercises other than through the Representative. Upon exercise of any Warrant by the holder thereof, the Company shall pay to the Standby Underwriter a fee in an amount equal to one percent (1%) of the aggregate exercise price of the Warrants so exercised, provided, that, (i) the market price of the Common Shares on the date the Warrant is exercised is greater than the then exercise price of the Warrants; (ii) the exercise of the Warrants was solicited by a member of the National Association of Securities Dealers, Inc.; (iii) the Warrant being exercised is not held in a discretionary account; (iv) disclosure of the compensation arrangements was made both at the time of the Rights Offering and at the time of the exercise of the Warrant; and (v) the solicitation of the exercise of the Warrant was not in violation of Regulation M promulgated under the Exchange Act. (h) The Company shall apply the net proceeds of the sale of the Units as set forth in the Effective and Final Prospectus. (i) The Company shall pay or cause to be paid (i) all expenses (including stock transfer taxes) incurred in connection with the distribution of the Rights and the purchase, sale and delivery of the Units to its shareholders and the Standby Underwriter, as applicable, (ii) all fees and expenses (including, without limitation, fees and expenses of the Company's accountants and counsel, but excluding fees and expenses of counsel for the Standby Underwriter not related to the matters set forth in Section 4(i)(iii) below)) in connection with the preparation, printing, filing, delivery and shipping of the Registration Statement (including the financial statements therein and all amendments and exhibits thereto), each Pre-Effective Prospectus, the Effective and Final Prospectus as amended or supplemented and the printing, delivery and shipping of this Standby Underwriting Agreement, the Agreement among Standby Underwriters and Selected Dealer Agreements and any letters transmitting the offering material to the Standby Underwriter or selling group members (including costs of mailing and shipment), (iii) all filing fees and up to $2,500 for the payment of fees and disbursements of counsel to the Standby Underwriter incurred in connection with the qualification of the Units and the Securities under state securities laws as provided in Section 4(d) hereof; (iv) the filing fee of the National Association of Securities Dealers, Inc., (v) any applicable listing fees, (vi) the cost of printing certificates representing the Warrants and the Common Shares, (vii) the cost and charges of any transfer agent or registrar, (viii) the costs of a tombstone advertisement relating to the Rights Offering 8 9 in the Wall Street Journal, national edition and The Investment Reporter, in each case in form and substance satisfactory to the Standby Underwriter, and of advertising undertaken at the Company's request, including all graphic slide costs (ix) the costs of preparing, printing and distributing bound volumes for the Standby Underwriter and its counsel, (x) all costs and expenses incurred by the Company in connection with traveling and attending meetings on the "road show" or other marketing expenses incurred in connection with distribution of the Rights and the Securities, (xi) the fee set forth in Section 2(b), and (xii) all other costs and expenses incident to the performance of the obligations of the Company hereunder which are not otherwise provided for in this section. In addition, the Company shall also pay to you, at the Closing Date, a nonaccountable expense allowance equal to one percent (1%) of the total gross proceeds received by the Company from the Sale of Units in the Rights Offering and from the Sale of Underwritten Units pursuant to this Agreement. If the sale of the Underwritten Units provided for herein is not consummated for any reason, the Company shall reimburse the Standby Underwriter for all reasonable out-of-pocket disbursements (including reasonable fees and disbursements of counsel) actually incurred by the Standby Underwriter in connection with the investigation, preparing to market and marketing of the Units or in contemplation of performing their obligations hereunder up to a maximum of $40,000. The Company shall not in any event be liable to the Standby Underwriters for loss of anticipated profits from the transactions covered by this Standby Underwriting Agreement. It is understood and agreed, however, that except as provided in this Section 4, the Standby Underwriter shall pay all of its expenses and costs, including the fees of its own counsel and advertising expenses or other expenses connected with any offers and/or sales of Underwritten Units they may make. (j) The Company, at its expense, shall furnish its shareholders with an annual report containing audited financial statements prepared in accordance with GAAP that have been reported on by its independent accountants, and, as soon as practicable after the end of each of the first three quarters of each fiscal year, a balance sheet, a statement of the Company's cash flows for such quarter, and a statement of the Company's operations for such quarter (which may be in condensed form), all in reasonable detail. (k) So long as the Company has an active subsidiary or subsidiaries, the financial statements provided for in Section 4(j) will be on a consolidated basis to the extent the accounts of the Company and its Subsidiary or Subsidiaries are consolidated in reports furnished to its shareholders generally, separate financial statements shall be furnished for all Subsidiaries whose accounts are not consolidated but which at the time are "Significant Subsidiaries." (l) The Company maintains and shall continue to maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (m) The Company shall comply with all registration, filing and reporting requirements of the Exchange Act which may from time to time be applicable to the Company. (n) The Company shall make all filings required, including registration under the Exchange Act, to obtain and maintain the listing of the Warrants and the Common Shares on the Nasdaq National Market System, in each case upon the effectiveness of the Registration Statement. 5. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligations of the Standby Underwriter hereunder to purchase and pay for the Underwritten Units, and to perform each of its other obligations set forth herein, are subject to the accuracy, as of the date hereof and the Closing Date (as if made at the Closing Date), of the representations and warranties of the Company contained herein, to the performance by the Company of its obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become 9 10 effective and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made within the time period required by the Rules and Regulations; no stop order suspending the effectiveness of the Registration Statement or any amendment or supplement thereto shall have been issued; no proceedings for the issuance of such an order shall have been initiated or threatened; and any request of the Commission for additional information (to be included in the Registration Statement or the Final Prospectus or otherwise) shall have been disclosed to you and complied with to your satisfaction. (b) You shall not have advised the Company that the Registration Statement or Effective or Final Prospectus, or any amendment or supplement thereto, contains an untrue statement of fact which, in your opinion, is material, or omits to state a fact which, in your opinion, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) On or prior to the Closing Date, you shall have received from Troop Meisinger Steuber & Pasich, LLP, counsel for the Standby Underwriters, such opinion or opinions with respect to the sufficiency of all corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as you reasonably may require, and such counsel shall have received such papers and information as they request to enable them to pass upon such matters. (d) On the Closing Date, there shall have been furnished to you the opinion (addressed to you as Representative of the Standby Underwriters) of McW, Todman & Co., counsel for the Company with respect to certain matters of the law of the British Virgin Islands, dated the Closing Date and in form and substance satisfactory to counsel for the Standby Underwriters and stating that it may be relied upon by counsel for the Underwriter in giving their opinion, to the effect that: (i) The Company is a corporation duly organized and validly existing and in good standing under the laws of the British Virgin Islands. The Company has all corporate power and authority, and all material permits of and from all British Virgin Islands' public, regulatory or governmental officials and bodies, to own, lease and operate its properties and conduct its business as now being conducted and as described in the Prospectus and, to the best knowledge of such counsel, there are no proceedings pending or threatened relating to the revocation or modification of any such permit, nor is there any basis therefor, nor has any event occurred that allows (or which with notice or lapse of time, or both, would allow) revocation or termination thereof or result in any other impairment of the rights of the holder of any such permit. (ii) The Company has all requisite corporate power and authority to execute, deliver and perform each of this Agreement, the Representative's Warrant Agreement and the Warrant Agreement. Each of this Agreement, the Representative's Warrant Agreement and the Warrant Agreement have been duly and validly authorized, executed and delivered by the Company, and constitute the legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its respective terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally from time to time in effect and the availability of equitable remedies (regardless of whether enforceability is considered in a proceeding at law or in equity). (iii) None of the execution, delivery and performance of this Agreement, the Representative's Warrant Agreement, the and the Warrant Agreement, the consummation of the transactions herein or therein contemplated by the Company, including the issuance, sale and delivery of the Securities provided for thereunder, nor compliance with the terms and provisions hereof and thereof, will: (A) to the best of such counsel's knowledge, conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event that with notice or lapse of time, the Counsel's Warrants, or both, would constitute a default) or require consent under, or result in the creation or imposition of any lien, encumbrance, security interest, claim or other restriction of any nature whatsoever upon any property or assets of the Company or any of the Subsidiaries, pursuant to the terms of any oral or written agreement or understanding, instrument 10 11 or permit known to such counsel to which the Company or any of the Subsidiaries is a party or by which any of their respective properties or assets may be bound; or (B) violate or conflict with any provisions of the charter of the Company or any of the Subsidiaries, or any statute, rule or regulation, or to the best of such counsel's knowledge, any permit, judgment, decree, order of any court, arbitrator or similar person or any British Virgin Islands' public, governmental or other regulatory agency or body having jurisdiction over the Company or any of the Subsidiaries or any of their respective properties or assets. No consent, approval, authorization or permit of or with any court, arbitrator or similar person or any British Virgin Islands' public, governmental or regulatory agency or body having jurisdiction over the Company or any of the Subsidiaries or any of their respective properties or assets is required for the execution, delivery and performance of this Agreement, the Representative's Warrant Agreement, or the Warrant Agreement, and the consummation of the transactions herein or therein contemplated, including, without limitation, the issuance, sale and delivery of any of the Units or the Securities. (iv) The authorized, issued and outstanding capital stock of the Company, is as set forth under the caption "Capitalization" in the Effective Prospectus. The Units, the Common Shares and the Warrants, the Representative's Warrants, the and each other authorized class of capital stock of the Company conforms in all material respects to all statements in relation thereto contained in the Effective Prospectus. The Company has a sufficient number of authorized but unissued Common Shares to enable the Company to issue, without further stockholder action, all of the Common Shares underlying the Warrants, the Representative's Warrants and the Counsel's Warrants. The Company has reserved out of the authorized but unissued Common Shares all of the shares underlying the Units and Warrants. All of the issued and outstanding Common Shares have been duly and validly authorized and issued and are fully paid and nonassessable, with no personal liability attaching to the ownership thereof. The shares included in, and underlying the Warrants included in, the Units to be issued or sold in accordance with the terms of this Agreement, when paid for in accordance with this Agreement, and the Warrant Agreement, as applicable, will be duly and validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership thereof. There are no preemptive rights or other rights to subscribe for or to purchase, or any restrictions upon the voting or transfer of, any Common Shares pursuant to the Company's Memorandum or Articles of Association or, to the best knowledge of such counsel, any other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries is bound. (v) To the best of such counsel's knowledge, there is no litigation, arbitration, action, suit, proceeding or investigation before or by any court, arbitrator or similar party or by or before any governmental agency or body, pending or threatened: (A) to which the Company, or any of the Subsidiaries is a party or which any property or assets of the Company, or any of the Subsidiaries is the subject that is required to be disclosed in the Registration Statement or the Prospectus that is not described as required; or (B) to which the Company or any of the Subsidiaries is a party or which any property or assets of the Company or any of the Subsidiaries is the subject that, if adversely determined, could individually or in the aggregate, have a material effect on the business, operations, earnings, prospects, properties or condition (financial or otherwise) of the Company, or any of the Subsidiaries. (vi) To the best of such counsel's knowledge, neither the Company, nor any of the Subsidiaries is in violation of, or in default with respect to, its charter or any British Virgin Islands' law, rule, permit, regulation, order, judgment or decree applicable to or binding upon the Company or any Subsidiary or by which any of their respective assets or properties may be bound or affected, except such as are described in the Effective Prospectus and Final Prospectus or such as, individually or in the aggregate, do not now have, and in the future do not pose a significant risk of having a material adverse effect upon the business, operations, earnings, properties or condition (financial or otherwise) of the Company or any of the Subsidiaries. (vii) To the best of such counsel's knowledge, no default exists, and no event has 