<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 20-F
[ ] Registration Statement Pursuant to Section 12(b) or (g) of the
Securities Exchange Act of 1934
OR
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
----------------------------------
For the Fiscal Year Ended: Commission File Number:
December 31, 1998 0-16673
----------------------------------
NAM TAI ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
British Virgin Islands
(Jurisdiction of incorporation or organization)
Unit 9, 15/F., Tower 1
China Hong Kong City, 33 Canton Road
TST, Kowloon, Hong Kong
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $0.01 par value per share
Common Share Purchase Warrants
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: NONE
As of December 31, 1998, there were 9,812,523 Common Shares of the
registrant outstanding.
Indicate by check mark whether the registrant: (i) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark which financial statement item the registrant
has elected to follow:
Item 17. Item 18. X
----- -----
Exhibit Index on Page 66
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION..................................................................2
PART I
Item 1. Description of Business..........................................................................3
Item 2. Properties......................................................................................21
Item 3. Legal Proceedings...............................................................................22
Item 4. Control of the Company..........................................................................23
Item 5. Nature of Trading Market........................................................................24
Item 6. Exchange Controls and Other Limitations Affecting Security Holders..............................25
Item 7. Taxation........................................................................................25
Item 8. Selected Financial Data.........................................................................26
Item 9. Management's Discussion and Analysis of Results of Operations and Financial Condition...........27
Item 10. Directors and Executive Officers of the Company.................................................39
Item 11. Compensation of Directors and Officers..........................................................40
Item 12. Options to Purchase Securities from the Company or its Subsidiaries.............................40
Item 13. Interest of Management in Certain Transactions..................................................41
PART II
Item 14. Description of Securities to be Registered......................................................42
PART III
Item 15. Defaults Upon Senior Securities.................................................................42
Item 16. Changes in Securities and Changes in Security For the Company's Securities......................42
PART IV
Items 17.
and 18. Financial Statements............................................................................42
Item 19. Financial Statements and Exhibits...............................................................66
SIGNATURES ....................................................................................................67
Consent of Independent Accountants (to incorporation of their report on Financial Statements
into the Company's Registration Statement on Forms F-3 and S-8)................................................68
</TABLE>
This Annual Report on Form 20-F contains forward-looking statements.
These statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled Risk Factors
under Item 1 - Description of Business.
Readers should not place undue reliance on forward-looking statements,
which reflect management's view only as of the date of this Report. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect subsequent events or circumstances. Readers should also carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission.
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
The Company prepares its consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America and publishes its financial statements in United States dollars.
-2-
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Nam Tai Electronics, Inc. (which together with its wholly owned
subsidiaries is hereafter referred to as the "Company" or "Nam Tai") was
incorporated as a limited liability International Business Company under the
laws of the British Virgin Islands in August 1987. The Company's corporate
administrative matters are conducted in the British Virgin Islands through its
registered agent, McW. Todman & Co., McNamara Chambers, P.O. Box 3342, Road
Town, Tortola, British Virgin Islands. The Company's principal executive offices
are located in Hong Kong Special Administrative Region ("Hong Kong"), of the
People's Republic of China ("PRC"). Its address is Unit 9, 15/F., Tower 1, China
Hong Kong City, 33 Canton Road, TST, Kowloon, Hong Kong.
As an International Business Company, the Company is prohibited from
doing business with persons resident in the British Virgin Islands, owning real
estate in the British Virgin Islands, or acting as a bank or insurance company.
The Company does not believe these restrictions materially affect its
operations.
Nam Tai was incorporated in the British Virgin Islands principally to
facilitate trading in its shares. The government of Hong Kong imposes stamp duty
on the transfer of shares equal to 0.3% of the value of the transaction. There
is no such stamp duty imposed by the British Virgin Islands. The Company was
organized in this manner to avoid any such requirements for the collection of
stamp duties for share transactions.
COMPANY OVERVIEW
Nam Tai provides design and manufacturing service to original equipment
manufacturers ("OEMs") of consumer electronic products. Nam Tai's two principal
customers include Texas Instruments Incorporated and Sharp Corporation. All of
the Company's design and manufacturing operations are based in Shenzhen, China,
approximately 30 miles from Hong Kong. Products manufactured by Nam Tai include
calculators, personal organizers, personal digital assistants, linguistic
products, integrated circuit ("IC") or smart card readers (referred to as "IC
card readers"), and various components including microwave oven control panel
modules.
Nam Tai assists OEMs in the design and development of products and
furnishes full turnkey manufacturing services to its OEM customers utilizing
advanced processes such as chip on board ("COB"), multichip modulators ("MCM"),
surface mount technology ("SMT"), tape automated bonding ("TAB"), outer lead
bonding ("OLB") and anisotropic conductive film ("ACF") heat seal technologies.
The Company provides hardware and software design, plastic molding, component
purchasing, assembly into finished products or electronic subassemblies,
post-assembly testing and shipping. It also manufactures electronic components
and subassemblies for printed circuit boards ("PCBs"). This includes large scale
integrated circuits ("LSI") bonded on PCBs that are used in the manufacture of
products such as electronic toys and telecommunication systems, and
subassemblies for liquid crystal display ("LCD") modules that are in turn used
in the manufacture of communications, camera and computer products. In addition,
Nam Tai provides OEMs with silk screening services for plastic parts, polyvinyl
chloride ("PVC") products and metal parts, and is developing Original Design
Manufacturing ("ODM") capabilities.
The Company moved its manufacturing facilities to China in 1980 and
later located in Shenzhen, China in 1987 to take advantage of lower overhead
costs, lower material costs, and competitive labor rates and to position itself
to achieve low-cost, high volume, high quality manufacturing. The location of
Nam Tai's facility in Shenzhen, about 30 miles from Hong Kong, provides the
Company with access to Hong Kong's infrastructure of communication and banking.
This also facilitates transportation of the Company's products out of China
through the port of Hong Kong.
The Company emphasizes high responsiveness to the needs of OEM
customers through the development and volume production of increasingly
sophisticated and specialized products. The Company seeks to build long-term
relationships with its customers through high quality standards (supported by
ISO 9001 Certification), competitive pricing, strong research and development
support, advanced assembly processes and high volume manufacturing, and with key
suppliers through volume purchasing and reliable forecasting of component
purchases.
-3-
<PAGE> 4
The Company believes that the potential for increased manufacturing outsourcing
by Japanese and U.S. OEMs in China is substantial and that it is in a position
to take advantage of this because of its expanded production capacity, and
experience. Management believes Nam Tai's record of providing timely delivery in
volume of high-quality, high technology, low-cost products builds close customer
relationships and positions the Company to receive orders for more complex
products. As the Company grows, management will seek to maintain a low cost
structure, reduce overhead where possible and continuously strive to improve its
manufacturing quality and processes.
THE COMPANY SUBSIDIARIES
The Company is a holding company for Nam Tai Electronic & Electrical Products
Limited and its subsidiaries, Nam Tai Electronics (Canada) Ltd. and Albatronics
(Far East) Company Limited ("Albatronics"). See Note 1 of Notes to Consolidated
Financial Statements appearing in Item 18 of this report. The chart below
illustrates the organizational structure of the Company and its principal
operating subsidiaries.
<TABLE>
<S> <C> <C>
Nam Tai
Electronics, Inc.
(A British Virgin
Island International
Business Company)
/
---------------------------------/------------------------------------/
/ / /
100% 100% 50%
Nam Tai Nam Tai Albatronics
Electronics Electronic & (Far East)
(Canada) Ltd. Electrical Products Ltd. Company Limited
(A Canadian Federal (A Hong Kong Limited (A Hong Kong Limited
Company) Liability Company) Liability Company)
/ and its subsidiary
/ Company
/
---------------------------------------------------------------------/
/ / /
/ 100% 100%
/ Namtai Electronic Zastron Plastic & Metal
/ (Shenzhen) Co. Ltd. Products (Shenzhen) Ltd.
/ (A Limited Liability of (A Limited Liability
/ China Foreign of China Foreign
/ Operation) Operation)
/ /
/ /
/ /
75% /
Shenzhen /
Namtek Co., Ltd. /
(A Limited Liability--------------------/
of China Foreign 25%
Operation)
</TABLE>
-4-
<PAGE> 5
Nam Tai Electronic & Electrical Products Limited
Nam Tai Electronic & Electrical Products Limited ("NTEE") was
incorporated in November 1983 and became the holding company for Namtai
Electronic (Shenzhen) Co. Ltd. and Zastron Plastic & Metal Products (Shenzhen)
Ltd. in 1992. Marketing, customer relations and management operations are the
main functions handled by NTEE.
Namtai Electronic (Shenzhen) Co. Ltd.
Namtai Electronic (Shenzhen) Co. Ltd. ("NTSZ") was established as Baoan
(Nam Tai) Electronic Co. Ltd. in May 1989 as a joint venture company with
limited liability pursuant to the relevant laws of China. The equity of NTSZ was
owned 70% by NTEE and 30% by a Chinese Governmental agency. During 1992, the
joint venture was dissolved and the company changed its name to NTSZ. As part of
such termination, the Company returned to the Chinese Governmental agency its
real property and investment, and NTSZ became a wholly owned subsidiary of NTEE.
NTSZ is the principal manufacturing arm of the Company and is engaged
in research and development, manufacturing and assembling the Company's
electronic products in China.
Zastron Plastic & Metal Products (Shenzhen) Ltd.
Zastron Plastic & Metal Products (Shenzhen) Ltd. ("Zastron") was
organized in March 1992 as a limited liability company pursuant to the relevant
laws of China. Zastron is principally engaged in silk screening metal and PVC
products, much of which are used in products manufactured by the Company's
manufacturing subsidiary. Zastron also provides silk screening of products for
other unrelated companies.
Shenzhen Namtek Co., Ltd.
Shenzhen Namtek Co., Ltd. ("Namtek") was organized in December 1995 as
a limited liability company pursuant to the relevant laws of China. Namtek
commenced operations in early 1996 developing and commercializing software for
the consumer electronics industry, particularly for the customers of the Company
and for products manufactured or to be manufactured by Nam Tai. Namtek employs
approximately 20 software engineers and provides the facilities and expertise to
assist in new product development and research, enabling Nam Tai to offer its
customers enhanced software design and development services, and strengthening
the Company's ODM capabilities.
Nam Tai Electronics (Canada) Ltd.
Nam Tai Electronics (Canada) Ltd. (`NT Canada") was incorporated in
August 1989 under the Canada Business Corporations Act. NT Canada currently
provides finance, administrative and investor relations services to the Company
from its office in Vancouver, British Columbia, Canada.
Albatronics (Far East) Company Limited
Consistent with the Company's strategy to review acquisition prospects
that would complement the Company's existing products and services, augment
market coverage and sales ability, or enhance its technological capabilities the
Company signed an agreement to acquire just over 50% of Albatronics (Far East)
Company Limited ("Albatronics") by purchasing newly issued shares from
Albatronics. Albatronics is a publicly traded company listed on the Hong Kong
Stock Exchange (Hang Seng company # 987). The purchase price paid by Nam Tai on
November 30, 1998 was approximately $9,980,000 including transaction fees.
Albatronics is principally engaged in the trade and distribution of Sony
semiconductors and CD mechanisms, and the OEM and Original Design Manufacturing
("ODM") development, manufacture and trade of consumer electronic products. Its
existing manufactured products include CD players, digital cameras and audio
amplifiers, which are sold to major customers such as Sony, Aiwa, Panasonic and
Fuji Film. Additionally, Albatronics possesses advanced research and development
capabilities in semiconductor system design, information processing and data
communications, which it carries out in Japan.
-5-
<PAGE> 6
Products under development by Albatronics include telecommunication products,
the AC-3 Music Centre, the Slim Discman, and minidisc ("MD"). Albatronics also
owns a material equity interest of approximately 21.72% in Shanghai Albatronics
Co., Ltd., a publicly listed company in the PRC, which manufactures and
distributes consumer electronic products in the PRC. In addition, Albatronics
has invested in joint ventures in the PRC, which are engaged in plastic and
metal manufacturing, the manufacture and sale of telecommunication products, and
the implementation of wire bonding technologies.
Albatronics is headquartered in Hong Kong and employs approximately
1600 people as of March 1, 1999. Its principal manufacturing facility, located
in Dongguan, Guangdong, PRC, is around 50 miles northwest of Nam Tai's
manufacturing facilities in Shenzhen, PRC. Albatronics' manufacturing facility
is situated on approximately 778,540 sq. ft. of land housing a factory,
administrative buildings and dormitories comprising approximately 312,740 sq.
ft. The manufacturing facility has been ISO 9002 certified since July 1996.
Albatronics' products are principally sold and delivered to customers in the
PRC, Hong Kong and Japan.
RISK FACTORS
The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to shareholders, or on the Company's web site. The Private Securities Reform Act
of 1995 contains a safe harbor for forward-looking statements on which the
Company relies in making such disclosures. In connection with this "safe harbor"
the Company is hereby identifying important factors that could cause actual
results to differ materially from those contained in any forward-looking
statements made by or on behalf of the Company. Any such statement is qualified
by reference to the following cautionary statements:
CUSTOMER CONCENTRATION; DEPENDENCE ON ELECTRONICS INDUSTRY
During the years ended December 31, 1998, 1997 and 1996, sales to the
Company's four largest customers aggregated approximately 92.4%, 89.3%, and
90.3%, respectively, of the Company's total net sales. During the same periods,
sales to its principal customers, i.e., customers which accounted for more than
10% of the Company's total sales during 1998, aggregated approximately 76.2%,
73.3% and 90.3%, respectively, of the Company's total sales. See "-- Customers
and Marketing -- Customers." The Company's sales transactions to all its OEM
customers are based on purchase orders received by the Company from time to
time. Except for these purchase orders, the terms of which in a few cases are
supplemented by basic agreements dependent upon the receipt of purchase orders,
the Company has no written agreements with its OEM customers. The loss of any of
its largest customers, especially its principal customers, or a substantial
reduction in orders from them would have a material adverse effect on the
Company's business. There can be no assurance that Nam Tai will be able to
quickly replace expired, canceled or reduced orders with new business. See "--
Risk Factors -- Potential Fluctuations of Operating Results."
Most of the Company's sales are to customers in the electronics
industry, which is subject to rapid technological change and product
obsolescence. The factors affecting the electronics industry in general, or any
of the Company's major customers or competitors in particular, could have a
material adverse effect on the Company's results of operations. Nam Tai's
success will depend to a significant extent on the success achieved by its
customers in developing and marketing their products, some of which may be new
and untested. If customers' products become obsolete or fail to gain widespread
commercial acceptance, the Company's business may be materially adversely
affected.
-6-
<PAGE> 7
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly and annual operating results are affected by a
wide variety of factors that could materially and adversely affect net sales,
gross profit and profitability. This could result from any one or a combination
of factors such as, but not limited to, the cancellation or postponement of
orders, the timing and amount of significant orders from the Company's largest
customers, customers' announcement and introduction of new products or new
generations of products, evolutions in the life cycles of customers' products,
the Company's timing of expenditures in anticipation of future orders,
effectiveness in managing manufacturing processes, changes in cost and
availability of components, mix of orders filled, adverse effects to the
Company's financial statements resulting from, or necessitated by the
Albatronics acquisition, possible future acquisitions, local factors and events
that may affect production volumes such as local holidays and seasonality of
customers' production requirements, and changes or anticipated changes in
economic conditions. The volume and timing of orders received during a quarter
are difficult to forecast. The Company's customers from time to time encounter
uncertain and changing demand for their products. Customers generally order
based on their forecasts. If demand falls below such forecasts or if customers
do not control inventories effectively, they may reduce or postpone shipments of
orders.
The Company's expense levels during any particular period are based, in
part, on expectations of future sales. If sales in a particular quarter do not
meet expectations, operating results could be materially adversely affected. In
addition, the Company's operating results are often affected by seasonality
during the second and third quarters in anticipation of the start of the school
year and Christmas buying season and in the first quarter resulting from both
the closing of the Company's factories in China for one-half of a month for the
Chinese New Year holidays and the general reduction in sales following the
holiday season. See Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations. The market segments served by the Company
are also subject to economic cycles and have in the past experienced, and are
likely in the future to experience, recessionary periods. A recessionary period
affecting the industry segments served by the Company could have a material
adverse effect on the Company's results of operations. Results of operations in
any period should not be considered indicative of results to be expected in any
future period, and fluctuations in operating results may also result in
fluctuations in the market price of the Company's Common Shares.
POLITICAL, LEGAL, ECONOMIC AND OTHER UNCERTAINTIES OF OPERATIONS IN
CHINA AND HONG KONG
INTERNAL POLITICAL AND OTHER RISKS.
The Company's manufacturing facilities are located in China. As a
result, the Company's operations and assets are subject to significant
political, economic, taxation, legal and other uncertainties associated with
doing business in China. Changes in policies by the Chinese government resulting
in changes in laws, regulations, or the interpretation and enforcement thereof,
confiscatory or increased taxation, restrictions on imports and sources of
supply, import duties, corruption, currency revaluations or the expropriation of
private enterprise could materially and adversely affect the Company. Over the
past several years, the Chinese government has pursued economic reform policies
including the encouragement of private economic activity and greater economic
decentralization. There can be no assurance that the Chinese government will
continue to pursue such policies, that such policies will be successful if
pursued, that such policies will not be significantly altered from time to time
or that business operations in China would not become subject to the risk of
nationalization, which could result in the total loss of investment in that
country. Following the Chinese government's program of privatizing many state
owned enterprises, the Chinese government has attempted to augment its revenues
through increased tax collection. Continued efforts to increase tax revenues
could result in increased taxation expenses being incurred by the Company.
Economic development may be limited as well by the imposition of austerity
measures intended to reduce inflation, increase taxes, or reform money losing
state-owned enterprises, the inadequate development of infrastructure and the
potential unavailability of adequate power, water supplies, transportation,
communications, raw materials and parts or the deterioration of the general
political, economic or social environment in China, any of which could have a
material adverse effect on the Company's business. The Company maintains its own
electrical generator, water treatment and water storage facilities at the
factory sites to address certain of these concerns. If for any reason the
Company were required to move its manufacturing operations outside of China, the
Company's profitability would be substantially impaired, its competitiveness and
market position would be materially jeopardized and there can be no assurance
that the Company could continue its operations.
-7-
<PAGE> 8
UNCERTAIN LEGAL SYSTEM AND APPLICATION OF LAWS.
The legal system of China relating to foreign investments is both new
and continually evolving, and currently there can be no certainty as to the
application of its laws and regulations in particular instances. China does not
have a comprehensive system of laws. Enforcement of existing laws or agreements
may be sporadic and implementation and interpretation of laws inconsistent. The
Chinese judiciary is relatively inexperienced in enforcing the laws that exist,
leading to a higher than usual degree of uncertainty as to the outcome of any
litigation. Even where adequate law exists in China, it may not be possible to
obtain swift and equitable enforcement of that law.
CURRENT DEPENDENCE ON SINGLE FACTORY COMPLEX.
The Company's products are manufactured exclusively at its complex
located in Baoan County, Shenzhen, China. The Company does not own the land
underlying its factory complex. It occupies the site under agreements with the
local Chinese government. In the case of its original facility, the lease
agreement covers an aggregate of approximately 150,000 square feet of factory
space and expires in August 2007. In the case of the newer facility, the Company
is entitled to use the land upon which it is situated until 2044. These
agreements and the operations of the Company's Shenzhen factories are dependent
on the Company's relationship with the local government. The Company's
operations and prospects would be materially and adversely affected by the
failure of the local government to honor these agreements. In the event of a
dispute, enforcement of these agreements could be difficult in China. Moreover,
firefighting and disaster relief or assistance in China is primitive by Western
standards. Material damage to, or the loss of, the Company's factory complex due
to fire, severe weather, flood, or other act of God or cause may not be
adequately covered by proceeds of its insurance coverage. In addition any
interruptions to the business caused by such disasters would have a material
adverse effect on the Company's financial condition, business and prospects.
POSSIBLE CHANGES AND UNCERTAINTIES IN ECONOMIC POLICIES.
As part of its economic reform, China has designated certain areas,
including Shenzhen where the Nam Tai manufacturing complex is located, as
Special Economic Zones. Foreign enterprises in these areas benefit from greater
economic autonomy and more favorable tax treatment than enterprises in other
parts of China. Changes in the policies or laws governing Special Economic Zones
could have a material adverse effect on the Company. Moreover, economic reforms
and growth in China have been more successful in certain provinces than others,
and the continuation or increase of such disparities could affect the political
or social stability of China.
INHERENT RISKS OF BUSINESS IN CHINA.
Conducting business in China, like most developing countries, is
inherently risky. Corruption, extortion, bribery, pay-offs, theft, and other
fraudulent practices may be more common in developing countries. The Company has
attempted to implement safeguards to prevent losses from such practices, but
there can be no assurance that despite these safeguards the Company will not
suffer losses relating to such practices.
UNCERTAINTY AND POSSIBLE CHANGES IN CHINA TAX LAWS.
The basic corporate tax rate for Foreign Investment Enterprises
("FIEs") such as Nam Tai's China subsidiaries is currently 33% (30% state tax
and 3% local tax). However, because Nam Tai's China subsidiaries are located in
the designated Special Economic Zone ("SEZ") of Shenzhen and are involved in
production operations, they qualify for a special reduced state tax rate of 15%.
In addition, the local tax authorities in the Shenzhen SEZ are not currently
assessing any local tax. Since Nam Tai's subsidiaries have agreed to operate for
a minimum of 10 years in China, a two-year tax holiday from the first profit
making year is available, following which in the third through fifth years there
is a 50% reduction to 7.5%. In any event, for FIEs such as Nam Tai's China
subsidiaries which export 70% or more of the production value of their products,
a reduction in the tax rate is available; in all cases apart from the years in
which a tax holiday is available, there is an overall minimum tax rate of 10%.
On January 8, 1999, Nam Tai's principal China subsidiary received the
recognition of "High and New Technology Enterprise" which entitles it to various
tax benefits including a lower income tax rate of 7.5% until January 7, 2004.
For a full discussion of the Company's income taxes, see Note 8 of Notes to
Consolidated Financial Statements included elsewhere herein.
Because of this favorable tax treatment and pursuant to the provisions
of applicable Chinese law, the Company has received substantial refunds income
taxes paid over the years on its operations in China and management believes
that under existing tax laws Nam Tai will continue to qualify for favorable tax
treatment in the future, particularly if Nam Tai reinvests profits attributable
to its Chinese operations in its Chinese subsidiaries. However, the Chinese tax
system is subject to substantial uncertainties and was subject to significant
changes enacted on January 1, 1994, the interpretation and enforcement of which
are still uncertain.
-8-
<PAGE> 9
Moreover, following the Chinese government's program of privatizing many state
owned enterprises, the Chinese government has attempted to augment its revenues
through heightened tax collection efforts. In early 1999 the Company learned
that for the 1996 and 1997 tax years it would not receive a 100% tax refund on
taxes paid by its principal Chinese subsidiary because the large intercompany
receivable between that subsidiary and a Hong Kong subsidiary was not considered
by the tax authorities to be a reinvestment of profits. Continued efforts by the
Chinese government to increase tax revenues could result in other decisions by
the taxing authorities which are unfavorable to Nam Tai and which increase its
future tax liabilities. There can be no assurance that changes in Chinese tax
laws or their interpretation or application will not subject the Company to
additional Chinese taxation in the future.
MFN STATUS.
China currently enjoys most favored nation ("MFN") trade status, which
provides China with the trading privileges generally available to trading
partners of the United States. The United States annually reconsiders the
renewal of China's MFN status. Various interest groups continue to urge that the
United States not renew MFN for China and there can no assurance that
controversies will not arise that threaten the status quo involving trade
between the United States and China or that the United States will not revoke or
refuse to renew China's MFN status. In any of such eventualities, the business
of the Company could be adversely affected, by among other things, causing the
Company's products in the United States to become more expensive, which could
result in a reduction in the demand for the Company's products by customers in
the United States. Trade friction between the United States and China, whether
or not actually affecting Nam Tai's business, could also adversely affect the
prevailing market price of the Company's Common Shares and Warrants.
SOUTHEAST ASIA ECONOMIC PROBLEMS.
Several countries in Southeast Asia, including Korea, Thailand and
Indonesia, have experienced a significant devaluation of their currencies and
decline in the value of their capital markets in 1997 and 1998. In addition,
these countries have experienced a number of bank failures and consolidations.
Most of the Company's products are paid for in U.S. dollars; therefore, the
Company believes that it is less susceptible to the direct effects of a
devaluation in the Hong Kong dollar or Chinese renminbi if either or both were
to occur despite assurances to the contrary by the Chinese government. The
decline in the currencies of other Southeast Asian countries could render the
Company's products less competitive if competitors located in these countries
are able to manufacture competitive products at a lower effective cost.
Management believes that the currency declines in other countries have resulted
in increased pressure from customers for the Company to reduce its prices. While
the Company's two principal competitors in the manufacture of its principal
product lines of calculator, personal organizers and linguistic products also
manufacture from China and therefore, the Company believes, are in the same
position as Nam Tai vis-a-vis Southeast Asia's economic problems, there can be
no assurance as to the ability of the Company's products to continue to compete
with products of other competitors from other Southeast Asian countries
suffering devaluations of their currencies or that currency or other effects of
the decline in Southeast Asia will not have a material adverse effect on the
Company's business, financial condition, results of operations or market price
of its securities.
RELATIONS BETWEEN CHINA AND TAIWAN.
Relations between China and Taiwan have been unresolved since Taiwan
was established in 1949. Although not directly a threat to Nam Tai, peaceful and
normal relations between China and its neighbors reduces the potential for
events that could have an adverse impact on the Company's business.
OPERATIONS IN HONG KONG.
The Company's executive and sales offices, and several of its customers
and suppliers are located in Hong Kong, formerly a British Crown Colony.
Sovereignty over Hong Kong was transferred effective July 1, 1997 to China. The
Company prepared for this transition in Hong Kong by increasing the role and
capability of its personnel in China to manage a number of responsibilities
previously managed through the Hong Kong office. Certain other responsibilities
have been transferred to the Company's office in Vancouver, British Columbia,
Canada. While the Company does not believe that the transfer of sovereignty over
Hong Kong to China will have a material adverse effect on the Company's
business, there can be no assurance as to the continued stability of political,
economic or commercial conditions in Hong Kong, and any instability could have
an adverse impact on the Company's business.
The Hong Kong dollar and the United States dollars have been fixed at
approximately 7.80 Hong Kong dollars to $1.00 since 1983. Although the Chinese
government has expressed its intention to maintain the stability of the Hong
-9-
<PAGE> 10
Kong currency there can be no assurance that the system of a fixed exchange rate
will be maintained at this rate or at all. Any change, or even expectations of a
change, will increase the currency risks for the Company. See "Exchange Rate
Fluctuations."
RISKS ASSOCIATED WITH RECENT ACQUISITIONS AND POTENTIAL FUTURE
ACQUISITIONS
The Company completed the Albatronics' acquisition in November 1998.
Due to the troubled financial condition of Albatronics at December 31, 1998, and
the possibility of Albatronics being wound up within a relatively short period,
Nam Tai did not consolidate Albatronics' financial statements in, or at December
31, 1998. Instead, Nam Tai wrote down its investment in Albatronics to a nominal
value. See "The Company's Subsidiaries - Albatronics" and Note 1 of Notes to
Consolidated Financial Statements. Currently, Nam Tai is seeking to work
together with Albatronics' major trade creditor and Albatronics' bankers to try
to support Albatronics. If any of these three parties refuses to provide the
necessary support, Albatronics' directors will consider all available options
including liquidation. Nam Tai's financial statements included in this Report
may be restated if a restructuring agreement for Albatronics is reached or is
probable and Nam Tai continues with its investment in Albatronics. Under those
circumstances Nam Tai would restate its 1998 financial statements to consolidate
Albatronics' results since December 1, 1998 and its balance sheet at December
31, 1998 with Nam Tai's financial statements for the year ended December 31,
1998 and would restate future financial statements that it issues before a
decision requiring consolidation is made. Based on their respective results
during 1998, Nam Tai's financial statements would be materially and adversely
affected if they were consolidated with Albatronics' and future Nam Tai results
and financial condition probably would be materially adversely affected as well.
See Item 9. Management's Discussion of Financial Statements and Results of
Operations.
An important element of the Company's strategy is to review acquisition
prospects that would complement the Company's existing products and services,
augment its market coverage and sales ability or enhance its technological
capabilities. Accordingly, the Company may acquire additional businesses,
products or technologies in the future. Future acquisitions by the Company could
result in charges similar to those incurred in connection with the Albatronics
acquisition, potentially dilutive issuances of equity securities, the incurrence
of debt and contingent liabilities and amortization expenses related to goodwill
and other intangible assets, any of which could materially adversely affect the
Company's business, financial condition and results of operations and/or the
price of the Company's Common Shares. Acquisitions entail numerous risks,
including the assimilation of the acquired operations, technologies and
products, diversion of management's attention to other business concerns, risks
of entering markets in which the Company has no or limited prior experience, the
potential loss of key employees of acquired organizations, increased debt loads,
and an increased risk of litigation. Management has limited experience in
assimilating or managing acquired organizations. There can be no assurance as to
the ability of the Company to successfully integrate the products, technologies
or personnel of any acquired business now or in the future, and the failure of
the Company to do so could have a material adverse affect on the Company's
business, financial condition and results of operations.
EXCHANGE RATE FLUCTUATIONS
The Company sells most of its products in United States dollars and
pays expenses in United States dollars, Japanese yen, Hong Kong dollars,
Canadian dollars and Chinese renminbi. The Company is subject to a variety of
risks associated with changes among the relative value of the United States
dollar, Japanese yen, Hong Kong dollar, Canadian dollar and Chinese renminbi,
but management believes the most significant exchange risk results from material
purchases made in Japanese yen. Approximately 18%, 23%, and 28% of Nam Tai's
material costs have been in yen during the years ended December 31, 1998, 1997
and 1996. Sales made in yen accounted for approximately 0.3% of sales for the
year ended December 31, 1998, 6.3% of sales for the year ended December 31,
1997, and 15% of sales for 1996. The net currency exposure has increased as a
result of decreased sales in yen not being fully offset by the decrease in
material purchases in yen.
Based on oral agreements with its customers which are customary in the
industry, the Company believes its customers will accept an increase in the
selling price of manufactured products if the exchange rate of the Japanese yen
appreciates beyond a range of 5% to 10% although such customers may also request
a decrease in selling price in the event of a depreciation of the Japanese yen.
Based on close working relationships with its principal customers, and
-10-
<PAGE> 11
because management believes similar oral agreements exist between these OEMs and
their other suppliers, the Company believes the oral nature of these agreements
will not prevent its OEMs from honoring them. However, there can be no assurance
that such agreements will be honored, and the refusal to honor such an agreement
in the event of a severe adverse fluctuation of the Japanese yen at a time when
sales made in yen are insufficient to cover material purchases in yen would
materially and adversely affect the Company's operations.
Although only 14.2% of the Company's expenses were in Chinese renminbi
in 1998, an appreciation of the renminbi against the U.S. dollar increases the
expenses of the Company when translated into U.S. dollars. While there has been
recent pressure on the Chinese government to devalue the renminbi against the
U.S. dollar, there can be no assurances that the renminbi will not increase
significantly in value relative to the U.S. dollar in the future.
Approximately 0.9% and 38.3%, respectively, of the Company's revenues
and expenses are in Hong Kong dollars. The Hong Kong dollar is currently pegged
to the U.S. dollar. At the end of 1997 and for most of 1998, in light of the
currency turmoil experienced by many other Southeast Asian countries, there has
been increasing pressure for a devaluation of the currencies of Hong Kong and
China. While the Governments of Hong Kong and China have indicated they will
support their currencies, possible devaluations may occur. Although the Company
expects that it may initially benefit from such devaluations through their
effect of reducing expenses when translated into U.S. dollars, such benefits
could be outweighed if it causes a destabilizing downturn in China's economy,
creates serious domestic problems in China, increases in borrowing costs, or
creates other problems adversely affecting the Company's business.
The Company's financial results have been affected this year and in the
past by currency fluctuations, resulting in total foreign exchange gains of
approximately $394,000 in 1998, $500,000 in 1997, and $20,000 in 1996.
From time to time, the Company attempts to hedge its currency exchange
risk. During 1998 the Company recorded a charge of $840,000 on the write-off of
a premium for an option which was purchased as a hedge in the event that the
Hong Kong dollar was allowed to depreciate against the U.S. dollar. After
purchasing the option, the Company invested a portion of its cash surplus in
short term Hong Kong dollar deposits which were earning interest rates between
10% and 14.175% - significantly higher than what was offered on U.S. dollar
deposits. In 1997 and 1996, Nam Tai recorded no gain or loss from hedging
transactions. The Company is continuing to review its hedging strategy and there
can be no assurance that Nam Tai will not suffer losses in the future as a
result of currency hedging.
COMPETITION
General competition in the contract electronic manufacturing industry
is intense. The Company however has two primary competitors in the manufacture
of its traditional product lines of calculators, personal organizers and
linguistic products - Kinpo Electronics, Inc. (formerly Cal-Comp Electronics,
Inc.) and Inventec Co. Ltd. While the Company is continually making efforts to
improve its competitiveness the industry is intensely competitive and certain
competitors may have substantially greater technical, financial and marketing
resources than the Company.
