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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
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For the Fiscal Year Ended: Commission File Number:
December 31, 1997 0-16673
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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
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TABLE OF CONTENTS
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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
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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.
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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
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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.
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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)
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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:
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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.
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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.
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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.
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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.
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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-
<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
PRODUCT LINE 1997 1996 1995
- -------------------------------------------- ----- ----- -----
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
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.
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<PAGE> 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.
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<PAGE> 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
GEOGRAPHIC AREAS 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
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%
========= ========= =========
</TABLE>
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.
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<PAGE> 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:
<TABLE>
<CAPTION>
BRAND CUSTOMER
CUSTOMER NAME PRODUCT SINCE
- -------- ---- ------- -----
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
CUSTOMER 1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
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%
============== ============= =============
</TABLE>
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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-
<PAGE> 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
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<PAGE> 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-
<PAGE> 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.
<TABLE>
<CAPTION>
NUMBER OF
IDENTITY OF COMMON SHARES PERCENT OF
PERSONS OR GROUPS BENEFICIALLY OWNED CLASS
- ----------------- ------------------ ----------
<S> <C> <C>
M. K. Koo 4,330,988(1) 35.3%
Officers and directors as a 5,159,237(2) 41.4%
group (six persons)
</TABLE>
(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-
<PAGE> 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.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
---- ---
<S> <C> <C>
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
</TABLE>
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-
<PAGE> 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.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH Low
- ------------- ---- ----
<S> <C> <C>
December 31, 1997 4.00 2.50
</TABLE>
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-
<PAGE> 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)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- -----------
(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-
<PAGE> 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-
<PAGE> 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.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(In thousands of U.S. dollars except per share data)
----------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
-27-
<PAGE> 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
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%
======== ======== ========
</TABLE>
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-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 36
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Management
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Position with Company
- ---- ---------------------
<S> <C>
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
</TABLE>
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
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<PAGE> 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.
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<PAGE> 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:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
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
</TABLE>
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.
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<PAGE> 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
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<PAGE> 40
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of U.S. Dollars except share data)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 41
NAM TAI ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. Dollars)
<TABLE>
<CAPTION>
As at December 31,
--------------------------
1997 1996
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
Commitments and contingencies (Note 11)
See accompanying notes to consolidated financial statements.
-41-
<PAGE> 42
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of U.S. Dollars except shares outstanding)
<TABLE>
<CAPTION>
Common Shares Foreign Total
------------------------- Additional Stock Currency Share-
Shares Paid-in Option Retained Translation holders'
Outstanding Amount Capital Grants Earnings Adjustment Equity
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
=========== =========== =========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-42-
<PAGE> 43
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-43-
<PAGE> 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:
<TABLE>
<CAPTION>
Classification Rate
-------------- ----
<S> <C>
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%
</TABLE>
-44-
<PAGE> 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-
<PAGE> 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-
<PAGE> 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):
<TABLE>
<CAPTION>
As at December 31,
-----------------------------
1997 1996
------- -------
<S> <C> <C>
Finished goods ..................... $ 1,241 $ 576
Work-in-progress ................... 1,399 2,548
Raw materials ...................... 7,198 7,387
------- -------
$ 9,838 $10,511
======= =======
</TABLE>
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-
<PAGE> 48
5 Other Income - Net
Other income - net consists of (in thousands):
<TABLE>
<CAPTION>
As at December 31,
--------------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
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
======== ======= =======
</TABLE>
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-
<PAGE> 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):
<TABLE>
<CAPTION>
Taxation Date
Company Year Paid Refunded Received
------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
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 -
</TABLE>
The current and deferred components of the income tax (expense) benefit
appearing in the statements of income are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Current tax............................................... $(279) $(158) $589
Deferred tax.............................................. - - -
----- ----- ----
$(279) $(158) $589
===== ===== ====
</TABLE>
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):
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
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)
</TABLE>
-49-
<PAGE> 50
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
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
======== ======= =======
</TABLE>
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
<TABLE>
<CAPTION>
Percentage of
Ownership
------------------
Consolidated Country of Principal As at December 31,
Subsidiaries Incorporation Activity 1997 1996
------------ ------------- --------- ---- ----
<S> <C> <C> <C> <C>
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%
</TABLE>
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-
<PAGE> 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):
<TABLE>
<CAPTION>
<S> <C>
- 1998 ................................................. $ 808
- 1999 ................................................. 523
- 2000 ................................................. 443
- 2001 ................................................. 443
- 2002 and thereafter................................... 2,731
-------
$ 4,948
=======
</TABLE>
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-
<PAGE> 52
<TABLE>
<CAPTION>
As at December 31,
----------------------
1997 1996
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
Number of Option Price
Options Per Share
------- ---------
<S> <C> <C>
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
-------
</TABLE>
-52-
<PAGE> 53
<TABLE>
<CAPTION>
Number of Option Price
Options Per Share
------- ---------
<S> <C> <C>
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
=======
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
$11.00 $11.375 $10.50
Options Options Options
------- ------- -------
<S> <C> <C> <C>
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
</TABLE>
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-
<PAGE> 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):
<TABLE>
<CAPTION>
Year ended December 31, 1997
-------------------------------------
Per Share
Income Shares Amount
--------- --------- -----
<S> <C> <C> <C>
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
========= =========
</TABLE>
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.
<TABLE>
<CAPTION>
Year ended December 31, 1996
-------------------------------------
Per Share
Income Shares Amount
--------- --------- -----
<S> <C> <C> <C>
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
========= =========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1995
-------------------------------------
Per Share
Income Shares Amount
--------- --------- -----
<S> <C> <C> <C>
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
========= =========
</TABLE>
-54-
<PAGE> 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):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
Intersegment sales arise from the transfer of finished goods between
subsidiary companies operating in different areas. These sales are
generally at estimated market prices.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
-55-
<PAGE> 56
16 Comparative Amounts
Certain comparative amounts have been reclassified to conform to the
current year presentation.
-56-
<PAGE> 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:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
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.
</TABLE>
-57-
<PAGE> 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-
<PAGE> 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
<PAGE> 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;
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<PAGE> 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) :-
<TABLE>
<S> <C>
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%
</TABLE>
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.
<PAGE> 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.
<PAGE> 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:
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(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.
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(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,
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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
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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.
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(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
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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
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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
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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
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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).
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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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
---------------------------------
<PAGE> 23
SCHEDULE A
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER
OF UNDERWRITTEN
Standby Underwriters UNITS
- -------------------- ------
<S> <C>
Joseph Charles & Associates, Inc. ........................................ 68%
Kashner Davidson Securities Corporation .................................. 20
Cohig & Associates, Incorporated ......................................... 12
---
Total ...................................................... 100%
===
</TABLE>
<PAGE> 1
EXHIBIT 2.4
- --------------------------------------------------------------------------------
NAM TAI ELECTRONICS, INC.
AND
JOSEPH CHARLES & ASSOCIATES, INC.
---------------------
REPRESENTATIVE'S WARRANT AGREEMENT
DATED AS OF DECEMBER 2, 1997
- --------------------------------------------------------------------------------
<PAGE> 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.
<PAGE> 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.
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<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
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<PAGE> 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
<PAGE> 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
<PAGE> 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.
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<PAGE> 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
<PAGE> 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.)
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<PAGE> 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
<PAGE> 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
- --------------------------------------------------------------------------------
<PAGE> 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.
<PAGE> 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.
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<PAGE> 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
<PAGE> 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
<PAGE> 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
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<PAGE> 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
<PAGE> 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.
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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
<PAGE> 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.)
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<PAGE> 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)
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-------------------------------------------
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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.)
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