11 12 occurred that with notice or lapse of time, or both, would constitute a default in the due performance and observance of any term, covenant or condition of any material indenture, mortgage, deed of trust, note, bank loan or credit agreement, lease, permit, authorization or any other material oral or written agreement or instrument to which the Company or any of the Subsidiaries is a party or by which any of them or any of their respective properties or assets may be bound or affected. (viii) The form of certificates for the Warrants attached to the Registration Statement as an exhibit has been duly adopted by the Company and conforms to all legal requirements of the British Virgin Islands. (ix) To the best of such counsel's knowledge, there are no outstanding options, warrants, calls, rights or other agreements or commitments with respect to the purchase of any capital shares of the Company, other than as disclosed in the Registration Statement. (x) The descriptions contained in the Registration Statement of British Virgin Islands statutes, British Virgin Islands legal and governmental proceedings or British Virgin Islands laws are accurate and complete in all material respects. (xi) Under the laws of the British Virgin Islands, the submission by the Company to the jurisdiction of any Federal or State court sitting in the State of California, and the designation of the law of the State of California to apply to this Agreement is binding upon the Company and would be enforceable in any judicial or administrative proceeding in the British Virgin Islands if properly brought to the attention of the Court or administrative body in accordance with the laws of the British Virgin Islands. (xii) Any judgment obtained in the Federal Courts of the United States or any State Court in the United States against the Company for a definite sum would be treated by the High Court of the British Virgin Islands as a cause of action in itself so that no retrial of the issues would be necessary provided that: (A) the Federal Court of or the State court in the United States had jurisdiction in the matter: (B) the judgment given by the Federal Court of or the State Court in the United States was final and conclusive; (C) the judgment given by the Federal Court of or the State Court in the United States was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations; (D) in obtaining the judgment there was no fraud on the part of the person in whose favor the judgment was given or on the part of the Federal Court of or the State Court in the United States; (E) recognition or enforcement of the judgment in the British Virgin Islands would not be contrary to public policy; and (F) the proceedings pursuant to which judgment was obtained were not contrary to natural justice. In rendering such opinion, such counsel may rely, as to matters of fact, to the extent it deems proper, on statements or certificates of responsible officers of the Company or the Subsidiaries, certificates of public officials, and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company and the Subsidiaries, provided that 12 13 copies of any such statements or certificates shall be delivered to the Standby Underwriter's counsel upon request. (e) On the Closing Date, there shall have been furnished to you the opinion (addressed to you as Representative of the Standby Underwriters) of Wilkinson & Grist, counsel for the Company with respect to certain matters of Hong Kong law, dated the Closing Date and in form and substance satisfactory to counsel for the Standby Underwriters and stating that it may be relied upon by counsel for the Standby Underwriters in giving their opinion, to the effect that: (i) Nam Tai Electronic & Electrical Products Limited ("Nam Tai HK") is a corporation duly organized and validly existing under the laws of the Special Administrative Region of Hong Kong, has full corporate power and authority, and all material permits of and from all Hong Kong public, regulatory or governmental officials or bodies, to own, lease and operate its properties and conduct its business in the manner currently conducted and as proposed to be conducted and, to the best of our knowledge, there are no proceedings pending or threatened relating to the revocation or modification of any such permit, nor is there any basis therefor, nor has any event occurred that allows (or which with notice or lapse of time, or both, would allow) revocation or termination thereof or result in any other impairment of the right of the holder of any such permit. (ii) All of the issued and outstanding capital stock of Nam Tai HK has been duly and validly authorized and issued, is fully paid and nonassessable, has not been issued and is not owned or held in violation of any preemptive rights contained in the Articles of Association of Nam Tai HK and is owned directly by the Company, to the best of our knowledge, free and clear of any lien, encumbrance, claim security interest, restriction on transfer (except for restrictions imposed under the Securities Act or applicable state or foreign securities laws). (iii) The descriptions contained in the Registration Statement of Hong Kong statutes, Hong Kong legal and governmental proceedings or Hong Kong laws are accurate and complete in all material respects. (iv) Under the laws of the Special Administrative Region of Hong Kong, the submission by the Company or any HK Subsidiary to the jurisdiction of any Federal or State court sitting in the State of California, and the designation of the law of the State of California to apply to the Standby Underwriting Agreement is binding upon the Company and each HK Subsidiary and would be enforceable in any judicial or administrative proceeding in the Special Administrative Region of Hong Kong if properly brought to the attention of the Court or administrative body in accordance with the laws of the Special Administrative Region of Hong Kong. (v) To the best of our knowledge (based upon examination of each of the HK Subsidiaries' statutory books, records maintained by the Registrar of Companies and available for inspection in respect of each of the HK Subsidiaries, and our files), there are no outstanding options, warrants, calls, fights or other agreements or commitments with respect to the purchase of any capital stock of any of the HK Subsidiaries, other than as disclosed in the Registration Statement. In rendering such opinion, such counsel may rely, as to matters of fact, to the extent it deems proper on statements or certificates of responsible officers of the Company or the Subsidiaries, certificates of public officials, and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company and the Subsidiaries, provided that copies of any such statements or certificates shall be delivered to the Standby Underwriter's counsel upon request. (f) On the Closing Date, there shall have been furnished to you the opinion (addressed to you as Representative of the Standby Underwriters) of counsel for the Company licensed in the People's Republic of China, dated the Closing Date and in form and substance satisfactory to counsel for the Standby Underwriters and covering such matters concerning the Company's Chinese subsidiaries, assets and property, as well as matters of Chinese law, as may be reasonably requested by the Standby Underwriters. 13 14 In rendering such opinion, such counsel for the Company shall state that it has reviewed the Registration Statement and the Prospectus, and no facts have come to the attention of such counsel to give such counsel reason to believe that the Registration Statement, at the time it became effective (or if any amendment thereof or supplement thereto is made prior to the Closing Date, as of the date of such amendment or supplement), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, at the time the Registration Statement became effective (or if any amendment thereof is made prior to the Closing Date, as of the date of such amendment) and at the Closing Date contained an untrue statement of a material fact or omitted to state a material fact necessary, in order to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief or opinion with respect to the financial statements and schedules and other financial statistical data included therein). In rendering such opinion, such counsel may rely, as to matters of fact, to the extent it deems proper, on statements or certificates of responsible officers of the Company or the Subsidiaries, certificates of public officials, and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company and the Subsidiaries, provided that copies of any such statements or certificates shall be delivered to the Standby Underwriter's counsel upon request. (g) On the Closing Date, there shall have been furnished to you the opinion (addressed to you as Representative of the Standby Underwriters) of Freshman, Marantz, Orlanski, Cooper & Klein, counsel for the Company, dated the Closing Date and in form and substance satisfactory to counsel for the Standby Underwriters and stating that it may be relied upon by counsel for the Standby Underwriters in giving their opinion, to the effect that: (i) Each of the Company and each of its Significant Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions in the United States, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure so to qualify would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise; (ii) To the best of such counsel's knowledge, based upon telephonic advice from the Commission, the Registration Statement has become effective under the Securities Act and, to the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act; (iii) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements, financial and statistical data included therein or omitted therefrom, as to which such counsel need express no opinion) as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Securities Act and the applicable Rules and Regulations; (iv) To the best of such counsel's knowledge, the Units, Common Shares and the Warrants conform in all material respects to all statements in relation thereto contained in the Prospectus; (v) The description in the Registration Statement and the Prospectus of the Memorandum or Articles of Association or Bylaws of the Company and of statutes and contracts are accurate in all material respects and fairly present in all material respects the information required to be presented by the Securities Act and the Rules and Regulations; (vi) To the best knowledge of such counsel, there are no agreements, contracts, licenses, leases or documents of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement that 14 15 are not described or referred to therein and filed as required; (vii) To the best of such counsel's knowledge, the performance of the Agreement, the Warrant Agreement and the Representatives' Warrant Agreement and the consummation of the transactions contemplated thereby will not result in the breach or violation of any of the terms and provisions of the Company's Memorandum or Articles of Association or Bylaws, or to the best of such counsel's knowledge, result in the breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, or any lease, license, contract or other agreement or instrument known to such counsel to which the Company is a party or by which any of its properties are bound, or to the best of such counsel's knowledge, (other than performance of the Company's indemnification and contribution obligations under such agreements, concerning which no opinion need be expressed) any applicable statute, rule or regulation or, to its knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or over any of its properties or operations; provided, however, that no opinion need be rendered concerning state securities or Blue Sky laws; (viii) No authorization, approval or consent of any governmental authority or agency of the United States of America is necessary in connection with the consummation of the transactions contemplated by the Agreement, the Warrant Agreement and the Representatives' Warrant Agreement, except such as have been obtained under the Securities Act or such as may be required under the rules and regulations of the National Association of Securities Dealers, Inc., or under state securities or Blue Sky laws in connection with the purchase and the distribution of the Securities by the Underwriters; (ix) To the best knowledge of such counsel, there are no legal or governmental proceedings pending or threatened against the Company or any of its subsidiaries of a character which are required to be disclosed in the Registration Statement or the Prospectus by the Securities Act or the applicable Rules and Regulations, other than those described therein; (x) To the best knowledge of such counsel, neither the Company nor any of its Significant Subsidiaries is presently in breach of, or in default under, any bond, debenture, note or other evidence of indebtedness or any contract, indenture, mortgage, deed of trust, loan agreement, lease, license or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which any of their properties are bound which is material to the financial condition, earnings, operations, business or business prospects of the Company and its Significant Subsidiaries considered as one enterprise; (xi) To the best knowledge of such counsel, except as set forth in the Registration Statement and Prospectus, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company; and (xii) The submission to Jurisdiction and Waiver of Immunity and Inconvient Forum clause of Section 14 of the Agreement is valid and binding upon the Company. In rendering such opinion, such counsel for the Company shall state that in participating in the preparation of the Registration Statement and the Final Prospectus, and in conferences with the officers and other representatives of and accountants for the Company and with the Representatives and Underwriter's Counsel, at which conferences the contents of the Registration Statement and the Final Prospectus and related matters were discussed, no facts have come to the attention of such counsel to give such counsel reason to believe that the Registration Statement, at the time it became effective (or if any amendment thereof is made prior to the Closing Date, as of the date of such amendment), and at the Closing Date contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief or opinion with respect to the financial statements and schedules and other financial statistical data included therein). 