The Company desires to produce more advanced and specialized products
as management believes that there is less competition in more advanced products
due to the complexity involved in manufacturing and the lower number of direct
competitors. There can be no assurance that the Company will be successful in
obtaining business for such products and failure to move into more advanced
products may result in the Company facing increasing competition and reduced
profit margins.
TECHNOLOGICAL CHANGES AND PROCESS DEVELOPMENT
The market for the Company's manufacturing services is characterized by
rapidly changing technology and continuing process development. The Company is
continually evaluating the advantages and feasibility of new manufacturing
processes, such as COB, MCM, SMT, TAB, OLB and ACF. The Company believes that
its future success may depend upon its ability to develop and market
manufacturing services which meet changing customer needs, maintain
technological leadership and successfully anticipate or respond to technological
changes in manufacturing processes on a cost-effective and timely basis. There
can be no assurance that the Company's process development efforts will continue
to prove successful.
-11-
<PAGE> 12
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the abilities and continued
participation of Mr. Tadao Murakami, its Chairman of the Board and Mr. M. K.
Koo, its Senior Executive Officer, Corporate Strategy, Finance and
Administration. The loss of the services of Mr. Murakami or Mr. Koo could have a
material adverse effect on the Company's business.
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is a holding corporation organized as an International
Business Company under the laws of the British Virgin Islands and its principal
operating subsidiary is organized under the laws of Hong Kong, where the
Company's principal executive offices are also located. It may be difficult for
investors to enforce judgments against the Company obtained in the United States
based on actions predicated upon civil liability provisions of Federal
securities laws. In addition, all of the Company's officers and most of its
directors reside outside the United States and nearly all of the assets of these
persons and of the Company are located outside of the United States. As a
result, it may not be possible for investors to effect service of process within
the United States upon such persons, or to enforce against the Company or such
persons judgments predicated upon the liability provisions of U.S. securities
laws. The Company has been advised by its Hong Kong counsel and its British
Virgin Islands counsel that there is substantial doubt as to the enforceability
against the Company or any of its directors and officers located outside the
United States in original actions or in actions for enforcement of judgments of
U.S. courts of liabilities predicated on the civil liability provisions of
Federal securities laws.
CERTAIN LEGAL CONSEQUENCES OF INCORPORATION IN THE BRITISH VIRGIN
ISLANDS
The Company is organized under the laws of the British Virgin Islands.
Pursuant to the Company's Memorandum and Articles of Association and pursuant to
the laws of the British Virgin Islands, the Board of Directors may amend the
Company's Memorandum and Articles of Association without shareholder approval.
This includes, but is not limited to, amendments increasing or reducing the
authorized capital stock of the Company and increasing or reducing the par value
of its shares. In addition, the Board of Directors may approve certain
fundamental corporate transactions, including reorganizations, certain mergers
or consolidations and the sale or transfer of assets, without shareholder
approval. The ability of the Company to amend its Memorandum and Articles of
Association without shareholder approval could have the effect of delaying,
deterring or preventing a change in control of Nam Tai without any further
action by the shareholders including, but not limited to, a tender offer to
purchase the Common Shares at a premium above current market prices.
Under U.S. law, management, directors and controlling shareholders
generally have certain fiduciary responsibilities to the minority shareholders.
Shareholder action must be taken in good faith and actions by controlling
shareholders which are obviously unreasonable may be declared null and void. The
British Virgin Islands law protecting the interests of minority shareholders
differs from, and may not be as protective of shareholders as, the law
protecting minority shareholders in jurisdictions in the United States. While
British Virgin Islands law does permit a shareholder of a British Virgin Islands
company to sue its directors derivatively, and to sue Nam Tai and its directors
for his or her benefit and the benefit of others similarly situated, the
circumstances in which any such action may be brought and the procedures and
defenses that may be available in respect of any such action may result in the
rights of shareholders of a British Virgin Islands company being more limited
than those rights of shareholders in a company incorporated in a jurisdiction
within the United States. Moreover, lawsuits brought in the British Virgin
Islands appear, from the Company's experience, to take longer to reach interim
or final resolution.
-12-
<PAGE> 13
RISKS OF INTERNATIONAL SALES
The products of the Company are sold in the United States and
internationally, principally in Japan, Europe and Hong Kong. International sales
may be subject to political and economic risks, including political instability,
currency controls and exchange rate fluctuations, and changes in import/export
regulations, tariff and freight rates. Changes in tariffs or other trade
policies could adversely affect the Company's customers or suppliers or decrease
the cost of products for Nam Tai's competitors relative to such costs for the
Company.
VOLATILITY OF MARKET PRICE OF COMPANY'S SECURITIES
The markets for equity securities have been volatile and the price of
the Company's Common Shares has been and could continue to be subject to wide
fluctuations in response to quarter to quarter variations in operating results,
news announcements, trading volume, sales of Common Shares by officers,
directors and principal shareholders of the Company, news issued from affiliated
companies or other publicly traded companies, general market trends both
domestically and internationally, currency movements and interest rate
fluctuations. These same factors can be expected to affect the market price of
the Company's Warrants that were publicly issued in late November 1997. Certain
events, such as the issuance of Common Shares upon the exercise of the Warrants
or other outstanding stock options or warrants of the Company could also
adversely affect the prevailing market prices of the Company's securities.
RISKS OF YEAR 2000 ISSUES
Many existing computer programs, including some programs used by the
Company, in its computer system and equipment use only two digits to identify a
year in the date field. These programs were designed without considering the
impact of the upcoming change in the century. If not corrected, these computer
applications and systems could fail or create erroneous results before, during,
or after the year 2000. The Company's investigations and efforts to date have
included studies, investigations, inquiries to software and equipment suppliers,
testing by internal management and outside consultants, and the purchase of
certain replacement software and rewriting certain sections of existing
programs. Based on these efforts, the cost of which was not material, management
does not anticipate that the Company will incur any material operating expenses
or be required to incur material costs as a result of the year 2000 issue.
Despite management's effort to take reasonable precautions to be year 2000
ready, and its belief that it is currently year 2000 compliant, to the extent
the Company's systems are not fully year 2000 compliant, or failed for any other
reason, there can be no assurance that potential systems interruptions or the
cost necessary to update software would not have a material adverse effect on
the Company's business, financial condition, results of operations and business
prospects.
In addition to the internal preparations discussed above, to prepare
for the year 2000 the Company has sent inquiry letters to its key suppliers and
key customers to ensure that they do not expect any year 2000 problems to impact
their business dealings with Nam Tai. In the event that the Company's
significant customers and suppliers do not successfully and timely achieve year
2000 compliance, the Company's business or operations could be adversely
affected. There is also a risk that year 2000 problems may cause regional or
global problems for utility companies, transportation systems, the global
banking system, or to the global economy. To the extent that these problems
materialize Nam Tai expects that its business will be adversely impacted and to
date the Company has not completed a year 2000 contingency plan.
EXEMPTIONS UNDER THE EXCHANGE ACT AS A FOREIGN PRIVATE ISSUER
The Company is a foreign private issuer within the meaning of rules
promulgated under the Exchange Act. As such, and though its Common Shares and
Warrants are registered under Section 12(g) of the Exchange Act, it is exempt
from certain provisions of the Exchange Act applicable to United States public
companies including: the rules under the Exchange Act requiring the filing with
the Commission of quarterly reports on Form 10-Q or current reports on Form 8-K;
the sections of the Exchange Act regulating the solicitation of proxies,
consents or authorizations with respect to a security registered under the
Exchange Act; and the sections of the Exchange Act requiring insiders to file
public reports of their stock ownership and trading activities and establishing
insider liability for profits realized from any "short-swing" trading
transaction (i.e., a purchase and sale, or sale and purchase, of the issuer's
equity securities within six months or less).
-13-
<PAGE> 14
Because of the exemptions under the Exchange Act applicable to foreign private
issuers, shareholders of the Company are not afforded the same protections or
information generally available to investors in public companies organized in
the United States.
PRODUCTS
The following table sets forth the percentage of net sales of each of
the Company's product lines for the years ended December 31, 1998, 1997, and
1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
PRODUCT LINE 1998 1997 1996
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electronic calculators 60% 52% 35%
Subassemblies, components and other products 24 22 28
Personal digital assistants and linguistic products 15 25 36
Silk screening 1 1 1
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
Electronic Calculators
The Company manufactures a wide range of electronic calculators that
include basic function calculators from small credit card size to desk top
display style, printer display with tax function, scientific, and graphic
calculators.
Personal Digital Assistants and Linguistic Products
The Company produces various types of electronic organizers and
personal digital assistants ("PDAs"), particularly telephone directories and
business card organizers with scheduler, clock, memo pad and calculator
functions. The linguistic products manufactured by Nam Tai include electronic
spell checkers, dictionaries and language translators, including some models
with voice functions. Linguistic products generally include a built-in
calculator. The Company has successfully developed its first ODM product, an
electronic dictionary, and production is expected to begin in July 1999. It has
also been appointed to manufacture a palm-sized PC with a Chinese version of
Windows CE software pre-installed.
Subassemblies, Components and Other Products
In 1994, the Company began manufacturing and delivering subassemblies
consisting of LSIs bonded on PCBs utilizing advanced technological processes.
These products are used to manufacture components that are incorporated into
such products as telecommunication products, electronic toys and games.
In 1995, the Company expanded its subassembly manufacturing business
into LCD modules. These subassemblies display information as part of such
products as portable telephones, telephone systems, portable computers and
facsimile machines. They employ the same bonding technologies as are used for
the LSI bonded PCBs.
-14-
<PAGE> 15
In 1995, the Company delivered a sample run of IC card balance readers
and in 1996 began volume shipments of these products. These readers are
hand-held devices used to check information contained on the IC cards. (IC cards
are being developed by certain major banks in Europe and North America as an
alternative to the use of cash and are currently still undergoing market
testing.)
In 1996, the Company again expanded the component products it offers by
completing development and shipping control panel modules for microwave ovens.
These products are incorporated into microwave ovens manufactured by a division
of Sharp Corporation, which, management believes, is a leading manufacturer of
microwave ovens worldwide.
In 1997, the Company began producing LCD modules for use in cellular
(mobile) phones for Epson Precision (HK) Ltd. In 1997, the Company also began
using ACF technology in the manufacture of LCD modules and advanced dictionaries
with personal organizers. This new technology is a fine pitch heat sealing
process for the connection of Tape Carrier Package ("TCP") onto the LCD with ACF
in between using TAB processing.
The Company has successfully developed its first ODM product, an
electronic language translation product, and production is expected to begin in
July 1999.
Through Namtek, the Company offers its customers software development
services principally for the design of personal organizers and linguistic
products.
Silk Screening
Through Zastron, the Company provides manufacturing and silk screening
to customers for plastic parts, PVC products and metal parts. This service is
also supplied to other firms for incorporation into their finished products.
MANUFACTURING
Quality Control
The Company maintains strict quality control programs for its products,
including the use of total quality management ("TQM") systems and advance
testing and calibration equipment. All incoming raw materials and components are
checked by the Company's quality control personnel. During the production stage,
Nam Tai's quality control personnel check all work in process at several points
in the production process. Finally, after the assembly stage, the Company
conducts random testing of finished products. In addition, the Company provides
office space at its China manufacturing facility for representatives of its
major customers to permit them to monitor production of their products and to
provide direct access to the Company's manufacturing personnel. Manufactured
products have a low level of product defect, as required by the Company's OEM
customers. When requested, Nam Tai provides a limited warranty of six months to
one year for products it manufactures. To date, claims under the Company's
warranty program have been negligible.
The Company's Hong Kong and China subsidiaries have maintained ISO 9002
Certification since December 1993 and ISO 9001 Certification since February
1996. The "ISO" or International Organization for Standardization, is a
Geneva-based organization dedicated to the development of worldwide standards
for quality management guidelines and quality assurance. ISO 9000, which was the
first quality system standard to gain worldwide recognition, requires a company
gather, analyze, document, monitor and make improvements where needed. The
Company's receipt of ISO 9001 Certification demonstrates that the Company's
manufacturing operations meet the most demanding of the established world
standards.
Management believes sophisticated customers are increasingly requiring
their manufacturers to be ISO 9000 certified, and manufacturers that are not so
qualified are increasingly looking to certified manufacturers like Nam Tai
rather than undertaking the expensive and time-consuming process of qualifying
their own operations.
-15-
<PAGE> 16
For three consecutive years the Company was awarded the prestigious
Texas Instruments Supplier Excellence Award. The award recognizes suppliers who
have achieved World class performance in the following categories: product
quality; quality management; continuous on-time delivery of products; cycle
times; leadership in product pricing and value; customer service; technology;
and environmental leadership. To qualify for the award the first time requires
very high scores in each of the categories. To receive the award in subsequent
years requires continuous improvement over the high scores required for the
first year.
Component Parts and Suppliers
The Company purchases over 3000 different component parts from more
than 100 major suppliers and is not dependent upon any single supplier for any
key component. The Company purchases components for its electronic products from
suppliers in Japan and elsewhere. Orders for components are based on forecasts
that Nam Tai receives from its OEM customers, which reflect anticipated
shipments during the production cycle for a particular model.
The major component parts purchased by the Company are integrated
circuits or "chips", LCDs, solar cells, printer heads and batteries. The Company
purchases both stock "off-the-shelf" chips and custom chips, the latter being
the most expensive component parts purchased by Nam Tai. At the present time,
the Company purchases most of its chips from Toshiba Corporation, Sharp
Corporation and certain of their affiliates, although there are many additional
suppliers from which the Company could purchase chips.
LCDs are readily available from many manufacturers and the Company
currently has two major suppliers, Epson Hong Kong Ltd. and Sharp Corporation.
PCBs and other circuit boards are purchased from circuit board manufacturers in
Hong Kong, China and solar cells are purchased from Matsushita Battery
Industrial Company Ltd. Batteries are standard "off-the-shelf" items, generally
purchased in Hong Kong from agents of Japanese manufacturers. The Company also
purchases various mechanical components such as plastic parts, rubber keypads,
PCBs and packaging materials locally in China. Management believes the low costs
for locally supplied parts adds to the Company's competitive advantage.
Certain components may be subject to limited allocation by certain of
Nam Tai's suppliers. Although such shortages and allocations have not had a
material adverse effect on the Company's results of operations, there can be no
assurance that any future allocation or shortages would not have such an effect.
CUSTOMERS AND MARKETING
Approximate percentages of net sales to customers by geographic area
based upon location of product delivery are set forth below for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
GEOGRAPHIC AREAS 1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
North America 47% 49% 34%
Japan 22 23 28
Europe 18 15 12
Hong Kong 9 7 18
Other 4 6 8
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
-16-
<PAGE> 17
The Company's Hong Kong based management personnel and sales staff is
responsible for marketing products to existing customers as well as potential
new customers. The Company places great emphasis on providing quality service to
its customers and has, as a result, limited the number of companies for which it
manufactures in an effort to ensure quality service.
Customers
The Company's OEM customers include the following entities which market
Nam Tai's products under their own brand name or, where no brand name is shown,
incorporate the Company's products into their products:
<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
Matushita Electronics Corporation ----- IC card readers 1994
(Matsushita Battery Industrial Co. Ltd)
Nitsuko (HK) Co. Ltd. ----- PCB modules for Telecommunications 1995
Systems
Optrex Corporation ----- Assemblies for LCD modules 1994
Premier Precision Ltd. Citizen Silk screening and aluminum panel 1993
Sanyo Electric (H. K.) Ltd. Sanyo, Casio Silk screening 1988
Seiko Instruments Inc. Seiko, SII Personal organizers and linguistic 1991
products
Sharp Corporation Sharp Personal organizers, calculators and 1989
control panel modules
Texas Instruments Incorporated Texas Personal organizers and calculators 1989
Instruments
Whirlpool Microwave Products Development Whirlpool Silk screening for microwave oven 1998
Ltd. control panels
</TABLE>
-17-
<PAGE> 18
At any given time, different customers account for a significant
portion of Nam Tai's business. Percentages of total sales to customer vary from
year to year and may fluctuate depending on the timing of production cycles for
particular products. Sales to Nam Tai's four largest customers, aggregated
approximately 92%, 89% and 90% of the Company's total net sales during the years
ended December 31, 1998, 1997 and 1996, respectively. Sales to Texas Instruments
Incorporated and Sharp Corporation, the only customers accounting for more than
10% of sales in 1998, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Texas Instruments Incorporated 44.2% 38.0% 22.3%
Sharp Corporation 32.0 35.3 38.4
---- ---- ----
76.2% 73.3% 60.7%
==== ==== ====
</TABLE>
A number of products are made for its major customers such that the
Company is not necessarily dependent on a single product for one customer.
Although management believes any one of the Company's customers could be
replaced with time, the loss of any of its largest customers, especially its
principal customers, or a substantial reduction in orders from them would have a
material adverse effect on the Company's business. See "--Risk Factors -
Customer Concentration; Dependence on Electronics Industry." While each of the
four largest customers is expected to continue to be a significant customer, the
Company continually tries to lessen its dependence on large customers through
efforts to diversify its customer and product base.
The Company's sales to all of its OEM customers are based on purchase
orders. Except for these purchase orders, the terms of which in a few cases are
supplemented by basic agreements dependent upon the receipt of purchase orders,
Nam Tai has no written agreements with its OEM customers. Often, the Company
receives letters of credit to cover the next three months of orders and all the
molds, tooling and development charges (including software design) are charged
to the account of OEM customers prior to production. Some customers require COD
terms and request the Company to bear the cost of molds, tooling and development
charges.
Many of Nam Tai's customers have a relationship that extends for a
number of years and consequently the Company believes its relations with these
customers are good. The Company encourages cooperation and communication with
its most important customers. In particular, senior management includes a team
of Japanese professionals who provide technical expertise and work closely with
both the Company's Japanese component suppliers and its Japanese customers.
Management also believes the risk of a sudden withdrawal by any of its major
customers is diminished by: (i) the lengthy production cycle, typically over
three years for each model, which is required to produce the products sold to
customers; (ii) the fact that production cycles may begin while other products
for the same customers are in progress; and (iii) the investment in molds,
tooling and development charges (including software design) which is borne by
some of the OEM customers.
Sales are predominately denominated in U.S. dollars and in many cases
are covered by standard letters of credit.
Production Scheduling
The typical cycle for a product to be manufactured and sold to an OEM
customer is three to four years including the production period, the development
period and the period for market research and data collection (which is
undertaken primarily by Nam Tai's OEM customers). Initially an OEM customer
gathers data from its sales personnel on products for which there is market
interest, including features and unit costs. The OEM customer then contacts the
Company, and possibly other prospective manufacturers, with forecasted total
production quantities and design specifications or renderings. From that
information, the Company in turn contacts its suppliers and determines estimated
component costs. The Company later advises the OEM customer of the development
costs, charges (including molds, tooling and development costs such as software
design) and unit cost based on the forecasted production quantities desired
during the expected production cycle.
-18-
<PAGE> 19
Once the Company and the OEM customer agree to the Company's quotation for the
development costs and the unit cost, the Company begins the product development.
This development period lasts approximately less than six months, longer if
software design is included. During this time the Company completes all molds,
tooling and software required to manufacture the product with the development
costs reimbursed by the customer. Recently, some of the customers have started
to request the Company to bear responsibility for paying development charges.
Upon completion of the molds, tooling and software, the Company produces samples
of the product for the customer's quality testing, and, once approved, commences
mass production of the product.
The production period usually lasts approximately 18 to 30 months.
Typically, more advanced products have longer production runs. If total
production quantities change, the OEM customer often provides six months notice
before discontinuing orders for a product. At any point in time the Company is
in different stages of the development and production periods for the various
models it has under development or in production for OEM customers.
The majority of the Company's production is based on forecasts received
from OEM customers covering the next six month period, the first three months of
which are scheduled shipments. These forecasts are reviewed and adjusted, where
necessary, at the beginning of each month with confirmed orders covering the
first three months. In many cases, confirmed orders are supported by letters of
credit and may not be canceled once confirmed without the customer becoming
responsible for all costs of the remaining components included in inventory for
that order. During the years ended December 31, 1998 and 1997 the Company did
not suffer a material loss resulting from the cancellation of an OEM customer
confirmed order. For the year ended December 31, 1996, the Company elected to
write-off the cost of certain components included in raw material inventory in
the amount of $415,000. These components were not likely to be used in
connection with future production, and due to the passage of time, could not be
charged to customers who would have otherwise been responsible for the cost.
Transportation
Since the Company sells its products F.O.B. Hong Kong, its customers
are responsible for the transportation of finished products from Hong Kong to
their final destination. Transportation of components and finished products to
and from Shenzhen is by truck. Component parts purchased from Japan are
generally shipped by air. To date, the Company has not been materially affected
by any transportation problems.
RESEARCH AND DEVELOPMENT
Between 1984 and 1994, the Company spent an average of approximately
$360,000 per annum on research and development, chiefly to advance manufacturing
technology. During the later half of this period Nam Tai concentrated on its OEM
business and expenditures fell below the average by the end of the period. At
that time the major responsibility of the Company's product design personnel was
limited to the production to the satisfaction of and in accordance with the
specifications provided by OEM customers.
Since 1995, the Company has placed increased emphasis on research and
development which provides greater service to OEM customers and assists in
design and development of future products. As a result of decreased orders,
research and development expenses decreased to $1,691,000 in 1998 from
$1,909,000 in 1997, but remains significantly higher than the research and
development expenses of $950,000 and $945,000 in 1996 and 1995, respectively as
some of the Company's customers have requested the Company to bear
responsibility for development charges. Namtek, the Company's software
development subsidiary which began operations in early 1996, accounted for
approximately 7%, 14% and 40% of the research and development expenses in 1998,
1997 and 1996 respectively and these expenses were substantially recovered from
fees paid by third parties.
ODM DEVELOPMENT
In 1998, Nam Tai focused special attention on furthering the research
and development capabilities of its engineering division. This included hiring
two new senior executives, the Company's CEO Mr. Takizawa, and Mr. Koike, Vice
General Manager Research and Development to oversee the development of Nam Tai's
product development capabilities.
-19-
<PAGE> 20
The Company plans to continue acquiring state-of-the art design equipment and
enhancing it technological expertise through continued education for all
engineers and further recruiting of system engineers.
Nam Tai hopes that by enhancing its capabilities it will be able to
expand into Original Design Manufacturing ("ODM") of telecommunication products
and personal computer accessories. In the ODM business, Nam Tai envisions being
responsible for the design and development of new products, the rights to which
it will own. The Company has successfully developed its first ODM product, an
electronic dictionary and production is expected to begin in July 1999. Nam Tai
plans to sell these products to OEM customers to be marketed to end users under
the customer's brand name. Nam Tai hopes to augment its OEM business with ODM
business in the future. There can be no assurance that Nam Tai's efforts to
enter the OEM business will be successful or that it will achieve material
revenue from its efforts.
COMPETITION
Competition in the contract electronic manufacturing industry is
intense with numerous other companies in the contract electronic manufacturing
industry. For Nam Tai's principal products, competition has been limited by OEMs
to a small number of companies who satisfy the requirements to become approved
suppliers. The Company's primary competitors in the manufacture of its principal
product lines of calculators, personal organizers and linguistic products, are
Kinpo Electronics, Inc. (formerly Cal-Comp Electronics, Inc.) and Inventec Co.
Ltd., Taiwanese Companies manufacturing in China. While an OEM may prefer its
approved suppliers, management believes OEMs tend to order from several
suppliers in order to lessen dependence on any one of them. Competition for OEM
sales is based primarily on unit price, product quality and availability,
promptness of service, reputation for reliability and OEM confidence in the
manufacturer. The Company believes it competes favorably in each of these areas.
EMPLOYEES
At December 31, 1998, Nam Tai employed approximately 1,755 people on a
full-time basis, of which 1,719 were working in China, 21 in Hong Kong, and 15
in Canada. Of these, approximately 1,499 were engaged in manufacturing, 167 were
engaged in clerical, research and development and marketing positions, and the
balance in supporting jobs such as security, janitorial, food and medical
services. The Company is not a party to any material labor contract or
collective bargaining agreement. The Company has experienced no significant
labor stoppages and believes relations with its employees are satisfactory. The
nature of its arrangement with its manufacturing employees is such that it can
increase or reduce staffing levels without significant difficulty, cost or
penalty.
The Company maintains an employee incentive compensation program in
China whereby a regular bonus is paid to employees on the employee's return to
work following the Chinese New Year holiday. Management believes this method has
contributed to low employee turnover in the factory.
PATENTS, LICENSES AND TRADEMARKS
The Company has no patents, licenses, franchises, concessions or
royalty agreements that are material to its business as a whole. Due to rapid
technological change in the products manufactured, the Company does not believe
the absence of patents has had or will have a material impact on its business.
The Company has obtained trademark registrations in Hong Kong for the
mark "FORTEC" and "SANTRON" in connection with electronic calculators. The
Company has registered the trademark "NAMTAI" in connection with electronic
calculators in Hong Kong, China, the United States, and Canada.
-20-
<PAGE> 21
ITEM 2. PROPERTIES
British Virgin Islands
As of January 17, 1997, the registered office of the Company was
transferred to McNamara Chambers, P.O. Box 3342, Road Town, Tortola, British
Virgin Islands. Only corporate administrative matters are conducted at this
office, through Nam Tai's registered agent, McW. Todman & Co. The Company
neither owns nor leases property in the British Virgin Islands.
Hong Kong
In February 1997, the Company leased new premises at Unit 9, 15/F.,
Tower 1, China Hong Kong City, 33 Canton Road, TST, Kowloon, Hong Kong for a
term of three years. Rental is approximately $17,900 per month for the first two
years, and will be reduced by 30% in the third year. The Company moved its
principal executive and marketing offices into these new premises in late March
1997.
The Company owns a residential flat in Hong Kong that was purchased for
total consideration of $1,850,000. This property was occupied by the Chairman of
the Company, Mr. Murakami until December 1998 and is now occupied by Mr.
Takizawa, Chief Executive Officer and President and forms part of his overall
compensation. See Item 11. Compensation of Directors and Officers.
Since 1984 the Company owned approximately ten acres of land in Hong
Kong carried on the books of the Company at its cost of approximately $523,000.
Throughout 1997 the Company disposed of approximately six acres of its land
holdings for net proceeds of $5,750,000 realizing a gain of $5,548,000. In 1998
the Company disposed of approximately 0.6 acres of its land holdings for net
proceeds of $815,000 realizing a gain of $795,000. The remaining land that the
Company plans to sell continues to be carried on the books of the Company at its
cost of approximately $185,000.
Shenzhen, China
Nam Tai's manufacturing complex is located in Baoan County, Shenzhen,
China. It includes the original facility and Phase I of the factory expansion
completed in May 1996. The original facility consists of 150,000 square feet of
manufacturing space under a 15 year lease expiring in 2007. The rental rate is
approximately $38,400 per month due to increase by 20% in August 2002. Phase I
of the complex expansion is located on 286,600 square feet of leasehold land
adjacent to the original facility. The lease for this land was purchased for
approximately $2,450,000 in 1994 and has a term of 50 years. The new facility
consists of 160,000 additional square feet of manufacturing space, 39,000 square
feet of offices, 212,000 square feet of new dormitories, 26,000 square feet of
full service cafeteria and recreation facilities and a swimming pool. The total
cost of the new factory complex, excluding land, was approximately $21,800,000.
The Company also has a 26,000 square foot facility in Shenzhen, located
approximately one mile from the manufacturing complex. This contains 28
apartment units to house certain factory managers who are married and have
families. The Company purchased this building for approximately $1,000,000,
paying the final installment in June 1993.
Canada
On September 28, 1998, Nam Tai Electronics (Canada) Ltd. moved its
corporate office to new leased premises in Vancouver, British Columbia. The
Company entered into a lease for 3,480 square feet of office space at an annual
rental of $77,649. The lease expires in September 2003.
General
The Company believes its existing manufacturing and office facilities
are adequate for the operation of its business for the foreseeable future.
-21-
<PAGE> 22
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings other than routine
litigation incidental to its business and there are no material legal
proceedings pending with respect to the property of the Company, other than as
described below.
In September 1993, Tele-Art, Inc., a shareholder of Nam Tai, commenced
an action against the Company seeking an injunction prohibiting the Company from
proceeding with a rights offering which was contemplated at that time.
Tele-Art's application was based on claims that Nam Tai may have violated
British Virgin Islands and United States law. Among other claims, Tele-Art
asserted the Company's rights offering was part of a scheme to enrich directors
and management of Nam Tai and dilute the interest of minority shareholders.
Within four days, a temporary injunction obtained by Tele-Art was discharged,
permitting the Company to proceed with, and complete, its rights and standby
offerings in October 1993. Tele-Art is pursuing claims in the British Virgin
Islands against Nam Tai for damages. In November 1993, Tele-Art applied to the
Court to include the Company's directors in the proceedings, and in March 1994
the application was granted. The Company continues to believe that Tele-Art's
claims are without merit and plans, if necessary, to continue to vigorously
defend against them as well as, if possible, to seek from Tele-Art and its
agents compensation for the damage caused by the injunction and the proceedings
that were brought to obtain it.
In June 1997, Nam Tai Electronics, Inc. filed a petition with the High
Court of Justice in the British Virgin Islands for the winding up of Tele-Art
Inc. on account of an unpaid judgment debt owing to Nam Tai. The High Court of
Justice granted an order to wind up Tele Art Inc. on July 17, 1998. The
Caribbean Court of Appeal upheld the decision on January 25, 1999. On January
22, 1999, pursuant to its Articles of Incorporation, Nam Tai redeemed and
cancelled 138,500 Common Shares of Nam Tai registered in the name of Tele-Art at
a price of $11.19 per share to offset substantially all of the judgment debt,
interest, and legal costs of approximately $1.6 million. On February 12, 1999
the liquidator of Tele-Art filed a summons seeking among other things, a
declaration setting aside the redemption. The Company believes it has acted
properly in this matter and will vigorously contest this application.
The Bank of China Hong Kong branch is pursuing claims in Hong Kong
seeking possession of 308,227 shares of the Company (including the 138,500
redeemed shares discussed in the above paragraph) allegedly beneficially owned
by Tele-Art but pledged to the Bank of China. Management believes that this
claim is without merit and will vigorously defend them.
Management believes that the outcome of the above cases will not have a
significant effect of the Company.
-22-
<PAGE> 23
ITEM 4. CONTROL OF THE COMPANY
The Company is not directly owned or controlled by another corporation
or by any foreign government. The following table sets forth, as of March 1,
1999, the beneficial ownership of the Company's Common Shares by each person
known by the Company to own beneficially more than 10% of the Common Shares of
the Company outstanding as of such date and by the officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
NUMBER OF
IDENTITY OF COMMON SHARES PERCENT OF
PERSONS OR GROUPS BENEFICIALLY OWNED CLASS
----------------- ------------------ ----------
<S> <C> <C>
M. K. Koo 3,499,489 (1) 33.0%
Officers and directors as a 4,325,884 (2) 40.0%
group (eleven persons)
</TABLE>
(1) Includes 2,519,306 shares which are owned by Mr. Koo, 53,333
shares issuable to Mr. Koo upon exercise of options
exercisable within 60 days of March 1, 1999 and 926,850 shares
issuable to Mr. Koo upon exercise of Warrants.
(2) Includes 3,146,607 shares owned by officers and directors as a
group, an aggregate of up to 53,333 shares issuable to
officers upon exercise of employee options exercisable within
60 days of March 1, 1999, and 1,125,944 shares issuable to
officers and directors as a group upon exercise of Warrants.
-23-
<PAGE> 24
ITEM 5. NATURE OF TRADING MARKET
COMMON SHARES
The Company's authorized capital consists of 20,000,000 Common Shares,
$0.01 par value per share. The Company's Common Shares are traded on The Nasdaq
National Market. Prior to March 12, 1999 the shares traded under the symbol
"NTAIF" and after the symbol changed to "NTAI".
The following table sets forth the high and low closing sale prices as
reported by The Nasdaq National Market during each of the quarters in the
two-year period ended December 31, 1998.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ----- -----
<S> <C> <C>
December 31, 1998 14.50 9.675
September 30, 1998 9.38 14.94
June 30, 1998 17.25 14.88
March 31, 1998 17.63 12.88
December 31, 1997 27.88 14.00
September 30, 1997 31.63 16.75
June 30, 1997 16.63 9.63
March 30, 1997 11.88 8.13
</TABLE>
Of the 9,812,523 Common Shares of the Company outstanding as of
December 31, 1998, 6,535,712 are held by 1,019 holders of record in the United
States.
WARRANTS
In November 1997, the Company completed rights and standby offerings
(the "1997 Offerings") selling 2,267,917 and 729,212 units at $17.00 and $16.75
respectively. Each Unit consisted of one Common Share and one Warrant. The
Common Shares and the Warrants included in the Units were separately
transferable immediately.
Each Warrant is exercisable to purchase one Common Share at a price of
$20.40 per share at any time until November 24, 2000. The Warrants are
redeemable by the Company at $0.05 per Warrant on 30 days' written notice
provided the closing sale price of the Common Shares for 20 consecutive trading
days within the 30-day period preceding the date of the notice of redemption
equals or exceeds $25.50. In the event the Company exercises the right to redeem
the Warrants, a holder will be forced either to sell or exercise the Warrants
within 30 days of the notice of redemption, or accept the redemption price.
-24-
<PAGE> 25
The Company's Warrants are traded on The Nasdaq National Market. Prior
to March 12, 1999 the shares traded under the symbol "NTAWF" and after the
symbol changed to "NTAIW".
The following table sets forth the high and low closing sale prices as
reported by The Nasdaq National Market during each of the quarters since the
Listing of the warrants.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
December 31, 1998 1.69 0.88
September 30, 1998 1.94 0.75
June 30, 1998 3.44 1.88
March 31, 1998 3.50 2.44
December 31, 1997 4.00 2.50
</TABLE>
Of the 2,997,129 Warrants of the Company outstanding as of December 31,
1998, 127 holders of record in the United States hold 2,706,070.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are no exchange control restrictions on payments of dividends on
the Company's Common Shares or on the conduct of the Company's operations in
Hong Kong, where the Company's principal executive offices are located or the
British Virgin Islands, where Nam Tai is incorporated. Other jurisdictions in
which the Company conducts operations may have various exchange controls.
Dividend distribution and repatriation by Nam Tai's subsidiaries in China are
regulated by Chinese laws and regulations. To date these controls have not had a
material impact on the Company's financial results as sales to customers are
generally made in Hong Kong.
There are no material British Virgin Islands laws which impose foreign
exchange controls on the Company or that affect the payment of dividends,
interest, or other payments to nonresident holders of Nam Tai's securities.
British Virgin Islands law and the Company's Memorandum and Articles of
Association impose no limitations on the right of nonresident or foreign owners
to hold or vote such securities of the Company.
ITEM 7. TAXATION
No reciprocal tax treaty regarding withholding tax exists between the
United States and the British Virgin Islands. Under current British Virgin
Islands law, dividends, interest or royalties paid by the Company to individuals
and gains realized on the sale or disposition of shares are not subject to tax
as long as the recipient is not a resident of the British Virgin Islands. The
Company is not obligated to withhold any tax for payments of dividends and
shareholders receive gross dividends irrespective of their residential or
national status.
-25-
<PAGE> 26
ITEM 8. SELECTED FINANCIAL DATA
The selected financial information set forth below is derived from
consolidated financial statements of the Company. The selected information is
qualified in its entirety by reference to, and should be read in conjunction
with, such consolidated financial statements, related notes and "Management's
Discussion and Analysis of Results of Operations and Financial Condition" under
Item 9. in this report.
SELECTED FINANCIAL INFORMATION
(In thousands of U.S. dollars except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data (1)
- -------------------------
Net sales $101,649 $132,854 $108,234 $121,240 $ 96,564
Gross margin 24,710 34,724 22,185 23,152 17,223
Net income 3,529 30,839 9,416 11,419 8,099
Dividends declared 2,829 786 243 120 65
Per share amounts
- -----------------
Basic earnings per share (2) $ 0.34 $ 3.70 $ 1.17 $ 1.42 $ 1.17
Diluted earnings per share (3) $ 0.34 $ 3.68 $ 1.16 $ 1.40 $ 1.09
Dividend declared $ 0.28 $ 0.10 $ 0.03 $ 0.015 $ 0.01
Balance Sheet Data (1)
- ----------------------
Current assets $ 97,015 $133,022 $ 46,609 $ 47,011 $ 45,520
Property, plant and equipment - net 32,445 32,442 36,487 27,635 14,624
Total assets 147,228 167,788 88,391 79,281 66,287
Current liabilities 19,476 19,552 21,401 19,108 17,838
Non-current liabilities 56 -- -- -- --
Shareholders' equity 127,696 148,236 66,990 60,173 48,449
</TABLE>
- ------------
(1) Assets and liabilities are translated into United States dollars using
the appropriate rates of exchange at the balance sheet date. Income and
expenses are translated at the average exchange rate in effect during
the year.
(2) For purposes of calculating basic earnings per share, the weighted
average number of common shares outstanding for the years ended
December 31, 1998, 1997, 1996, 1995, and 1994 were 10,316,510,
8,324,320, 8,040,497, 8,018,252, and 6,934,098 respectively.
(3) For purposes of calculating fully diluted earnings per share, the
weighted average number of common shares outstanding for the years
ended December 31, 1998, 1997, 1996, 1995, and 1994 were 10,351,100,
8,391,290, 8,142,131, 8,171,750, and 7,459,570 respectively.
-26-
<PAGE> 27
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This section contains forward-looking statements involving risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under the section of this Report entitled Item 1.
Description of Business "Risk Factors". This section should be read in
conjunction with the Company's Consolidated Financial Statements included
elsewhere herein.
RESULTS OF OPERATIONS
General
The Company derives its revenues principally from manufacturing
consumer electronic products and subassemblies for OEM customers in the
electronics industry. Products manufactured by Nam Tai include calculators,
personal organizers, personal digital assistants, linguistic products,
integrated circuit ("IC") or smart card readers (referred to as "IC card
readers"), and various components including microwave oven control panel
modules.
During each of the years ended December 31, 1998, 1997, and 1996, sales
to OEM customers accounted for 99% of total net sales. Management believes sales
of personal organizers, linguistic products and calculators to its OEM customers
will continue to be an important line of business for the Company for the next
several years. Management expects subassemblies, components, and other products,
along with new products contribute to an increasing proportion of total revenue
in the future. See Item 1. Description of Business -- Customers and Marketing.
The consumer electronics industry is very competitive and the Company
is continuously under pressure to lower the selling price of its existing
product lines. In response to these pressures, the Company seeks to reduce its
material costs by negotiating lower prices on components and upgrading its
technology and human resources in order to be capable of manufacturing more
advanced and specialized products with higher unit margins. It also strives to
improve customer relations and quality. The Company desires to produce more
advanced and specialized products as management believes that there is less
competition in more advanced products due to the complexity involved in
manufacturing and the lower number of direct competitors. There can be no
assurance that the Company will be successful in obtaining business for such
products and failure to move into more advanced products may result in the
Company facing increasing competition and reduced profit margins.
The Company moved its manufacturing operations to China in 1987 and
derives substantially all of its operating income from these operations. Nam Tai
plans to continue increasing the scope of its operations and investment in
China.
Under current British Virgin Islands law, Nam Tai is not subject to tax
on its income. Most of the Company's operating profits accrue in China, where
its effective tax rate is 10%, and in Hong Kong, where the corporate tax rate on
assessable profits is currently 16% in 1998. The Company receives tax credits in
China related to its reinvestment of profits on China operations into share
capital and tax benefits for being a "High and New Technology Enterprise". This
reduces the overall tax payable by the Company. See Note 8 of Notes to
Consolidated Financial Statements.
The Company values its inventory at the lower of cost and market value.
Until March 1997, the Company used a standard cost system to value its
inventory, which is purchased in U.S. dollars, Japanese yen and Hong Kong
dollars. Under this system, the Company revalued its inventory at the end of
each quarter based upon actual costs and the resulting standard cost revaluation
flowed through cost of sales when the inventory was sold. Since March 1997, the
Company uses a cost system which is an actual cost system based on FIFO
inventory flow.
The Company completed the Albatronics' acquisition in November 1998.
Due to the troubled financial condition of Albatronics at December 31, 1998, and
the possibility Albatronics would be wound up within a relatively short period,
Nam Tai did not consolidate Albatronics' financial statements in, or at December
31, 1998. Instead, Nam Tai wrote down its investment in Albatronics to a nominal
value. See "The Company's Subsidiaries - Albatronics" and Note 1 of Notes to
Consolidated Financial Statements. Currently, Nam Tai is seeking to work
together with Albatronics' major trade creditor and Albatronics' bankers to try
to support Albatronics. If any of these three parties refuses to provide the
-27-
<PAGE> 28
necessary support, Albatronics' directors will consider all available options
including liquidating Albatronics. Nam Tai's financial statements included in
this Report may be restated if a restructuring agreement for Albatronics is
reached or is probable and Nam Tai continues with its investment in Albatronics.
Under those circumstances Nam Tai would restate its 1998 financial statements to
consolidate Albatronics' results since December 1, 1998 and its balance sheet as
at December 31, 1998 with Nam Tai's financial statements for the year ended
December 31, 1998 and would restate future financial statements that it issues
before a decision requiring consolidation is made. This would mean in the case
of its 1998 financial statements that Nam Tai would restate its 1998 financial
statements to consolidate Albatronics' results since December 1, 1998 and its
balance sheet at December 31, 1998 with Nam Tai's 1998 financial statements for
the year ended December 31, 1998. Although Nam Tai's 1998 net income would not
change materially from $3,529,000 reported in this Report (i.e., the provision
for impairment in value of $8.27 million would not be reversed irrespective of
consolidation), all of Albatronics' sales and expenses during December 1998 of
$17.6 million and $19.3 million, respectively, would be included in Nam Tai's
statements of income for the year ended December 31, 1998. In addition, Nam
Tai's Consolidated Balance Sheet at December 31, 1998 would be materially
altered to include Albatronics' assets and liabilities. Other financial ratios
and measures, including gross profit margin, net profit margin, cash to current
liabilities, total assets to total liabilities, and the amount of long-term
debt, would be materially adversely affected upon a consolidation of results. A
decision requiring consolidation which is made after future financial statements
of the Company are issued would result in an additional restatement of
previously issued financial statements and probably would have a material
adverse impact on the Company's financial results and financial condition for
periods subsequent to December 31, 1998.
-28-
<PAGE> 29
The first quarter is historically a slower sales period for the Company
as its factories are closed for two weeks for the Chinese New Year holidays as
is customary in China. First quarter sales, as a percentage of total sales, were
stronger than usual in 1998 because the impact of the Asian Flu which had a more
severe impact on the Company as the year progressed. The following table sets
forth selected operating data for the quarters indicated. This information has
been derived from the unaudited consolidated financial statements of the Company
which, in the opinion of management, contain all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of such
information. These operating results are not necessarily indicative of results
for any future period and results may fluctuate significantly from quarter to
quarter in the future.
<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>
1998
- ----
Summary of operations
Net sales $ 26,280 $ 30,857 $ 23,659 $ 20,853
Gross profit 6,591 7,465 5,513 5,141
Income from operations 3,321 2,432 1,838 793
Net income 5,865 2,802 2,565 (7,703)
Basic earnings per share $ 0.53 $ 0.27 $ 0.26 $ (0.78)
Diluted earnings per share $ 0.53 $ 0.27 $ 0.26 $ (0.78)
1997
- ----
Summary of operations
Net sales $ 31,152 $ 40,444 $ 31,245 $ 30,013
Gross profit 7,246 12,594 7,536 7,348
Income from operations 3,630 8,005 3,878 3,503
Net income 5,570 7,763 8,751 8,755
Basic earnings per share $ 0.71 $ 0.98 $ 1.07 $ 0.93
Diluted earnings per share $ 0.71 $ 0.97 $ 1.06 $ 0.93
1996
- ----
Summary of operations
Net sales $ 25,357 $ 24,885 $ 28,005 $ 29,987
Gross profit 5,036 4,907 6,344 5,898
Income from operations 2,007 1,201 2,893 2,432
Net income 2,333 1,409 3,318 2,356
Basic earnings per share $ 0.29 $ 0.17 $ 0.41 $ 0.30
Diluted earnings per share $ 0.29 $ 0.17 $ 0.41 $ 0.30
</TABLE>
-29-
<PAGE> 30
The following table presents selected consolidated financial
information stated as a percentage of net sales for the years ended December 31,
1998, 1997, and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net sales ............................................ 100.0% 100.0% 100.0%
Cost of sales ........................................ 75.7 73.9 79.5
----- ----- -----
Gross profit ......................................... 24.3 26.1 20.5
----- ----- -----
Costs and expenses:
Selling, general and administrative expenses........ 13.0 10.4 11.7
Research and development expenses .................. 1.6 1.4 0.9
Non-recurring expense .............................. 1.4 -- --
----- ----- -----
16.0 11.8 12.6
----- ----- -----
Income from operations ............................... 8.3 14.3 7.9
Profit (loss) on disposal of fixed assets .......... 0.7 3.3 (0.1)
Provision for impairment of value of investment..... (8.2) -- --
Other income - net ................................. 4.8 5.8 1.1
Interest expense ................................... -- -- (0.1)
----- ----- -----
Income from consolidated companies before income taxes
and minority interests ............................. 5.6 23.4 8.8
----- ----- -----
Net income ........................................... 3.5% 23.2% 8.7%
===== ===== =====
</TABLE>
Year ended December 31, 1998 Compared to Year ended December 31, 1997
Nam Tai's sales decreased by 24% to $101,649,000 for the year ended
December 31, 1998 compared to $132,854,000 for the year ended December 31, 1997,
primarily due to the decrease in customer orders from all of its major
customers. As a result of the Asian economic turmoil, both sales quantities and
unit prices fell. Management believes that the quantity of products ordered by
Asian OEM customers fell as a result of reduced demand by end users. Sales also
declined as a result of reductions in unit prices. Management reduced unit
prices to maintain market share as a result of the increasingly competitive
environment, and it reduced unit prices to pass material and component cost
savings resulting from currency depreciations on to its OEM customers.
The Company's gross profit decreased to $24,710,000 for the year ended
December 31, 1998 from $34,724,000 for the year ended December 31, 1997. The
principal reason for the decrease in gross profit was the decrease in customer
orders and lower unit prices. Nam Tai's gross profit margin decreased to 24.3%
in 1998 from 26.1% in 1997.The major reasons for the decrease in profit margins
was the lowering unit prices caused by the increasingly competitive environment,
a changing product mix and the fact that fixed depreciation overhead costs
accounted for a larger percentage of cost of sales.
-30-
<PAGE> 31
Selling, general and administrative expenses decreased to $13,190,000
or 13.0% of sales from $13,799,000 or 10.4% of sales in the year ended December
31, 1997. The decrease in absolute dollars principally reflected reduced direct
selling expenses incurred as a result of the decrease in sales. The increase in
such expenses as a percent of sales was the result of the Company having to
cover fixed general and administrative expenses during a time of declining
sales.
Research and development expenses as a percentage of sales were
essentially the same in 1998 and 1997 at 1.6% and 1.4% respectively. Research
and development expenses decreased to $1,691,000 in 1998 from $1,909,000 in 1997
in part because there were fewer customer orders that involved non-reimbursable
expenses for research and development work. Namtek, the Company's software
development subsidiary which began operations in early 1996, accounted for
approximately 7% of the research and development expenses in 1998 and 14% of the
research and development expenses in 1997. These expenses were recovered from
fees paid by third parties.
Normally the Company does not have to pay custom duties in the PRC on
foreign purchases which are incorporated into manufactured goods that are
subsequently exported. During the last audit, PRC customs was not satisfied with
supporting documentation provided by the Company for certain material purchases
of prior years. As a result, a non-recurring expense of $1,445,000 was incurred
relating to customs assessment in China in 1998.
Loss on disposal of property, plant and equipment was $82,000 for the
year ended December 31, 1998 as compared to $1,198,000 for the year ended
December 31, 1997. The loss in 1998 related primarily to the relocation of the
Canadian office and the write-off of the unamortized leasehold improvements.
Gain on disposal of property, plant and equipment was $848,000 for the
year ended December 31, 1998 as compared to $5,548,000 for the year ended
December 31, 1997. The gains in both 1998 and 1997 related primarily to the sale
of portions of the Company's landholdings in Hong Kong. (See the discussion
regarding the sale in 1998 under Liquidity and Capital Resources below.)
A provision for the impairment of value of $8,271,000 was made to
reduce to a nominal carrying value Nam Tai's investment in Albatronics. (See the
discussion regarding the Albatronics investment under Liquidity and Capital
Resources below.)
Other income decreased to $4,865,000 for the year ended December 31,
1998 compared to $7,791,000 for the year ended December 31,1997. Other income in
1998 consisted primarily of interest income of $5,047,000, a gain of $1,207,000
on the disposal of the Company's investment in Deswell Industries Inc.
("Deswell") and a gain of $394,000 on foreign exchange. Such gains were offset
by the write-off of the $840,000 premium of an option purchased by Nam Tai as a
hedge against the devaluation of the Hong Kong dollar against the U.S. dollar,
unrealized losses of $468,000 incurred as a result of the decline in the market
value of short-term investments and miscellaneous expenses of $266,000. Other
income in 1997 derived principally from interest income of $1,847,000 and gains
on the sale of shares of Deswell of $5,488,000. Interest income increased in
1998 as a result of interest earned on the proceeds received in November 1997
from the sale of securities in the Company's rights and standby offerings.
Income from continuing operations from consolidated companies before
income tax was $5,743,000 for the year ended December 31, 1998 compared to
$31,118,000 for the year ended December 31, 1997. The decrease of 82% was
primarily due to the 24% decrease in 1998 sales, tightening gross profit margins
and the provisions for the impairment of value of Albatronics.
The income tax expense of $1,040,000 for the year ended December 31,
1998 compares to an expense of $279,000 for the prior year. The income tax
expense relates to income taxes on the Hong Kong and China operations. In the
past the Company received 100% tax credits in China related to its reinvestment
of profits into additional share capital of the China subsidiaries. This reduced
the overall tax payable by the Company in China. For the years 1993 through
1995, the Company received a full refund of China taxes paid as a result of
reinvesting its profits into share capital. As a result of its expectations that
it would receive a full refund of income taxes attributable to China operations
as it had in the past, the Company recorded tax payments in 1996 and 1997 as
prepayments. In early 1999, the Company learned that for the 1996 and 1997 tax
years it would not receive a 100% tax refund on taxes already paid, and was
required to reduce the prepayment by the amount of the refund that was not
obtained. For 1996, the Company received tax refunds of $484,000 on taxes paid
of $917,000.
-31-
<PAGE> 32
For 1997, the Company now expects to receive a refund of $1,329,000 on taxes
paid of $1,769,000. Only $6,000 of the expected refund had been received as of
December 31, 1998. A full refund was denied for 1997 and 1996 because the large
intercompany receivable between the China subsidiary and the Hong Kong
subsidiary was not considered by the China Tax Authorities to be a reinvestment
of profits. In January 1999, the Company's Shenzhen manufacturing facility
received the recognition of was recognized as a "High and New Technology
Enterprise" which entitles it to various tax benefits including lowering the
corporate profits tax rate to 7.5% until January 7, 2004.
Net income decreased $27,310,000 or 89% to $3,529,000 (3.5% of sales)
for the year ended December 31, 1998 compared to $30,839,000 (or 23.2% of sales)
for the year ended December 31, 1997. This resulted in diluted earnings per
share for the year ended December 31, 1998 of $0.34 ($0.34 basic) compared to
diluted earnings per share of $3.68 ($3.70 basic) for the year ended December
31, 1997. The decrease in net income and earnings per share is the result of:
(i) a decrease in sales; (ii) lower operating margins; (iii) fixed general and
administrative expenses; (iv) fewer gains from the disposal of fixed assets; (v)
the provision for impairment of value for Albatronics; (vi) a non-recurring
customs assessment; (vii) increased income tax expenses as a result of 1997 and
1996 tax refunds not being received as expected; (viii) Nam Tai's share of
Albatronics' losses in December 1998 of $1,708,000; and (ix) an increase in the
weighted average number of shares outstanding resulting from the issuance of
approximately 3,000,000 additional shares in late November 1997. The decrease in
net income was partially offset by Nam Tai's share of Group Sense
(International) Limited's ("Group Sense") net income for the first six months of
fiscal 1999 (ending September 30, 1998) of $534,000 and an increase in net
interest income of $3,238,000 as a result of the increased amount of cash on
hand throughout the year.
The diluted weighted average number of common shares outstanding
increased to 10,351,000 (basic 10,317,000) for the year ended December 31, 1998
from 8,391,000 (basic 8,324,000) for the year ended December 31, 1997,
reflecting the issuance of approximately 3,000,000 additional shares around the
end of November 1997 in the Company's Rights and Standby Offerings, offset by
the repurchase during 1998 of shares pursuant to the Company's repurchase
program.
Year ended December 31, 1997 Compared to Year ended December 31, 1996
Nam Tai's sales increased by 23% to $132,854,000 for the year ended
December 31, 1997 compared to $108,234,000 for the year ended December 31, 1996
primarily due to increased sales to Texas Instruments Incorporated and Sharp
Corporation.
The Company's gross profit increased to $34,724,000 for the year ended
December 31, 1997 from $22,185,000 for 1996. The principal reason for the
increase in gross profit was the increase in sales. Also contributing to the
increase in gross profit were improved gross profit margins.
Nam Tai's gross profit margin improved to 26.1% in 1997 from 20.5% in
1996. The major reasons for the increase in profit margin were (i) the
production of new, higher margin products, (ii) improvements in quality control
which resulted in the reduction of the scrap rate, (iii) lower cost of raw
materials and components, in part the result of the weakness of the Japanese yen
in relation to the U.S. dollar which benefitted the Company as it purchases a
substantial volume of components from Japanese companies which are paid for in
Japanese yen, and (iv) changes in materials used in production to reduce
manufacturing costs.
Selling, general and administrative expenses increased by 8.6% to
$13,799,000 or 10.4% of sales in the year ended December 31, 1997 from
$12,702,000 or 11.7% of sales for the year ended December 31, 1996. The increase
in absolute dollars principally reflected additional staff and costs required to
provide services to the Company as a result of the growth in sales. The decrease
in such expenses as a percent of sales was the result of efficiencies obtained
in general administrative expenses as the Company handled a greater level of
activity with available resources.
Research and development expenses increased to $1,909,000 in 1997 from
$950,000 in 1996 as some of the Company's customers have requested the Company
to bear responsibility for paying development charges. Namtek, the Company's
software-development subsidiary which began operations in early 1996, accounted
for approximately 14% of the research and development expenses in 1997 and 40%
of the research and development expenses in 1996.
-32-
<PAGE> 33
These expenses were substantially recovered from fees paid by third parties.
Loss on disposal of property, plant and equipment was $1,198,000 for
the year ended December 31, 1997 as compared to $123,000 for the year ended
December 31, 1996. The loss in 1997 related to the sale of certain of the
Company's real property in Burnaby, British Columbia, Canada and the write-off
of equipment. See the discussion regarding this sale under Liquidity and Capital
Resources below.
Gain on disposal of property, plant and equipment was $5,548,000 for
the year ended December 31, 1997 as compared to nil for the year ended December
31, 1996. The gain in 1997 principally related to the sale of a portion of the
Company's land holdings in Hong Kong. See the discussion regarding this sale
under Liquidity and Capital Resources below.
Other income (net) increased to $7,791,000 for the year ended December
31, 1997 from $1,253,000 for the year ended December 31, 1996. This income
consisted of profit on the disposal of investments of $5,488,000, interest
income of $1,847,000 on the Company's cash balances, foreign exchange gains of
$500,000 and miscellaneous income of $650,000 net of bank charges of $343,000
and donations of $351,000.
Interest expense decreased to $39,000 for the year ended December 31,
1997 from $89,000 for the year ended December 31, 1996 as a result of the
reduction in the Company's utilization of trade credit facilities under its
banking arrangements.
Income from continuing operations before income tax was $31,118,000 for
the year ended December 31, 1997 as compared to $9,574,000 for the year ended
December 31, 1996. The increase of 225% was primarily due to increased 1997
sales, improved profit margins, and gains on the disposal of investments and
gains on the disposal of fixed assets.
The income tax expense of $279,000 for the year ended December 31, 1997
compares to an expense of $158,000 for the prior year. The income tax expense in
1997 relates to income taxes on Hong Kong operations and is comparable to 1996
income taxes paid with respect to Hong Kong operations. In 1995, the Company
reversed a provision of $705,000 against income taxes owing from China
operations following receipt of a refund of 1994 income taxes on China
operations. The refund in 1995 from 1994 China income taxes resulted in an
overall recovery of total income taxes paid for 1995. As a result of expected
refunds of income taxes attributable to China operations, the Company made no
provision for such income taxes in 1997, 1996 or 1995. The refund of 1995 income
taxes on China operations was received in 1996 and the refund of 1996 and 1997
income taxes is expected in 1998.
Net income increased by 228% to $30,839,000 (or 23.2% of sales) for the
year ended December 31, 1997 compared to $9,416,000 (or 8.7% of sales) for the
year ended December 31, 1996. This resulted in diluted earnings per share for
the year ended December 31, 1997 of $3.68 ($3.70 basic) compared to diluted
earnings per share of $1.16 ($1.17 basic) for the year ended December 31, 1996.
The increase in net income and earnings per share is the result of (i) increase
in sales; (ii) higher operating margins; (iii) increases in other income; and
(iv) gains from the disposal of fixed assets.
The weighted average number of common shares outstanding increased to
8,390,290 for the year ended December 31, 1997 from 8,142,131 for the year ended
December 31, 1996, reflecting the repurchase of 1,000 shares through the
facilities of the Toronto Stock Exchange, the issuance of 386,667 common shares
upon exercise of stock options granted under the Company's stock option plan and
issuance by the Company of 2,997,129 common shares in its 1997 Offerings of
units, which was completed at the end of November 1997. In the 1997 Offerings,
the Company sold a total of 2,997,129 units, each unit consisting of one common
share and one common share purchase warrant. Each warrant is exercisable to
purchase one common share at a price of $20.40 per share until November 24,
2000. The warrants are redeemable by the Company at any time at $0.05 per
warrant if the average closing sale price of the common shares for 20
consecutive trading days within the 30-day period preceding the date the notice
is given equals or exceeds $25.50 per share.
-33-
<PAGE> 34
LIQUIDITY AND CAPITAL RESOURCES
Current assets decreased to $97,015,000 for the year ended December 31,
1998 compared to $133,022,000 for the year ended December 31, 1997. Cash and
cash equivalents, consisting of cash and short-term term deposits, decreased to
$71,215,000 for the year ended December 31, 1998 versus $102,411,000 for the
year ended December 31, 1997. The principal reasons for the decrease in cash and
cash equivalents were: (i) the repurchase of an aggregate of 1,407,500 common
shares of the Company for $21,255,000; (ii) a strategic investment of
approximately 20% of the common shares of Group Sense for $16,000,000; (iii) an
acquisition of just over 50% control of Albatronics for $9,980,000; (iv)
dividends paid of $2,141,000; and (v) additions to fixed assets of $4,699,000.
Accounts receivable at December 31, 1998 decreased to $16,138,000 from
$16,985,000 at December 31, 1997, in part because of a decrease in sales in
1998. Inventories at December 31, 1998 decreased by $5,483,000 or 56% from
levels at December 31, 1997, reflecting an inventory turnover period of 21 days
in 1998 versus 37 days in 1997. The decrease in inventory levels is a result of
both decreased sales levels and improved inventory management.
In December 1994, the Company invested $3,931,000 for approximately 14%
of Deswell's then outstanding capital stock. In July 1995, Deswell completed an
initial public offering of its securities in the United States and the Company's
investment was diluted to approximately 10.5% of Deswell's outstanding shares as
at December 31, 1995. In July 1996, the Company exercised warrants to purchase
an additional 12,000 shares of Deswell for $119,000. As at December 31, 1996,
this investment was shown at cost and was approximately 87% of the market value
of Deswell common shares as reported on the Nasdaq National Market at December
31, 1996. In 1997, the market price of the Deswell shares rose substantially on
the Nasdaq National Market and the Company elected to sell a portion of its
investment in Deswell, reducing its stake in Deswell to below 2% of its shares
reported outstanding at December 31, 1997 and realizing a gain of approximately
$5.5 million on sales of 390,000 shares. In 1998 the Company sold the remainder
of its Deswell holdings for $2,132,000, realizing a gain of approximately $1.3
million.
On September 12, 1998, Nam Tai signed an agreement to acquire
Albatronics by subscribing for slightly over 50% of the outstanding shares of
Albatronics. The transaction was completed on November 30, 1998 for $9.98
million, including transaction fees. When Nam Tai announced the completion of
the Albatronics acquisition on December 2, 1998, the Company indicated that it
would take steps to support Albatronics depending on the results of a
comprehensive study investigating opportunities for corporate restructuring and
the streamlining of Albatronics' overhead expenses. Since that time, results
from Albatronics' year-end audit show a company in financial difficulty with a
deficiency in shareholders' equity of $45.2 million, up from the $22.6 million
adjusted deficiency in shareholders' equity reported in Albatronics' unaudited
August 31, 1998 accounts. The deficiency increased despite the capital injection
from Nam Tai's share subscription, reflecting Albatronics' continuing losses,
which for the month of December 1998 were $1.71 million. Under ordinary
circumstances, Nam Tai, as the controlling shareholder, would consolidate
Albatronics' financial statements with Nam Tai's. However, due to the troubled
financial condition of Albatronics at December 31, 1998 and the possibility of
Albatronics being wound up within a relatively short period, Nam Tai did not
consolidate Albatronics' financial statements at December 31, 1998. Instead, Nam
Tai accounted for Albatronics on an equity basis and recorded as separate line
items on its Consolidated Statements of Income all of Albatronics' December 1998
losses of $1.71 million as "Share of losses of unconsolidated subsidiary" and
also made a "Provision for impairment of value" of $8.27 million against the
remaining carrying value of this investment. As a result, the carrying value of
Nam Tai's investment in Albatronics has been recorded on Nam Tai's Consolidated
Balance Sheet at December 31, 1998 at a nominal value as "Investment in
unconsolidated subsidiary (less provision for impairment of value)."
On May 27, 1998, Nam Tai completed a strategic investment of $16
million for approximately 20% of the outstanding shares of Group Sense, a
publicly listed Hong Kong company (Hang Seng company #601). During 1998, the
Company received dividend payments from Group Sense of $590,000 and earned
$534,000 as its share of Group Sense's results (since its May 27, 1998
investment) for the six-month period ending September 30, 1998, which are the
most recent results announced to date.
Property, plant and equipment - net of $32,445,000 as at December 31,
1998 is virtually unchanged from $32,442,000 as at December 31, 1997.
Depreciation on fixed assets for 1998 was $4,258,000 while additions to plant
and equipment during 1998 were $4,699,000. New equipment and machines purchased
in 1998 included four sets of SMT systems, five sets of ACF heat seal machines,
and equipment for product development including a laser rapid prototyping
machine and a Hast Chamber for product reliability testing.
-34-
<PAGE> 35
At December 31, 1998, 58% and 29% of the Company's identifiable assets
were located in Hong Kong and China, respectively, as compared to 14.7% and
26.7%, respectively, at December 31, 1997. Cash and cash equivalents consisting
of cash and short-term term deposits representing 23% of the total cash and cash
equivalents of $71,215,000 was held by the Company in North America at December
31, 1998 compared to 93.2% of the $102,411,000 cash and cash equivalents at
December 31, 1997. The decrease in the percentage of funds held in North America
occurred because in the second half of 1998 the Company took advantage of the
higher Hong Kong dollar interest rates by shifting a portion of its surplus
funds from U.S. dollar deposits into Hong Kong dollar term deposits and
purchased an option contract to hedge the risk of a devaluation of the Hong Kong
dollar. As a result, identifiable assets in North America declined to 13% of
total assets at December 31, 1998 compared to 58.6% of total assets at December
31, 1997. The Company expects that in the future the majority of its surplus
funds will be held in North America.
In the past, the Company used short-term bank borrowing to assist in
meeting its working capital requirements and to provide funds for investments in
property, plant and equipment; however, since 1996 the Company's capital
requirements have been financed from internally generated funds, and short-term
borrowing was reduced to nil at December 31, 1998 and 1997 respectively. The
Company had working capital of $77,539,000 and $113,470,000 as of December 31,
1998 and 1997 respectively.
At December 31, 1998, Nam Tai had in place general banking facilities
with four financial institutions aggregating $50,100,000. For the three years
ended December 31, 1998, banking facilities bore Nam Tai's corporate guarantee
and there was an undertaking not to pledge any assets to any other banks without
the prior consent of the Company's bankers. Such facilities, which are subject
to annual review, permit the Company to obtain overdrafts, lines of credit for
forward exchange contracts, letters of credit, import facilities, trust receipt
financing, shipping guarantees and working capital, as well as fixed loans. As
at December 31, 1998, the Company had utilized approximately $1,201,000 under
such general credit facilities and had available unused credit facilities of
$48,899,000. Interest on notes payable averaged 5.8% per annum during the year
ended December 31, 1998. During the year ended December 31, 1998, the Company
paid a total of $1,000 in interest on indebtedness.
Accounts payable increased by 4.7% to $18,377,000 for the year ended
December 31, 1998 from $17,551,000 for the year ended December 31, 1997,
principally as a result of the extension of credit terms from suppliers.
The Company had no long-term debt during either 1998 or 1997.
Cash flow from operations for 1998 was $19,400,000, including net
income of $3,529,000, depreciation of $4,258,000 and other non-working capital
adjustments of $7,978,000. The net cash increase due to changes in working
capital (excluding cash and bank borrowings) was $3,635,000.
During 1998, the Company's net investment activities used $27,222,000.
This principally includes proceeds on the disposal of shares of Deswell of
$2,132,000 and proceeds from the disposal of land in Hong Kong of $815,000, less
the investment in Group Sense (net of dividends received) of $15,819,000, the
investment in Albatronics of $9,980,000 and additions to fixed assets of
$4,699,000.
Net cash used by financing activities was approximately $23,396,000 in
1998. Financing activities during 1998 included share repurchases of $21,255,000
and the payment of dividends of $2,141,000.
The Company believes there are no material restrictions (including
foreign exchange controls) on the ability of Nam Tai's non-China subsidiaries to
transfer funds to the Company in the form of cash dividends, loans, advances or
product/material purchases. With respect to the Company's China subsidiaries,
there are restrictions on the payment of dividends and the removal of dividends
from China due to the Company's reinvestment program for tax purposes and the
10% reserve fund. (See note 15 of the Notes to the Consolidated Financial
Statements.) In the event that dividends are paid by the Company's China
subsidiaries, they would reduce the amount available for the reinvestment
program and accordingly taxes would be payable on the profits not reinvested.