15 16 In rendering such opinion, such counsel may rely, as to matters of fact (except such firm's knowledge), to the extent it deems proper, on statements or certificates of responsible officers of the Company or the Subsidiaries, certificates of public officials, and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company and the Subsidiaries, provided that copies of any such statements or certificates shall be delivered to the Standby Underwriter's counsel upon request. (h) There shall have been furnished to you a certificate, dated the Closing Date and addressed to you, signed by the Chairman of the Board and Chief Financial Officer of the Company to the effect that (i) the representations and warranties of the Company contained in this Standby Underwriting Agreement are true and correct as if made at and as of the Closing Date, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date; (ii) no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been initiated or threatened; (iii) all filings required by Rule 424 and Rule 430A of the Rules and Regulations have been made; (iv) the signers of said certificate have carefully examined the Registration Statement and the Effective Prospectus and the Final Prospectus, and any amendments or supplements thereto, and such documents contain all statements and information required to be included therein, and do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;, and (v) since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amendment or supplement to the Registration Statement or the Effective Prospectus and the Final Prospectus which has not been so set forth. (i) Since the effective date of the Registration Statement, the Company shall not have sustained any loss by fire, flood, accident or other calamity, nor shall it have become a party to or the subject of any litigation, individually or in the aggregate, which is material to the Company, nor shall there have been a material adverse change in the general affairs, business, key personnel, capitalization, financial position or net worth of the Company, whether or not arising in the ordinary course of business, which loss, litigation or change, in your judgment, shall render it inadvisable to proceed with the delivery and purchase of the Representative's Warrants, the Counsel's Warrants or the Underwritten Units. (j) On the date of this Standby Underwriting Agreement and on the Closing Date you shall have received a letter from Price Waterhouse independent accountants, dated such date and Closing Date, respectively, addressed to you as Representative, to the effect that: (i) It is an independent certified public accountant with respect to the Company within the meaning of the Securities Act and the applicable Rules and Regulations. (ii) In its opinion, the financial statements and notes thereto of the Company examined by it and contained in the Effective and Final Prospectus comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Rules and Regulations. (iii) On the basis of its procedures and inquiries as specified in its letters, nothing has come to its attention to cause it to believe that: (1) The unaudited financial statements of the Company contained in the Effective and Final Prospectus (x) do not comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Rules and Regulations, or (y) are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements: (2) The data included in the Effective and Final Prospectus under the caption "Selected Financial Data" do not agree with the corresponding amounts in the audited and unaudited financial statements for and as at the end of each of the periods then ended; and 16 17 (3) At a specified date not more than five business days prior to the date of such letter, (x) there was any change in the capital stock or long-term debt of the Company or any decrease in net current assets or net assets or shareholders' equity, in each ease as compared with the corresponding amounts shown in the June 30, 1997 balance sheet contained in the Effective and Final Prospectus, or (y) for the period from July 1, 1997 to the specified date referred to above, as compared with the corresponding period in the prior year, there was any decrease in sales, net income or income per share, except in all instances for changes or decreases which the Effective and Final Prospectus discloses have occurred or may occur, or if there was any change or decrease, setting forth the amount of such change or decrease. (iv) It has compared the information expressed in amounts, dollar amounts and percentages derived therefrom, and other financial information pertaining to the Company set forth in the Effective and Final Prospectus specified by you, in each case to the extent such information was obtained or derived from the general accounting records of the Company, with the results obtained from the application of specified readings, inquiries and other appropriate procedures set forth in such letters, and found by it to be in agreement. (k) At or prior to the Closing Date, you shall have received the Lock-Up Agreements described in the last sentence of Section 4(f) hereof. (l) You shall have been furnished all additional documents and certificates as you may reasonably request. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to you and to counsel for the Standby Underwriter. The Company shall furnish you with such conformed copies of such opinions, certificates, letters and other documents as you shall reasonably request. If any of the conditions specified in this Section 5 shall not have been fulfilled when and as required by this Standby Underwriting Agreement and all obligations of the Underwriters hereunder may be cancelled at, or at any time prior to, the Closing Date, by you. Any such cancellation shall be without liability of the Standby Underwriters to the Company. Notice of such cancellation shall be given to the Company in writing, or by telegraph or telephone and confirmed in writing. 6. INDEMNIFICATION AND CONTRIBUTION. (a) The Company shall indemnify and hold harmless the Standby Underwriters, each of its Subsidiaries, officers, directors, employees, agents and counsel, and each person, if any, who controls the Standby Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any loss, claim, damage or liability, joint or several, to which such Standby Underwriter may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage or liability (or action with respect thereto) arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact made by the Company in Section 1 or 2 hereof, or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Effective or Final Prospectus or any amendment or supplement thereto, or (iii) the omission or alleged omission to state in the Registration Statement. any Pre-Effective Prospectus, the Effective or Final Prospectus or any amendment or supplement thereto a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and the Company shall reimburse the Standby Underwriter for any reasonable legal or reasonable other expenses as incurred by the Standby Underwriter in connection with investigating or defending against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action, notwithstanding the possibility that payments for such expenses might later be held to be improper, in which case the person receiving them shall promptly refund them; provided, however, that the Company shall not be liable in any such case to the extent, but only to the extent, that any such loss, claim, damage or liability arising out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information 17 18 furnished to the Company by or on behalf of the Standby Underwriter specifically for use in the preparation of the Registration Statement, any Pre-Effective Prospectus, the Effective or Final Prospectus or any amendment or supplement thereto, and provided further, that with respect to any untrue statement or omission or alleged untrue statement or omission made in any Pre-Effective Prospectus, the indemnity agreement contained in this paragraph shall not inure to the benefit of any Standby Underwriter to the extent that any such loss, claim, damage, liability or expense of the Standby Underwriter or controlling person results from the fact that a copy of the Final Prospectus was not sent or given to such person at or prior to the written confirmation of sale of the Underwritten Securities as required by the Securities Act, and if the untrue statement or omission has been corrected in the Final Prospectus, unless such failure to deliver the Final Prospectus was a result of noncompliance by the Company with its obligations under Section 4(c) hereof. (b) The Standby Underwriter shall indemnify and hold harmless the Company against any loss, claim, damage or liability to which the Company may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage or liability (or action with respect thereof) arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the Pre-Effective Prospectus, the Effective or Final Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state in the Registration Statement, any Pre-Effective Prospectus, the Effective or Final Prospectus or any amendment or supplement thereto a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that such indemnification shall be available in each such 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 you specifically for use in the preparation thereof; and the Standby Underwriter shall reimburse any legal or other expenses as and when reasonably incurred by the Company in connection with investigating, defending against, settling, compromising or paying any such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability which the Standby Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of any claim or the commencement of any action, the indemnified party shall, if a claim with respect thereto is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the claim or the commencement of that action; and the failure to notify the indemnifying party shall not relieve it from any liability that it may have to an indemnified party otherwise than under such subsection. If any such claim or action is brought against an indemnified party, it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under such subsection for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation, except that you shall have the right to employ counsel to represent you against the Company under such subsection if, in your reasonable judgment, it is advisable for you to be represented by separate counsel, and in that event the reasonable legal fees and expenses of one such separate counsel shall be paid by the Company. (d) If the indemnification provided for in this Section 6 is unavailable or insufficient to hold harmless an indemnified party under subsection 6(a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above and in such proportion as is appropriate to reflect the relative benefits received by the Company and the Standby Underwriter from the offer and sale of the Securities, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand, and the Standby Underwriter, on the other hand, in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative respective benefits received by the Company and the Standby Underwriter shall be deemed to be in the same proportion that the total net proceeds from 18 19 the offer and sale of the Underwritten Securities (before deducting expenses) received by the Company, on the one hand, and the total standby fees received by the Standby Underwriter, on the other hand, bear to one another, in each ease as set forth in the table on the cover page of the Final Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, or the Standby Underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company and the Standby Underwriter agree that it would not be just and equitable if contributions pursuant to this subsection 6(d) were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this subsection (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending against any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), the Standby Underwriter shall not be required to contribute any amount in excess of the amount by which the total price at which the Underwritten Units purchased by it and distributed to the public exceeds the amount of any damages that the Standby Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11 of the Securities Act) shall be entitled to contributions from any person who was not guilty of such fraudulent misrepresentation. Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it with respect to which contribution may be sought, it shall promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in Section 6(c) above). (e) The obligations of the Company under this Section 6 shall be in addition to any liability that the Company may otherwise have, and shall extend, upon the same terms and conditions, to each person, if any, who controls any Standby Underwriter within the meaning of the Securities Act. The obligations of the Standby Underwriter under this Section 6 shall be in addition to any liability that the Standby Underwriter may otherwise have, and shall extend, upon the same terms and conditions, to each director of the Company (including any person who, with his consent, is named in the Registration Statement as about to become a director of the Company), to each officer of the Company who has signed the Registration Statement and to each person, if any, who controls the Company within the meaning of the Securities Act. 7. EFFECTIVE DATE AND TERMINATION. (a) This Standby Underwriting Agreement shall become effective at 8:00 A.M., Los Angeles time, on the earlier of (i) the first full Business Day following the date the Registration Statement becomes effective or (ii) the day on which you release the Underwritten Units for sale to the public. You shall notify the Company immediately after you have taken any action that causes this Standby Underwriting Agreement to become effective. Until this Standby Underwriting Agreement is effective, it may be terminated by the Company by giving notice as hereinafter provided to you or by you by giving notice as hereinafter provided to the Company, except that the provisions of Section 4(i) and Section 6 shall at all times be effective. For purposes of this Standby Underwriting Agreement, the release of the Underwritten Units for sale to the public shall be deemed to have been made when you release, by telegram or otherwise, firm offers of the Underwritten Units to securities dealers or release for publication a newspaper advertisement relating to the Units, whichever occurs first. (b) Until the Closing Date, this Standby Underwriting Agreement may be terminated by you by giving notice as hereinafter provided to the Company, if (i) the Company shall have failed, refused or been unable, at or prior to the Closing Date, in material respects to perform any agreement on its part to be performed hereunder, (ii) any other material condition of the obligations of the Standby Underwriter hereunder is not fulfilled; (iii) trading in or reporting of securities generally on the New York Stock Exchange. The Nasdaq National Market System or the over-the-counter market shall have been suspended 19 20 or minimum prices shall have been established on either of such exchanges or such market by the Commission or by such exchange or other regulatory body or governmental authority having jurisdiction; (iv) a general banking moratorium shall have been declared by federal or state authorities; or (v) if in your sole judgment there shall have been such a material adverse change in general economic, political or financial conditions or if in your sole judgment there shall have been a material adverse change in international conditions, the effect of which on the financial market in the United States shall be such as makes it inadvisable to proceed with the delivery of any of the Underwritten Units. Any termination of this Underwriting Agreement pursuant to this Section 7 shall be without liability on the part of the Company or the Standby Underwriter, except as otherwise provided in Section 4(i) and Section 6 hereof. Any notice referred to above may be given at the address specified in Section 9 hereof in writing or by telegraph or telephone, and if by telegraph or telephone, shall be immediately confirmed in writing. 