-35-
<PAGE> 36
The Company believes such restrictions will not have a material effect on the
Company's liquidity or cash flow.
In 1994, the Company resumed paying annual dividends, paying
shareholders aggregate dividends of $65,000 ($0.01 per share) in 1994. Since
then dividends paid per share have increased annually to $120,000 ($0.015 per
share) in 1995, $243,000 ($0.03 per share) in 1996, $786,000 ($0.10 per share)
in 1997 and $2,141,000 or ($0.28 per share) in 1998. On February 15, 1999, the
Company announced that it was increasing the annual dividend to $0.32 per share
to be paid on a quarterly basis commencing with the first quarter 1999 dividend
of $0.08 per share. It is the general policy of Nam Tai to determine the actual
annual amount of future dividends based upon the Company's growth during the
preceding year. In spite of the lower net sales and income in 1998 compared to
1997, the Company increased the dividends per share marginally to reflect its
positive outlook for 1999, the continued strong cash flows from operations in
1998 and taking into account the reduced number of shares outstanding at
December 31, 1998 compared to December 31, 1997. Future dividends will be in the
form of cash or stock or a combination of both. There can be no assurance that
any dividend on the Common Shares will be declared, or if declared, what the
amounts of dividends will be or whether such dividends, once declared, will
continue for any future period.
Impact of Inflation
Inflation in China and Hong Kong, estimated at -0.8% and 2.6%
respectively, has not had a material effect on Nam Tai's past business. During
times of inflation, the Company has generally been able to increase the price of
its products in order to keep pace with inflation. Furthermore, increases in
labor costs, which represent the most significant component of the Company's
production costs (other than material costs), would not materially affect its
business because of the Company's utilization of less expensive labor through
its operations in China. Labor and overhead expenses related to Nam Tai's
Chinese factory amounted to 13.7% of the Company's total expenses before
operating income during the year ended December 31, 1998 and 10.9% during the
year ended December 31, 1997.
Exchange Rates
The Company sells a majority of its products in U.S. dollars and pays
for its material components in Japanese yen, U.S. dollars and Hong Kong dollars.
It pays labor costs and overhead expenses in renminbi, the currency of China
(the basic unit of which is the yuan), Hong Kong dollars and Canadian dollars.
The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed by
the Hong Kong government since 1983 at approximately HK$7.80 to US$1.00 through
the currency issuing banks in Hong Kong and accordingly has not in the past
presented a currency exchange risk.
At the end of 1997 and early 1998, in light of the currency turmoil
experienced by many other Southeast Asian countries, there has been increasing
pressure for a devaluation of the currencies of Hong Kong and China. While the
governments of Hong Kong and China have indicated they will support their
currencies, possible devaluations may occur. While the Company expects that it
may initially benefit from such devaluations through their effect of reducing
expenses when translated into U.S. dollars, such benefits could be outweighed if
it causes a destabilizing downturn in China's economy, creates serious domestic
problems in China or creates other problems adversely affecting the Company's
business.
Canadian operations are relatively small with the percentage of expense
in Canadian dollars representing 2% of the total expenses for the year ended
December 31, 1998.
Management believes the Company's most significant foreign exchange
risk results from material purchases made in Japanese yen. Approximately 18%,
23% and 28% of Nam Tai's material costs have been in Japanese yen during the
years ended December 31, 1998, 1997 and 1996, respectively. Sales made in yen
account for approximately 0.3% of sales for the year ended December 31, 1998,
6.3% of sales for the year ended December 31, 1997 and 15% of sales for the year
ended December 31, 1996. The net currency exposure has increased as a result of
the decision to price the majority of goods sold in U.S. dollars. The Company
believes its customers will accept an increase in the selling price of
manufactured products if the exchange rate of the yen appreciates beyond a range
of 5% to 10%, although such customers may also request a decrease in selling
price in the event of a depreciation of the Japanese yen. The Company's
-36-
<PAGE> 37
belief is based on oral agreements with its principal customers which management
believes are customary between OEMs and their suppliers. However, there can be
no assurance that such agreements will be honored, and the refusal to honor such
an agreement in the event of a severe fluctuation of the yen at a time when
sales made in yen are insufficient to cover material purchases in yen would
materially and adversely affect the Company's operations.
Effective January 1, 1994, China adopted a floating currency system
whereby the official exchange rate equaled the market rate. Since the market and
official renminbi rates were unified, the value of the renminbi against the
dollar has been stable. This is in spite of significant inflation during 1994
and 1995 that placed devaluation pressure on the renminbi. The Chinese
Government took steps to restrict credit to counteract these pressures, which
taken together with the net inflow of capital into China, resulted in stability
of the currency against the U.S. dollar.
The Company believes that because its Chinese operations are presently
confined to manufacturing products for export, any devaluation of the renminbi
would benefit Nam Tai by reducing its costs in China, provided that devaluation
or other economic pressures do not lead to fundamental changes in the present
economic climate in China.
Foreign exchange transactions involving the renminbi take place through
the Bank of China or other institutions authorized to buy and sell foreign
exchange or at an approved foreign exchange adjustment center (known as a "swap
center"). In the past, when exchanging Hong Kong dollars for Chinese renminbi,
the Company used a swap center to obtain the best possible rate. When
translating the Chinese company account into U.S. dollars, the Company uses the
same exchange rate as quoted by the Bank of China. Since January 1, 1994, when
China adopted a floating currency system (whereby the official rate is equal to
the market rate), swap centers and banks in China offer essentially the same
market rates, facilitating the exchange of Hong Kong dollars for renminbi. The
adoption of a floating currency system has had no material impact on the
Company.
Beginning on November 30, 1996, the Chinese renminbi has become fully
convertible under the current accounts. There are no restrictions on
trade-related foreign exchange receipts and disbursements in China. Capital
account foreign exchange receipts and disbursements are subject to control, and
organizations in China are restricted in foreign currency transactions which
must take place through designated banks.
The Company may elect to hedge its currency exchange risk when it
judges such action may be required. In an attempt to lower the costs of
expenditures in foreign currencies, management will periodically enter into
forward contracts or option contracts to buy or sell foreign currency(ies)
against the U.S. dollar through one of its banks. As a result, the Company may
suffer losses resulting from the fluctuation between the buy forward exchange
rate and the sell forward exchange rate, or from the price of the option
premium.
As at December 31, 1998 and December 31, 1997, the Company had no open
forward contracts and no option contracts. During 1998, the Company recorded a
charge of $840,000 on the write-off of a premium on an option which was
purchased as a hedge in the event that the Hong Kong dollar was de-pegged and
allowed to depreciate against the U.S. dollar. Under the terms of the option,
Nam Tai had the right to purchase US$30 million at a fixed exchange rate of
HK$7.8 for each U.S. dollar. After purchasing the option, the Company invested a
portion of its cash surplus in short-term Hong Kong dollar deposits which were
earning interest rates between 10% and 14.175%, significantly higher than what
was offered on U.S. dollar deposits. In 1997 and 1996, Nam Tai recorded no gain
or loss from hedging transactions. The Company is continuing to review its
hedging strategy and there can be no assurance that Nam Tai will not suffer
losses in the future as a result of currency hedging.
Year 2000 Issue
Many existing computer programs, including some programs used by the
Company in its computer systems and equipment, use only two digits to identify a
year in the date field. These programs were designed without considering the
impact of the upcoming change in the century. If not corrected, these computer
applications and systems could fail or create erroneous results before, during,
or after the year 2000. The Company's investigations and efforts to date have
included studies, investigations, inquiries to software and equipment suppliers,
testing by internal management and outside consultants, and the purchase of
certain replacement software and rewriting certain sections of existing
programs.
-37-
<PAGE> 38
Based on these efforts, the cost of which has not been material to
date, management does not anticipate that the Company will incur any material
operating expenses or be required to incur material costs as a result of the
year 2000 issue. Management believes that as a result of its efforts to date,
the Company is year 2000 compliant. Despite management's effort to take
reasonable precautions to be year 2000 ready, and its belief that it is
currently year 2000 compliant, to the extent the Company's systems are not fully
year 2000 compliant, there can be no assurance that potential systems
interruptions or the cost necessary to update software would not have a material
adverse effect on the Company's business, financial condition, results or
operations and business prospects.
In addition to the internal preparations discussed above, the Company
has sent inquiry letters to its key suppliers and key customers to ensure that
they do not expect any year 2000 problems to impact their business dealings with
Nam Tai. In the event that the Company's significant customers and suppliers do
not successfully and timely achieve year 2000 compliance, the Company's business
or operations could be adversely affected. There is also a risk that year 2000
problems may cause regional or global problems for utility companies,
transportation systems, banking systems, or the global economy. To the extent
that these problems materialize, Nam Tai expects that its business will be
adversely impacted and to date the Company has not completed a year 2000
contingency plan.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share. The new
rule requires specific disclosure of both diluted earnings per share and
earnings per common share calculated without the dilutive impacts of outstanding
stock options or convertible securities. As disclosed in Note 1(e) of Notes to
Consolidated Financial Statements appearing in Item 18 of this Report, the
Company has adopted this method of accounting for earnings per share.
In 1998, the Company adopted a new disclosure standard, SFAS No. 130,
"Reporting Comprehensive Income." which requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from non-owner sources.
New Accounting Standards Not Yet Disclosed
The Financial Accounting Standards Board has issued a new standard SFAS
No. 133 "Derivative Instruments and Hedging Activities." Management has not yet
completed the analysis of the impact this would have on the financial statements
of the Company.
-38-
<PAGE> 39
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>
Tadao Murakami Chairman of the Board and Director
Shigeru Takizawa Chief Executive Officer, President and Director
M. K. Koo Senior Executive Officer and Director
Hidekazu Amishima General Manager of NTSZ
Y.C. Chang Vice General Manager of NTSZ
Mamoru Koike Vice General Manager Research and Development
Mark Waslen Treasurer
Lorne Waldman Secretary
Charles Chu Director
Stephen Seung Director
</TABLE>
TADAO MURAKAMI Mr. Murakami has served the Company in various
executive capacities since 1984. He became Secretary and a Director of the
Company in December 1989. From June 1989, he has been employed as the President
of the Company's Hong Kong subsidiary. In July 1994, Mr. Murakami succeeded Mr.
Koo as President and in June 1995 became the Company's Chief Executive Officer.
Mr. Murakami assumed the position of Vice-Chairman in January 1996 and is in
charge of the manufacturing and marketing operations of the Company. In
September 1998, Mr. Murakami succeeded Mr. Koo as the Chairman of the Board of
Directors. Mr. Murakami graduated from Japan Electronic Technology College in
1964.
SHIGERU TAKIZAWA Mr. Takizawa joined the Company in September 1998
after a forty year career with Toshiba Corporation holding various senior
management and executive positions. He assumed the positions of President and
Chief Executive Officer of the Company, succeeding Mr. Murakami. Mr. Takizawa is
responsible for the management and direction of all business operations and
technological development of the Nam Tai group of companies. He is also a
director.
M.K. KOO Mr. Koo had served as Chairman of the Board and a Director of
Nam Tai and its predecessor companies since inception. Mr. Koo assumed the role
as Chief Financial Officer of the Company from April 1997 until January 1998 and
again in February 1998 to May 1998. Mr. Koo assumed the newly created position
of Senior Executive Officer, Corporate Strategy, Finance and Administration when
Mr. Murakami succeeded him as Chairman of the Board. Mr. Koo also serves on the
Company's audit committee. Mr. Koo received his Bachelor of Laws degree from
National Taiwan University in 1970.
HIDEKAZU AMISHIMA Mr. Amishima joined the Company in August 1996 as
Vice General Manager and assumed the responsibility for overseeing day-to-day
factory operations of the Company's Shenzhen, China manufacturing complex as
General Manager in November 1996. From 1964 until joining the Company, Mr.
Amishima was employed by Kanda Tsushin Industrial Co. Ltd., a Japanese
electronics manufacturer.
-39-
<PAGE> 40
Y.C. CHANG Mr. Chang joined the Company in 1991 and assumed the
position of Assistant General Manager of Production before being promoted to
Vice General Manager of the Company's principal manufacturing facility in late
1997. Mr. Chang is in charge of production at the Company's Shenzhen, China
manufacturing facility. Prior to joining Nam Tai he was Assistant Production
Manager for Inventec Co. Ltd. and Production and Quality Control Manager for
Supercom Co. Ltd.
MAMORU KOIKE Mr. Koike joined Nam Tai in April 1998 as Vice General
Manager of Nam Tai's Research and Development Department in charge of design and
development. Before joining Nam Tai, Mr. Koike serve Sharp Corporation for
thirty-five years since his graduation from Osaka Electric Communication High
School in 1963.
MARK WASLEN Mr. Waslen first joined Nam Tai in July 1990 to oversee
Nam Tai's financial reporting and accounting. In June 1993 Mr. Waslen was
appointed the Company's Financial Controller. From the end of 1995 to May 1998
Mr. Waslen worked for Deloitte Touche Tohmatsu where he pursued further training
in the area of tax before rejoining Nam Tai in June 1998 as Treasurer. Mr.
Waslen is both a Chartered Accountant ("C.A"). and a Certified Public Accountant
("C.P.A"). He earned his Bachelor of Commerce degree at the University of
Saskatchewan in 1982.
LORNE WALDMAN Mr. Waldman joined Nam Tai in December 1996 as in-house
counsel for Nam Tai Electronics (Canada) Ltd. He was appointed Secretary of Nam
Tai Electronics, Inc. in October 1997. Mr. Waldman received a Bachelor of
Commerce Degree from the University of Calgary in 1990. In 1994 he received his
LL.B. and MBA degrees from the University of British Columbia.
CHARLES CHU Mr. Chu originally served as Secretary and a Director of
the Company from August 1987 to September 1989. He was reappointed a Director in
December 1992. Since July 1988, Mr. Chu has been engaged in the private practice
of law in Hong Kong. Mr. Chu serves on Nam Tai's audit committee. Mr. Chu
received his Bachelor of Laws degree and Post-Graduate Certificate of Laws from
the University of Hong Kong in 1980 and 1981, respectively.
STEPHEN SEUNG Mr. Seung was appointed a Director of Nam Tai in 1995.
Mr. Seung is an attorney and C.P.A. and has been engaged in the private practice
of law in New York since 1981. Mr. Seung received a B.S. degree in Engineering
from the University of Minnesota in 1969, an M.S. degree in Engineering from the
University of California at Berkeley in 1971, an MBA degree from New York
University in 1973 and a J.D. degree from New York Law School in 1979. Mr. Seung
serves on Nam Tai's audit committee and acts as Nam Tai's authorized agent in
the United States.
No family relationship exists among any of the named directors,
executive officers or key employees. No arrangement or understanding exists
between any such director or officer and any other persons pursuant to which any
director or executive officer was elected as a director or executive officer of
the Company. Directors of the Company are elected each year at its annual
meeting of shareholders and serve until their successors take office or until
their death, resignation or removal. Executive officers serve at the pleasure of
the Board of Directors of the Company.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate amount of compensation paid by Nam Tai and its
subsidiaries during the year ended December 31, 1998 to all directors and
officers as a group for services in all capacities was approximately $1,903,000.
The includes compensation in the form of housing in Hong Kong for its Chairman
and Chief Executive Officer consistent with the practice of other Companies in
Hong Kong.
Directors who are not employees of the Company nor any of its
subsidiaries are paid $1,000 per month for services as a director, $750 per
meeting attended in person, and $500 per meeting attended by telephone. In
addition they are reimbursed for all reasonable expenses incurred in connection
with services as a director.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY OR ITS SUBSIDIARIES
At March 1, 1999, the Company had outstanding options to purchase an
aggregate of 353,333 Common Shares, all of which were granted under the
Company's 1993 Stock Option Plan including; 53,333 options granted on January
-40-
<PAGE> 41
12, 1996 and exercisable at $10.50 per share and expiring on January 11, 2001;
3500 options granted on March 16, 1998 with an exercise price of $15.75 and
expiring March 15, 2001; and 296,500 options were granted on August 27, 1998 and
are exercisable after August 27, 1999 at $10.50 per share and expire on March
15, 2001. All options are granted with an exercise price equal to or exceeding
the average of the daily per share high and low prices on the 10 consecutive
trading days immediately preceding the grant date.
At March 1, 1999, the Company had outstanding warrants to purchase an
aggregate of 3,427,129 Common Shares. Of these, 2,997,129 warrants which were
issued to the public in the 1997 Offering (the "Warrants") are exercisable to
purchase 2,997,129 Common Shares at $20.40 per share until November 24, 2000;
130,000 warrants are exercisable beginning November 30, 1998 to purchase 130,000
Units (consisting of one Common Share and one Warrant) at $20.40 per Unit until
November 24, 2000; and 300,000 warrants issued on October 5, 1998 are
exercisable to purchase 300,000 Commons Shares at $10.25 per share until October
4, 2001.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Not Applicable
-41-
<PAGE> 42
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not Applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR THE COMPANY'S
SECURITIES
Not Applicable.
PART IV
ITEM 17. FINANCIAL STATEMENTS
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements are filed as part of this Report:
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Deloitte Touche Tohmatsu....................................................................... 43
Report of PricewaterhouseCoopers......................................................................... 44
Consolidated Statements of Income for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996.................................................................45
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997.................................46
Consolidated Statement of Changes in Shareholders' Equity for the years
ended December 31, 1998, December 31, 1997 and December 31, 1996........................................47
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996.................................................................48
Notes to Consolidated Financial Statements................................................................49
</TABLE>
In accordance with Rule3-09 of Regulation S-X the Company believes that
it is required to file the Consolidated Financial Statements of Albatronics (Far
East) Company Limited, a majority owned unconsolidated subsidiary. Such
financial statements will be filed by amendment by June 30, 1999.
All other schedules for which provisions made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
-42-
<PAGE> 43
[LETTERHEAD OF DELOITTE TOUCHE TOHMATSU]
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Directors of Nam Tai Electronics, Inc.
We have audited the accompanying consolidated balance sheet of Nam Tai
Electronics, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of income, shareholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Nam Tai Electronics, Inc. and
subsidiaries at December 31, 1998, and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
/S/ Deloitte Touch Tohmatsu
- ---------------------------
DELOITTE TOUCHE TOHMATSU
March 12, 1999
Hong Kong
-43-
<PAGE> 44
[LETTERHEAD OF PRICE WATERHOUSE]
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
NAM TAI ELECTRONICS, INC.
We have audited the accompanying consolidated balance sheet of Nam Tai
Electronics, Inc. and its subsidiaries as of December 31, 1997 and the related
statements of income, shareholders' equity, and cash flows for each of the two
years ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nam Tai Electronics, Inc. and
its subsidiaries as of December 31, 1997 and the results of their operations and
their cash flows for each of the two years ended December 31, 1997 and 1996 in
conformity with accounting principles generally accepted in the United States of
America.
/S/Price Waterhouse
- -------------------
PRICE WATERHOUSE
Certified Public Accountants
HONG KONG
March 11, 1998
-44-
<PAGE> 45
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 101,649 $ 132,854 $ 108,234
Cost of sales 76,939 98,130 86,049
--------- --------- ---------
Gross profit 24,710 34,724 22,185
--------- --------- ---------
Selling, general and administrative expenses 13,190 13,799 12,702
Research and development expenses 1,691 1,909 950
Non-recurring expense (Note 4) 1,445 -- --
--------- --------- ---------
16,326 15,708 13,652
--------- --------- ---------
Income from operations 8,384 19,016 8,533
Net gain (loss) on disposal of property, plant and equipment 766 4,350 (123)
Provision for impairment of investment in an
unconsolidated subsidiary (Note 1) (8,271) -- --
Other income - net (Note 5) 4,865 7,791 1,253
Interest expense (1) (39) (89)
--------- --------- ---------
Income before income taxes and equity in results of an affiliated
company and unconsolidated subsidiary 5,743 31,118 9,574
Income taxes (Note 8) (1,040) (279) (158)
--------- --------- ---------
Income before equity interest 4,703 30,839 9,416
Equity in income of an affiliated company, less amortization
of goodwill 534 -- --
Equity in loss of an unconsolidated subsidiary (Note 1) (1,708) -- --
--------- --------- ---------
Net income $ 3,529 $ 30,839 $ 9,416
========= ========= =========
Basic earnings per share (Note 9) $ 0.34 $ 3.70 $ 1.17
========= ========= =========
Diluted earnings per share (Note 9) $ 0.34 $ 3.68 $ 1.16
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-45-
<PAGE> 46
NAM TAI ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 71,215 $102,411
Marketable securities (Note 10) 513 --
Accounts receivable, net 16,138 16,985
Inventories (Note 11) 4,355 9,838
Prepaid expenses and deposits 4,794 3,788
-------- --------
Total current assets 97,015 133,022
Long-term investments (Note 12) -- 833
Investment in an unconsolidated subsidiary (Note 1) 1 --
Investment in an affiliated company (Note 13) 16,223 --
Property, plant and equipment - net (Note 14) 32,445 32,442
Other assets 1,544 1,491
-------- --------
Total assets $147,228 $167,788
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 329 $ 1,814
Accounts payable and accrued expenses 18,377 17,551
Dividend payable 665 --
Income taxes payable 105 187
-------- --------
Total current liabilities 19,476 19,552
Deferred income taxes 56 --
-------- --------
Total liabilities 19,532 19,552
-------- --------
Commitments and contingencies (Note 17)
Shareholders' equity:
Common shares ($0.01 par value - authorized 20,000,000 shares; shares issued
and outstanding at December 31, 1998 - 9,812,523
December 31, 1997 - 11,220,023) 98 112
Additional paid-in capital 80,044 80,044
Retained earnings 47,509 68,050
Accumulated other comprehensive income 45 30
-------- --------
Total shareholders' equity 127,696 148,236
-------- --------
Total liabilities and shareholders' equity $147,228 $167,788
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-46-
<PAGE> 47
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
COMMON COMMON ADDITIONAL STOCK OTHER SHARE -
SHARES SHARES PAID-IN OPTION RETAINED COMPREHENSIVE HOLDERS'
OUTSTANDING AMOUNT CAPITAL GRANTS EARNINGS INCOME EQUITY
----------- ----------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 8,063,177 $ 80 $ 28,182 $ 467 $ 31,417 $ 27 $ 60,173
Share buy-back program (273,500) (3) -- -- (2,583) -- (2,586)
Shares issued on exercise of options 47,550 1 390 (91) -- -- 300
Options cancelled -- -- -- (71) -- -- (71)
Comprehensive income:
Net income -- -- -- -- 9,416 -- 9,416
Foreign currency translation -- -- -- -- -- 1 1
Dividends ($0.03 per share) -- -- -- -- (243) -- (243)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 7,837,227 78 28,572 305 38,007 28 66,990
Share buy-back program (1,000) -- -- -- (10) -- (10)
Shares issued on exercise of
options 386,667 4 3,802 (305) -- -- 3,501
Shares and warrants issued
on rights offering 2,997,129 30 47,670 -- -- -- 47,700
Comprehensive income:
Net income -- -- -- -- 30,839 -- 30,839
Foreign currency translation -- -- -- -- -- 2 2
Dividends ($0.1 per share) -- -- -- -- (786) -- (786)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 11,220,023 112 80,044 -- 68,050 30 148,236
Share buy-back program (1,407,500) (14) -- -- (21,241) -- (21,255)
Issue of options -- -- -- 75 -- -- 75
Options cancelled -- -- -- (75) -- -- (75)
Comprehensive income:
Net income -- -- -- -- 3,529 -- 3,529
Foreign currency translation -- -- -- -- -- 15 15
Dividends ($0.28 per share) -- -- -- -- (2,829) -- (2,829)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 9,812,523 $ 98 $ 80,044 $ -- $ 47,509 $ 45 $ 127,696
========= =========== =========== =========== =========== =========== ===========
</TABLE>
Accumulated other comprehensive income represents foreign currency translation
adjustments.
The comprehensive income of the Company was $3,544, $30,841 and $9,417 for the
years ended December 31, 1998, 1997 and 1996, respectively.
See accompanying notes to consolidated financial statements.
-47-
<PAGE> 48
NAM TAI ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,529 $ 30,839 $ 9,416
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 4,258 4,331 2,675
Net (gain) loss on disposal of property, plant and equipment (766) (4,350) 123
Gain on disposal of long-term investments (1,299) (5,488) --
Unrealized loss on decline of market value of marketable securities 468 -- --
Equity in income of an affiliated company less dividend
received and amortization of goodwill (404) -- --
Equity in loss of an unconsolidated subsidiary 1,708 -- --
Provision for impairment of investment in an unconsolidated
subsidiary 8,271 -- --
Changes in current assets and liabilities:
Increase in marketable securities (981) -- --
Decrease (increase) in accounts receivable 824 (396) 1,110
Decrease (increase) in inventories 5,483 673 (86)
Increase in prepaid expenses and deposits (1,006) (2,020) (243)
Decrease in notes payable (1,485) (3,372) (134)
Increase in accounts payable and accrued expenses 826 1,330 2,776
(Decrease) increase in income taxes payable (26) 156 (76)
--------- --------- ---------
Total adjustments 15,871 (9,136) 6,145
--------- --------- ---------
Net cash provided by operating activities 19,400 21,703 15,561
--------- --------- ---------
Cash flows from investing activities:
Purchase of interest in an affiliated company (15,819) (12) (119)
Purchase of interest in an unconsolidated subsidiary (9,980) -- --
Purchase of property, plant and equipment (4,699) (3,602) (11,650)
Purchase of other assets (53) (246) (541)
Proceeds from disposal of long-term investments 2,132 8,717 --
Proceeds from disposal of property, plant and equipment 1,197 7,666 --
--------- --------- ---------
Net cash (used in) provided by investing activities (27,222) 12,523 (12,310)
--------- --------- ---------
Cash flows from financing activities:
Share buy-back program (21,255) (10) (2,583)
Dividends paid (2,141) (749) (243)
Decrease in short-term bank loans and overdraft -- -- (273)
Proceeds from shares issued in rights offering, net -- 47,700 --
Additional shares issued, net -- 3,501 226
--------- --------- ---------
Net cash (used in) provided by financing activities (23,396) 50,442 (2,873)
--------- --------- ---------
Foreign currency translation adjustments 22 2 1
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (31,196) 84,670 379
Cash and cash equivalents at beginning of period 102,411 17,741 17,362
--------- --------- ---------
Cash and cash equivalents at end of period $ 71,215 $ 102,411 $ 17,741
========= ========= =========
Supplemental schedule of cash flow information:
Interest paid $ 1 $ 39 $ 89
--------- --------- ---------
Income taxes paid $ 161 $ 123 $ 234
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
-48-
<PAGE> 49
NAM TAI ELECTRONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ACQUISITIONS
On December 2, 1998, the Company acquired 50.00025% of the outstanding
shares of Albatronics (Far East) Company Limited ("Albatronics"), a
Hong Kong public listed company, for cash of $9,980 including
transaction fees. Albatronics and its subsidiaries are engaged in the
trading of electronic components and manufacturing of consumer
electronics products.
On the completion of the Albatronics acquisition on December 2, 1998,
the Company indicated that it would take steps to support Albatronics
depending on the results of a comprehensive study investigating
opportunities for corporate restructuring and streamlining of overhead
expenses in Albatronics. Despite the Company's cash investment,
Albatronics' financial position has weakened dramatically since the
agreement to invest in Albatronics was signed in September 1998.
Currently, the Company is seeking to work together with Albatronics'
major trade creditor and bankers to try to support Albatronics. If any
of these three parties refuses to provide the necessary support,
Albatronics' directors will consider all available options including
putting Albatronics into liquidation.
Due to the troubled financial condition of Albatronics at December 31,
1998, and the possibility of Albatronics being wound up within a
relatively short period, the Company has not consolidated Albatronics'
financial statements at December 31, 1998 or for the year then ended.
Instead, the Company recorded as separate line items on its
consolidated statements of income Albatronics' loss for the month of
December 1998 of $1,708 as "equity in loss of an unconsolidated
subsidiary" and a "provision for impairment of investment in an
unconsolidated subsidiary" of $8,271 against the remaining carrying
value of this investment. As a result, the carrying value of the
Company's investment in Albatronics has been recorded on the
consolidated balance sheet at December 31, 1998 as "investment in an
unconsolidated subsidiary" at a nominal value of $1.
On May 27, 1998, the Company acquired 20% of the outstanding shares of
Group Sense (International) Limited ("Group Sense"), a Hong Kong public
listed company, for cash of $16,279. Group Sense and its subsidiaries
manufacture consumer electronics products.
Group Sense has been accounted for as an affiliated company and the
results of Group Sense have been included in the consolidated financial
statements from the date of acquisition to September 30, 1998 (interim
announcement date of Group Sense, the date of latest available results)
as permitted by Accounting Principles Board ("APB") Opinion No. 18 "The
equity method of accounting for investments in common stock".
The following table sets out certain proforma information for the years
ended December 31, 1998 and 1997 to reflect the acquisition of
Albatronics as though it had occurred on January 1, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Provision for impairment of investment in an unconsolidated
subsidiary $ -- $ --
Equity in results of an unconsolidated subsidiary, less
amortization of goodwill (11,525) 1,545
Proforma net income 1,343 31,685
Proforma basic earnings per share 0.13 3.81
Proforma diluted earnings per share 0.13 3.78
</TABLE>
-49-
<PAGE> 50
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements
of Nam Tai Electronics, Inc. (the "Company") and all its subsidiaries,
excluding Albatronics. Intercompany accounts and transactions have been
eliminated on consolidation. The details of the Company's subsidiaries
are described in Note 15.
The Company's investments in Group Sense and Albatronics, 20% and
50.00025% owned companies, respectively, in which it has the ability to
exercise significant influence over operating and financial policies,
are accounted for by the equity method. Accordingly, the Company's
share of the earnings of these companies is included in consolidated
net income.
B GOODWILL
The excess of the purchase price over the fair value of net assets
acquired is recorded on the consolidated balance sheet as goodwill and
is amortized to expense on a straight line basis.
C USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
D CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash balances and certificates of
deposit having a maturity date of three months or less upon
acquisition.
E INVENTORIES
Inventories are stated at the lower of cost and market value. Cost is
determined on the first-in, first-out basis.
F MARKETABLE SECURITIES
All marketable securities are classified as trading securities and are
stated at fair market value. Market value is determined by the most
recently traded price of the security at the balance sheet date. Net
realized and unrealized gains and losses on trading securities are
included in other income. The cost of securities sold is based on the
average cost method and interest earned is included in other income.
G LONG-TERM INVESTMENTS
Long-term investments are stated at the lower of cost and market value.
H PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and include interest
on funds borrowed to finance construction in Canada. Capitalized
interest was nil, nil and $13 for the years ended December 31, 1998,
1997 and 1996, respectively. The cost of major improvements and
betterments is capitalized whereas the cost of maintenance and repairs
is expensed in the year incurred. Gains and losses from the disposal of
property, plant and equipment are included in income.
All land in the Hong Kong Special Administration Region ("Hong Kong")
of the People's Republic of China (the "PRC") is owned by the
government of Hong Kong which leases the land at public auction to
nongovernmental entities. With the exception of those leases which
expire after June 30, 1997 and before June 30, 2047 with no right of
renewal, the Sino-British Joint Declaration extends the terms of all
currently existing land leases for another 50 years beyond June 30,
1997. Thus, all of the Company's land leaseholds in Hong Kong are
considered to be medium-term assets. The cost of such land leaseholds
is amortized on the straight-line basis over the respective terms of
the leases.
-50-
<PAGE> 51
H PROPERTY, PLANT AND EQUIPMENT - CONTINUED
All land in other regions in the PRC is owned by the PRC government.
The government in the PRC, according to PRC law, may sell the right to
use the land for a specified period of time. Thus all of the Company's
land purchases in the PRC are considered to be land leaseholds and are
amortized on the straight-line basis over the respective term of the
right to use the land.
Depreciation rates computed using the straight-line method are as
follows:
<TABLE>
<CAPTION>
CLASSIFICATION RATE
<S> <C>
Medium-term leasehold buildings 2.0% - 4.5%
Freehold buildings 3.3% - 4.0%
Furniture and fixtures 18.0% - 25.0%
Machinery and equipment 9.0% - 25.0%
Molds and tools 18.0% - 25.0%
Motor vehicles 18.0% - 25.0%
Leasehold improvements 18.0% - 33.0%
</TABLE>
In 1996, management reassessed the useful life of certain plant and
equipment assets and changed their estimated useful life from four to
five years effective January 1, 1996. As a result of this change, the
1998, 1997 and 1996 depreciation expenses were lower by $899, $835 and
$860, respectively, than they would have been had an estimated life of
four years been used.
I. IMPAIRMENT
The Company review its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an
asset may no longer be recoverable. An impairment loss, measured based
on the fair value of the assets, is recognized if expected future
non-discounted cash flows are less than the carrying amount of the
assets.
J REVENUE RECOGNITION
Revenue from sales of products is generally recognized upon shipment to
customers.
K RESEARCH AND DEVELOPMENT COSTS
Research and development costs relating to the development of new
products and processes, including significant improvements and
refinements to existing products, are expensed as incurred. The amounts
charged against income were $1,691, $1,909 and $950 for the years ended
December 31, 1998, 1997 and 1996, respectively.
L STAFF RETIREMENT PLAN COSTS
The Company's contributions to the staff retirement plan (Note 6) are
charged to the consolidated statement of income as incurred.
M DEFERRED COMPENSATION ARRANGEMENT COSTS
For the years 1990 through 1994, the liability relating to the Deferred
Compensation Arrangement (Note 7) was provided ratably over the future
employment periods of the beneficiaries of the plan until their dates
of retirement or earlier departure from the Company. At December 31,
1995, the remaining balance was fully provided for. Consequently, for
the three years ended December 31, 1998, no further provision was made.
-51-
<PAGE> 52
N INCOME TAXES
The Company provides for all taxes based on income whether due at year
end or estimated to become due in future periods but based on profits
earned to date. However, under the current tax legislation in the PRC,
the Company has reasonable grounds to believe that income taxes paid in
respect of any year would be refunded after the profits earned in that
year are reinvested in the business by way of subscription for new
shares. Accordingly, any PRC tax paid during the year is recorded as an
amount receivable at year end when an application for reinvestment of
profits has been filed and a refund is expected unless there is an
indication from the PRC tax authority that the refund will be refused.
Deferred income taxes are provided to recognize the effect of the
difference between the financial statement and income tax bases of
measuring assets and liabilities.
O FOREIGN CURRENCY TRANSLATIONS
The consolidated financial statements have been stated in U.S. dollars,
the official currency used in the British Virgin Islands (the Company's
place of incorporation). Although the operating facilities are located
in Hong Kong and the PRC, the U.S. dollar is the currency of the
primary economic environment in which the Company's consolidated
operations are conducted. The exchange rate between the Hong Kong
dollar and the U.S. dollar has been pegged (HK$7.80 to US$1.00) since
October 1983.
All transactions in currencies other than functional currencies during
the year are translated at the exchange rates prevailing on the
respective transaction dates. Related accounts payable or receivable
existing at the balance sheet date denominated in currencies other than
functional currencies are translated at the exchange rates existing on
that date. Exchange differences arising are dealt with in the
consolidated statement of income.
The financial statements of all subsidiaries with functional currencies
other than the U.S. dollar are translated in accordance with SFAS No.
52, "Foreign Currency Translation." With the exception of Namtai
Electronic (Shenzhen) Co. Ltd. ("NTES"), Zastron Plastic & Metal
Products (Shenzhen) Ltd. ("Zastron") and Shenzhen Namtek Co. Ltd.
("Namtek"), which are companies established in the PRC, all assets and
liabilities are translated at the rates of exchange ruling at the
balance sheet date and all income and expense items are translated at
the average rates of exchange over the year. Also with the exception of
the above named PRC companies, all exchange differences arising from
translation of subsidiaries' financial statements are dealt with as a
separate component of equity.
As NTES, Zastron and Namtek act as production centers for the Company,
the Company controls their operations and the majority of their
transactions are made in Hong Kong dollars. Therefore, the Hong Kong
dollar has been determined to be the functional currency of NTES,
Zastron and Namtek. Accordingly, all monetary assets and liabilities
are translated at the rates of exchange ruling at the balance sheet
date, non-monetary assets and liabilities are translated at the
historical rate, all income and expense items are translated at the
average rates of exchange over the year and all translation adjustments
resulting from the conversion of NTES, Zastron and Namtek's financial
statements to Hong Kong dollars are taken to the consolidated statement
of income. Exchange rates used to translate and remeasure transactions
and balances of NTES, Zastron and Namtek are the rates quoted by the
Bank of China.
-52-
<PAGE> 53
P EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding during the period.
Diluted earnings per share gives effect to all dilutive potential
common shares outstanding during the period. The weighted average
number of common shares outstanding is adjusted to include the number
of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued.
In computing the dilutive effect of potential common shares, the
average stock price for the period is used in determining the number of
treasury shares assumed to be purchased with the proceeds from exercise
of warrants and options.
Q CURRENCY CONTRACTS
The Company enters into forward currency contracts in its management of
foreign currency exposures. Since the forward currency contracts are
not intended to hedge identifiable foreign currency commitments,
generally accepted accounting principles require that the contracts are
marked to market with the net realized or unrealized gains or losses
recognized in other income - net. (Note 5).
R STOCK OPTIONS
SFAS No. 123 allows companies which have stock-based compensation
arrangements with employees to adopt a new fair value basis of
accounting for stock options and other equity instruments or to
continue to apply the existing accounting rules under APB Opinion No.
25, "Accounting for Stock Issued to Employees," but with additional
financial statement disclosure. The Company plans to continue to
account for stock-based compensation arrangements under APB Opinion No.
25 and provides additional disclosure to that effect in Note 19(a).
S COMPREHENSIVE INCOME
In 1998, the Company adopted a new disclosure standard SFAS No.130,
"Reporting Comprehensive Income" which requires that an enterprise
report, by major components and as a single total, the change in its
net assets during the period from non-owner sources.
T NEW ACCOUNTING STANDARD NOT YET ADOPTED
The Financial Accounting Standards Board has issued a new standard SFAS
No.133 "Derivative Instruments and Hedging Activities". Management has
not yet completed the analysis of the impact this would have on the
financial statements of the Company.
-53-
<PAGE> 54
3. FINANCIAL INSTRUMENTS
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of its cash equivalents, term deposits
and trade receivables.
The Company's cash and cash equivalents and term deposits are
high-quality deposits placed with banking institutions with high credit
ratings. This investment policy limits the Company's exposure to
concentrations of credit risk.
The trade receivable balances largely represent amounts due from the
Company's principal customers who are generally international
organizations with high credit ratings. Letters of credit are the
principal security obtained to support lines of credit or negotiated
contracts from a customer. As a consequence, concentrations of credit
risk are limited.
All of the Company's significant financial instruments at December 31,
1998 are reported in current assets or current liabilities in the
consolidated balance sheet at carrying amounts which approximate their
fair value.
From time to time, the Company hedges its currency exchange risk, which
primarily arises form materials purchased in currencies other than U.S.
dollar, through the purchase and sale of forward currency contracts.
Such contracts typically allow the Company to buy or sell currencies at
a fixed price for up to one year, but the Company normally books
forward six months. At December 31, 1998 and 1997 there were no open
forward currency contracts.
4. NON-RECURRING EXPENSE
The amount represents the provision relating to a non-recurring customs
assessment in the PRC in 1998.
5. OTHER INCOME - NET
Other income - net consists of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest income $ 5,047 $ 1,847 $ 1,092
Gain on disposal of securities, net 1,207 5,488 --
Foreign exchange gains 394 500 20
Currency option premium written off (840) -- --
Unrealized loss on decline of market value of
marketable securities (468) -- --
Bank charges (252) (343) (406)
Miscellaneous (expense) income (196) 650 547
Donations (27) (351) --
------- ------- -------
$ 4,865 $ 7,791 $ 1,253
======= ======= =======
</TABLE>
6. STAFF RETIREMENT PLANS
The Company maintains staff contributory retirement plans (defined
contribution pension plans) which cover certain of its employees. The
cost of the Company's contributions amounted to $79, $55 and $92 for
the years ended December 31, 1998, 1997 and 1996, respectively.
-54-
<PAGE> 55
7. DEFERRED COMPENSATION ARRANGEMENT
In August 1990, the Company agreed to provide compensation in the event
of loss of office, for whatever reason, for two officers. The amount of
compensation to be ultimately provided is $500 for Mr. M. K. Koo, the
senior executive officer of the Company and $300 for Mr. T. Murakami,
the Chairman of the Company. During the year ended December 31, 1996,
pursuant to an agreement between Mr. Koo and the Company, Mr. Koo
elected to apply an amount of $450 payable to him under the provision
for compensation for loss of office against an amount receivable from
him. In July 1997, Mr. Koo reversed the election and retained his right
to receive the sum of $500 for the compensation of loss of office (Note
16).
8. INCOME TAXES
The components of income before income taxes and equity in results of
an affiliated company and unconsolidated subsidiary are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
PRC, excluding Hong Kong $ 8,207 $ 17,241 $ 10,339
Hong Kong (2,843) 5,768 3,079
Other 379 8,109 (3,844)
-------- -------- --------
$ 5,743 $ 31,118 $ 9,574
======== ======== ========
</TABLE>
Under the current British Virgin Islands law, the Company's income is
not subject to taxation. Subsidiaries, primarily operating in Hong Kong
and the PRC, are subject to income taxes as described below.
The provision for current income taxes of the subsidiaries operating in
Hong Kong has been calculated by applying the current rate of taxation
of 16% (1997 and 1996: 16.5%) to the estimated taxable income earned in
or derived from Hong Kong during the period.
Deferred tax, where applicable, is provided under the liability method
at the rate of 16% (1997 and 1996: 16.5%), being the effective Hong
Kong statutory income tax rate applicable to the ensuing financial
year, on the difference between the financial statement and income tax
bases of measuring assets and liabilities.
The basic corporate tax rate for Foreign Investment Enterprises
("FIEs") in the PRC, such as NTES, Zastron and Namtek, is currently 33%
(30% state tax and 3% local tax). However, because NTES, Zastron and
Namtek are located in the designated Special Economic Zone ("SEZ") of
Shenzhen and are involved in production operations, they qualify for a
special reduced state tax rate of 15%. In addition, the local tax
authorities in the Shenzhen SEZ are not currently assessing any local
tax.
Since NTES, Zastron and Namtek have agreed to operate for a minimum of
10 years in the PRC, a two-year tax holiday from the first profit
making year is available, following which in the third through fifth
years there is a 50% reduction to 7.5%. In any event, for FIEs such as
NTES, Zastron and Namtek which export 70% or more of the production
value of their products, a reduction in the tax rate is available; in
all cases apart from the years in which a tax holiday is available,
there is an overall minimum tax rate of 10%. For the years ended
December 31, 1990 and 1991, NTES qualified for a tax holiday; tax was
payable at the rate of 7.5% on the assessable profits of NTES for the
years ended December 31, 1992, 1993 and 1994, and 10% in 1995, 1996,
1997 and 1998. On January 8, 1999, NTES received the recognition of
"High and New Technology Enterprise" which entitles it to various tax
benefits including a lower income tax rate of 7.5% until January 7,
2004. For the years ended December 31, 1992 and 1993, Zastron qualified
for a tax holiday; tax was payable at the rate of 7.5% on the
assessable profits of Zastron for the years ended December 31, 1994,
1995 and 1996 and 10% for the years ended December 31, 1997 and 1998.
In 1996 and 1997, Namtek qualified for a tax holiday. For the year
ended December 31, 1998, tax was payable at the rate of 7.5% on the
assessable profit.
-55-
<PAGE> 56
8. INCOME TAXES - CONTINUED
Notwithstanding the foregoing, an FIE whose foreign investor directly
reinvests by way of subscription for new shares its share of profits
obtained from that FIE in establishing or expanding an export-oriented
or technologically advanced enterprise in the PRC for a minimum period
of five years may obtain a refund of the taxes already paid on those
profits.
NTES qualified for such refunds of its 1994 and 1995 taxes as a result
of reinvesting its profits earned in those years. Zastron qualified for
such refunds of its 1994 and 1995 taxes as a result of reinvesting its
profits earned in those years. As a result of expected refunds of
income taxes attributable to the PRC operations, the Company recorded
tax payments in 1996 and 1997 as prepayments. In early 1999 the Company
learned that for the 1996 and 1997 tax years it would not receive a
100% tax refund on taxes already paid for NTES and was required to
reduce the prepayments by the amount of the refund that was not
obtained. The full refund was denied for the 1996 and 1997 tax years
because the large intercompany receivable between NTES and a Hong Kong
subsidiary was not considered by the tax authorities to be a
reinvestment of profits. The Company has accordingly made a provision
of $700 in the year ended December 31, 1998 and is continuing to work
with tax consultants in the PRC to determine what can be done to
minimize the impact of the PRC tax and will consider increasing its tax
provision in the future. For Zastron, as the management fee expense
charged by the Hong Kong subsidiary for the years ended December 31,
1996 and 1997 was not allowed for PRC tax purposes, the related tax
charge for the 1996 and 1997 tax years was paid during the year.
Zastron intends to apply for tax refund after reinvestment of profits.
The tax refunds received or receivable during the three years ended
December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Related to
Company tax year Paid Refunded Date Received
------- ----------- ---- -------- --------------------
<S> <C> <C> <C> <C>
NTES 1995 $ 919 $919 December 1996
1996 $ 895 $484 April 1998, balance
awaiting refund
1997 $ 1,709 -- Awaiting refund
1998 $ 1,243 -- Application for
reinvestment of
profits in progress
Zastron 1995 $ 31 $ 31 August 1997
1996 $ 22 - Application for
reinvestment of
profits in progress
1997 $ 60 $ 6 July 1998, balance
awaiting refund
</TABLE>
The amounts stated above include the amounts denied by the PRC tax
authorities for refund.
The current and deferred components of the income tax expense appearing
in the consolidated statements of income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current tax $ (984) $ (279) $ (158)
Deferred tax (56) -- --
------- ------- -------
$(1,040) $ (279) $ (158)
======= ======= =======
</TABLE>
The deferred income tax represents the tax effect of timing differences
attributable to the excess of tax allowances over depreciation.
-56-
<PAGE> 57
8. INCOME TAXES - CONTINUED
A reconciliation of the income tax (expense) benefit to the amount
computed by applying the current tax rate to the income before income
taxes in the consolidated statements of income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income before income taxes $ 5,743 $ 31,118 $ 9,574
PRC minimum tax rate 10.0% 10.0% 10.0%
Income tax expense at PRC minimum tax rate on
income before income tax $ (574) $ (3,112) $ (957)
Effect of difference between Hong Kong and PRC tax (325) (375) (180)
rates applied to Hong Kong income
Effect of Canadian net profits (losses) for which no income
tax expense (benefit) is payable (available) 38 811 (384)
Effect of PRC tax concessions, giving rise to no PRC tax
liability 720 1,712 1,034
Tax benefit (expense) arising from items which are not
assessable/deductible for tax purposes:
Gain on disposal of land in Hong Kong 125 899 --
Provision for impairment of investment in an
unconsolidated subsidiary (827) -- --
Underprovision of income tax in previous year (833) (80) (27)
Other 636 (134) 356
-------- -------- --------
$ (1,040) $ (279) $ (158)
======== ======== ========
</TABLE>
No income tax arose in the United States of America in any of the
periods presented.
-57-
<PAGE> 58
9. EARNINGS PER SHARE
The calculations of basic earnings per share and diluted earnings per
share are in accordance with SFAS No.128 and are computed as follows:
<TABLE>
<CAPTION>
Per share
YEAR ENDED DECEMBER 31, 1998 Income Shares amount
---------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share
Income available to common shareholders $ 3,529 10,316,510 $ 0.34
Effect of dilutive securities
- Stock options -- 23,162
- Warrants -- 11,428
---------- ---------- ----------
Diluted earnings per share
Income available to common shareholders $ 3,529 10,351,100 $ 0.34
========== ========== ==========
</TABLE>
Stock options to purchase 3,500 shares of Common shares at $15.75 and
warrants to purchase 2,997,129 shares of common shares at $20.40 and
130,000 shares of common shares plus 130,000 warrants at $20.40 were
outstanding at December 31, 1998 but were not included in the
computation of diluted earnings per share because the redeemable price
of the share options and warrants was greater than the average market
price of the common shares during the relevant period.
<TABLE>
<CAPTION>
Per share
YEAR ENDED DECEMBER 31, 1997 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 -- 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>
Per share
YEAR ENDED DECEMBER 31, 1996 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 -- 101,634
---------- --------- ----------
Diluted earnings per share
Income available to common shareholders $ 9,416 8,142,131 $ 1.16
========== ========= ==========
</TABLE>
-58-
<PAGE> 59
10. MARKETABLE SECURITIES
During 1998, the Company acquired equity securities listed in Hong Kong
and all of them were classified as trading securities and included in
current assets at December 31, 1998.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1998 1997
----- -----
<S> <C> <C>
Cost $ 981 --
Unrealized loss on decline of market value (468) --
----- -----
Market value $ 513 --
===== =====
</TABLE>
Proceeds and realized loss from sale of securities for the year ended
December 31, 1998 were $620 and $92, respectively. For the purposes of
determining realized gains and losses, the cost of securities sold was
ascertained based on the average cost method.
11. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1998 1997
------ ------
<S> <C> <C>
Raw materials $3,324 $7,198
Work-in-progress 863 1,399
Finished goods 168 1,241
------ ------
$4,355 $9,838
====== ======
</TABLE>
12. LONG-TERM INVESTMENTS
In December 1994, the Company purchased 14.04% or 477,370 of the
outstanding common shares of Deswell Investment Holding Limited which
later changed its name to Deswell Industries, Inc. ("Deswell"), a
supplier of plastic parts to the Company, for a total consideration of
$3,931. In 1995, Deswell completed its initial public offering which
reduced the Company's ownership to approximately 10.5% at December 31,
1995. In July 1996, the Company elected to exercise warrants which
increased its holdings by 12,000 shares to 489,370 or 10.6% of the
outstanding common shares of Deswell. In February 1997, the Company
elected to exercise warrants which increased its holdings by 1,152
shares to 490,522 or 10.2% of the outstanding common shares of Deswell
at March 31, 1997.
During the year ended December 31, 1997, the Company sold 390,000
shares of Deswell realizing a net gain of $5,488 and the Company sold
the remaining 100,522 shares for $2,132 during the year ended December
31, 1998, realizing a net gain of $1,299.
13. INVESTMENT IN AN AFFILIATED COMPANY
The Company's investment in Group Sense includes the unamortized excess
of the Company's investment over its equity in Group Sense's assets.
The excess was approximately $2,331 at December 31, 1998 and is being
amortized on a straight-line basis over the estimated economic useful
life of 10 years. The amortization charge for the year ended December
31, 1998 was $80. At December 31, 1998, the aggregate market value of
the Company's investment in Group Sense as quoted on The Stock Exchange
of Hong Kong Limited was $10,501.
During 1998, the Company received dividend payments from Group Sense of
$590 ($460 pre-acquisition dividend and $130 post acquisition
dividend). Retained earnings at December 31, 1998 included
undistributed earnings less amortization of goodwill of affiliates of
$534.
-59-
<PAGE> 60
14. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
At cost
Land and buildings $ 22,288 $ 22,661
Machinery and equipment 15,801 14,106
Leasehold improvements 7,558 5,881
Automobiles 1,198 675
Furniture and fixtures 1,167 885
Tools and molds 105 87
-------- --------
Total 48,117 44,295
Less: accumulated depreciation and amortization (15,672) (11,853)
-------- --------
Net book value 32,445 32,442
======== ========
</TABLE>
15. INVESTMENT IN SUBSIDIARIES
<TABLE>
<CAPTION>
Percentage of ownership
Place of Principal as at December 31
incorporation activity 1998 1997
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consolidated subsidiaries:
Nam Tai Electronic &
Electrical Products Ltd. Hong Kong Trading 100% 100%
Nam Tai Electronics
(Canada) Ltd. Canada Services 100% 100%
Namtai Electronic
(Shenzhen) Co. Ltd. PRC Manufacturing 100% 100%
Zastron Plastic & Metal
Products (Shenzhen) Ltd. PRC Manufacturing 100% 100%
Shenzhen Namtek Co. Ltd. PRC Software
development 100% 100%
Unconsolidated subsidiary:
Albatronics Hong Kong Trading and 50.00025% --
manufacturing
</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.
-60-
<PAGE> 61
16. RELATED PARTY TRANSACTIONS
In June 1995, the Company completed the construction of a residential
property pursuant to an agreement dated January 13, 1995. As the
property had not been sold to a third party by December 31, 1995, Mr.
M.K. Koo, the then Chairman of the Company, purchased the property for
$2,620 being the higher of the market value and the book value of the
property as required by the contract. At December 31, 1995 this amount
was included in accounts receivable. In March 1996, Mr. Koo elected to
apply $450 available from his compensation for loss of office against
the account receivable. The balance outstanding of the accounts
receivable at December 31, 1996 amounting to $2,120 was repayable by
Mr. Koo on or before December 31, 1997. In July 1997, Mr. Koo reversed
his election and retained his right to receive the sum of $500 for the
compensation for loss of office and agreed to pay the full purchase
price of $2,620 for the property. This amount was paid by Mr. Koo in
full in August 1997.
17. COMMITMENTS AND CONTINGENCIES
A As at December 31, 1998, the Company has entered into commitments for
capital expenditures of approximately $846 for plant and machinery
which are expected to be disbursed during the year ending December 31,
1999.
B Lease commitments
At December 31, 1998, the Company was obligated under operating leases,
which relate to land and buildings, requiring minimum rentals as
follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
- 1999 $ 756
- 2000 569
- 2001 470
- 2002 501
- 2003 503
- 2004 and thereafter 1,520
--------
$ 4,319
========
</TABLE>
C Significant legal proceedings
i. Tele-Art, Inc., a shareholder of the Company, is pursuing
claims in a court in the British Virgin Islands for damages
allegedly suffered as a result of the rights offering
completed in 1993.
ii. In June 1997, the Company filed a petition in the British
Virgin Islands for the winding up of Tele-Art Inc. on account
of an unpaid judgement debt owing to the Company. The High
Court of Justice granted an order to wind up Tele Art Inc. and
the Caribbean Court of Appeal upheld the decision on January
25, 1999. On January 22, 1999, pursuant to its Articles of
Association, the Company redeemed and cancelled 138,500 shares
of the Company registered in the name of Tele-Art, Inc. at a
price of US$11.19 per share to offset substantially all of the
judgement debt, interest and legal costs of approximately
US$1,600. On February 12, 1999, the liquidator of Tele-Art
Inc. filed a summons in the British Virgin Islands on its
behalf seeking among other things, a declaration setting aside
the redemption. The Courts of the British Virgin Islands have
yet to fix a specific date for the hearing of the substantive
application.
iii. Bank of China Hong Kong branch is pursuing claims in Hong Kong
seeking the possession of 308,227 shares of the Company
allegedly beneficially owned by Tele-Art, Inc. and allegedly
pledged to the Bank of China Hong Kong branch for the debt
mentioned in (ii) above.
Management believes that the above claims are without merit and will
vigorously defend them and believes that the outcome of the cases will
not have a significant effect on the consolidated financial statements.
-61-
<PAGE> 62
18. BANKING FACILITIES
The Company has credit lines with various banks representing trade
acceptances and overdrafts. At December 31, 1998 and 1997 these
facilities totalled $50,100 and $43,200, of which $1,201 and $3,318
were utilized at December 31, 1998 and 1997, respectively. The maturity
of these facilities is generally up to 90 days. Interest rates are
generally based on the banks' usual lending rates in Hong Kong and the
credit lines are normally subject to annual review.
For the three years ended December 31, 1998, banking facilities bore
the corporate guarantee of Nam Tai Electronics, Inc., and there was an
undertaking by Nam Tai Electronics, Inc. not to pledge any assets to
any other banks without the prior consent of the Company's bankers.
The notes payable, which include trust receipts and shipping
guarantees, may not agree to utilized banking facilities due to a
timing difference between the Company receiving the goods and the bank
issuing the trust receipt to cover financing of the purchase. The
Company recognizes the outstanding letter of credit as a note payable
when the goods are received, even though the bank may not have issued
the trust receipt. However, this will not affect the total bank
facility utilization, as an addition to trust receipts will be offset
by a reduction in the same amount of outstanding letters of credit.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
Outstanding letters of credit $ 1,174 $ 2,429
Usance bills pending maturity 27 889
------- -------
Total banking facilities utilized 1,201 3,318
Less: Outstanding letters of credit (1,174) (2,429)
Plus: Goods received but trust receipts not issued by the bank 302 925
------- -------
Notes payable per balance sheets $ 329 $ 1,814
======= =======
</TABLE>
-62-
<PAGE> 63
19. COMMON SHARES
A STOCK OPTIONS
In August 1993, the Board of Directors approved a stock option plan
which authorized the issuance of 300,000 vested options to key
employees of the Company at an exercise price of $5.35. The options
expired in September 1998. Because the option's exercise price was less
than the market value of the Company's common shares on the date of
grant, the Company recorded compensation expense of $690 reflecting the
excess of the fair value of the underlying stock over the exercise
price. In December 1993 and January 1996, the option plan was amended
and the maximum number of shares to be issued pursuant to the exercise
of options granted was increased to 650,000 and 1,000,000,
respectively. A summary of stock option activity during the three years
ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Number of Option price per share with the weighted
options average option price in parenthesis
--------- ----------------------------------------
<S> <C> <C>
Outstanding at January 1, 1996 570,850 $5.35, $11.00 &11.375 $(9.03)
Exercised (47,550) $5.35 & $11.00 $(6.30)
Granted 170,000 $10.50
Cancelled (156,000) $5.35 & $11.00 $(9.95)
--------
Outstanding at December 31, 1996 537,300 $5.35, $10.50, $11.00 & $11.375
$(9.47)
Exercised (386,667) $5.35, $10.50, $11.00 & $11.375
$(9.06)
Cancelled (97,300) $5.35, $10.50, & $11.00 $(10.52)
--------
Outstanding at December 31, 1997 53,333 $10.50
Granted 596,500 $10.50 & $15.75 $(13.14)
Cancelled (296,500) $15.75
--------
Outstanding at December 31, 1998 353,333 $10.50 & $15.75 $(10.55)
--------
</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 diluted earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Net Income As reported $ 3,529 $ 30,839 $ 9,416
Pro forma 3,273 30,583 9,081
Diluted earnings per share As reported $ 0.34 $ 3.68 $ 1.16
Pro forma 0.32 3.65 1.12
</TABLE>
There were no stock options granted during the year ended December 31,
1997. The weighted average fair value of options granted during 1998
and 1996, and taking into account outstanding stock options at January
1, 1996, was $3.24 and $4.52, respectively, using the Black-Scholes
option-pricing model based on the following assumptions:
<TABLE>
<CAPTION>
1998 1996
-------------------------- ---------------------------------------------
$15.75 $10.50 $11.00 $11.375 $10.50
Options Options Options Options Options
------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Risk-free interest rate 5.5% 5.0% 6.0% 5.4% 5.3%
Expected life 3/15/01 3/15/01 8/1/98 12/1/98 1/12/00
Expected volatility 61.1% 60.9% 44.0% 49.0% 48.0%
Expected dividends .070 .070 .030 .030 .030
</TABLE>
The weighed average remaining contractual life of the stock options
outstanding at December 31, 1998 was 2.18 years.
-63-
<PAGE> 64
19. COMMON SHARES - CONTINUED
B SHARE BUY - BACK PROGRAM
During 1998, the Company bought back 1,407,500 common shares of its
outstanding capital stock at an average price of $15.10 per share.
C SHARES AND WARRANTS ISSUED ON RIGHTS OFFERING
On October 10, 1997, the Company distributed to each holder of its
common shares nontransferable rights (the "Rights") to subscribe for
one unit for every three common shares owned at that date (referred to
as the "Rights Offering"). The subscription price was $17.00 per unit.
Each unit consisted of one common share and one redeemable common share
purchase warrant. Each warrant is exercisable to purchase one common
share at a price of $20.40 per share at any time from the date of their
issuance until November 24, 2000. The common shares and the warrants
included in the units will be separately transferable immediately on
issuance of the common shares. The warrants are redeemable by the
Company at any time at $0.05 per warrant if the average closing sale
price of the common shares for 20 consecutive trading days within the
30-day period preceding the date the notice is given equals or exceeds
$25.50 per share. The terms of the Rights Offering include an over
subscription privilege available to shareholders subject to certain
conditions and a Standby Purchase Commitment made by the Standby
Underwriters to the Rights Offering, subject to the terms and
conditions of a Standby Underwriting Agreement made between the Company
and the Standby Underwriters, and which includes purchase by the
Standby Underwriters of units not subscribed for by shareholders of the
Company. Pursuant to the Rights Offering, 3,000,000 units were offered,
with a subscription expiry date of November 24, 1997.
During the period of the Rights Offering, shareholders of the Company
exercised Rights to purchase a total of 2,267,917 units at $17.00 per
unit and the Standby Underwriters purchased a total of 729,212 units at
a price of $16.75, being the lower of the subscription price per unit
and the closing bid price per common share as reported on The Nasdaq
National Market on the subscription expiry date, as provided for under
the Standby Underwriting Agreement. The gross proceeds raised amounted
to $50,769 and the net proceeds raised after deduction of expenses
associated with the Rights Offering amounted to $47,700.
D ADVISORS' WARRANTS
On December 2, 1997, the Company issued 130,000 units to its advisors.
The holder of each unit is entitled to purchase from the Company at the
purchase price of $20.40 per unit one common share and one warrant
exercisable to purchase one common share at $20.40 per share for the
period from November 30, 1998 to November 24, 2000.
On October 5, 1998, the Company issued 300,000 warrants to an advisor
as consideration of advisory services under a service contract for a
period of 3 years. The holder of each warrant is entitled to purchase
from the Company one common share at $10.25 per share for the period
from October 5, 1998 to October 4, 2001. The fair value of the
warrants, using the Black-Scholes option-pricing model, was $780 and is
amortized over the life of the contract commencing October 1998.
-64-
<PAGE> 65
20. BUSINESS SEGMENT INFORMATION
The Company operates principally in only one segment of the consumer
electronic products industry. A summary of the net sales, income (loss)
from operations and identifiable assets by geographic areas and net
sales to major customers is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales from operations within:
- Hong Kong:
Unaffiliated customers $100,081 $ 131,052 $105,170
-------- --------- --------
- PRC, excluding Hong Kong:
Unaffiliated customers 1,568 1,802 3,064
Intersegment sales 93,556 123,115 95,669
-------- --------- --------
95,124 124,917 98,733
-------- --------- --------
- Intersegment eliminations (93,556) (123,115) (95,669)
-------- --------- --------
Total net sales $101,649 $ 132,854 $108,234
======== ========= ========
Income (loss) from operations within:
- PRC, excluding Hong Kong 7,272 17,229 10,339
- Hong Kong (4,122) 5,501 2,921
- Canada 379 8,109 (3,844)
-------- --------- --------
Total net income $ 3,529 $ 30,839 $ 9,416
======== ========= ========
<CAPTION>
AT DECEMBER 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Identifiable assets by geographic area:
- PRC, excluding Hong Kong $ 42,690 $ 44,781 $ 44,975
- Hong Kong 85,419 24,738 24,564
- Canada 19,119 98,269 18,852
-------- --------- --------
Total assets $147,228 $ 167,788 $ 88,391
======== ========= ========
</TABLE>
Intersegment sales arise from the transfer of finished goods between
subsidiaries operating in different areas. These sales are generally at
estimated market prices.
At December 31, 1998, the identifiable assets in Hong Kong included the
investment in an affiliated company of $16,223.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales to customers by geographic area:
-North America $ 48,204 $ 65,432 $ 36,595
- Japan 21,839 30,972 30,483
- Europe 18,770 19,105 13,187
- Hong Kong 8,731 9,835 19,404
- Other 4,105 7,510 8,565
-------- --------- --------
Total net sales $101,649 $ 132,854 $108,234
======== ========= ========
</TABLE>
The Company's sales to the customers which accounted for more than 10%
of its sales are as follows:
<TABLE>
<S> <C> <C> <C>
Customer
A $ 44,975 $ 50,510 $ 24,138
B 32,478 46,868 41,569
C (through Customer B) N/A N/A 17,395
D N/A N/A 14,642
-------- --------- --------
$ 77,453 $ 97,378 $ 97,744
======== ========= ========
</TABLE>
21. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform with the
current year's presentation.
-65-
<PAGE> 66
ITEM 19. FINANCIAL STATEMENT AND EXHIBITS
(a) Financial Statements. See list under Item 18. of this Report
(b) Exhibits. The following documents are filed as exhibits
herewith unless otherwise specified are incorporated herein by
reference:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------- -------
<S> <C>
2.1 Nam Tai Electronics, Inc. Amended Memorandum and Articles of
Association.
2.2 Subscription Agreement between Nam Tai Electronics, Inc. and
Albatronics (Far East) Company Limited dated September 11, 1998.
2.3 Employment contract between Nam Tai Electronics (Canada) Ltd. and
Edward K. W. Chan dated April 26, 1998.
2.4 Termination Agreement between Nam Tai Electronics (Canada) Ltd.
and Edward K. W. Chan dated January 11, 1999.
2.5 Agreement dated January 11, 1999 between Nam Tai Electronics, Inc.
and Edward K. W. Chan to negotiate settlement of dispute.
2.6 Agreement dated October 5, 1998 between Nam Tai Electronics, Inc.
and National Securities Corporation for financial advisory
services.
2.7 Warrant Certificate issued to National Securities Corporation
dated October 5, 1998.
2.8 Diagram of the Company's operating subsidiaries. See page 4 of
this report.
</TABLE>
-66-
<PAGE> 67
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned thereunto duly authorized.
NAM TAI ELECTRONICS, INC.
Date: March 29, 1999 By: /S/ Tadao Murakami
----------------------
Tadao Murakami
-67-
<PAGE> 68
[Deloitte Touch Tohmatsu Letterhead]
INDEPENDENT AUDITORS' CONSENTS
We hereby consent to the incorporation by reference of our report dated March
12, 1999 relating to the consolidated financial statements of Nam Tai
Electronics, Inc. (the "Company") for the year ended December 31, 1998 appearing
in this annual report on Form 20-F in (1) the Registration Statement on Form S-8
of the Company (file no. 33-73954); (2) the Registration Statement on Form S-8
of the Company (file no. 333-27761; and (3) the Registration Statement on Form
F-3 of the Company (file no. 333-36135).