8. SURVIVAL OF INDEMNITIES, CONTRIBUTION, WARRANTIES AND REPRESENTATIONS. The indemnity and contribution agreements contained in Section 6 and the representations, warranties and agreements of the Company in Sections 1, 2, 4 and 5 shall survive the delivery of the Warrants or Units to the Underwriters hereunder and shall remain in full force and effect, regardless of any termination or cancellation of this Underwriting Agreement or any investigation made by or on behalf of any indemnified party. 9. NOTICES. Except as otherwise provided in this Underwriting Agreement, whenever notice is required by the provisions hereof to be given to: (a) the Company, such notice shall be in writing addressed to the Company at Unit 9, 15/F., Tower 1, China Hong Kong City, 33 Canton Road, Kowloon, Hong Kong, Attention: Mr. Tadao Murakami, President with a copy to Nam Tai Electronics (Canada) Ltd., 999 West Hastings Street, Suite 530, Vancouver, British Columbia V6C 2W2, Canada, Attention: Mr. M. K. Koo; and (b) to the Standby Underwriter, such notice shall be in writing addressed to Joseph Charles & Associates, Inc., 9701 Wilshire Boulevard, 9th Floor, Beverly Hills, California 90212, Attention: Richard A. Rappaport. 10. INFORMATION FURNISHED BY UNDERWRITERS. The statements set forth (i) on the front cover page with respect to price, Standby Fees and terms of the offering, the last two paragraphs on the inside front cover page with respect to stabilization and passive market making, under the caption "Standby Underwriting" in any Pre-Effective Prospectus and in the Effective Prospectus and the Final Prospectus, and (ii) the portion of the amount reflected under "Blue Sky" fees and expenses (including those of counsel included in "Legal Fees") in Item 14 of Part II of the Registration Statement representing the blue sky filing fees and estimated legal fees and expenses of counsel for the Standby Underwriter in connection with registration of the Securities for sale in various states, constitute the written information furnished by or on behalf of any Standby Underwriter herein, and are true and correct in all material respects. 11. PARTIES. Except for the provisions of Section 14, which provisions alone are intended to benefit persons who purchase the Underwritten Units directly from the Standby Underwriter, this Standby Underwriting Agreement is made solely for the benefit of the Standby Underwriter and the Company and may officer, director or controlling person referred to in Section 6 hereof, and their respective successors and assigns, and no other person shall acquire or have any right by virtue of this Standby Underwriting Agreement. The term 'successors and assigns," as used in this Standby Underwriting Agreement, shall not include any purchaser of any of the Underwritten Units from the Standby Underwriter under this Agreement merely by reason of such purchase. 12. DEFINITION OF "BUSINESS DAY," "SUBSIDIARY" AND "SIGNIFICANT SUBSIDIARY." For purposes of this Standby Underwriting Agreement, (a) "Business Day" means any day on which the New York Stock Exchange, Inc. is open for trading, and) "Subsidiary" and "Significant Subsidiary" have the respective meanings set forth in Rule 405 of the Rules and Regulations. 13. GOVERNING LAW. THIS STANDBY UNDERWRITING AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO THE CHOICE OF LAW OR CONFLICT OF LAWS PRINCIPLES THEREOF. 20 21 14. SUBMISSION TO JURISDICTION AND WAIVER OF IMMUNITY AND INCONVENIENT FORUM. The Company acknowledges, consents and agrees that any and all disputes arising in connection with this Standby Underwriting Agreement and the transactions contemplated by this Standby Underwriting Agreement, including the offer and sale of the Units, may be brought in any state or federal court of record in located in Los Angeles County, State of California. By its signature to this Standby Underwriting Agreement, the Company irrevocably submits to the jurisdiction of the state and federal courts located in Los Angeles County, State of California in any legal action or proceeding relating to this Standby Underwriting Agreement and the transactions contemplated by this Standby Underwriting Agreement, including the offer and sale of the Underwritten Units. The Company irrevocably waives all immunity from jurisdiction, attachment and execution, whether on the basis of sovereignty or otherwise, to which it might otherwise be entitled in any legal action or proceeding in any state or federal court located in Los Angeles County, State of California. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to any suit, action or proceeding relating to this Standby Underwriting Agreement and the transactions contemplated by this Standby Underwriting Agreement, including the offer and sale of the Securities being brought in the federal or state courts located in Los Angeles County, State of California, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. The provisions of this Section 14 are also intended to benefit those persons who acquire the Underwritten Units directly from the Standby Underwriter. 15. COUNTERPARTS. This Standby Underwriting Agreement may be signed in one or more counterparts, each of which shall constitute an original and all of which together shall constitute one and the same agreement. Please confirm, by signing and returning to us counterparts of this Standby Underwriting Agreement, that the foregoing correctly sets forth the agreement among the Company and the Standby Underwriter. 21 22 Very truly yours, "COMPANY" NAM TAI ELECTRONICS, INC. By:(s.d) M. K. Koo ------------------------------------- Its: Chairman of the Board Confirmed and accepted as of the date first above mentioned: JOSEPH CHARLES & ASSOCIATES, INC. By: (s.d.) Richard A. Rappaport - ----------------------------------------- Its: Managing Director In consideration of the execution of this Agreement by Joseph Charles & Associates, Inc., the Undersigned hereby agree to exercise in full all of our Rights (without regard to any oversubscription rights we may have). (s.d) M. K. Koo --------------------------------- (s.d) Tadao Murakami --------------------------------- 23 SCHEDULE A
PERCENTAGE OF NUMBER OF UNDERWRITTEN Standby Underwriters UNITS - -------------------- ------ Joseph Charles & Associates, Inc. ........................................ 68% Kashner Davidson Securities Corporation .................................. 20 Cohig & Associates, Incorporated ......................................... 12 --- Total ...................................................... 100% ===
EX-2.4 5 EXHIBIT 2.4 1 EXHIBIT 2.4 - -------------------------------------------------------------------------------- NAM TAI ELECTRONICS, INC. AND JOSEPH CHARLES & ASSOCIATES, INC. --------------------- REPRESENTATIVE'S WARRANT AGREEMENT DATED AS OF DECEMBER 2, 1997 - -------------------------------------------------------------------------------- 2 REPRESENTATIVE'S WARRANT AGREEMENT THIS REPRESENTATIVE'S WARRANT AGREEMENT (the "Agreement"), dated as of December 2, 1997 is made and entered into by and between NAM TAI ELECTRONICS, INC., a British Virgin Islands international holding corporation (the "Company") and JOSEPH CHARLES & ASSOCIATES., INC., a Florida corporation (the "Warrantholder"). The Company agrees to issue and sell, and the Warrantholder agrees to purchase, for the price of $.001 per warrant, warrants, as hereinafter described (the "Warrants"), to purchase up to an aggregate of up to 120,000 units (the "Units"), each Unit consisting of (i) one (subject to adjustment pursuant to Section 8 hereof) share (the "Shares") of the Company's Common Shares, $.01 par value (the "Common Shares") and (ii) one common share purchase warrant (the "Unit Warrants") exercisable to purchase one Common Share, in connection with a public offering by the Company to its shareholders of non-transferable subscription rights (the "Rights") to purchase up to 3,000,000 Units pursuant to a standby underwriting agreement (the "Underwriting Agreement"), dated as of October 30, 1997, between the Company and the Warrantholder). Common Shares purchasable upon exercise of the Unit Warrants are hereinafter referred to as the "Unit Warrant Stock.") The purchase and sale of the Warrants shall occur on the Closing Date, as defined in the Underwriting Agreement, and be subject to the conditions to the Underwriters' obligations to purchase Units thereunder, if any. The Unit Warrants shall be subject to all of the terms and conditions of the warrant agreement, dated November 24, 1997 between the Company and U.S. Stock Transfer Corporation, as Warrant Agent (the "Warrant Agreement"). In consideration of the foregoing and for the purpose of defining the terms and provisions of the Warrants and the respective rights and obligations thereunder, the Company and the Warrantholder, for value received, hereby agree as follows: SECTION 1. TRANSFERABILITY AND FORM OF WARRANTS. 1.1 Registration. The Warrants shall be numbered and shall be registered on the books of the Company when issued. 1.2 Transfer. The Warrants shall be transferable only on the books of the Company maintained at its principal office, wherever its principal office may then be located, upon delivery thereof duly endorsed by the Warrantholder or by its duly authorized attorney or representative, accompanied by proper evidence of succession, assignment or authority to transfer. Upon any registration of transfer, the Company shall execute and deliver new Warrants to the person entitled thereto. 1.3 Limitations on Transfer of the Warrants. The Warrants shall not be sold, transferred, assigned or hypothecated by the Warrantholder until November 24, 1998, except to (i) one or more persons, each of whom on the date of transfer is an officer or partner of the Warrantholder; (ii) a successor to the Warrantholder in merger or consolidation; (iii) a purchaser of all or substantially all of the Warrantholder's assets; or (iv) any person receiving the Warrants from one or more of the persons listed in this subsection 1.3 at such person's or persons' death pursuant to will, trust or the laws of intestate succession. The Warrants may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates representing the right to purchase the same aggregate number of Units. Unless the context indicates otherwise, the term "Warrantholder" shall include any transferee or transferees of the Warrants pursuant to this subsection 1.3, and the term "Warrants" shall include any and all warrants outstanding pursuant to this Agreement, including those evidenced by a certificate or certificates issued upon division, exchange, substitution or transfer pursuant to this Agreement. 3 1.4 Form of Warrants. The text of the Warrants and of the form of election to purchase Units shall be substantially as set forth in Exhibit A attached hereto. The number of Shares per Unit issuable upon exercise of the Warrants is subject to adjustment upon the occurrence of certain events, all as hereinafter provided. The Warrants shall be executed on behalf of the Company by its President or by a Vice President, attested to by its Secretary or an Assistant Secretary. A Warrant bearing the signature of an individual who was at any time the proper officer of the Company shall bind the Company, notwithstanding that such individual shall have ceased to hold such office prior to the delivery of such Warrant or did not hold such office on the date of this Agreement. The Warrants shall be dated as of the date of signature thereof by the Company either upon initial issuance or upon division, exchange, substitution or transfer. SECTION 2. EXCHANGE OF WARRANT CERTIFICATE. Any Warrant certificate may be exchanged for another certificate or certificates entitling the Warrantholder to purchase a like aggregate number of Units as the certificate or certificates surrendered then entitled such Warrantholder to purchase. Any Warrantholder desiring to exchange a Warrant certificate shall make such request in writing delivered to the Company, and shall surrender, properly endorsed, with signatures guaranteed, the certificate evidencing the Warrant to be so exchanged. Thereupon, the Company shall execute and deliver to the person entitled thereto a new Warrant certificate as so requested. SECTION 3. TERM OF WARRANTS; EXERCISE OF WARRANTS. (a) Subject to the terms of this Agreement, the Warrantholder shall have the right, at any time during the period commencing at 9:00 a.m., Pacific Time, on November 24, 1998 and ending at 5:00 p.m., Pacific Time, on November 24, 2000 (the "Termination Date"), to purchase from the Company up to the number of Units to which the Warrantholder may at the time be entitled to purchase pursuant to this Agreement, upon surrender to the Company, at its principal office, of the certificate evidencing the Warrants to be exercised, together with the purchase form on the reverse thereof duly filled in and signed, with signatures guaranteed, and upon payment to the Company of the Warrant Price (as defined in and determined in accordance with the provisions of this section 3 and sections 7 and 8 hereof), for the number of Units in respect of which such Warrants are then exercised, but in no event for less than 100 Units (unless less than an aggregate of 100 Units are then purchasable under all outstanding Warrants held by a Warrantholder). (b) Payment of the aggregate Warrant Price shall be made in cash or by check, or any combination thereof. Upon such surrender of the Warrants and payment of such Warrant Price as aforesaid, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the Warrantholder and in such name or names as the Warrantholder may designate a certificate or certificates for the number of Units so purchased upon the exercise of the Warrant, together with cash, as provided in Section 9 hereof, in respect of any fractional Shares otherwise issuable upon such surrender. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such securities as of the date of surrender of the Warrants and payment of the Warrant Price, as aforesaid, notwithstanding that the certificate or certificates representing such securities shall not actually have been delivered or that the stock transfer books of the Company shall then be closed. The Warrants shall be exercisable, at the election of the Warrantholder, either in full or from time to time in part and, in the event that a certificate evidencing the Warrants is exercised in respect of less than all of the Units specified therein at any time prior to the Termination Date, a new certificate evidencing the remaining portion of the Warrants will be issued by the Company. SECTION 4. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of the Warrants or the securities comprising the Units; provided, however, the Company shall not be required to pay any tax which may be payable in respect of any secondary transfer of the Warrants or the securities comprising the Units. 