/S/ Deloitte Touch Tohmatsu
- ---------------------------
DELOITTE TOUCH TOHMATSU
Hong Kong
March 29, 1999
-68-
<PAGE> 1
EXHIBIT 2.1
TERRITORY OF THE BRITISH VIRGIN ISLANDS
INTERNATIONAL BUSINESS COMPANIES ACT, 1984
A M E N D E D
MEMORANDUM OF ASSOCIATION
OF
NAM TAI ELECTRONICS, INC.
1. The name of the Company is Nam Tai Electronics, Inc.
2. The Registered Office of the Company is McNamara Chambers, P.O. Box
3342, Road Town, Tortola, British Virgin Islands or at such other place
within the British Virgin Islands as the Directors may from time to
time determine.
3. The Registered Agent of the Company in the British Virgin Islands is
McNamara Corporate Services Limited, whose address is P.O. Box 3342,
Road Town, Tortola, British Virgin Islands.
4. The object or purpose for which the Company is established is to engage
in any act or activity that is not prohibited under any law for the
time being in force in the British Virgin Islands.
5. Without prejudice to the generality of clause 4 hereof and subject
thereof, the Company has power to do any and all acts to carry on any
business or businesses whatsoever and to engage in any activities which
may conveniently be carried on with or be conducive to the attainment
of the Company's objects or purposes, including the power to enter into
any contract or undertaking whether directly or indirectly for the
benefit or profit of the Company and to settle the Company's assets or
property or any part thereof in trust or transfer the same to any other
Company whether for the protection of its assets or not, and with
respect to the transfer, the Directors may provide that the Company,
its creditors, its members or any person having a direct or indirect
interest in the Company or any of them may be the beneficiaries,
creditors, members, certificate holders, partners or holders of any
other similar interest.
6. The Company has no power to -
(i) carry on business with persons resident in the British Virgin
Islands except as provided by the Act,
<PAGE> 2
(ii) own an interest in real property situate in the British Virgin
Islands, or other than a lease of property for use as an
office from which to communicate with members or where books
and records of the Company are prepared or maintained,
(iii) accept banking deposits,
(iv) accept contracts of insurance.
7. Shares in the Company shall be issued in the currency of the United
States dollar.
8. The Company shall have an authorized capital of US200,000.00 divided
into 20,000,000 shares with a par value of US$0.01 each.
9. The Company shall have one class of one series comprising ordinary
common shares of US$0.01 par value.
10. In as much as more than one class or more than one series of shares are
authorized to be issued, the Directors shall have the authority and the
power to fix by a resolution of directors the designations, powers,
preferences, rights, qualifications, imitations and restrictions if any
appertenant to that class or series of shares.
11. The number of shares into which the share capital is divided may be
issued as registered nominative shares or as shares issued to bearer.
12. Registered nominative shares may be exchanged and converted into shares
issued to bearer and shares issued to bearer may be exchanged and
converted into registered nominative shares..
13. Any notice or other information required by the Act to be given to the
holder of shares issued to bearer shall be given by publishing the same
in a newspaper of general circulation in the British Virgin Islands or
in such other newspaper if any as the Company may from time to time by
resolution of directors determine.
14. The Memorandum and Articles of Association of the Company may be
amended by a resolution of members or a resolution of directors.
2
<PAGE> 3
We, Tortola Corporation Company Limited of P.O. Box 662, Citco Building,
Wickhams Cay, Road Town, Tortola for the purpose of incorporating an
International Business Company under the laws of the British Virgin Islands
hereby subscribe our name to this Memorandum of Association this 12th day of
August, 1987 in the presence of:
Witness (Sgd.) J. Caminada
Tortola Corporation Company Limited
Daphne Wattley
Road Town, Tortola
British Virgin Islands
Secretary
(Sgd.) D. Wattley
3
<PAGE> 4
TERRITORY OF THE BRITISH VIRGIN ISLANDS
THE INTERNATIONAL BUSINESS COMPANIES ACT 1984
A M E N D E D
ARTICLES OF ASSOCIATION
OF
NAM TAI ELECTRONICS, INC.
1. The following Regulations constitute the Regulations of the Company. In
these Articles words and expressions defined in the Intentional
Business Companies Act ("the Act") shall have the same meaning and,
unless otherwise required by the context, the singular shall include
the plural and vice-versa, the masculine shall include the feminine and
neuter and references to persons shall include corporations and all
legal entities capable of having a legal existence.
SHARES
2. Subject to the provisions of these Articles the unissued shares of the
Company (whether forming part of the original or any increased
authorized capital) shall be at the disposal of the Directors who may
offer, allot, grant options over or otherwise dispose of them to such
persons at such times and for such consideration and upon such terms
and conditions as the directors may determine.
3. No shares hall be issued except as fully paid up.
4. The name and address for every person being the holder of registered
nominative shares, their class or series and the date when they became
or ceased to become a member shall be entered as a member in the share
register.
5. Every person whose name is entered as a member in the share register
being the holder of registered nominative shares, shall, without
payment, be entitled to a certificate specifying the share or shares
held and the par value thereof, provided that in respect of a
registered nominative share, or shares, held jointly be several persons
the Company shall not be bound to issue more than one certificate, and
delivery of a certificate for a share to one of several joint holders
shall be sufficient delivery to all.
6. In the case of shares issued to bearer, the share register shall
contain the total number of each class and series of shares so issued
and with respect to each certificate therefor, the identifying number,
the number of each class or series of shares issued to bearer specified
therein and the date of issue of the certificate.
<PAGE> 5
7. Every person to whom shares to bearer must hold a certificate
specifying the share or shares and the par value thereof.
8. Registered nominative shares may pursuant to a resolution of directors
be exchanged and converted into shares issued to bearer.
9. Shares issued to bearer may pursuant to a resolution of directors and
on the giving of such indemnity as the Company be resolution of
directors may reasonably require be exchanged and converted into
registered nominative shares.
10. The bearer of a certificate representing shares issued to bearer shall
for all purposes be deemed to be the owner of the shares comprised in
such certificate.
11. If a certificate is worn out or lost it may be renewed on production of
the worn out certificate, or on satisfactory proof of its loss together
with such indemnity as the directors may reasonably require. Any member
receiving a share certificate shall indemnify and hold the Company and
its officers harmless from any loss or liability which it or they may
incur by reason of wrongful or fraudulent use or representation may by
any person by virtue of the possession such certificate.
SHARE CAPITAL AND VARIATION OF RIGHTS
12. Without prejudice to any special rights previously conferred on the
holders of any existing shares or class of shares, any share in the
Company may be issued with such preferred, deferred or other special
rights or such restrictions, whether in regard to dividend, voting,
return of capital or otherwise as the directors may from time to time
determine.
13. Subject to the provisions of the Act, any shares may be purchased,
redeemed or acquired by the Company on such terms and in such manner as
the directors may determine.
13.1 (a) For the purposes of Regulation 13.1 of these
Articles the following defined terms have the
meanings indicated:
"Beneficial owner," "beneficial ownership" or
"beneficially owned," in the context of a Person
whose shares may be redeemed shall be ascertained in
accordance with Rule 13d-3 of Regulation 13D
promulgated by the U.S. Securities and Exchange
Commission pursuant to the U.S. Securities Exchange
Act of 1934, as amended, or any successor to that
Rule.
"Date Fixed for Redemption" shall have the meaning
specified in Regulation 13.1(b) of these Regulations.
2
<PAGE> 6
"Fair Market Value" of the shares to be redeemed
means the product of the number of shares redeemed
multiplied by the Redemption Price.
"Judgment" means a judgment (i) for a liquidated
amount in a civil matter; (ii) that is final and
conclusive and has not been stayed or satisfied in
full; (iii) that is not directly or indirectly for
the payment of taxes, penalties, fines or charges of
a like nature; (iv) that is not obtained by actual or
constructive fraud or duress; (v) in which the
rendering court has taken jurisdiction on grounds
that are recognized by the common law rules of the
British Virgin Islands; (vi) in which proceedings it
was obtained were not contrary to natural justice or
the public policy of the British Virgin Islands;
(vii) in which the Person against whom the judgment
is given is subject to the jurisdiction of the court
rendering the judgment; and (viii) is not on a claim
for contribution in respect of damages awarded by a
judgment which does not satisfy the foregoing.
"Judgment Amount" means the sum of (i) the liquidated
amount of the Judgement, (ii) interest thereon at the
legal rate of the jurisdiction in which it was
entered from the date of such entry through the Date
Fixed for Redemption, and (iii) reasonable expenses
of the Company (including its reasonable attorney
fees, court costs, administration and overhead costs,
and any other related expenses) of enforcing the
Judgment and/or redeeming its shares to satisfy the
same, less the sum of any amounts thereto fore paid
on, or credited against, the Judgment.
"Notice" shall have the meaning specified in
Regulation 13.1(b) of these Regulations.
"Person" means any natural person, corporation,
company incorporated under the International Business
Companies Act of the British Virgin Islands, limited
liability company, general partnership, limited
partnership, proprietorship, other business
organization, trust, union, association or other
"person" defined in the International Business
Companies Act of the British Virgin Islands.
3
<PAGE> 7
"Redemption Price" means (i) if the class of shares
to be redeemed is traded in the over-the-counter
market in the U.S. and not in The Nasdaq National
Market nor on any national securities exchange in the
U.S., the average of the per share closing bid prices
of the shares on the 20 consecutive trading days
immediately preceding the Date Fixed for Redemption,
as reported by The Nasdaq Small Cap Market (or an
equivalent generally accepted reporting service if
quotations are not reported on The Nasdaq Small Cap
Market), or (ii) if the class of shares to be
redeemed is traded in The Nasdaq National Market or
on a national securities exchange in the U.S., the
average for the 20 consecutive trading days
immediately preceding the Date Fixed for Redemption
of the daily per share closing prices of the shares
in The Nasdaq National Market or on the principal
stock exchange in the U.S. on which they are listed,
as the case may be. For purposes of clause (i) above,
if trading in the shares is not reported by The
Nasdaq Small Cap Market, the bid price referred to in
said clause shall be the lowest bid price as reported
in the Nasdaq Electronic Bulletin Board or, if not
reported thereon, as reported in the "pink sheets"
published in the U.S. by National Quotation Bureau,
Incorporated, and, if such shares are not so reported
shall be the price of a share determined by the
directors in good faith. The closing price referred
to in clause (ii) above shall be the last reported
sale price or, in the case no such reported sale
takes place on such day, the average of the reported
closing bid and asked prices, in either case in The
Nasdaq National Market or on the national securities
exchange in the U.S. on which the class of shares is
then listed.
"U.S." shall mean the United States of America.
(b) Without limiting the generality of Regulation 13
of these Articles, in the furtherance thereof and in
addition to any other rights or remedies available to
the Company at law or in equity, the Company may at
any time and from time to time redeem, at the
Redemption Price per share, all or any of its
outstanding shares beneficially owned by any Person,
or registered in the name of any Person whose name is
entered as a member in the share register, against
whom the Company has a Judgment. At least 30 calendar
days before the date fixed for redemption as
determined by resolution of the directors (the "Date
Fixed for Redemption"), a written redemption notice
(the "Notice") shall be sent to each beneficial owner
and registered holder (if different, from the
beneficial owner) whose shares are to be redeemed by
first-class mail, postage prepaid, at the address of
the beneficial owner and registered holder (if
different, from the beneficial owner) as shown on the
records of the Company, stating: (i) the class(es) of
shares
4
<PAGE> 8
and the number of shares in each such class to be
redeemed from the beneficial owner, (ii) the Date
Fixed for Redemption, (iii) information on the method
to be used to determine Redemption Price in
accordance with Regulation 13.1(a) of these Articles,
(iv) the Judgment Amount and (v) the address of the
place where the certificates for the shares to be
redeemed shall be surrendered for redemption. On or
before the Date Fixed for Redemption, each beneficial
owner and registered holder (if different, from the
beneficial owner) of the shares to be redeemed shall
surrender the certificates representing these shares
to the Company at the place so designated therefor in
the Notice unless the Judgment Amount has theretofore
been satisfied in full. On the Date Fixed for
Redemption the Company shall pay the Redemption Price
for the shares redeemed by offsetting the Fair Market
Value of the shares redeemed against the Judgment
Amount. If the Fair Market Value of the shares
redeemed exceeds the Judgment Amount, then new
certificates representing the number of shares
determined by dividing such excess by the Redemption
Price (and rounding the quotient down to the nearest
whole share) shall be issued to the Person whose
shares were redeemed. In lieu any fractional shares
otherwise issuable, the Company shall pay an amount
equal to the Redemption Price multiplied by the
fraction. If the Fair Market Value of the shares
redeemed is insufficient to fully satisfy the
Judgment Amount, the Company shall retain the right
to pursue all of its rights and remedies otherwise
available to satisfy the deficiency. If the Notice is
given in the manner provided in this Regulation,
whether or not the certificates covering these shares
are surrendered, all rights with respect to the
redeemed shares shall terminate except for the right
of the Person whose shares are so redeemed to receive
credit by offset against the Judgment Amount as
herein provided. Unless the certificates covering
these shares are received by the company at the place
so designated the Judgment Amount will not be deemed
to have been satisfied in full.
14. If at any time the authorised share capital is divided into different
classes or series of shares, the rights attached to any class or series
(unless otherwise provided by the terms of issue of the shares of that
class or series) may, whether or not the Company is being wound up, be
varied with the consent in writing of the holders of not less than
three fourths of the issued shares of any other class or series of
shares which may be affected by such variation.
15. The rights conferred upon the holders of the shares of any class issued
with preferred or other rights shall not, unless otherwise expressly
provided by the terms of issue of the shares of that class, be deemed
to be varied by the creation or issue of further shares ranking pari
passu therewith.
5
<PAGE> 9
16. No notice of a trust, whether expressed, implied or constructive, shall
be entered on the share register.
TRANSFER OF SHARES
17. Subject to any limitations in the Memorandum, registered share sin the
Company may be transferred by a written instrument of transfer signed
by the transferor and containing the name and address of the
transferee, in the absence of such written instrument of transferor the
directors may accept such evidence of a transfer of shares as they
consider appropriate.
18. Shares issued to bearer may be transferred by delivery of the
certificate representing such shares.
19. The directors shall have power to close the Share Register for such
period as they shall think fit, but not exceeding 90 days in any one
year.
TRANSMISSION OF SHARES
20. (i) The personal representatives, guardian or trustee as the case
may be deceased, incompetent or bankrupt sole holder of a
registered nominative share shall be the only persons
recognised by the Company as having any title to the share. In
the case of a share registered in the names of two or more
holders, the survivor or survivors, and the personal
representative, guardian or trustee as the case may be of the
deceased, incompetent or bankrupt, shall be the only persons
recognised by the company as having any title to the share but
they shall not be entitled to exercise any rights as a member
of the Company until they have proceeded as set forth in the
following Regulations.
(ii) Any person becoming entitled by operation of law or otherwise
to a share or shares in consequence of the death, incompetence
or bankruptcy of any member may be registered as a member upon
such evidence being produced as may reasonably be required by
the directors. An application by any such person to be
registered as a member for all purposes shall be deemed to be
a transfer of shares of the deceased, incompetent or bankrupt
member and the directors shall treat it a such.
21. Any person who has become entitled to a share or shares in consequence
of the death, incompetence or bankruptcy of any member may, instead of
being registered himself, request in writing that some person to be
named by him be registered as a transferee of such share or shares and
such request shall likewise be treated as it were a transfer.
6
<PAGE> 10
ACQUISITION OF OWN SHARES
22. Subject to the provisions of the Act, the Company may purchase, redeem
or otherwise acquire any of its own shares for such consideration as
the Company by resolution of directors considers fit, and either cancel
or hold such shares as treasury shares. The Company may dispose of any
shares held as treasury shares on such terms and conditions as the
Company by a resolution of directors may from time to time determine.
Shares may be purchased or otherwise acquired by the Company in
exchange for newly issued shares in the Company.
23. Subject to the provisions of the Act as to reduction of capital the
Company may be resolution of directors amend its Memorandum of
Association to increase or reduce its authorised capital.
24. Any capital raised by the creation of new shares shall be considered as
part of the original capital, and shall be subject to the same
provisions as if it had been part of the original capital.
25. The Company may amend its Memorandum of Association to
(a) consolidate all or any of its share capital into shares of
larger amount than its existing shares;
(b) cancel any shares which, at the date of the passing of the
resolution, have not been taken or agreed to be taken by any
person and diminish the amount of its authorised share capital
by the amount of the shares so cancelled;
(c) sub-divide its shares or any of them into shares of smaller
amount than is fixed by the Memorandum of Association and so
that subject to the provisions of Regulation 14 the resolution
whereby any share is sub-divided may determine that as between
the holders of the shares resulting from such sub-division one
or more of the shares may have such preferred or other special
rights over or may have such qualified or deferred rights or
be subject to any such restrictions as compared with the other
or others as the Company has power to attach to unissued or
new shares;
(d) subject to the provisions of the Act, reduce its issued share
capital or any capital represented by the capital redemption
reserve fund or by the share premium account in any manner.
26. Where any difficulty arises in regard to any consolidation and division
under Regulation 25, the Company by a resolution of directors may
settle the same as it thinks expedient.
7
<PAGE> 11
MEETINGS OF MEMBERS
27. The directors may convene meetings of the members of the Company at
such times and in such manner and places as the directors consider
necessary or desirable, and they shall convene such a meeting upon the
written request of members holding more than 30 percent of the votes of
the outstanding voting shares in the Company.
28. At least seven days notice specifying the place, the day and the hour
of the meeting and the general nature of the business to be conducted
shall be given to such persons whose names on the date the notice is
given appear as members in the share register of the Company.
29. In the case of shares issued to bearer, the directors shall at least 14
days prior to the date of the meeting cause notice of the same,
specifying the place, the day and the hour of the meeting and the
general nature of the business to be conducted, to be published in the
manner prescribed by the Memorandum of Association.
30. A meeting of the members shall be deemed to have been validly called,
notwithstanding that is called in contravention of the requirement to
give notice in Regulations 28 and 29 if shorter notice of the meeting
is agreed by members holding not less than 90 percent of the total
number of shares having a right to attend and vote at the meeting, or
if all such members have waived notice of the meeting.
Presence at the meeting shall be deemed to constitute waiver.
31. The inadvertent failure of the directors to give notice of a meeting to
a member or to the agent or attorney as the case may be, or the fact
that a member or such agent or attorney has not received the notice,
does not invalidate the meeting.
32. A member may be represented at a meeting of members by proxy. The
instrument appointing a proxy shall be in such form as the Chairman of
the meeting shall accept and shall be produced at the place appointed
for the meeting before the time for holding the meeting at which the
person named in such instrument proposes to vote.
33. In the case of shares issued to bear, the holder of such shares may
vote:
in person, by producing the Certificate representing such shares to the
Chairman of the meeting at which the holder proposes to vote;
by proxy, by depositing the certificate with a law firm appointed in
writing by the Company or with a recognised bank or trust company which
shall give a certificate of deposit and voting instructions in the form
below:-
8
<PAGE> 12
CERTIFICATE OF DEPOSIT
AND
VOTING INSTRUCTIONS
The Undersigned hereby declares and certifies that bearer-share
certificate(s), representing shares of the share capital of
(the "Company"), an International Business Company organised under the
laws of the British Virgin Islands, is/are being held by the
Undersigned on behalf of the owner(s) of the said shares, who have
authorised the Undersigned to represent the said share with full power
of substitution at a shareholder's meeting to be held with the
following agenda:
( ) In the transaction of such other business as may properly come before
meeting.
To cast their votes on each of the above mentioned agenda matters at
the meeting, and to designate any third party to act in and on its
behalf as the representatives of the said shareholders and these shares
at the meeting; and the Undersigned with continue to keep the said
shares in safekeeping until the date indicated above.
In accordance with this power authority, the Undersigned hereby
designates and appoints Messrs........................................
................................. and each of them with full power of
substitution to represent the Undersigned and said shareholders and to
so vote the said shares at the meeting of shareholders of the Company
to be held at
IN WITNESS WHEREOF, the Undersigned has caused this certificate to be
duly executed this _____ day of ________ __, 19__.
------------------------------------
NAME OF BANK OR TRUST COMPANY
NAME OF LAW FIRM
PROCEEDINGS AT MEETINGS OF MEMBERS
34. No business shall be transacted at any meeting of members unless a
quorum of members is present at the time when the meeting proceeds to
business. A quorum shall consist of one or more members present in
person or by proxy representing at least one half of the votes of the
shares of each class or series of share entitled to vote as a class or
series and the same proportion of the votes of the remaining shares
entitled to vote.
9
<PAGE> 13
35. If within one hour from the time appointed for the meeting a quorum is
not present, the meeting, if convened upon the requisition of members,
shall be dissolved; in any other case it shall stand adjourned to the
next business day at the same time and place or to such other time and
place as the directors may determine, and if at the adjourned meeting
there are present within one hour from the time appointed for the
meeting in person or by proxy not less than one third of the votes of
the shares or each class or series of shares entitled to vote on the
resolutions to be considered by the meeting, those present shall
constitute a quorum but otherwise the meeting shall be dissolved.
36. The Chairman, if any, of the board of directors shall preside as
Chairman at every general meeting of the Company.
37. If there is no such Chairman, or if at any meeting he is not present
within fifteen minutes after the time appointed for holding the
meeting, the members present shall choose someone of their number to be
chairman.
38. The Chairman may, with the consent of the meeting, adjourn any meeting
from time to time, and from place to place, but no business shall be
transacted at any adjourned meeting other than the business left
unfinished at the meeting from which the adjournment took place.
39. All shares vote as one class and each whole share has one vote. If two
or more persons are jointly entitled to a registered nominative share
and if more than one of such persons is desirous of voting at the
meetings whether in person or by proxy, the vote of that person whose
name appears first among such voting joint holders in the share
register alone shall be counted.
40. A member may be present at a meeting if he participates by telephone or
other electronic means and all members participating at the meeting are
able to hear each other.
41. At any meeting of the members the Chairman shall be responsible for
deciding in such manner as he shall consider appropriate whether a
resolution has been carried or not and the result of his decision shall
be announced to the meeting and recorded in the minutes thereof. If the
Chairman shall have any doubt as to the outcome of any resolution put
to the vote, he shall cause a poll to be taken of all votes cast upon
such resolution, but if the Chairman shall fail to take a poll then any
member present in person or by proxy who disputes the announcement by
the Chairman of the result of any vote may immediately following such
announcement demand that a poll be taken and the Chairman shall
thereupon cause a poll to be taken. If a poll is taken at any meeting,
the result thereof shall be duly recorded in the minutes of that
meeting by the Chairman.
10
<PAGE> 14
42. Unless a poll be so demanded, a declaration by the Chairman that a
resolution has, on a show of hands, been carried, and an entry to that
effect in the book containing the minutes of the proceedings of the
Company, shall be sufficient evidence of the fact, without proof of the
number or proportion of the votes recorded in favour of or against such
resolution.
43. If a poll demanded it shall be taken in such manner as the Chairman
directs, and the result of the poll shall be deemed to be the
resolution of the meeting at which the poll was demanded. The demand
for a poll may be withdrawn.
44. A resolution which has been notified to all members for the time being
entitled to vote and which has been approved by a majority of the votes
of those members in the form of one or more documents in writing by
telex, telegram, cable or other written electronic communication shall
without the need for any notice, become effectual as at the dates
thereof as a resolution of the members.
45. Any person other than an individual shall be regarded as one member and
subject to Regulation 46 the right of any individual to speak for or
represent such member shall be determined by the law of the
jurisdiction where, and by the documents by which, the person is
constituted or derives its existence. In case of doubt, the directors
may in good faith seek legal advice from any qualified person and
unless and until a court of competent jurisdiction shall otherwise
rule, the directors may rely and act upon such advice without incurring
any liability to any member.
46. Any person other than an individual which is a member of the Company
may by resolution of its directors or other governing body authorise
such person as it thinks fit to act as its representative at any
meeting of the Company or of any class of members of the Company, and
the person so authorised shall be entitled to exercise the same powers
on behalf of the person which he represents as that person could
exercise if it were an individual member of the Company.
DIRECTORS
47. The first director or directors shall be elected by the subscriber to
the Memorandum of Association. Thereafter, the directors, other than in
the case of a vacancy, shall be elected by the members for such term as
the members may determine and may be removed by them.
48. The number of the directors shall be not less than one nor more than
eight.
49. Each director holds office according to the terms of his appointment
until his successor takes office or until his earlier death,
resignation or removal.
50. A vacancy in the board of directors may be filled by the appointment of
a new director pursuant to a resolution of members or of a majority of
the remaining directors.
11
<PAGE> 15
51. A director shall not require a share qualification, but nevertheless
shall be entitled to attend and speak at any meeting of the members and
at any separate meeting of the holders of any class of shares in the
Company.
52. A director by writing under his and deposited at the Registered Office
of the Company may from time to time appoint another director or any
other person to be his alternate. Every such alternate shall be
entitled to be given notice of meetings of the directors and to attend
and vote as a director at any such meeting at which the director
appointing him is not personally present and generally at such meeting
to have and exercise all the powers, rights, duties and authorities of
the director appointing him. Every such alternate shall be deemed to be
an officer of the Company and shall not be deemed to be an agent of the
director appointing him. If undue delay or difficulty would be
occasioned by giving notice to a director of a resolution of which his
approval is sought in accordance with Regulation 80 his alternate (if
any) shall be entitled to signify approval of the same on behalf of
that director. A director by writing under his hand deposited at the
Registered Office of the company may at any time revoke the appointment
of an alternate appointed by him. If a director shall die or cease to
hold the office of director, the appointment of his alternate shall
thereupon cease and terminate.
53. The directors may, by resolution of directors, fix the emoluments of
directors in respect of services rendered or to be rendered in any
capacity to the company. The directors may also be paid such
travelling, hotel and other expenses properly incurred by them in
attending and returning from meetings of the directors, or any
committee of the directors or meetings of the members, or in connection
with the business of the Company as shall be approved by resolution of
directors.
54. Any director who, by request, goes or resides abroad for any purposes
of the Company or who performs services which in the opinion of the
Board go beyond the ordinary duties of a director, may be paid such
extra remuneration (whether by way of salary, commission, participation
in profits or otherwise) as shall be approved by resolution of
directors.
55. The Company may pay to a director who at the request of the Company
holds any office (including a directorship) in, or renders services to
any company in which the Company may be interested, such remuneration
(whether by way of salary, commission, participation in profits or
otherwise) in respect of such office or services as shall be approved
by resolution of directors.
56. The office of director shall be vacated if the director:-
(a) is removed from office by resolution of members or
(b) becomes bankrupt or makes any arrangement or composition with
his creditors generally, or
12
<PAGE> 16
(c) becomes of unsound mind, or of such infirm health as to be
incapable of managing his affairs, or
(d) resigns his office by notice in writing to the Company.
57. A director may hold any other office or position of profit under the
Company (except that of auditor) in conjunction with his office of
director, and may act in a professional capacity to the Company on such
terms as to remuneration and otherwise as the directors shall arrange.
58. A director may be or become a director other officer of, or otherwise
interested in any company promoted by the Company, or in which the
Company may be interested, as a member or otherwise, and no director
shall be accountable for any remuneration or other benefits received by
him as director or officer or from his interest in such other company.
The directors may also exercise the voting powers conferred by the
shares in any other company held or owned by the Company in such manner
in all respects as they think fit, including the exercise thereof in
favour of any resolutions appointing them, or any of their number,
directors or officers of such other company, or voting or providing for
the payment of remuneration to the directors or officers of such other
company. A director may vote in favour of the exercise of such voting
rights in manner aforesaid, notwithstanding that he may be, or be about
to become, a director or officer of such other company, and as such in
any other manner is, or may be, interested in the exercise of such
voting rights in manner aforesaid.
59. No director shall be disqualified by reason of his office from
contracting with the Company, either as vendor, purchase or otherwise,
nor shall any such contract or arrangement entered into by or on behalf
of the Company in which any director shall be in any way interested by
avoided, nor shall nay director so contracting or being so interested
be liable to account to the Company for any profit realised by any such
contract or arrangement, by reason of such director holding that office
or of the fiduciary relationship thereby established. The nature of a
director's interest must be declared by him at the meeting of the
directors at which the question of entering into the contract or
arrangement is first taken into consideration, and if the director was
not at the date of that meeting interested in the proposed contract or
arrangement, or shall become interested in a contract or arrangement
after it is made, he shall forthwith after becoming so interested
advise the Company in writing of the fact and nature of his interest. A
general notice to the directors by a director that he is a member of a
specified firm or company, and is to be regarded as interested in any
contract or transaction which may, after the date of notice, be made
with such firm or company shall (if such director shall give the same
at a meeting of the directors, or shall take reasonable steps to secure
that the same is brought up and read at the next meeting of directors
after it is given) be a sufficient declaration of interest in relation
to such contract or transaction with such firm or company.
13
<PAGE> 17
60. A director may be counted as one of a quorum upon a motion in respect
of any contract or arrangement which he shall make with the Company, or
in which he is so interested as aforesaid, and may vote upon such
motion. However, if the agreement or transaction cannot be approve by a
resolution of directors without counting the vote or consent of any
interested director the agreement or transaction may only be validated
by approval or ratification by a resolution of members.
OFFICERS
61. (i) The Company may, by a resolution of directors, appoint
officers of the Company at such times as shall be considered
necessary or expedient, and such officers may consist of a
President one or more Vice-Presidents, a Secretary and a
Treasurer and such other officers as may from time to time be
deemed desirable. The officers shall perform such duties as
shall be prescribed at the time of their appointment subject
to any modification in such duties as may be prescribed by the
directors thereafter, but in the absence of any specific
allocation of duties it shall be the responsibility of the
President to manage the day to day affairs of the Company, the
Vice-Presidents to act in order of seniority in the absence of
the President but otherwise to perform such duties as may be
delegated to them by the President, the Secretary to maintain
the registers, minute books and records (other than financial
records) of the Company and to ensure compliance with all
procedural requirements imposed on the Company by applicable
law, and the Treasurer to be responsible for the financial
affairs of the Company.
(ii) Any person may hold more than one office and officer need be a
director or member of the Company. The officers shall remain
in office until removed from office by the directors whether
or not a successor is appointed.
62. Any officer who is a body corporate may appoint any person its duly
authorised representative for the purpose of representing it and
transacting any of the business of the officers.
63. The Registered Agent may certify to whom it may concern the names and
addresses of the directors and officers of the Company and the terms of
their encumbency.
14
<PAGE> 18
POWERS OF DIRECTORS
64. The business and affairs of the Company shall be managed by the
directors who may pay all expenses incurred preliminary to and in
connection with the formation and registration of the Company, and may
exercise all such powers of the Company as are not by the Act or by
these Regulations required to be exercised by the members subject to
any delegation of such powers as may be authorised by these Regulations
and to such requirements as may be prescribed by resolution of the
members; but no requirement made by resolution of the members shall
invalidate any prior act of the directors which would have been valid
if such requirement had not been made. Notwithstanding the generality
of the foregoing the Company may by resolution of directors exercise
the several powers granted to it by Section 9 of the Act and by the
Memorandum of Association to inter alia transfer any of its assets in
trust.
65. The Board may entrust to and confer upon any director or officer any of
the powers exercisable by it upon such terms and conditions and with
such restrictions as it thinks fit, and either collaterally with, or to
the exclusion of, its own powers, and may from time to time revoke,
withdraw, alter or vary all or any of such powers. The directors may
delegate nay of their powers to committees consisting of such member or
members of their body as they think fit; any committee so formed shall
in the exercise of the powers so delegated conform to any regulations
that may be imposed on it by the directors.
66. The Company may from time to time and at any time by resolution of
directors appoint any company, firm or person or body of persons,
whether nominated directly or indirectly by the directors, to be the
attorney or attorneys of the Company for such purposes and with such
powers, authorities any discretions (not exceeding those vested in or
exercisable by the directors under these Regulations) and for such
period and subject to such conditions as they may think fit, and any
such powers of attorney may contain such provisions for the protection
and convenience of persons dealing with any such attorney as the
directors may think fit and may also authorise any such attorney to
delegate all or any of the powers, authorities and discretions vested
in him.
67. Any director who is a body corporate may appoint any person its duly
authorised representative for the purpose of representing it at Board
Meetings and of transacting any of the business of the directors.
68. All cheques, promissory notes, drafts, bills of exchange and other
negotiable instruments and all receipts for monies paid to the Company,
shall be signed, drawn, accepted, endorsed or otherwise executed, as
the case may be, in such manner as the Company shall from time to time
by resolution of directors determine.
15
<PAGE> 19
69. The directors may by resolution of directors exercise all the powers of
the Company to borrow money and to mortgage or charge its undertakings
and property or any part thereof, to issue debentures, debenture stock
and other securities whenever money is borrowed or as security for any
debt, liability or obligation of the Company or of any third party.
70. Subject to Regulation 48 the continuing directors may act
notwithstanding any vacancy in their body.
PROCEEDINGS OF DIRECTORS
71. The directors may meet together for the despatch of business, adjourn
and otherwise regulate their meetings as they think fit. Questions
arising at any meeting shall be decided by a majority of votes; in case
of an equality of votes the Chairman shall have a second or casting
vote. A director may at any time summon a meeting of directors.
72. Provided that there shall be more than one director the quorum for
directors' meetings shall be one third of the total number of directors
and a minimum of 7 days notice (exclusive of the day of the meeting)
shall be given to all directors and alternate directors of any meeting
of the board unless all the directors or their alternates on their
behalf shall waive such notice for any particular meeting or any
director shall waive his right to receive notice. Presence at the
meeting shall be deemed to constitute waiver.