2 4 SECTION 5. MUTILATED OR MISSING WARRANTS. In case the certificate or certificates evidencing the Warrants shall be mutilated, lost, stolen or destroyed, the Company shall, at the request of the Warrantholder, issue and deliver in exchange and substitution for and upon cancellation of the mutilated certificate or certificates, or in lieu of and in substitution for the certificate or certificates lost, stolen or destroyed, a new Warrant certificate or certificates of like tenor and representing an equivalent right or interest, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Warrant and a bond of indemnity, if requested, also satisfactory in form and amount at the applicant's cost. Applicants for such substitute Warrants certificate shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. SECTION 6. RESERVATION OF SHARES. There has been reserved, and the Company shall at all times keep reserved so long as the Warrants remain outstanding, out of its authorized Common Shares, such number of shares of Common Shares as shall be subject to purchase under the Warrants (including such number of shares of Unit Warrant Stock subject to purchase upon exercise of the Unit Warrants). Every transfer agent for the Common Shares and other securities of the Company issuable upon the exercise of the Warrants will be irrevocably authorized and directed at all times to reserve such number of authorized shares and other securities as shall be requisite for such purpose. The Company will keep a copy of this Agreement and the Warrant Agreement on file with every transfer agent for the Common Shares and other securities of the Company issuable upon the exercise of the Warrants. The Company will supply every such transfer agent with duly executed stock and other certificates, as appropriate, for such purpose and will provide or otherwise make available any cash which may be payable as provided in Section 9 hereof. SECTION 7. WARRANT PRICE. The price per Unit at which Units shall be purchasable upon the exercise of the Warrants (the "Warrant Price") shall be $20.40, subject to further adjustment pursuant to Section 8 hereof. SECTION 8. ADJUSTMENT OF NUMBER OF SHARES. The number and kind of securities purchasable upon the exercise of the Warrants and the Warrant Price shall be subject to adjustment from time to time upon the happening of certain events, as follows: 8.1 Adjustments. The number of Shares purchasable upon the exercise of the Warrants shall be subject to adjustment as follows: (a) In case the Company shall (i) pay a dividend in Common Shares or make a distribution in Common Shares, (ii) subdivide its outstanding Common Shares, (iii) combine its outstanding Common Shares into a smaller number of shares of Common Shares, or (iv) issue by reclassification of its Common Shares other securities of the Company, the number of Shares purchasable upon exercise of the Warrants immediately prior thereto shall be adjusted so that the Warrantholder shall be entitled to receive the kind and number of Shares or other securities of the Company which it would have owned or would have been entitled to receive immediately after the happening of any of the events described above, had the Warrants been exercised immediately prior to the happening of such event or any record date with respect thereto. Any adjustment made pursuant to this subsection 8.1(a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) In case the Company shall issue rights, options, warrants or convertible securities to all or substantially all holders of its Common Shares, without any charge to such holders, entitling them to subscribe for or purchase Common Shares at a price per share which is lower at the record date mentioned below than the then Current Market Price (as defined in Section 9), the number of Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Shares theretofore purchasable upon exercise of the Warrant by a fraction, of which the numerator shall be the number of shares of Common Shares outstanding immediately prior to the issuance of such rights, options, warrants or convertible securities plus the number of additional shares of Common Shares offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Shares outstanding immediately prior to the issuance of such rights, options, warrants 3 5 or convertible securities plus the number of shares which the aggregate offering price of the total number of shares offered would purchase at such Current Market Price. Such adjustment shall be made whenever such rights, options, warrants or convertible securities are issued, and shall become effective immediately and retroactive to the record date for the determination of stockholders entitled to receive such rights, options, warrants or convertible securities. (c) In case the Company shall distribute to all or substantially all holders of its Common Shares evidences of its indebtedness or assets (excluding cash dividends or distributions out of earnings) or rights, options, warrants or convertible securities containing the right to subscribe for or purchase Common Shares (excluding those referred to in subsection 8.1(b) above), then in each case the number of Shares thereafter purchasable upon the exercise of the Warrants shall be determined by multiplying the number of Shares theretofore purchasable upon exercise of the Warrants by a fraction, of which the numerator shall be the then Current Market Price on the date of such distribution, and of which the denominator shall be such Current Market Price on such date minus the then fair value (determined as provided in subparagraph (e) below) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights, options, warrants or convertible securities applicable to one share. Such adjustment shall be made whenever any such distribution is made and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. (d) No adjustment in the number of Shares purchasable pursuant to the Warrants shall be required unless such adjustment would require an increase or decrease of at least one percent in the number of Shares then purchasable upon the exercise of the Warrants or, if the Warrants are not then exercisable, the number of Shares purchasable upon the exercise of the Warrants on the first date thereafter that the Warrants become exercisable; provided, however, that any adjustments which by reason of this subsection 8.1(d) are not required to be made immediately shall be carried forward and taken into account in any subsequent adjustment. (e) Whenever the number of Shares purchasable upon the exercise of the Warrant is adjusted, as herein provided, the Warrant Price payable upon exercise of the Warrant shall be adjusted by multiplying such Warrant Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Shares purchasable upon the exercise of the Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Shares so purchasable immediately thereafter. (f) Whenever the number of Shares purchasable upon the exercise of the Warrants is adjusted as herein provided, the Company shall cause to be promptly mailed to the Warrantholder by first class mail, postage prepaid, notice of such adjustment and a certificate of the chief financial officer of the Company setting forth the number of Shares purchasable upon the exercise of the Warrants after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. (g) For the purpose of this subsection 8.1, the term 'Common Shares' shall mean (i) the class of stock designated as the Common Shares of the Company at the date of this Agreement, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Shares consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time, as a result of an adjustment made pursuant to this Section 8, the Warrantholder shall become entitled to purchase any securities of the Company other than Common Shares and Unit Warrants, (i) if the Warrantholder's right to purchase is on any other basis than that available to all holders of the Company's Common Shares, the Company shall obtain an opinion of an independent investment banking firm valuing such other securities and (ii) thereafter the number of such other securities so purchasable upon exercise of the Warrants shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Shares contained in this Section 8. 4 6 (h) Upon the expiration of any rights, options, warrants or conversion privileges, if such shall not have been exercised, the number of Shares purchasable upon exercise of the Warrants, to the extent the Warrants have not then been exercised, shall, upon such expiration, be readjusted and shall thereafter be such as they would have been had they been originally adjusted (or had the original adjustment not been required, as the case may be) on the basis of (A) the fact that the only Common Shares so issued were the Common Shares, if any, actually issued or sold upon the exercise of such rights, options, warrants or conversion privileges, and (B) the fact that such shares of Common Shares, if any, were issued or sold for the consideration actually received by the Company upon such exercise plus the consideration, if any, actually received by the Company for the issuance, sale or grant of all such rights, options, warrants or conversion privileges whether or not exercised; provided, however, that no such readjustment shall have the effect of decreasing the number of Shares purchasable upon exercise of the Warrants by an amount in excess of the amount of the adjustment initially made in respect of the issuance, sale or grant of such rights, options, warrants or conversion privileges. 8.2 No Adjustment for Dividends. Except as provided in subsection 8.1, no adjustment in respect of any dividends or distributions out of earnings shall be made during the term of the Warrants or upon the exercise of the Warrants. 8.3 No Adjustment in Certain Cases. No adjustments shall be made pursuant to Sections 3 or 8 hereof in connection with the issuance of Units, Shares, Unit Warrants or Unit Warrant Stock sold as part of the public sale and issuance of Units (or any of the underlying securities) pursuant to the Underwriting Agreement or the issuance of Units, Shares, Unit Warrants or Unit Warrant Stock upon exercise of the Warrants or the warrants issued to Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation. No adjustments shall be made pursuant to Sections 3 or 8 hereof in connection with the grant or exercise of presently authorized or outstanding options to purchase, or the issuance of shares, aggregating up to 1,000,000 Common Shares under the Company's existing stock option plans. 8.4 Preservation of Purchase Rights upon Reclassification, Consolidation, etc. In case of any consolidation of the Company with or merger of the Company into another corporation or in case of any sale or conveyance to another corporation of the property, assets or business of the Company as an entirety or substantially as an entirety, the Company or such successor or purchasing corporation, as the case may be, shall execute with the Warrantholder an agreement that the Warrantholder shall have the right thereafter upon payment of the Warrant Price in effect immediately prior to such action to purchase, upon exercise of the Warrants, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such consolidation, merger, sale or conveyance had the Warrants (and each underlying security) been exercised immediately prior to such action. In the event of a merger described in Section 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended, in which the Company is the surviving corporation, the right to purchase Units under the Warrants shall terminate on the date of such merger and thereupon the Warrants shall become null and void, but only if the controlling corporation shall agree to substitute for the Warrants its warrant which entitles the holder thereof to purchase upon its exercise the kind and amount of shares and other securities and property which it would have owned or been entitled to receive had the Warrants been exercised immediately prior to such merger. Any such agreements referred to in this subsection 8.4 shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 8 hereof. The provisions of this subsection 8.4 shall similarly apply to successive consolidations, mergers, sales or conveyances. 8.5 Par Value of Common Shares. Before taking any action which would cause an adjustment effectively reducing the portion of the Warrant Price allocable to each Share below the then par value per Common Shares issuable upon exercise of the Warrants, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Common Shares upon exercise of the Warrants. 5 7 8.6 Independent Public Accountants. The Company may retain a firm of independent public accountants of recognized national standing (which may be any such firm regularly employed by the Company) to make any computation required under this Section 8, and a certificate signed by such firm shall be conclusive evidence of the correctness of any computation made under this Section 8. 8.7 Statement on Warrant Certificates. Irrespective of any adjustments in the number of securities issuable upon exercise of Warrants, Warrant certificates theretofore or thereafter issued may continue to express the same number of securities as are stated in the similar Warrant certificates initially issuable pursuant to this Agreement. However, the Company may, at any time in its sole discretion (which shall be conclusive), make any change in the form of Warrant certificate that it may deem appropriate and that does not affect the substance thereof; and any Warrant certificate thereafter issued, whether upon registration of transfer of, or in exchange or substitution for, an outstanding Warrant certificate, may be in the form so changed. SECTION 9. FRACTIONAL INTERESTS; CURRENT MARKET PRICE. The Company shall not be required to issue fractional Shares on the exercise of the Warrants. If any fraction of a Share would, except for the provisions of this Section 9, be issuable on the exercise of the Warrants (or specified portion thereof), the Company shall pay an amount in cash equal to the then Current Market Price multiplied by such fraction. For purposes of this Agreement, the term "Current Market Price" shall mean (i) if the Common Shares are traded in the over-the-counter market and not in the NASDAQ National Market System nor on any national securities exchange, the average of the per share closing bid prices of the Common Shares on the 30 consecutive trading days immediately preceding the date in question, as reported by NASDAQ or an equivalent generally accepted reporting service, or (ii) if the Common Shares are traded in the NASDAQ National Market System or on a national securities exchange, the average for the 30 consecutive trading days immediately preceding the date in question of the daily per share closing prices of the Common Shares in the NASDAQ National Market System or on the principal stock exchange on which it is listed, as the case may be. For purposes of clause (i) above, if trading in the Common Shares is not reported by NASDAQ, the bid price referred to in said clause shall be the lowest bid price as reported in the "pink sheets" published by National Quotation Bureau, Incorporated. The closing price referred to in clause (ii) above shall be the last reported sale price or, in 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 System or on the national securities exchange on which the Common Shares are then listed. SECTION 10. NO RIGHTS AS SHAREHOLDER; NOTICES TO WARRANTHOLDER. Nothing contained in this Agreement or in the Warrants shall be construed as conferring upon the Warrantholder or its transferees any rights as a shareholder of the Company, including the right to vote, receive dividends, consent or receive notices as a shareholder in respect of any meeting of shareholders for the election of directors of the Company or any other matter. If, however, at any time prior to the expiration of the Warrants and prior to their exercise, any one or more of the following events shall occur: (a) any action which would require an adjustment pursuant to Section 8.1 or 8.4; or (b) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger or sale of its property, assets and business as an entirety or substantially as an entirety) shall be proposed; then the Company shall give notice in writing of such event to the Warrantholder, as provided in Section 11 hereof, at least 20 days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to any relevant dividend, distribution, subscription rights or other rights or for the determination of shareholders entitled to vote on such proposed dissolution, liquidation or winding up. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to mail or receive such notice or any defect therein shall not affect the validity of any action taken with respect thereto. 6 8 SECTION 11. NOTICES. Any notice pursuant to this Agreement by the Company or by a Warrantholder, a holder of Shares, Unit Warrants or Unit Warrant Stock shall be in writing and shall be deemed to have been duly given if delivered or mailed by certified mail, return receipt requested: (a) If to a Warrantholder or a holder of Shares, Unit Warrants or Unit Warrant Stock, addressed to Joseph Charles & Associates, Inc., 9701 Wilshire Blvd., 9th Floor, Beverly Hills, California 90212; Attention: Corporate Finance Department. (b) If to the Company addressed to it at 999 West Hastings Street, Suite 530, Vancouver, B.C. Canada V6C 2W2, Attention: Mr. M.K. Koo, Chairman of the Board. Each party may from time to time change the address to which notices to it are to be delivered or mailed hereunder by notice in accordance herewith to the other party. SECTION 12. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company, the Warrantholders, or the holders of Shares, Unit Warrants or Unit Warrant Stock shall bind and inure to the benefit of their respective successors and assigns hereunder. SECTION 13. MERGER OR CONSOLIDATION OF THE COMPANY. The Company will not merge or consolidate with or into any other corporation or sell all or substantially all of its property to another corporation, unless the provisions of Section 8.4 are complied with. SECTION 14. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements contained in any schedule, exhibit, certificate or other instrument delivered by or on behalf of the parties hereto, or in connection with the transactions contemplated by this Agreement, shall be deemed to be representations and warranties hereunder. Notwithstanding any investigations made by or on behalf of the parties to this Agreement, all representations, warranties and agreements made by the parties to this Agreement or pursuant hereto shall survive. SECTION 15. GOVERNING LAW. This Agreement shall be deemed to be a contract made under the laws of the State of California and for all purposes shall be construed in accordance with the laws of said State applicable to contracts entered into and performed in said State, and without regard to any conflicts of laws principles thereof. SECTION 19. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Warrantholders and the holders of Shares, Unit Warrants or Unit Warrant Stock any legal or equitable right, remedy or claim under this Agreement. This Agreement shall be for the sole and exclusive benefit of the Company, the Warrantholders and the holders of Shares, Unit Warrants and Unit Warrant Stock. SECTION 20. COUNTERPARTS. This Agreement may be signed in one or more counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. 7 9 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed, all as of the day and year first above written. NAM TAI ELECTRONICS, INC. By: (s.d.) M. K. Koo -------------------------------------- Chairman of the Board JOSEPH CHARLES & ASSOCIATES, INC. By (s.d.) Richard A. Rappaport ---------------------------------------- Managing Director 8 10 Exhibit A THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH SECTION 1 OF THE AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED. Warrant Certificate No. _______ REPRESENTATIVE'S WARRANT TO PURCHASE 120,000 UNITS, EACH UNIT CONSISTING OF ONE COMMON SHARE AND ONE WARRANT EXERCISABLE TO PURCHASE ONE COMMON SHARE VOID AFTER 5:00 P.M., PACIFIC TIME, ON NOVEMBER 24, 2000 NAM TAI ELECTRONICS, INC. This certifies that, for value received, Joseph Charles & Associates, Inc., the registered holder hereof or assigns (the "Warrantholder"), is entitled to purchase from NAM TAI ELECTRONICS, INC. (the "Company"), at any time during the period commencing at 9:00 a.m., Pacific Time, on November 24, 1998, and before 5:00 p.m., Pacific Time, on November 24, 2000, at the purchase price per Unit of $20.40 (the "Warrant Price"), the number of Units of the Company set forth above (the "Units"). The number of Common Shares of the Company included in the Units purchasable upon exercise of each Warrant evidenced hereby shall be subject to adjustment from time to time as set forth in the Representative's Warrant Agreement referred to below. The Warrants evidenced hereby may be exercised in whole or in part by presentation of this Warrant Certificate with the Purchase Form attached hereto duly executed (with a signature guarantee as provided thereon) and simultaneous payment of the Warrant Price at the principal office of the Company. Payment of such price shall be made at the option of the Warrantholder in cash or by check. The Warrants evidenced hereby represent the right to purchase an aggregate of up to 120,000 Units and are issued under and in accordance with a Representative's Warrant Agreement, dated as of December 1, 1997, (the "Representative's Warrant Agreement") between the Company and Joseph Charles & Associates, Inc., and are subject to the terms and provisions contained in the Representative's Warrant Agreement, to all of which the Warrantholder by acceptance hereof consents. Upon any partial exercise of the Warrants evidenced hereby, there shall be signed and issued to the Warrantholder a new Warrant Certificate in respect of the Units as to which the Warrants evidenced hereby shall not have been exercised. These Warrants may be exchanged at the office of the Company by surrender of this Warrant Certificate properly endorsed for one or more new Warrants of the same aggregate number of Units as here evidenced by the Warrant or Warrants exchanged. No fractional Shares will be issued upon the exercise of rights to purchase the Units hereunder, but the Company shall pay the cash value of any fraction upon the exercise of one or more Warrants. These Warrants are transferable at the office of the Company in the manner and subject to the limitations set forth in the Representative's Warrant Agreement. i 11 This Warrant Certificate does not entitle any Warrantholder to any of the rights of a shareholder of the Company. NAM TAI ELECTRONICS, INC. By__________________________________ Dated: December 1, 1997 M.K. Koo, Chairman of the Board ATTEST: [Seal] - --------------------------------- Secretary ii 12 NAM TAI ELECTRONICS, INC. PURCHASE FORM NAM TAI ELECTRONICS, INC. 999 West Hastings Street Suite 530 Vancouver, B.C. Canada V6C 2W2 The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant Certificate for, and to purchase thereunder, ____________ Units (the "Units") provided for therein, and requests that certificates for the Units be issued in the name of: -------------------------------------------------------------- (Please Print or Type Name, Address and Social Security Number -------------------------------------------------------------- -------------------------------------------------------------- and, if said number of Units shall not be all the Units purchasable hereunder, that a new Warrant Certificate for the balance of the Units purchasable under the within Warrant Certificate be registered in the name of the undersigned Warrantholder or his Assignee as below indicated and delivered to the address stated below. Dated: _______________________ Name of Warrantholder or Assignee:_____________________________________________ (Please Print) Address:_________________________________________________ _________________________________________________ Signature:_______________________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever, unless these Warrants have been assigned. Signature Guaranteed:______________________ (Signature must be guaranteed by a bank or trust company having an office or correspondent in the United States or by a member firm of a registered securities exchange or the National Association of Securities Dealers, Inc.) i 13 ASSIGNMENT (To be signed only upon assignment of Warrants) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto (Name and Address of Assignee Must Be Printed or Typewritten) ------------------------------------------- ------------------------------------------- ------------------------------------------- the within Warrants, hereby irrevocably constituting and appointing ____________________ Attorney to transfer said Warrants on the books of the Company, with all power of substitution in the premises. Dated:___________________ ________________________________________ Signature of Registered Holder Note: The signature on this assignment must correspond with the name as it appears upon the face of the within Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed:____________________________ (Signature must be guaranteed by a bank or trust company having an office or correspondent in the United States or by a member firm of a registered securities exchange or the National Association of Securities Dealers, Inc.) ii EX-2.5 6 EXHIBIT 2.5 1 EXHIBIT 2.5 - -------------------------------------------------------------------------------- NAM TAI ELECTRONICS, INC. AND FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN, A LAW CORPORATION --------------------- COUNSEL'S WARRANT AGREEMENT DATED AS OF DECEMBER 2, 1997 - -------------------------------------------------------------------------------- 2 COUNSEL'S WARRANT AGREEMENT THIS COUNSEL'S WARRANT AGREEMENT (the "Agreement"), dated as of December 2, 1997 is made and entered into by and between NAM TAI ELECTRONICS, INC., a British Virgin Islands international holding corporation (the "Company") and FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN, a law corporation (the "Warrantholder"). The Company agrees to issue and sell, and the Warrantholder agrees to purchase, for the price of $.001 per warrant, warrants, as hereinafter described (the "Warrants"), to purchase up to an aggregate of up to 10,000 units (the "Units") , each Unit consisting of (i) one (subject to adjustment pursuant to Section 8 hereof) share (the "Shares") of the Company's Common Shares, $.01 par value (the "Common Shares") and (ii) one common share purchase warrant (the "Unit Warrants") exercisable to purchase one Common Share, in connection with a public offering by the Company to its stockholders of non-transferable subscription rights (the "Rights") to purchase up to 3,000,000 Units pursuant to a standby underwriting agreement (the "Underwriting Agreement"), dated as of October 30, 1997, between the Company and Joseph Charles & Associates, Inc. Common Shares purchasable upon exercise of the Unit Warrants are hereinafter referred to as the "Unit Warrant Stock.") The purchase and sale of the Warrants shall occur on the Closing Date, as defined in the Underwriting Agreement, and be subject to the conditions to the Underwriters' obligations to purchase Units thereunder, if any. The Unit Warrants shall be subject to all of the terms and conditions of the warrant agreement, dated November 24, 1997 between the Company and U.S. Stock Transfer Corporation, as Warrant Agent (the "Warrant Agreement"). In consideration of the foregoing and for the purpose of defining the terms and provisions of the Warrants and the respective rights and obligations thereunder, the Company and the Warrantholder, for value received, hereby agree as follows: SECTION 1. TRANSFERABILITY AND FORM OF WARRANTS. 1.1 Registration. The Warrants shall be numbered and shall be registered on the books of the Company when issued. 1.2 Transfer. The Warrants shall be transferable only on the books of the Company maintained at its principal office, wherever its principal office may then be located, upon delivery thereof duly endorsed by the Warrantholder or by its duly authorized attorney or representative, accompanied by proper evidence of succession, assignment or authority to transfer. Upon any registration of transfer, the Company shall execute and deliver new Warrants to the person entitled thereto. 1.3 Limitations on Transfer of the Warrants. The Warrants shall not be sold, transferred, assigned or hypothecated by the Warrantholder until November 24, 1998, except to (i) one or more persons, each of whom on the date of transfer is a shareholder of the Warrantholder; (ii) a successor to the Warrantholder in merger or consolidation; (iii) a purchaser of all or substantially all of the Warrantholder's assets; or (iv) any person receiving the Warrants from one or more of the persons listed in this subsection 1.3 at such person's or persons' death pursuant to will, trust or the laws of intestate succession. The Warrants may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates representing the right to purchase the same aggregate number of Units. Unless the context indicates otherwise, the term "Warrantholder" shall include any transferee or transferees of the Warrants pursuant to this subsection 1.3, and the term "Warrants" shall include any and all warrants outstanding pursuant to this Agreement, including those evidenced by a certificate or certificates issued upon division, exchange, substitution or transfer pursuant to this Agreement. 3 1.4 Form of Warrants. The text of the Warrants and of the form of election to purchase Units shall be substantially as set forth in Exhibit A attached hereto. The number of Shares per Unit issuable upon exercise of the Warrants is subject to adjustment upon the occurrence of certain events, all as hereinafter provided. The Warrants shall be executed on behalf of the Company by its President or by a Vice President, attested to by its Secretary or an Assistant Secretary. A Warrant bearing the signature of an individual who was at any time the proper officer of the Company shall bind the Company, notwithstanding that such individual shall have ceased to hold such office prior to the delivery of such Warrant or did not hold such office on the date of this Agreement. The Warrants shall be dated as of the date of signature thereof by the Company either upon initial issuance or upon division, exchange, substitution or transfer. SECTION 2. EXCHANGE OF WARRANT CERTIFICATE. Any Warrant certificate may be exchanged for another certificate or certificates entitling the Warrantholder to purchase a like aggregate number of Units as the certificate or certificates surrendered then entitled such Warrantholder to purchase. Any Warrantholder desiring to exchange a Warrant certificate shall make such request in writing delivered to the Company, and shall surrender, properly endorsed, with signatures guaranteed, the certificate evidencing the Warrant to be so exchanged. Thereupon, the Company shall execute and deliver to the person entitled thereto a new Warrant certificate as so requested. SECTION 3. TERM OF WARRANTS; EXERCISE OF WARRANTS. (a) Subject to the terms of this Agreement, the Warrantholder shall have the right, at any time during the period commencing at 9:00 a.m., Pacific Time, on November 24, 1998 and ending at 5:00 p.m., Pacific Time, on November 24, 2000 (the "Termination Date"), to purchase from the Company up to the number of Units to which the Warrantholder may at the time be entitled to purchase pursuant to this Agreement, upon surrender to the Company, at its principal office, of the certificate evidencing the Warrants to be exercised, together with the purchase form on the reverse thereof duly filled in and signed, with signatures guaranteed, and upon payment to the Company of the Warrant Price (as defined in and determined in accordance with the provisions of this section 3 and sections 7 and 8 hereof), for the number of Units in respect of which such Warrants are then exercised, but in no event for less than 100 Units (unless less than an aggregate of 100 Units are then purchasable under all outstanding Warrants held by a Warrantholder). (b) Payment of the aggregate Warrant Price shall be made in cash or by check, or any combination thereof. Upon such surrender of the Warrants and payment of such Warrant Price as aforesaid, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the Warrantholder and in such name or names as the Warrantholder may designate a certificate or certificates for the number of Units so purchased upon the exercise of the Warrant, together with cash, as provided in Section 9 hereof, in respect of any fractional Shares otherwise issuable upon such surrender. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such securities as of the date of surrender of the Warrants and payment of the Warrant Price, as aforesaid, notwithstanding that the certificate or certificates representing such securities shall not actually have been delivered or that the stock transfer books of the Company shall then be closed. The Warrants shall be exercisable, at the election of the Warrantholder, either in full or from time to time in part and, in the event that a certificate evidencing the Warrants is exercised in respect of less than all of the Units specified therein at any time prior to the Termination Date, a new certificate evidencing the remaining portion of the Warrants will be issued by the Company. SECTION 4. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of the Warrants or the securities comprising the Units; provided, however, the Company shall not be required to pay any tax which may be payable in respect of any secondary transfer of the Warrants or the securities comprising the Units. 2 4 SECTION 5. MUTILATED OR MISSING WARRANTS. In case the certificate or certificates evidencing the Warrants shall be mutilated, lost, stolen or destroyed, the Company shall, at the request of the Warrantholder, issue and deliver in exchange and substitution for and upon cancellation of the mutilated certificate or certificates, or in lieu of and in substitution for the certificate or certificates lost, stolen or destroyed, a new Warrant certificate or certificates of like tenor and representing an equivalent right or interest, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Warrant and a bond of indemnity, if requested, also satisfactory in form and amount at the applicant's cost. Applicants for such substitute Warrants certificate shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. SECTION 6. RESERVATION OF SHARES. There has been reserved, and the Company shall at all times keep reserved so long as the Warrants remain outstanding, out of its authorized Common Shares, such number of shares of Common Shares as shall be subject to purchase under the Warrants (including such number of shares of Unit Warrant Stock subject to purchase upon exercise of the Unit Warrants). Every transfer agent for the Common Shares and other securities of the Company issuable upon the exercise of the Warrants will be irrevocably authorized and directed at all times to reserve such number of authorized shares and other securities as shall be requisite for such purpose. The Company will keep a copy of this Agreement and the Warrant Agreement on file with every transfer agent for the Common Shares and other securities of the Company issuable upon the exercise of the Warrants. The Company will supply every such transfer agent with duly executed stock and other certificates, as appropriate, for such purpose and will provide or otherwise make available any cash which may be payable as provided in Section 9 hereof. SECTION 7. WARRANT PRICE. The price per Unit at which Units shall be purchasable upon the exercise of the Warrants (the "Warrant Price") shall be $20.40, subject to further adjustment pursuant to Section 8 hereof. SECTION 8. ADJUSTMENT OF NUMBER OF SHARES. The number and kind of securities purchasable upon the exercise of the Warrants and the Warrant Price shall be subject to adjustment from time to time upon the happening of certain events, as follows: 8.1 Adjustments. The number of Shares purchasable upon the exercise of the Warrants shall be subject to adjustment as follows: (a) In case the Company shall (i) pay a dividend in Common Shares or make a distribution in Common Shares, (ii) subdivide its outstanding Common Shares, (iii) combine its outstanding Common Shares into a smaller number of shares of Common Shares, or (iv) issue by reclassification of its Common Shares other securities of the Company, the number of Shares purchasable upon exercise of the Warrants immediately prior thereto shall be adjusted so that the Warrantholder shall be entitled to receive the kind and number of Shares or other securities of the Company which it would have owned or would have been entitled to receive immediately after the happening of any of the events described above, had the Warrants been exercised immediately prior to the happening of such event or any record date with respect thereto. Any adjustment made pursuant to this subsection 8.1(a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) In case the Company shall issue rights, options, warrants or convertible securities to all or substantially all holders of its Common Shares, without any charge to such holders, entitling them to subscribe for or purchase Common Shares at a price per share which is lower at the record date mentioned below than the then Current Market Price (as defined in Section 9), the number of Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Shares theretofore purchasable upon exercise of the Warrant by a fraction, of which the numerator shall be the number of shares of Common Shares outstanding immediately prior to the issuance of such rights, options, warrants or convertible securities plus the number of additional shares of Common Shares offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Shares outstanding immediately prior to the issuance of such rights, options, warrants 3 5 or convertible securities plus the number of shares which the aggregate offering price of the total number of shares offered would purchase at such Current Market Price. Such adjustment shall be made whenever such rights, options, warrants or convertible securities are issued, and shall become effective immediately and retroactive to the record date for the determination of stockholders entitled to receive such rights, options, warrants or convertible securities. (c) In case the Company shall distribute to all or substantially all holders of its Common Shares evidences of its indebtedness or assets (excluding cash dividends or distributions out of earnings) or rights, options, warrants or convertible securities containing the right to subscribe for or purchase Common Shares (excluding those referred to in subsection 8.1(b) above), then in each case the number of Shares thereafter purchasable upon the exercise of the Warrants shall be determined by multiplying the number of Shares theretofore purchasable upon exercise of the Warrants by a fraction, of which the numerator shall be the then Current Market Price on the date of such distribution, and of which the denominator shall be such Current Market Price on such date minus the then fair value (determined as provided in subparagraph (e) below) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights, options, warrants or convertible securities applicable to one share. Such adjustment shall be made whenever any such distribution is made and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. (d) No adjustment in the number of Shares purchasable pursuant to the Warrants shall be required unless such adjustment would require an increase or decrease of at least one percent in the number of Shares then purchasable upon the exercise of the Warrants or, if the Warrants are not then exercisable, the number of Shares purchasable upon the exercise of the Warrants on the first date thereafter that the Warrants become exercisable; provided, however, that any adjustments which by reason of this subsection 8.1(d) are not required to be made immediately shall be carried forward and taken into account in any subsequent adjustment. (e) Whenever the number of Shares purchasable upon the exercise of the Warrant is adjusted, as herein provided, the Warrant Price payable upon exercise of the Warrant shall be adjusted by multiplying such Warrant Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Shares purchasable upon the exercise of the Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Shares so purchasable immediately thereafter. (f) To the extent not covered by subsections 8.1(b) or (c) hereof, in case the Company shall sell or issue Common Shares or rights, options, warrants or convertible securities containing the right to subscribe for or Common Shares at a price per share (determined, in the case of such rights, options, warrants or convertible securities, by dividing (i) the total amount received or receivable by the Company in consideration of the sale or issuance of such rights, options, warrants or convertible securities, plus the total consideration payable to the Company upon exercise or conversion thereof, by (ii) the total number of shares covered by such rights, options, warrants or convertible securities) lower than the then Current Market Price in effect immediately prior to such sale or issuance, then the number of Shares thereafter purchasable upon the exercise of the Warrants shall be determined by multiplying the number of Shares theretofore purchasable upon exercise of the Warrants by a fraction, of which the numerator shall be the Warrant Price and the denominator shall be that price (calculated to the nearest cent) determined by dividing (I) an amount equal to the sum of (A) the number of Common Shares outstanding immediately prior to such sale or issuance multiplied by the Warrant Price, plus (B) the consideration received by the Company upon such sale or issuance, by (II) the total number of Common Shares outstanding immediately after such sale or issuance. For the purposes of such adjustments, the Common Shares which the holders of any such rights, options, warrants or convertible securities shall be entitled to subscribe for or purchase shall be deemed issued and outstanding as of the date of such sale or issuance and the consideration received by the Company therefor shall be deemed to be the consideration received by the Company for such rights, options, warrants or convertible securities, plus the consideration or premiums stated in such rights, options, warrants or convertible securities to be paid for the Common Shares covered thereby. In case the Company shall sell or issue Common Shares or rights, options, warrants or convertible securities containing the right to subscribe for or purchase Common Shares for a consideration consisting, in whole or in part, of property other than cash or its equivalent, then in determining the "price per share" of Common 4 6 Shares and the "consideration received by the Company" for purposes of the first sentence of this subsection 8.1(f), the Board of Directors shall determine the fair value of said property, and such determination, if reasonable and based upon the Board of Directors' good faith business judgment, shall be binding upon the Warrantholder. In determining the "price per share" of the Common Shares, any underwriting discounts or commissions shall not be deducted from the price received by the Company for sales of securities registered under the Act. (g) Whenever the number of Shares purchasable upon the exercise of the Warrants is adjusted as herein provided, the Company shall cause to be promptly mailed to the Warrantholder by first class mail, postage prepaid, notice of such adjustment and a certificate of the chief financial officer of the Company setting forth the number of Shares purchasable upon the exercise of the Warrants after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. (h) For the purpose of this subsection 8.1, the term "Common Shares" shall mean (i) the class of stock designated as the Common Shares of the Company at the date of this Agreement, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Shares consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time, as a result of an adjustment made pursuant to this Section 8, the Warrantholder shall become entitled to purchase any securities of the Company other than Common Shares and Unit Warrants, (i) if the Warrantholder's right to purchase is on any other basis than that available to all holders of the Company's Common Shares, the Company shall obtain an opinion of an independent investment banking firm valuing such other securities and (ii) thereafter the number of such other securities so purchasable upon exercise of the Warrants shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Shares contained in this Section 8. (i) Upon the expiration of any rights, options, warrants or conversion privileges, if such shall not have been exercised, the number of Shares purchasable upon exercise of the Warrants, to the extent the Warrants have not then been exercised, shall, upon such expiration, be readjusted and shall thereafter be such as they would have been had they been originally adjusted (or had the original adjustment not been required, as the case may be) on the basis of (A) the fact that the only Common shares so issued were the Common Shares, if any, actually issued or sold upon the exercise of such rights, options, warrants or conversion privileges, and (B) the fact that such shares of Common Shares, if any, were issued or sold for the consideration actually received by the Company upon such exercise plus the consideration, if any, actually received by the Company for the issuance, sale or grant of all such rights, options, warrants or conversion privileges whether or not exercised; provided, however, that no such readjustment shall have the effect of decreasing the number of Shares purchasable upon exercise of the Warrants by an amount in excess of the amount of the adjustment initially made in respect of the issuance, sale or grant of such rights, options, warrants or conversion privileges. 8.2 No Adjustment for Dividends. Except as provided in subsection 8.1, no adjustment in respect of any dividends or distributions out of earnings shall be made during the term of the Warrants or upon the exercise of the Warrants. 