73. A sole director shall have full power to represent the Company
notwithstanding the reference in these Regulations to a Board of
Directors consisting of more than one person.
74. The directors may elect a chairman of their meeting and determine the
period for which he is to hold office, but if no such chairman is
present at the time appointed for holding the same, the directors
present shall choose one of their number to be the chairman of such
meeting.
75. The directors may, subject to the Act, delegate any of their powers to
committees consisting of such of their body as they think fit; any
committee so formed shall, in the exercise of the powers so delegated
conform to any regulations that may be imposed on it by the directors.
76. A committee may elect a chairman of its meeting; if no such chairman is
elected, or if he is not present at the time appointed for holding the
meeting the members of the committee present shall choose one of their
number to be chairman of such meeting.
16
<PAGE> 20
77. A committee may meet and adjourn as it thinks proper. Questions arising
at any meeting shall be determined by a majority of votes of its
members present, and in case of an equality of votes, the chairman
shall have a second casting vote.
78. All acts done by any meeting of the directors or of a committee of
directors, or by any person acting as a director, notwithstanding that
it be afterwards discovered that there was some defect in the
appointment of any such directors or persons acting as aforesaid, or
that they or any of them were disqualified are hereby ratified and
shall be as valid as if every such person had been duly appointed and
was qualified to be a director.
79. The directors shall cause the following books to be kept:
(a) minutes of all meetings of directors, members and committees
appointed by them;
(b) copies of all resolutions consented to by directors, members
and committees appointed by them;
(c) such other books and records as may be necessary or desirable
in their opinion to reflect the financial position of the
Company.
80. A resolution approved by all the directors or members of a committee
for the time being entitled to receive notice of a meeting of the
directors or of a committee of the directors and taking the form of one
or more documents in writing or messages transmitted by teleprinter
from a duly authenticated source shall be as valid and effectual as if
it had been passed at a meeting of the directors of such committee duly
convened and held. Any one or more members of the board of directors or
any committee thereof may participation a meeting of such board or
committee by means of a conference telephone or similar communication
equipment allowing all persons participating in the meeting to hear
each other at the same time. Participation by such means shall
constitute presence in person at a meeting.
INDEMNITY
81. Subject to the provisions of the Act every director or other officer of
the Company shall be entitled to be indemnified out of the assets of
the Company against all losses or liabilities which he may sustain or
incur in or about the execution of the duties of his office or
otherwise in relation thereto, and no director or other officer shall
be liable for any loss, damage or misfortune which may happen to, or be
incurred by the Company in the execution of the duties of his office,
or in relation thereto provided he acted honestly and in good faith
with a view to the best interest of the Company and except for his own
wilful mis-conduct or negligence.
17
<PAGE> 21
SEAL
82. The directors shall provide for the safe custody of the seal, and every
instrument to which the seal shall be affixed shall be signed by one or
more persons so authorised from time to time by the directors. If so
authorised by resolution of directors, a facsimile of the seal and of
the signatures of any authorised signatory as is herein provided may be
reproduced by printing or other means on any instrument and shall have
the same force and validity as if the seal had been affixed to such
instrument and the same had been signed as hereinbefore described.
DIVIDEND AND RESERVES
83. The directors may from time to time declare and pay a dividend whether
interim or final and whether in money or in specie, but no dividend
shall be declared and paid:-
(1) except out of surplus;
(2) unless the directors determine that immediately after payment
of the dividend;
(a) the Company will be able to satisfy its liabilities
as they become due in the ordinary course of its
business and
(b) the realisable value of the assets of the Company
will not be less than the sum of its total
liabilities (other than deferred taxes) as shown in
the books of account and of its capital.
84. The directors may, before declaring any dividend, set aside out of the
profits of the Company such sum as they think proper as a reserve fund
for whatever purpose, and may invest the sum so set apart as a reserve
fund upon such securities as they may select.
85. The directors may deduct from the dividends payable to any shareholder
all such sums of money as may be due from him to the Company.
86. Notice of any dividend that may have been declared shall be given to
each shareholder in manner hereinafter mentioned and all dividends
unclaimed for three years after having been declared may be forfeited
by the directors for the benefit of the Company.
87. No dividends shall bear interest as against the Company.
88. Any one of the joint holders of a share may give a valid receipt to the
Company, for dividends paid thereon.
18
<PAGE> 22
ACCOUNTS
89. The books of account shall be kept at the registered office of the
Company, or at such other place or places as the directors think fit.
90. The directors may be required by a resolution of members to cause to be
made out and lay before the Company in a meeting of members at some
date not later than eighteen months after incorporation of the Company
and subsequently once at least every calendar year a profit and loss
account for a period in the case of the first account since
incorporation of the Company and in any other case, since the preceding
account, made to a date not earlier than the date of the meeting by
more than twelve months, and a balance sheet as at the date to which
the profit or loss of the Company for that financial period, and a true
and fair view of the state of the affairs of the Company as at the end
of that fiscal period.
91. If so required by the members, a copy of such profit and loss account
and balance sheet shall be served on every member in the manner to that
prescribed herein for calling a meeting.
AUDIT
92. The directors may call for the accounts to be examined by an auditor or
auditors and shall do so if required by a resolution of members.
93. The auditors shall be appointed by the directors, unless otherwise
appointed by a resolution of members.
94. The auditors may be shareholders of the Company but no director or
other officer shall be eligible to be an auditor of the Company during
his continuance in office.
95. The remuneration of the auditors of the Company:-
(a) in the case of auditors appointed by the directors, may be
fixed by the directors,
(b) subject to the foregoing, shall be fixed by the company by a
resolution of members.
96. The auditors shall examine each profit and loss account and balance
sheet required to be laid before the Company in accordance with
Regulation 90 and shall state in a written report whether or not:-
(a) in their opinion the profit and loss account and balance sheet
give a true and fair view respectively of the profit and loss
for the period covered by the accounts, and of the state of
affairs of the Company at the end of that period;
19
<PAGE> 23
(b) all the information and explanations required by the auditors
have been obtained.
97. The report of the auditors shall be annexed to the accounts and shall
be read at the meeting, if any, at which the accounts are laid before
the Company.
98. Every auditor of the company shall have a right of access at all times
to the books of account and vouchers of the Company, and shall be
entitled to require from the officers of the Company such information
and explanations as he thinks necessary for the performance of the
duties of the auditors.
99. The auditors of the Company shall be entitled to receive notice of, and
to attend any meeting of members of the Company at which the Company's
profit and loss account and balance sheet are to be presented in
accordance with Regulation 90.
CAPITALISATION OF PROFITS AND BONUS SHARES
100. The directors may resolve that it is desirable to capitalise any part
of the amount for the time being standing to the credit of the
Company's surplus account or otherwise available for distribution as a
dividend and accordingly that such sum be set free for distribution
amongst the members who would have been entitled thereto if distributed
by way of dividend and in the same proportions on condition that the
same be not paid in cash but applied either in or towards paying up in
full unissued shares or debentures of the Company to be allotted and
distributed credited as fully paid to and amongst such members.
101. A share allotted in accordance with Regulation 100 hereof shall be
treated for all purposes as having been issued for money equal to the
surplus that is transferred to capital upon the issue of the share.
102. In the case of an allotment of authorised but unissued shares with par
value, an amount equal to the aggregate par value of the shares shall
be transferred from surplus to capital at the time of the allotment.
103. In the case of an allotment of authorised but unissued shares without
par value, the amount designated by the directors shall be transferred
from surplus to capital at the time of the allotment, except that the
Company by resolution of directors must designate as capital an amount
that is at least equal to the amount that the shares are entitled to as
preference if any in the assets of the Company upon liquidation of the
Company.
104. The allotment of bonus shares shall for the purposes of the Act be
treated as a dividend of shares.
20
<PAGE> 24
105. The directors shall make all appropriations and applications of the
surplus thereby resolved to be capitalised and all allotments and
issues of fully-paid shares or debentures if any, and generally shall
do all acts and thinks required to give effect thereto, with full power
to the directors to ignore fractions altogether or to determine that
payment be made in cash or otherwise as they think fit in the case of
shares or debentures becoming distributable in fractions, and also to
authorise any person to enter on behalf of all the members entitled
thereto into an agreement with the Company providing for the allotment
to them respectively, credited as fully paid, of any further shares or
debentures to which they may be entitled upon such capitalisation, and
any agreement made under such authority shall be effective and binding
on all such shareholders. The directors may appoint any person to sign
on behalf of the person entitled to participate in the distribution any
contract necessary or desirable for giving effect thereto and such
appointment shall be effective and binding upon the shareholders.
NOTICES
106. A notice may be served by the Company upon any registered nominative
shareholder either personally or by posting it by airmail service in a
prepaid letter addressed to him at his address as shown in the share
register or by cable or by telex should the directors think it
appropriate and in the case of the holders of shares issued to bearer
notice may be served by the Company in the manner prescribed by the
Memorandum.
107. All notices directed to be given to the shareholders shall, with
respect to any share to which persons are jointly entitled, be given to
whichever of such persons is named first in the Register of
Shareholders, and notice so given shall be sufficient notice to all the
holders of such share.
108. Any notice, if served post, shall be deemed to have been served within
ten days of posting and in proving such service, it shall be sufficient
to prove that the letter containing the notice was properly addressed
and put into the Post Office. Notices by cable or by telex shall be
deemed to have been served 24 hours after despatch.
109. Notice may be served on the Company by posting it by prepaid service
addressed to the Company at its Registered Office or to its Registered
Agent.
21
<PAGE> 25
PENSION AND SUPERANNUATION FUNDS
110. The directors may establish and maintain or procure the establishment
and maintenance of any non-contributory or contributory pension or
superannuation funds for the benefit of, and give or procure the giving
of donations, gratuities pensions, allowances or emoluments to any
persons who are or were at any time in the employment or service of the
Company or any Company which is a subsidiary of the Company or is
allied to or associated with the Company or with any such subsidiary or
who are or were at any time directors or officers of the Company or of
any such other Company as aforesaid or who hold or held any salaried
employment or office in the Company or such other Company, or any
persons in whose welfare the Company or any such other company as
aforesaid is or has been at any time interested, and to the wives,
widows, families and dependants of any such person, and may make
payments for or towards the insurance of any such persons as aforesaid,
and may do any of the matters aforesaid either alone or in conjunction
with any such other company as aforesaid. Subject always if the Act
shall so require to particulars with respect thereto being disclosed to
the shareholders, and to the proposals being approved by the company by
resolution of members, a director holding any such employment or office
shall be entitled to participate in and retain for his own benefit any
such donation, gratuity, pension, allowance or emolument.
WINDING UP
111. The Company may commence winding up and dissolve by resolution of
members save that if the Company has never issued shares, by resolution
of directors. The Company and its liquidator shall wind up the affairs
of the Company pursuant to the provisions of the Act.
ARBITRATION
112. Whenever any differences arise between the Company on the one hand and
any of the shareholders, their executors, administrators or assigns on
the other hand touching the true intent and construction or the
incidence or consequences of these presents or of the Act, touching
anything then or thereafter done or executed, omitted or suffered in
pursuance of the Act or touching any breach or alleged breach or
otherwise relating to the premises or to these presents or to any Act
affecting the Company or to any of the affairs of the Company, such
difference shall unless the parties agree to refer the same to a single
arbitrator be referred to two arbitrators shall before entering on the
reference appoint an umpire.
22
<PAGE> 26
113. If either party to the reference makes default in appointing an
arbitrator either originally or by way of substitution (in the event
that an appointed arbitrator shall dies, be incapable of acting or
refuse to act) for ten days after the other party has given him notice
to appoint the same, such other party may appoint an arbitrator to act
in the place of the arbitrator of the defaulting party.
AMENDMENT TO ARTICLES
114. The Company may by resolution of directors or by resolution of members
alter or modify these Regulations as originally drafted or as amended
from time to time.
UNDER FOREIGN LAW
115. The Company may by a resolution of directors or a resolution of members
continue as a company incorporated under the laws of another
jurisdiction which may permit such continuation and in the manner
provided by those laws and may by a resolution of directors or of
members amend its Memorandum and Articles to be consistent therewith.
23
<PAGE> 27
We, Tortola Corporation Company Limited of P.O. Box 662, Citco Building,
Wickhams Cay, Road Town, Tortola for the purposes of incorporating an
International Business Company under the Laws of the British Virgin Islands
hereby subscribe our name to these Articles of Association in the presence of:-
Witness
(Sgd.) J. Caminada
Tortola Corporation Company Limited
Subscriber
Daphne Wattley
Road Town, Tortola
British Virgin Islands
(Sgd.) D. Wattley
24
<PAGE> 1
EXHIBIT 2.2
DATED 1998
----
ALBATRONICS (FAR EAST) COMPANY LIMITED (1)
NAM TAI ELECTRONICS, INC. (2)
AND
THE PERSONS WHOSE NAMES ARE LISTED IN SCHEDULE 1 (3)
--------------------------------------------
SUBSCRIPTION AGREEMENT RELATING TO SHARES OF
ALBATRONICS (FAR EAST) COMPANY LIMITED
--------------------------------------------
J O H N S O N
S T O K E S &
M A S T E R
in association with Norton Rose
Solicitors & Notaries
17th Floor, Prince's Building
10 Chater Road
Hong Kong
(PJS-Ewin-771150/1-Nam Tai-Subscription Agt)
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
Clause Page
- ------ ----
<S> <C>
1. Interpretation..........................................................................1
2. Conditions..............................................................................4
3. Subscription............................................................................5
4. Completion..............................................................................6
5. The Press Announcement..................................................................7
6. Warranties..............................................................................7
7. NT's Rights.............................................................................11
8. Period between Exchange and Completion..................................................11
9. Costs and Expenses......................................................................12
10. Time of the Essence.....................................................................12
11. Announcements...........................................................................12
12. Notices.................................................................................12
13. Governing Law...........................................................................14
Execution........................................................................................14
Schedule 1 - Names and Addresses of Warrantors...................................................16
Schedule 2 - Details of the Company..............................................................17
Schedule 3 - Warranties..........................................................................19
</TABLE>
<PAGE> 3
THIS AGREEMENT is made on , 1998 BETWEEN:
(1) ALBATRONICS (FAR EAST) COMPANY LIMITED a company incorporated in Hong
Kong with limited liability and having its registered office at Unit
No.4, 5th Floor, Block A, Po Lung Centre, No.11 Wang Chiu Road, Kowloon
Bay, Hong Kong (the "Company");
(2) NAM TAI ELECTRONICS, INC. a company incorporated in the British Virgin
Islands with limited liability and having its registered office at McW.
Todman & Co., McNamara Chambers, P.O. Box 3342, Road Town, Tortola, the
British Virgin Islands ("NT"); and
(3) The parties whose names and addresses are set out in Schedule 1 (the
"Warrantors").
WHEREAS:
(A) The Company was incorporated with limited liability under the Companies
Ordinance (Cap.32 of the laws of Hong Kong). Full details of the
Company are set out in Schedule 2.
(B) The Company has at the date of this Agreement an authorised share
capital of HK$30,000,000 divided into 300,000,000 Shares of which
200,000,000 Shares have been issued and are fully paid.
(C) All of the issued Shares are currently listed on the Stock Exchange.
(D) NT and the Company have agreed that the Company will issue and NT
(either directly or through up to two of its wholly-owned subsidiaries)
shall subscribe for the New Shares on and subject to the terms and
conditions hereinafter appearing.
NOW IT IS HEREBY AGREED as follows:
1. INTERPRETATION
1.01 In this Agreement (including the Recitals hereof) unless specifically
provided otherwise or the context otherwise requires:
(a) the following expressions shall have the following meanings:
"Accounts" means the audited consolidated balance sheet of the
Company as at 31st March 1998, the audited consolidated profit
and loss account of the Company for the year ended 31st March
1998 and the consolidated cash flow statement of the Company
for the year ended 31st March 1998;
"business day" means a day, excluding a Saturday, when
commercial banks are generally open for business in Hong Kong
SAR;
<PAGE> 4
"Code" means the Code on Takeovers and Mergers;
"Conditions" means the conditions set out in Clause 2.01;
"Completion" means completion of the allotment and issue of
the New Shares in accordance with Clause 4 under this
Agreement;
"Circular" means the circular to shareholders of the Company
in relation to, inter alia, the Subscription and the Placing;
"Disclosure Letter" means the letter of even date from the
Warrantors to NT handed over by the Company to NT immediately
prior to entry into this Agreement containing disclosures
against the Warranties;
"Executive" means the Executive Director of the Corporate
Finance Division of the SFC or any delegate of the Executive
Director (in each case acting in the capacity of "Executive"
under the Code);
"Group" means the Company and its subsidiaries;
"Hong Kong SAR" means the Hong Kong Special Administrative
Region of the PRC;
"HK$" means the local currency of Hong Kong SAR;
"Listing Rules" means the Rules Governing the Listing of
Securities on the Stock Exchange;
"Management Accounts" means the unaudited management accounts
of the Group for the financial period ended 31st July, 1998
and initialled by the Company and NT for identification
purpose;
"New Shares" means the 200,002,000 new Shares to be allotted
and issued to the Subscriber(s) pursuant to the terms of this
Agreement;
"PRC" means People's Republic of China;
"Placing" means the placing of the Placing Shares by the
Company on the terms set out in the Placing Agreement;
"Placing Agreement" means the agreement of even date between,
inter alia, the Company, the Warrantors and Standard Capital
Brokerage Limited;
"Placing Shares" means the 43,306,000 Shares to be placed
pursuant to the Placing;
<PAGE> 5
"Press Announcement" means the press announcement pertaining
to the Subscription and the Placing and to be released jointly
by the Company and NT, in the agreed form;
"SFC" means the Securities and Futures Commission;
"Share(s)" means share(s) of HK$0.10 each in the capital of
the Company;
"Stock Exchange" means The Stock Exchange of Hong Kong
Limited;
"Subscriber(s)" means NT and/or such one or more wholly-owned
subsidiaries of NT as NT shall nominate to subscribe for the
New Shares by notice in writing given to the Company at least
3 business days prior to the date of Completion (if more than
one such wholly-owned subsidiary shall be nominated, each such
subsidiary shall be a "Subscriber" and all such subsidiaries
(together with NT, if relevant) shall together be the
"Subscribers");
"Subscription" means the subscription of the New Shares by the
Subscriber(s) under this Agreement;
"Taxation" means all forms of tax, duty, rate, levy or other
imposition whenever and by whatever authority imposed and
whether of the PRC (including Hong Kong SAR), Japan or
elsewhere, including (without limitation) profits and income
tax (whether required to be deducted or withheld from or
accounted for in respect of any payment) salaries tax,
property tax, estate duty, capital gains tax including PRC
Capital Gains Tax), capital transfer tax, development land
tax, value added tax, customs duties, excise duties, rates,
stamp duty, capital duty and any other taxes, levies, duties,
charges, imposts or withholdings corresponding to, similar to,
replaced by or replacing any of them together with any
interest, penalty or fine in connection with any such taxation
and regardless of whether any such taxes, levies, duties,
imposts, charges, withholdings, penalties or interest are
chargeable directly or primarily against or attributable
directly or primarily to the company concerned or any other
person and of whether any amount in respect of any of them is
recoverable from any other person (and including any liability
in relation to failure to meet any withholding tax obligation
for any third party's PRC Capital Gains Tax liability); and
3. "Warranties" means the representations and warranties contained in
Schedule 3.
1.02 References to clauses and schedules are to the clauses of and schedules
to this Agreement.
1.03 In this Agreement, unless the context requires otherwise:-
<PAGE> 6
(a) the index and clause and schedule headings are inserted for
convenience only and do not affect its interpretation;
(b) the schedules form part of this Agreement and have the same
force and effect as if expressly set out in the body of this
Agreement and any reference to this Agreement shall include
the schedules;
(c) words in the singular include the plural, and vice versa;
(d) a reference to a person includes a reference to a firm, a body
corporate, an unincorporated association or authority;
(e) a reference to a person includes a reference to his executors,
administrators, successors (including, but not limited to,
persons taking by novation) and assigns;
(f) a reference to a document in an agreed form means a form
initialled by or on behalf of the parties simultaneously with
the execution of this Agreement; and
(g) a reference to a balance sheet or profit and loss account or
cash flow statement includes a reference to any note forming
part of or attached to it.
1.04 Where any of the Warranties is qualified by the expression "to the best
of the knowledge, information and belief of the Warrantors" or any
similar expression, that Warranty is deemed to include an additional
representation that it has been made after due, diligent and careful
inquiry and that each of the Warrantors has used all his reasonable
endeavours to ensure that all information given in the Warranty is
true, complete and accurate in all material respects.
2. CONDITIONS
2.01 Completion of this Agreement is conditional upon on or before 30th
November 1998 (or such later date as may be agreed in writing between
the parties):
(a) the Listing Committee of the Stock Exchange granting listing
of and permission to deal in the New Shares (subject only to
issue);
(b) the authorised share capital of the Company being increased
from HK$30,000,000 to HK$100,000,000 by the addition of
700,000,000 new Shares;
(c) the passing of an ordinary resolution (on a poll) by an
independent vote (as defined in Note 1 of Notes on
dispensation from Rule 26 of the Code) of the shareholders at
an extraordinary general meeting of the Company, authorising
the allotment and issue of the New Shares and approving the
"white-wash waiver" referred to in Clause 2.01(d) below;
<PAGE> 7
(d) following a vote of the independent shareholders at an
extraordinary general meeting of the Company referred to in
Clause 2.01(c) above, the Executive granting a "white-wash
waiver" waiving any obligation on the part of NT and parties
acting in concert with it to make a general offer under Rule
26 of the Code as a result of the Subscription;
(e) the Placing Agreement becoming unconditional save in relation
to any matter which is conditional or contingent upon
Completion;
(f) the Shares remaining listed and traded on the Stock Exchange
on the day immediately before the date of Completion;
(g) no notification being received by the Company prior to the
date of Completion from the Stock Exchange or the SFC to the
effect that the listing of the Shares on the Stock Exchange
will or is likely to be withdrawn as a result of completion of
the Subscription and/or of the Placing Agreement and NT being
reasonably satisfied on the date immediately prior to the date
of Completion that such listing will not be withdrawn for any
reason including (without limiting the generality of the
foregoing) by reason of an inadequate percentage of the
Company's issued share capital being in public hands as a
result of completion of the Subscription and/or of the Placing
Agreement;
(h) confirmation in terms reasonably satisfactory to NT being
obtained from the banking and financial institutions to whom
more than 50% of the Group's indebtedness outstanding as at
the date of this Agreement that they will continue after
Completion to extend banking facilities to the Group and will
not seek to terminate such facilities or demand immediate
repayment of any such facilities before or immediately after
Completion;
(i) confirmation in terms reasonably satisfactory to NT being
obtained from Sony Electronics Device Hong Kong Company
Limited that Completion will not materially adversely affect
its continuing business relationship with the Group
and if such conditions have not been fulfilled or in the case of
conditions (d), (f), (g), (h) and (i) waived by NT then this Agreement
and all rights and obligations hereunder will cease and terminate and
no party shall have any liability under them (without prejudice to the
rights of any such parties in respect of any antecedent breaches).
2.02 The Company and NT shall use their respective reasonable endeavours to
procure that the Conditions are satisfied not later than the date
specified in sub-clause 2.01 and no party is entitled to withdraw from
this Agreement before the date unless the Conditions have become
incapable of fulfillment.
3. SUBSCRIPTION
<PAGE> 8
3.01 NT shall subscribe (or procure up to 2 of its wholly-owned subsidiaries
which have been duly nominated to be the Subscriber(s) by notice in
writing given to the Company at least 3 business days prior to the date
of Completion) and the Company shall allot and issue such New Shares
fully paid and free from all liens, charges, security interests,
encumbrances and adverse claims and the New Shares shall rank pari
passu in all respects with the Shares in issue at the date hereof
including ranking for payment of any dividend declared after the date
hereof.
3.02 The subscription price of each of the New Shares shall be HK$0.35 per
Share aggregating HK$70,000,700.
4. COMPLETION
4.01 Completion shall take place at 10/F., Hutchison House, 10 Harcourt
Road, Central, Hong Kong at 12:00 noon on the second Business Day after
the Conditions shall have become fulfilled (save as regards fulfillment
or waiver of conditions (f) and (g) and provided all the other
Conditions have been fulfilled or waived by then) and is subject to
completion of the Placing taking place simultaneously with Completion.
4.02 At Completion, in addition to the events set out in Clause 4.03 below,
the Company shall procure that a board meeting of the Company shall be
held at which such number of persons nominated by NT by notice in
writing given to the Company at least 2 business days prior to the date
of Completion as will comprise a majority on the board of the Company
shall be appointed as directors of the Company with effect from
Completion.
4.03 At Completion:-
(a) NT will pay to the Company, or procure the payment to the
Company of the sum of HK$70,000,700 such payment to be made by
banker's cashier order or by RTGS (real time gross settlement)
or via CHATS (Clearing House Automated Transfer System
operated for the time being by Hong Kong Interbank Clearing
Limited) (or in such form as may be agreed between the
parties);
(b) NT will deliver to the Company a duly executed written
application by the Subscriber(s) to subscribe for the New
Shares in a form reasonably satisfactory to the Company;
(c) NT will deliver to the Company a certified copy of resolutions
of the board of directors of NT (in a form reasonably
satisfactory to the Company) of its authority for the
execution and performance of this Agreement; and
(d) the Company will deliver to NT :-
(i) a certified copy of resolutions of the board of
directors of the Company (or a duly authorised
committee thereof) duly approving the allotment
<PAGE> 9
and issue of the New Shares (subject to payment of
the subscription moneys in accordance with Clause
4.03 (a)) and appointing as directors of the Company
the persons nominated by NT as referred to in Clause
4.02;
(ii) evidence reasonably satisfactory to NT that
conditions set out in sub-clause 2.01(a), (b), (c),
(d), (e) , (h) and (i) have been fulfilled (unless if
relevant waived by NT); and
(iii) a share certificate or certificates for the New
Shares in the name(s) of the Subscriber(s).
5. THE PRESS ANNOUNCEMENT
The parties hereby authorise the release for publication of the Press
Announcement subject to Clause 11 and each of the Stock Exchange and
the SFC confirming that it has no further comments thereon, immediately
following signing by all the parties this Agreement.
6. WARRANTIES
6.01 The Warrantors jointly and severally represent and warrant to NT in the
terms set out in Schedule 3 and accept that NT is entering into this
Agreement in reliance upon the terms of the Warranties.
6.02 Each Warranty:
(a) shall be construed as a separate Warranty and (save as
expressly provided to the contrary) shall not be limited or
restricted by reference to or inference from the terms of any
other Warranty or any other terms of this Agreement; and
(b) shall be given subject to the matters fairly disclosed in the
Disclosure Letter, and this Clause 6 and shall be deemed to be
repeated as at Completion with reference to the facts and
circumstances then existing.
6.03 The Warrantors undertake that:
(a) they will from time to time, forthwith disclose in writing to
NT any event, fact or circumstance which may become known to
any of them after the date hereof and which is materially
inconsistent with any of the Warranty or which could
reasonably be expected materially to affect a subscriber for
value of any of the New Shares or which may entitle NT to make
any claim under this Agreement; and
<PAGE> 10
(b) they will not, and will procure that no company in the Group
will, do or omit to do anything which may cause any of the
Warranties to be untrue at any time prior to or on Completion.
6.04 The rights and remedies of NT in respect of a breach of any of the
Warranties shall not be affected by Completion, by any investigation
made by or on behalf of NT into the affairs of any member the Group, by
the giving of any time or other indulgence by the NT to any person, by
the NT rescinding or not rescinding this Agreement, or by any other
cause whatsoever except a specific waiver or release by the NT in
writing; and any such waiver or release shall not prejudice or affect
any remaining rights or remedies of the NT.
6.05 NT acknowledges to and agrees with each of the Warrantors that:-
(a) the Warranties are the only representations, warranties or
other assurances of any kind given by or on behalf of the
Warrantors or any of them and on which NT may rely in entering
into and performing this Agreement;
(b) no other representation, warranty, statement, promise,
forecast or projection made by or on behalf of the Warrantors
or any of them may be relied on or form the basis of, or be
pleaded in connection with, any claim by NT under or in
connection with this Agreement;
(c) any claim by NT in connection with the Warranties (a "Warranty
Claim") shall be subject to the following provisions of this
Clause 6; and
(d) at the time of entering into this Agreement, various pieces of
information have been provided to NT pursuant to the
information request dated 10th September, 1998 prepared by
Johnson Stokes & Master which information has not been
reviewed by NT or by its advisers. Subject to the contents of
such information, NT is not aware of any matter or thing which
is not disclosed or mentioned in the Disclosure Letter or in
this Agreement or the Press Announcement and which is
inconsistent with the Warranties or constitutes a breach of
any of them.
6.06 NT shall not be entitled to make any Warranty Claim:-
(a) in respect of any fact which has been fully, fairly and
specifically disclosed to NT in the Disclosure Letter or would
have been disclosed by a search made before the date of this
Agreement at the Hong Kong Companies Registry or any other
public office or registry in Hong Kong;
(b) if NT knew prior to entry into this Agreement that the
Warranty in question was untrue, misleading or had been
breached;
(c) to the extent that provision, reserve or allowance for the
matter or liability which would otherwise give rise to the
claim in question has been made in
<PAGE> 11
the Accounts or the Management Accounts or is otherwise taken
account of in the Accounts or the Management Accounts;
(d) if the Warranty Claim would not have arisen but for a change
in legislation announced or enacted after the date of its
Agreement (whether relating to taxation, rates of taxation or
otherwise) whether or not the change purports to be effective
retrospectively in whole or in part;
(e) to the extent that the Warranty Claim arises as a result of
any change after Completion in the accounting bases on which
the Company values its assets; or
(f) to the extent occasioned by any act or omission of NT after
Completion;
and to the extent that any Warranty Claim is increased as a result of
any of the matters set out in this Clause 6.06, the Warrantors shall
not be liable in respect of any amount by which such Warranty Claim is
so increased.
6.07 The Warrantors shall have no liability for breach of any Warranty which
may have an effect on the consolidated net asset value of the Company
unless
(a) as a result of the breach of one or more of the Warranties the
consolidated shareholders funds (i.e. the consolidated net
assets) of the Company as at 31st July 1998 is reduced (as a
result of a breach of any of the Warranties) by more than
HK$250,000,000; or
(b) the claim relates to the period after 31st July 1998 but
before Completion, when no claim will be made unless all such
claims relating to such period aggregate at least HK$500,000.
6.08 Any liability of the Warrantors under or in respect of the Warranties
shall be reduced by an amount equal to:
(a) the value or additional value of any fixed assets held by the
Company at Completion which are not included in the Accounts
or the Management Accounts;
(b) the amount of or by which any Taxation for which the Company
is or would otherwise be accountable is reduced or
extinguished as a result of a Warranty Claim giving rise to
such liability of the Warrantors;
(c) the amount by which any provision, reserve or allowance for
Taxation (not being a provision, reserve or allowance for
deferred Taxation), bad or doubtful debts or contingent or
other liabilities in the Accounts proves after Completion to
have been excessive, save by reason of a reduction in rates of
Taxation; and
<PAGE> 12
(d) the amount of any credits, recoveries or other benefits which
have been or will be received or obtained by the Company
because of or arising from any transaction, matter or thing
giving rise to such liability of the Warrantors.
6.09 If NT becomes aware of a matter or thing which could give rise to a
Warranty Claim, NT will use all reasonable endeavours to the Warrantors
as soon as reasonably practicable after NT becoming aware of those
facts if the Warranty Claim in question is as a result of or in
connection with a liability and NT shall procure that the Company makes
available to the Warrantors at the cost of the Warrantors) all such
information as the Warrantors may reasonably require for the purpose of
avoiding, contesting, disputing, resisting, appealing or comprising any
such liability.
6.10 The Warrantors shall cease to have any liability under or in respect of
the Warranties on the first anniversary of the Completion Date save in
respect of a Warranty Claim of which NT gives notice to the Warrantors
before such anniversary.
6.11 Nothing in this Agreement shall (or shall be construed to) release NT
from its duty to mitigate its loss in respect of any breach of the
Warranties.
6.12 If NT receives from the Warrantors an amount pursuant to any claim in
respect of a breach of any of the Warranties and NT subsequently
recovers from a third party a sum which is referable directly to such a
claim, NT shall forthwith pay to the Warrantors the sum it has
recovered from the third party to the extent that the aggregate of the
sum received from the Warrantors and the sum received from the third
party exceeds the aggregate of (i) the amount of the loss suffered by
NT with respect to such claim and (ii) any costs and expenses incurred
by NT in obtaining such sum from the third party.
6.13 The provisions of this Clause 6 shall have effect notwithstanding any
other provision of this Agreement.
6.14 NT hereby represents and warrants that:-
(a) as at the date of this Agreement and at the Completion Date,
NT is and shall remain an independent third party not
connected with the Company or any of the directors, chief
executives or substantial shareholders of the Company or any
of its subsidiaries or their respective associates (as defined
in the Listing Rules). NT hereby agrees and acknowledges that
the Company is entering into the Agreement in reliance upon
the representation and warranty made by it under this Clause
6.14; and
(b) neither NT nor any person acting in concert (as defined in the
Code) with it has acquired voting rights (as defined in the
Code) in the Company in the 6 months prior to the date hereof.