8.3 No Adjustment in Certain Cases. No adjustments shall be made pursuant to Sections 3 or 8 hereof in connection with the issuance of Units, Shares, Unit Warrants or Unit Warrant Stock sold as part of the public sale and issuance of Units pursuant to the Underwriting Agreement or the issuance of Units, Shares, Unit Warrants or Unit Warrant Stock upon exercise of the Warrants. No adjustments shall be made pursuant to Sections 3 or 8 hereof in connection with the grant or exercise of presently authorized or outstanding options to purchase, or the issuance of shares, aggregating up to 1,000,000 Common Shares under the Company's existing stock option plans. 8.4 Preservation of Purchase Rights upon Reclassification, Consolidation, etc. In case of any consolidation of the Company with or merger of the Company into another corporation or in case of any sale or conveyance to another corporation of the property, assets or business of the Company as an entirety or substantially 5 7 as an entirety, the Company or such successor or purchasing corporation, as the case may be, shall execute with the Warrantholder an agreement that the Warrantholder shall have the right thereafter upon payment of the Warrant Price in effect immediately prior to such action to purchase, upon exercise of the Warrants, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such consolidation, merger, sale or conveyance had the Warrants (and each underlying security) been exercised immediately prior to such action. In the event of a merger described in Section 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended, in which the Company is the surviving corporation, the right to purchase Units under the Warrants shall terminate on the date of such merger and thereupon the Warrants shall become null and void, but only if the controlling corporation shall agree to substitute for the Warrants its warrant which entitles the holder thereof to purchase upon its exercise the kind and amount of shares and other securities and property which it would have owned or been entitled to receive had the Warrants been exercised immediately prior to such merger. Any such agreements referred to in this subsection 8.4 shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 8 hereof. The provisions of this subsection 8.4 shall similarly apply to successive consolidations, mergers, sales or conveyances. 8.5 Par Value of Common Shares. Before taking any action which would cause an adjustment effectively reducing the portion of the Warrant Price allocable to each Share below the then par value per Common Shares issuable upon exercise of the Warrants, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Common Shares upon exercise of the Warrants. 8.6 Independent Public Accountants. The Company may retain a firm of independent public accountants of recognized national standing (which may be any such firm regularly employed by the Company) to make any computation required under this Section 8, and a certificate signed by such firm shall be conclusive evidence of the correctness of any computation made under this Section 8. 8.7 Statement on Warrant Certificates. Irrespective of any adjustments in the number of securities issuable upon exercise of Warrants, Warrant certificates theretofore or thereafter issued may continue to express the same number of securities as are stated in the similar Warrant certificates initially issuable pursuant to this Agreement. However, the Company may, at any time in its sole discretion (which shall be conclusive), make any change in the form of Warrant certificate that it may deem appropriate and that does not affect the substance thereof; and any Warrant certificate thereafter issued, whether upon registration of transfer of, or in exchange or substitution for, an outstanding Warrant certificate, may be in the form so changed. SECTION 9. FRACTIONAL INTERESTS; CURRENT MARKET PRICE. The Company shall not be required to issue fractional Shares on the exercise of the Warrants. If any fraction of a Share would, except for the provisions of this Section 9, be issuable on the exercise of the Warrants (or specified portion thereof), the Company shall pay an amount in cash equal to the then Current Market Price multiplied by such fraction. For purposes of this Agreement, the term "Current Market Price" shall mean (i) if the Common Shares are traded in the over-the-counter market and not in the NASDAQ National Market System nor on any national securities exchange, the average of the per share closing bid prices of the Common Shares on the 30 consecutive trading days immediately preceding the date in question, as reported by NASDAQ or an equivalent generally accepted reporting service, or (ii) if the Common Shares are traded in the NASDAQ National Market System or on a national securities exchange, the average for the 30 consecutive trading days immediately preceding the date in question of the daily per share closing prices of the Common Shares in the NASDAQ National Market System or on the principal stock exchange on which it is listed, as the case may be. For purposes of clause (i) above, if trading in the Common Shares is not reported by NASDAQ, the bid price referred to in said clause shall be the lowest bid price as reported in the "pink sheets" published by National Quotation Bureau, Incorporated. The closing price referred to in clause (ii) above shall be the last reported sale price or, in 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 System or on the national securities exchange on which the Common Shares are then listed. 6 8 SECTION 10. NO RIGHTS AS STOCKHOLDER; NOTICES TO WARRANTHOLDER. Nothing contained in this Agreement or in the Warrants shall be construed as conferring upon the Warrantholder or its transferees any rights as a stockholder of the Company, including the right to vote, receive dividends, consent or receive notices as a stockholder in respect of any meeting of stockholders for the election of directors of the Company or any other matter. If, however, at any time prior to the expiration of the Warrants and prior to their exercise, any one or more of the following events shall occur: (a) any action which would require an adjustment pursuant to Section 8.1 or 8.4; or (b) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger or sale of its property, assets and business as an entirety or substantially as an entirety) shall be proposed; then the Company shall give notice in writing of such event to the Warrantholder, as provided in Section 11 hereof, at least 20 days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to any relevant dividend, distribution, subscription rights or other rights or for the determination of stockholders entitled to vote on such proposed dissolution, liquidation or winding up. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to mail or receive such notice or any defect therein shall not affect the validity of any action taken with respect thereto. SECTION 11. NOTICES. Any notice pursuant to this Agreement by the Company or by a Warrantholder, a holder of Shares, Unit Warrants or Unit Warrant Stock shall be in writing and shall be deemed to have been duly given if delivered or mailed by certified mail, return receipt requested: (a) If to a Warrantholder or a holder of Shares, Unit Warrants or Unit Warrant Stock, addressed to Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, Eighth Floor, East Tower, 9100 Wilshire Blvd., Beverly Hills, California 90212; Attention: Mark A. Klein. (b) If to the Company addressed to it at 999 West Hastings Street, Suite 530, Vancouver, B.C. Canada V6C 2W2, Attention: Mr. M.K. Koo, Chairman of the Board. Each party may from time to time change the address to which notices to it are to be delivered or mailed hereunder by notice in accordance herewith to the other party. SECTION 12. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company, the Warrantholders, or the holders of Shares, Unit Warrants or Unit Warrant Stock shall bind and inure to the benefit of their respective successors and assigns hereunder. SECTION 13. MERGER OR CONSOLIDATION OF THE COMPANY. The Company will not merge or consolidate with or into any other corporation or sell all or substantially all of its property to another corporation, unless the provisions of Section 8.4 are complied with. SECTION 14. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements contained in any schedule, exhibit, certificate or other instrument delivered by or on behalf of the parties hereto, or in connection with the transactions contemplated by this Agreement, shall be deemed to be representations and warranties hereunder. Notwithstanding any investigations made by or on behalf of the parties to this Agreement, all representations, warranties and agreements made by the parties to this Agreement or pursuant hereto shall survive. 7 9 SECTION 15. GOVERNING LAW. This Agreement shall be deemed to be a contract made under the laws of the State of California and for all purposes shall be construed in accordance with the laws of said State applicable to contracts entered into and performed in said State, and without regard to any conflicts of laws principles thereof. SECTION 19. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Warrantholders and the holders of Shares, Unit Warrants or Unit Warrant Stock any legal or equitable right, remedy or claim under this Agreement. This Agreement shall be for the sole and exclusive benefit of the Company, the Warrantholders and the holders of Shares, Unit Warrants and Unit Warrant Stock. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed, all as of the day and year first above written. NAM TAI ELECTRONICS, INC. By: (s.d.) M. K. Koo --------------------------------- Chairman of the Board FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN a law corporation By (s.d.) Mark A. Klein ---------------------------------- Vice-President 8 10 Exhibit A THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH SECTION 1 OF THE AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED. Warrant Certificate No. _______ COUNSEL'S WARRANT TO PURCHASE 10,000 UNITS, EACH UNIT CONSISTING OF ONE COMMON SHARE AND ONE WARRANT EXERCISABLE TO PURCHASE ONE COMMON SHARE VOID AFTER 5:00 P.M., PACIFIC TIME, ON NOVEMBER 24, 2000 NAM TAI ELECTRONICS, INC. This certifies that, for value received, Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, the registered holder hereof or assigns (the "Warrantholder"), is entitled to purchase from NAM TAI ELECTRONICS, INC. (the "Company"), at any time during the period commencing at 9:00 a.m., Pacific Time, on November 24, 1998, and before 5:00 p.m., Pacific Time, on November 24, 2000, at the purchase price per Unit of $20.40 (the "Warrant Price"), the number of Units of the Company set forth above (the "Units"). The number of Common Shares of the Company included in the Units purchasable upon exercise of each Warrant evidenced hereby shall be subject to adjustment from time to time as set forth in the Counsel's Warrant Agreement referred to below. The Warrants evidenced hereby may be exercised in whole or in part by presentation of this Warrant Certificate with the Purchase Form attached hereto duly executed (with a signature guarantee as provided thereon) and simultaneous payment of the Warrant Price at the principal office of the Company. Payment of such price shall be made at the option of the Warrantholder in cash or by check. The Warrants evidenced hereby represent the right to purchase an aggregate of up to 10,000 Units and are issued under and in accordance with a Counsel's Warrant Agreement, dated as of December 1, 1997 (the "Counsel's Warrant Agreement"), between the Company and Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, and are subject to the terms and provisions contained in the Counsel's Warrant Agreement, to all of which the Warrantholder by acceptance hereof consents. Upon any partial exercise of the Warrants evidenced hereby, there shall be signed and issued to the Warrantholder a new Warrant Certificate in respect of the Units as to which the Warrants evidenced hereby shall not have been exercised. These Warrants may be exchanged at the office of the Company by surrender of this Warrant Certificate properly endorsed for one or more new Warrants of the same aggregate number of Units as here evidenced by the Warrant or Warrants exchanged. No fractional Shares will be issued upon the exercise of rights to purchase the Units hereunder, but the Company shall pay the cash value of any fraction upon the exercise of one or more Warrants. These Warrants are transferable at the office of the Company in the manner and subject to the limitations set forth in the Counsel's Warrant Agreement. i 11 This Warrant Certificate does not entitle any Warrantholder to any of the rights of a shareholder of the Company. NAM TAI ELECTRONICS, INC. By__________________________________ Dated: December 1, 1997 M.K. Koo, Chairman of the Board ATTEST: [Seal] - --------------------------------- Secretary ii 12 NAM TAI ELECTRONICS, INC. PURCHASE FORM NAM TAI ELECTRONICS, INC. 999 West Hastings Street, Suite 530 Vancouver, B.C. Canada V6C 2W2 The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant Certificate for, and to purchase thereunder, ____________ Units (the "Units") provided for therein, and requests that certificates for the Units be issued in the name of: -------------------------------------------------------------- (Please Print or Type Name, Address and Social Security Number -------------------------------------------------------------- -------------------------------------------------------------- and, if said number of Units shall not be all the Units purchasable hereunder, that a new Warrant Certificate for the balance of the Units purchasable under the within Warrant Certificate be registered in the name of the undersigned Warrantholder or his Assignee as below indicated and delivered to the address stated below. Dated: _______________________ Name of Warrantholder or Assignee:_____________________________________________ (Please Print) Address:_________________________________________________ _________________________________________________ Signature:_______________________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever, unless these Warrants have been assigned. Signature Guaranteed:______________________ (Signature must be guaranteed by a bank or trust company having an office or correspondent in the United States or by a member firm of a registered securities exchange or the National Association of Securities Dealers, Inc.) i 13 ASSIGNMENT (To be signed only upon assignment of Warrants) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto (Name and Address of Assignee Must Be Printed or Typewritten) ------------------------------------------- ------------------------------------------- ------------------------------------------- the within Warrants, hereby irrevocably constituting and appointing ____________________ Attorney to transfer said Warrants on the books of the Company, with all power of substitution in the premises. Dated:___________________ ________________________________________ Signature of Registered Holder Note: The signature on this assignment must correspond with the name as it appears upon the face of the within Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed:____________________________ (Signature must be guaranteed by a bank or trust company having an office or correspondent in the United States or by a member firm of a registered securities exchange or the National Association of Securities Dealers, Inc.) ii -----END PRIVACY-ENHANCED MESSAGE-----