<PAGE> 13
7. NT'S RIGHTS
7.01 If before Completion (i) NT becomes aware that any of the Warranties
was at the date of this Agreement, or has since become, untrue or
misleading in any material respect or that the Warrantors are in breach
of any term of this Agreement in any material respect; or (ii) that the
Placing Agreement has been amended or any term of the Placing Agreement
waived without the prior written consent of NT; NT shall be entitled to
rescind this Agreement without liability to the Company or the
Warrantors.
7.02 Subject to the provisions of Clause 7.01, the rights, including rights
of rescission, conferred on NT by this Agreement are in addition and
without prejudice to all other rights and remedies available to NT; and
no exercise or failure to exercise a right under this Agreement or
otherwise or to invoke a remedy shall constitute a waiver of that right
or remedy by NT.
8. PERIOD BETWEEN EXCHANGE AND COMPLETION
8.01 The Warrantors undertake, unless and until this Agreement lapses or
unless specifically contemplated by this Agreement, that until
Completion that they will use their respective reasonable endeavours
(where a Warrantor is a director of the Company, subject to his
fiduciary duties) to procure that except with the prior written
approval of NT, which approval shall not be unreasonably withheld or
delayed:-
(a) the business of the Group will be carried on in the ordinary
and normal course and that no amendment will be made to the
Company's constitutional documents;
(b) no alteration will be made to the Company's authorised and
issued share capital and no options or rights shall be granted
in respect of the same under the Company's executive share
option scheme or otherwise;
(c) no member of the Group will enter into any service agreement
with any director of a member of the Group and no amendment
will be made to any such existing agreement;
(d) no dividend, distribution or bonus will be declared, paid or
made in respect of the profits or capital of the Company or
any of its non-wholly owned subsidiaries;
(e) other than in the ordinary course of business, no disposal of
the business or any property or assets of any member of the
Group of a value in excess of HK$500,000 or its equivalent
will be made to any person or third party and no interest in a
mortgage or charge thereon to secure obligations in aggregate
exceeding HK$500,000 or its equivalent will be made or
effected;
(f) save for any expenses incurred by the Company in connection
with this Agreement, the Placing Agreement and related
transactions, no material
<PAGE> 14
liability (including contingent liability) will be assumed or
incurred by a member of the Group and no contract of an
onerous or long term nature will be entered into by a member
of the Group; and
(g) such meetings of the directors or members of the Company as
may be necessary to pass such resolutions as may be required
to enable this Agreement to become unconditional will be
convened.
8.02 The Warrantors shall procure that as from the date of this Agreement NT
and any persons authorised by it shall be given reasonable access to
the officers, employees, premises, plant, machinery, books of account,
records and documents of all members of the Group and the Warrantors
shall use all reasonable endeavours to procure that the officers and
employees of the Group shall give promptly to NT and any persons
authorised by it all information in relation to the Group that NT may
reasonably request after giving reasonable notice therefor.
9. COSTS AND EXPENSES
Each of the parties to this Agreement will bear its or his own costs
and expenses incurred in relation to the preparation of this Agreement
and the Subscription except that the Company shall bear all capital
duty in relation to the allotment and issue of the New Shares and the
reasonable costs of obtaining the confirmation from the SFC referred to
in Clause 2.01(d).
10. TIME OF THE ESSENCE
Time will be of the essence of this Agreement.
11. ANNOUNCEMENTS
Save as otherwise required by the Stock Exchange or the SFC, none of
the parties shall make any public announcement or communication other
than the Press Announcement and the Circular in relation to the
Subscription without the prior written approval of the other parties to
this Agreement.
12. NOTICES
12.01 A notice, approval, consent or other communication in connection with
this Agreement:
(a) must be in writing;
<PAGE> 15
(b) in the case of NT, must be marked for the attention of Mr.
Tadao Murakami and in the case of the Company, must be marked
for the attention of Mr. Nakahara Fukumori;
(c) must be left at the address of the addressee, or sent by
prepaid ordinary post (airmail if posted to or from a place
outside Hong Kong) to the address of the addressee or sent by
facsimile to the facsimile number of the addressee which is
specified in this clause or if the addressee notifies another
address or facsimile number in Hong Kong then to that address
or facsimile number.
The facsimile number of each party is:
Company
Facsimile: 2750 4362
NT
Facsimile: 2341 4164
Warrantors
Facsimile: 2750 4362
12.02 A notice, approval, consent or other communication shall take effect
from the time it is received (or, if earlier, the time it is deemed to
be received in accordance with sub-clause 12.03) unless a later time is
specified in it.
12.03 Subject to sub-clause 12.04 below, a notice is deemed to be received:
(a) in the case where it is left at the address of the addressee,
upon delivery at that address;
(b) in the case of a posted letter, on the first business day
after posting of, if posted to or from a place outside Hong
Kong, the third business day after posting;
(c) in the case of facsimile, on production of a transmission
report from the machine from which the facsimile was sent
which indicates that the facsimile was sent in its entirety to
the facsimile number of the recipient provided that a
confirmatory copy of such facsimile shall have been sent by
post or by hand in accordance with the above provisions within
24 hours of such transmission.
12.4 A notice received or deemed to be received in accordance with
sub-clause 12.3 above on a day which is not a business day or after 5
p.m. on any business day, shall be deemed to be received on the next
following Business Day.
<PAGE> 16
12.7 Each party undertakes to notify all of the other parties by notice
served in accordance with this clause if the address specified herein
is no longer an appropriate address for the service of notice.
13. GOVERNING LAW
13.01 This Agreement shall be governed by and construed in accordance with
the law of the Hong Kong. The parties hereto hereby submits to the
non-exclusive jurisdiction of the Courts of Hong Kong.
13.02 NT hereby appoints Nam Tai Electronic & Electrical Products Limited
whose registered office is at Unit 9, 15/F., Tower 1, China Hong Kong
City, 33 Canton Road, Tsimshatsui, Kowloon, Hong Kong as its process
agent to accept service of process in the HK SAR.
13.03 If at any time any provision of this Agreement is or becomes illegal,
invalid or unenforceable in any respect, the legality, validity and
enforceability of the remaining provisions of this Agreement shall not
be affected or impaired thereby, unless the primary purpose of the
Agreement shall be frustrated thereby.
13.04 This Agreement constitutes the whole agreement between the parties
hereto and supersede all previous agreements between the parties
relating to these transactions and it is expressly declared that no
variations hereof shall be effective unless made in writing and signed
by all the parties hereto.
13.05 Each of the parties hereto shall do and execute or procure to be done
and executed all such further acts, deeds, things and documents as may
be necessary or desirable to give effect to the terms of this
Agreement.
13.06 This Agreement may be executed in one or more counterparts, each of
which shall be binding on each party by whom or on whose behalf it is
so executed, but which together shall constitute a single instrument.
13.07 NT undertakes that it will not acquire voting rights (as defined in the
Code), save for the New Shares, in the Company for the period
commencing from the date hereof and ending on the date of the
shareholders' meeting of the Company where the resolutions referred to
in Clause 2.01(c) are passed (both dates inclusive).
IN WITNESS whereof this Agreement has been entered into the day and year first
above written.
SIGNED by )
)
)
)
<PAGE> 17
duly authorised for and on behalf )
of ALBATRONICS (FAR EAST) )
COMPANY LIMITED )
SIGNED by )
)
)
)
duly authorised for and on behalf )
of NAM TAI ELECTRONICS, )
INC. )
SIGNED by )
NAKAHARA FUKUMORI )
in the presence of : )
SIGNED by )
WAKAKI KAIZO )
in the presence of: )
<PAGE> 18
Schedule 1
Names and addresses of Warrantors
(i) The Company whose registered office is at Unit No.4, 5th Floor, Block
A, Po Lung Centre, No.11 Wang Chiu Road, Kowloon Bay, Kowloon, Hong
Kong.
(ii) NAME ADDRESS
NAKAHARA Fukumori 16C Emperor Height
5 Cox's Road
Tsimshatsui
Kowloon
Hong Kong
WAKAKI Kaizo Room 45, 22/F
Tower 6, Hong Kong Parkview
88 Tai Tam Reservoir Road
Hong Kong
<PAGE> 19
Schedule 2
Details of the Company
1. Name: Albatronics (Far East) Company Limited
2. Place of Incorporation: Hong Kong
3. Authorised Share capital: HK$30,000,000 divided into 300,000,000 shares
of HK$0.10 each
Name Address
---- -------
4. Directors:
NAKAHARA Fukumori 16C Emperor Height
5 Cox's Road
Tsimshatsui
Kowloon
Hong Kong
WAKAKI Kaizo Room 45, 22/F
Tower 6, Hong Kong Parkview
88 Tai Tam Reservoir Road
Hong Kong
YASUKAWA Yoshihiro Flat A, 14/F., Block 5
Cavendish Heights
33 Perkins Road
Hong Kong
MAH Hoon Hai 7/F., Flat A, Block 10
Pacific Palisades
1 Braemar Hill Road
Hong Kong
OGURA Keiichi 7/F., Flat C, Block 11, Site 10
Whampoa Garden
Hung Hom
Kowloon
Hong Kong
NON-EXECUTIVE DIRECTOR
LAI Wing Leung 17th Floor, Flat B
Albron Court
99 Caine Road
Hong Kong
<PAGE> 20
INDEPENDENT NON-EXECUTIVE DIRECTORS
CHAN Ching Cheung, Edward Flat D, 27th Floor, Block 4
City Garden
231-233 Electric Road
North Point
Hong Kong
LUI Tat Ming Room 8, 26/F., Block D
Shan Tsui Court
200 Tai Tam Road
Chai Wan
Hong Kong
5. Secretary: Keith Hung Kwok Keung
6. Auditors: Deloitte Touche Tohmatsu
7. Financial year end date: 31st March
<PAGE> 21
Schedule 3
Warranties
The Warrantors hereby jointly and severally warrant and represent to NT that:-
1. All information contained in the recitals to and in Schedule 2 of this
Agreement is correct and to the best of the knowledge, information and
belief of the Warrantors all information relating to the Group which is
known to any of the Warrantors and which would be material to a
subscriber for value of the New Shares (in particular information
relating to any material contract or commitment of an unusual or
onerous nature) has been fully and fairly disclosed to NT and all
information provided to NT pursuant to the information request dated
10th September, 1998 prepared by Johnson Stokes & Master is complete
and accurate in all respects;
2. There is no option, warrant, right to subscribe on, over or affecting
any shares or debenture or registered capital or securities of any
member of the Group and no agreement or commitment is outstanding which
calls for the allotment or issue of any shares or debentures in any
member of the Group;
3. The financial or business information and all statements of fact
concerning the Group as contained in the information publicly disclosed
by any member of the Group at any time prior to the date hereof and/or
as contained in the Press Announcement and all statements of opinion,
intention or expectation of the directors in relation to the Company or
any of its subsidiaries contained in any such document and/or in the
Press Announcement are truly and honestly held and have been made after
due and careful consideration, and there is no fact or matter omitted
from such document and/or the Press Announcement the omission of which
would make any statement in the such document and/or the Press
Announcement misleading or which is otherwise material in the context
of the Subscription do not contain any material misrepresentation of
fact or omit to state a fact necessary to make the information
contained therein not materially misleading;
4. The Accounts show a true and fair view in all respects of the state of
affairs of the Company and of the Group as at 31st March 1998 and of
the profit for the year then ended that date and except as stated in
the Accounts, were prepared in accordance with generally accepted
accounting principles in Hong Kong consistently applied;
5. The Management Accounts were prepared in accordance with the same
accounting policies and practices as the Accounts and represent a true
and fair view of the state of affairs and financial position of the
Group as at 31st July 1998 and of the results of the Group for the
financial period ended on such date;
6. Except as stated in the Accounts the Group owns all of its assets shown
or comprised in the Accounts as owned assets and has a good title to
such assets and all such assets and all documents necessary to prove
the Group's title to such assets are in its possession or under its
control;
<PAGE> 22
7. As at the date of this Agreement and as at Completion no member of the
Group has or will have guaranteed the liability of any third party
which is not a member of the Group save and except shipping guarantees
entered into in the ordinary course of business of the Group.
8. To the best of the knowledge, information and belief of the Warrantors,
there is no order, decree or judgment of any court or governmental
agency or regulatory body outstanding or anticipated against any member
of the Group nor is there any investigation or enquiry by any
governmental agency or regulatory body outstanding or against any
member of the Group which in such case may reasonably be expected to
have or has had a material adverse effect upon the financial position
of the Group;
9. To the best of the knowledge, information and belief of the Warrantors,
in relation to any release, omission, disposal or other fact or
circumstance which causes or might cause pollution of the environment
or harm to human health, no past or present member of the Group has, in
any manner, to an extent which is material in the context of the Group
taken as a whole (i) committed any violation of any laws, statutes,
ordinances, regulations or other requirements of any relevant
governmental authority in the PRC (including the Hong Kong SAR) or
Japan; and/or (ii) incurred any liability (whether actual or
contingent) with respect thereto;
10. To the best of the knowledge, information and belief of the Warrantors,
no member of the Group is in material breach or in material default
(nor any event occurred which, with the giving of notice or the lapse
of time or both would result in a material default) under any law,
agreement, licence, certificate, instrument or authorisation which is
binding upon or affects it or any of its assets or revenues or
operation of its business or is in breach or violation of its
memorandum and articles of association or other constitutive document
which is likely to have a material adverse effect on the Group taken as
a whole;
11. Since 31st March 1998, except as publicly announced by the Company
prior to the date hereof and as disclosed in the Press Announcement:
(a) there has been no adverse change in the business, financial or
trading position or profits or prospects of any other member
of the Group which in any such case is material in the context
of the Group taken as a whole;
(b) to the best of the knowledge, information and belief of the
Warrantors, no litigation, arbitration proceedings,
prosecution or other legal proceedings have been instituted,
announced or threatened by or against or remaining outstanding
against any member of the Group which in any such case could
have a material affect on the Group taken as a whole );
(c) each member of the Group has carried on its business in the
ordinary course and so as to maintain it in a going concern in
the same manner as previously carried on;
<PAGE> 23
(d) no member of the Group has declared, paid or made or proposed
to declare, pay or make any bonus in respect of shares,
dividends or other distribution other than to members of the
Group;
(e) no member of the Group has issued or proposed to the issue of
any debentures or incurred any indebtedness or liabilities or
commitments, whether actual, contingent or deferred, which is
material in the context of the Group taken as a whole other
than in the ordinary course of business of the relevant
company;
(f) no member of the Group has disposed of or transferred,
mortgaged or encumbered any asset or any right, title or
interest in any asset in a manner which is material in the
context of the Group taken as a whole;
(g) no member of the Group has entered into any contract or
commitment (whether in respect of capital expenditure or
otherwise) which is of a long-term or unusual nature or
involves or could involve an obligation of a nature or
magnitude, in either case which is material in the context of
the Group taken as a whole;
(h) no transaction has taken place which might give rise to a
claim for Taxation for any member of the Group other than
transactions in respect of or arising in the ordinary course
of business of the Group;
(i) no member of the Group has authorised or proposed or announced
its intention to propose any merger or demerger or acquisition
or disposal of assets or shares which are material in the
context of the Group taken as a whole (other than in the
ordinary course of trading) or any such material change in its
share or loan capital;
(j) no member of the Group has entered into any reconstruction,
amalgamation, transaction or arrangement (otherwise than in
the ordinary course of business of the relevant company) which
is material in the context of the Group taken as a whole;
(k) no member of the Group has taken any corporate action or had
any order for its winding up, dissolution or reorganisation or
for the appointment of a receiver, administrator,
administrative receiver, trustee or similar officer of all or
as substantial part of its assets and revenues;
(l) no member of the Group has entered into or varied any terms of
any service agreement with any of its directors;
(m) no member of the Group has entered into any agreement or
commitment or passed any resolution with respect to any of the
transactions or events referred to in this paragraph.
<PAGE> 24
12. There is no provision in any arrangement, agreement, licence or other
instrument to which any member of the Group is a party or to which any
of their assets may be bound, entitled or be subject which, in
consequence of the Subscription and/or the Placing, would or might to
an extent which is material in the context of the Group taken as a
whole, result in:
(a) any monies borrowed by, or other indebtedness , actual or
contingent of, any member of the Group being or becoming
repayable or being capable of being declared repayable
immediately or prior to their stated maturity;
(b) the creation of any mortgage, charge or other security
interest over the whole or any part of the business, property
or assets of such member or any such security (whenever
arising or having arisen) becoming enforceable;
(c) cause any breach of such arrangement, agreement, licence or
instrument or any limits, restrictions, obligations or
commitments contained therein being infringed or exceeded, or
such arrangement, agreement, licence or instrument being
terminated or adversely affected or any actions being taken of
an adverse nature or any obligation arising thereunder;
(d) any assets of any such member being disposed of other than in
the ordinary course of business;
(e) the interest or business of any such member in or with any
firm or body or person or any arrangements relating to such
interests or business, being terminated or adversely modified
or affected;
(f) any such member ceasing to be able to carry on business under
any name under which it presently does so; or
(g) the creation of liabilities by such member.
<PAGE> 1
EXHIBIT 2.3
[Letterhead of Nam Tai Electronics (Canada) Ltd.]
April 28, 1998
PRIVATE & CONFIDENTIAL
Mr. Edward K.W. Chan
601 West Hastings Street
Suite 1600
Vancouver, B.C. V6B 5A5
Dear Mr. Chan:
Re: Offer for Chief Financial Officer Position:
On behalf of Nam Tai Electronics, Inc. and its subsidiary companies (the "Nam
Tai group") I am pleased to offer you a position as the Chief Financial Officer
of the Nam Tai group to be based in Vancouver, B.C. as an employee of Nam Tai
Electronics (Canada) Ltd. (the "Company"). You will also be appointed to the
Board of Directors of Nam Tai Electronics, Inc. at the earliest possible
opportunity. This is a ten year full time appointment located in Vancouver and
subject to the following terms and conditions:
1. POSITION
As Chief Financial Officer of the Nam Tai group, you will report to the Chairman
and the Chief Executive Officer and be responsible for the management and
direction of the financial, investor relations and administration affairs of the
Nam Tai group and the business and affairs of the Company in North America. In
the Vancouver office the financial, accounting, control and systems staff will
report directly to you. The senior financial officers of each subsidiary and
affiliate in the Nam Tai group will have a functional responsibility to you.
2. TERM OF EMPLOYMENT AND TERMINATION
Your employment will be for a fixed term of ten years commencing on Monday, May
4, 1998, or earlier subject to your final confirmation, and lasting until May 3,
2008. Should you wish to resign from this position you will be required to
provide three months written notice to the Company.
If your employment is terminated by the Company during the 10 year term, you
will not be
<PAGE> 2
obligated to mitigate your damages in respect of seeking other employment or
otherwise to reduce any loss. However, if your employment is terminated for just
cause based on criminal activities, then the Company shall have no obligation
after the termination of employment.
3. REMUNERATION
(a) Salary
You will be paid a salary of CAD $350,000 per annum, payable every two weeks in
arrears. This amount is to be paid directly to you, or partially to you and the
residue to such persons or entities as you may from time to time direct.
Your salary will be subject to review on an annual basis every January to
determine if an increase is warranted.
(b) Options
Before the end of January 1999, you will be granted 30,000 employee stock
options to purchase the common stock of Nam Tai Electronics, Inc. This amount
will be reduced on a pro rata basis depending the your commencement date in the
calender year. For example, if you start on May 4, 1998 with two thirds of a
year remaining you will receive 20,000 options. Further employee stock options
will be granted in future years in amounts determined by the Board of Directors.
The exercise price of the options will be fixed at the fair market value of the
common stock on the date the options are granted as defined in the Employees'
Stock Option Plan. The value of the options granted shall be determined based on
the fair value at the grant date consistent with the method of FASB No. 123 and
as reported in Nam Tai Electronics, Inc.'s audited financial statements.
(c) Guaranteed Total Income
In consideration of you commencing employment with the Company, the Company,
first, and second Mr. M. K. Koo personally, guarantees that your total yearly
remuneration, which shall include both your salary, including any money paid to
persons or entities designated by you, and the value of the employee stock
options granted to you will not be less than CAD $400,000 per annum until the
end of this contract in year 2008, unless you resign on your own accord. For the
first year of this agreement the guaranteed amount will be reduced pro rata
based upon your commencement date in the calender year. For the last year of the
contract in 2008 the guaranteed amount will be reduced pro rata based upon your
departure date in the calender year.
4. EMPLOYMENT BENEFITS
(a) General Benefits
You will be entitled to participate in a program of employee benefits which are
comparable to those offered to executives of comparable companies located in
Canada including medical coverage, a dental program and accidental death
coverage, all described in the Company Policy,
<PAGE> 3
and long term and short term disability coverage to cover the guaranteed total
income amount.
If you become disabled during the 10 year term of this contract and if the long
term disability insurers refuse to cover you, or continue to cover you, the
Company will re-employ you at your full guaranteed total income for the balance
of the 10 year term.
(b) Golf Membership
The Company will provide you with a golf club membership at a golf club
determined by the Company.
(c) Pension Contribution
The Company will make monthly contributions based on $13,500 per annum to a
pension fund on your behalf. Alternatively, at your option, the Company will
consider contributing a similar amount to your Registered Retirement Savings
Plan.
(d) Life Insurance
The Company will purchase a life insurance policy which will provide total
compensation of CAD $3,000,000. Half of this amount will be paid to the Company
and half will be paid to your designated beneficiaries.
5. ANNUAL HOLIDAY
You will be entitled to five weeks holidays (25 days) per annum.
This offer will remain valid until the close of business on April 30, 1998. To
accept the offer please execute and return one of the enclosed signed copies to
the Company.
Yours truly, In respect of the guarantee
of income
- ----------------------------------- ---------------------------
M. K. Koo M. K. Koo
Chairman, Nam Tai Electronics, Inc.
I agree to the terms and conditions contained in this letter of employment and,
to the extent that it is not in conflict with this agreement, the attached Nam
Tai Electronics (Canada) Ltd. Company
<PAGE> 4
Policy and where there is a conflict between the two, the terms of this
agreement will prevail.
Name:_____________________________
Date:_____________________________
<PAGE> 1
EXHIBIT 2.4
Termination Agreement made January 11, 1999.
Between:
Nam Tai Electronics (Canada) Ltd.
("NTC")
And:
Edward K.W. Chan
("Chan")
WHEREAS Chan is employed by NTC pursuant to a contract of
employment dated April 28, 1998 (the "Contract") and NTC and Chan have agreed to
terminate the Contract on the terms and conditions set forth in this Agreement.
NOW THEREFORE in consideration of the premises and the mutual
covenants and agreements hereinafter contained, and for other good and valuable
consideration (the receipt and sufficiency of which is hereby acknowledged by
the parties hereto), it is agreed by and between the parties hereto as follows:
1. Chan will sign and deliver to NTC, concurrent with the
execution of this Agreement, the irrevocable written
resignation which is attached hereto as Schedule "A".
2. The Contract, including all past and future rights and
obligations in it, will
<PAGE> 2
terminate in full and all respects as of the date of this
Agreement.
3. From the date of this Agreement to and including June 30,
1999, Chan will not attend at work during normal office hours
or perform any of the duties or responsibilities of the Chief
Financial Officer position.
4. NTC will pay to Chan the following monies:
(a) upon signing of this Agreement NTC will pay to Chan
$5,635.17 ($8,826.92 less $3,191.75 in Governmental
deductions as set out in Schedule "C"), representing
RRSP contributions owing to December 31, 1998; and
(b) until June 30, 1999, NTC will pay to Chan an annual
salary rate of $350,000 plus $13,500 in annual RRSP
contribution (pro rated), less Governmental and
Health Care Deduction, all paid by regular salary
payments every two weeks. The total net pay to be
received by Ed Chan for the period up to and
including June 30, 1999 will be $88,419.17 as set out
in Schedule "D" of this Agreement.
(c) No other benefits or money will be due to Chan under
this Agreement other than what is specified in
paragraphs (a) and (b) above.
2
<PAGE> 3
5. Chan hereby releases and forever discharges NTC, Nam Tai
Electronics, Inc. and all other Companies in the Nam Tai Group
and all of their directors, officers, employees and agents and
M.K. Koo from all manner of actions, causes of action, claims
or demands whatsoever, including all manner of actions, causes
of action, claims or demands arising out of:
(a) Facts or events, known or unknown, which have
occurred up to and including the date of this
Agreement;
(b) Chan's employment with NTC, Nam Tai Electronics, Inc.
and all other Companies in the Nam Tai Group and the
termination of that employment; and
(c) The Contract and the termination of the Contract,
including all manner of actions, causes of action,
claims or demands with respect to stock options,
insurance, guaranteed total income, golf membership,
holiday pay or any other monies or benefits which may
be payable or owing under the Contract.
6. NTC, Nam Tai Electronics, Inc. and all other Companies in the
Nam Tai Group hereby release and forever discharge Chan from
all manner of actions, causes of action, claims or demands
whatsoever, including all manner of actions, causes of
3
<PAGE> 4
action, claims or demands arising out of:
(a) Facts or events, known or unknown, which have
occurred up to and including the date of this
Agreement;
(b) Chan's employment with NTC, Nam Tai Electronics, Inc.
and all other Companies in the Nam Tai Group and the
termination of that employment; and
(c) The Contract and the termination of the Contract.
7. Chan will maintain in complete secrecy and not disclose to
anyone, any of the confidential business information of NTC,
Nam Tai Electronics, Inc. and the Companies in the Nam Tai
Group.
8. Chan agrees to deliver to NTC all documents, records,
photographs, notebooks, computer disks and CD ROMs or similar
repositories of or containing the confidential business
information of NTC, Nam Tai Electronics, Inc. and the other
Companies of the Nam Tai Group, including without limitation,
all copies thereof, then in his possession, whether prepared
by him or not, and will permanently erase (without making
copies thereof) all such confidential business information
4
<PAGE> 5
from any form of electronic storage being retained by Chan
including, without limitation, computer hard drives and memory
chips.
9. NTC will sign and deliver on Nam Tai Electronics, Inc.
letterhead paper the letter of reference which is attached
hereto as Schedule "B" and give all future references
requested regarding Chan in the future in a manner consistent
with the wording of Schedule "B". Chan will indemnify Nam Tai
Electronics, Inc. from all costs, damages or liabilities
arising from his use of the letter of reference. Chan will
agree not to use the letter of reference for any purpose other
than seeking new employment without written consent of NTC.
10. Chan's name will not be used in any document, announcement or
information regarding NTC, Nam Tai Electronics, Inc. or any
other Company in the Nam Tai Group without the express consent
of Chan except that Nam Tai Electronics, Inc. will be
permitted to list Chan's name as the Chief Financial Officer
in its 1998 Form 20 F and Annual Report and in the press
release announcing Chan's intention to resign notwithstanding
the fact that Chan shall assume no responsibility nor
liability over the preparation and content of the 1998 Form 20
F and annual report. No statements shall be made in any
company document under Chan's name, or attributed to Chan,
without his express consent.
11. Chan will indemnify NTC with respect to any claims made by
Alice Tang in
5
<PAGE> 6
connection with the termination of her employment by NTC with
two weeks' severance pay.
12. No representations have been made except such representations
as are specifically set forth in this Agreement and any
statements or representations that may have previously been
made by any of them to the other have not been relied on in
connection with this Agreement and are of no effect.
13. This Agreement has been executed by the parties in
consideration of the mutual premises and covenants herein
contained, and for good and valuable consideration the receipt
and sufficiency of which is acknowledged. Any and all defences
relating to an alleged failure or lack of consideration in
connection with this Agreement are waived.
14. The terms of this Agreement shall be kept confidential by Chan
and NTC, Nam Tai Electronics, Inc. and the Companies in the
Nam Tai Group except that:
(a) Chan may discuss its terms with his immediate family
and legal and accounting advisers; and
(b) The directors, officers, managers and legal and
accounting advisers of NTC, Nam Tai Electronics, Inc.
and the Companies in the Nam Tai Group
6
<PAGE> 7
may together discuss its terms.
15. Both Chan and NTC (and the Nam Tai Group of Companies and its
directors and officers) will avoid making any negative or
derogatory comments verbally or in writing that could
reasonably be expected to cause any damage to the other.
16. Nam Tai Electronics (Canada) Ltd. will continue to provide the
same indemnification to Chan against any claim or liability
which might arise as a result of Chan acting as director and
President of Nam Tai Electronics ( Canada) Ltd.,
17. Chan shall bear no future responsibility or liability for any
matters relating to the finance, administration, and
accounting of Nam Tai Electronics, Inc. and its subsidiaries
in the Nam Tai Group,
18. The provisions of this Agreement shall enure to the benefit of
and be binding upon Chan and his heirs, executors,
administrators and assigns and NTC, Nam Tai Electronics, Inc.
and all other Companies in the Nam Tai Group.
19. Both Chan and NTC acknowledge that they have sought and
received independent legal advice prior to the signing of this
agreement.
7
<PAGE> 8
IN WITNESS WHEREOF this Agreement has been executed by the parities hereto as of
the day, month and year first above written.
Nam Tai Electronics (Canada) Ltd.
Per:
_______________________________________
SIGNED AND DELIVERED BY)
EDWARD K.W. CHAN in the presence of: )
)
_____________________________________ ) __________________________
Name ) Edward K.W. Chan.
)
_____________________________________ )
Address )
)
_____________________________________ )
Occupation
8
<PAGE> 9
Schedule "A" to Termination Agreement dated January 11, 1999 between Edward Chan
and Nam Tai Electronics (Canada) Ltd.
Edward Chan
1467 West 53rd Avenue
Vancouver, B.C.
Canada V6P 1L1
January 11, 1999
CONFIDENTIAL
Nam Tai Electronics (Canada) Ltd.
1500 - 999 West Hastings Street
Vancouver, B.C.
V6C 2W2
ATTENTION: M.K. KOO
Dear Mr. Koo:
RE: RESIGNATION FROM EMPLOYMENT
I hereby irrevocably tender my resignation from all employment with you and all
other Companies in the Nam Tai Group, including my employment as Chief Financial
Officer of the Nam Tai Group and President and Director of Nam Tai Electronics
(Canada) Ltd., effective June 30, 1999 on the condition that I shall continue to
receive payments specified in paragraph 4 of the Termination Agreement.
Yours truly,
Edward Chan
9
<PAGE> 10
SCHEDULE "B" TO TERMINATION AGREEMENT DATED JANUARY 11, 1999 BETWEEN EDWARD CHAN
AND NAM TAI ELECTRONICS (CANADA) LTD.
[To be printed on Nam Tai Electronics, Inc. letterhead]
January 11, 1999
To Whom It May Concern
EDWARD K. W. CHAN
For your information, Edward K. W. Chan has been the Group Chief Financial
Officer of the Nam Tai Group of companies since May 1, 1998. He has been
requested to be in charge of administration for the Group and has also acted as
the President of our subsidiary Nam Tai Electronics (Canada) Ltd. since July
1,1998.
As Group Chief Financial Officer, Mr. Chan's responsibilities and duties include
the following:
- - to manage, control and plan all aspects of operation of Finance
Department,
- - to provide leadership, guidance and advice to all Finance staff,
including coordination of all activities undertaken,
- - to prescribe roles, responsibilities, and reporting structure for all
staff,
- - to set policies, priorities and agenda for Finance and Administration
Departments,
- - to offer advice to and liaise with Chairman and other senior executives
on Finance and other business operational matters,
- - to attend directors' meetings and participate in corporate decision
making process,
- - to participate in top level consideration of mergers and acquisitions,
- - to take charge of all matters relating to quarterly financial reporting
and annual general meeting,
- - to deal with analysts, lawyers, bankers, auditors, consultants and
other outside parties on significant finance and administrative
matters,
- - to review and approve correspondence, documents and reports and
releases with significant financial implications,
- - to negotiate and approve expenditures for significant services,
purchases, and disbursements,
- - to participate in hiring of senior staff, and
- - to make presentations on behalf of the Nam Tai Group.
In addition to the above, it is noteworthy that Mr. Chan initiated a program
involving our Year 2000 computer and operational issues and supported making
necessary preparations to avoid potential negative repercussions arising from
such issues.
Since our company acquired a major subsidiary operating in China in December
1998, the Group
10
<PAGE> 11
CFO has to discharge his duties and responsibilities principally outside of
Canada. Mr. Chan has decided that he does not wish to be absent from Canada for
extended periods without relocating to Asia and has agreed to resign voluntarily
for that reason.
The Company basically agrees without any problem that Mr. Chan has worked
diligently on the aforementioned responsibilities and duties for which he had
been in charge.
I have no hesitation in recommending Mr. Edward K.W. Chan, especially since he
was also a former partner with Price Waterhouse, to a position involving
responsibilities in finance, accounting, and administration.
Yours Truly,
M.K.Koo
Senior Executive Officer, Corporate Strategy, Finance and Administration
11
<PAGE> 1
EXHIBIT 2.5
Agreement made January 11, 1999
Between:
Nam Tai Electronics, Inc.
("NTEI")
And:
Edward K. W. Chan
("Chan")
WHEREAS NTEI wishes to retain Chan to negotiate a resolution of a
dispute between it and Price Waterhouse (Hong Kong) regarding the statement of
account submitted by Price Waterhouse (Hong Kong) and the services performed by
Price Watehouse (Hong Kong), in connection with the Albatronics project.
NOW THEREOFE the parties agree as follows:
1. Chan will travel to Hong Kong and engage in settlement
discussions with Price Waterhouse (Hong Kong) regarding the
Price Waterhouse (Hong Kong) statement of account and the
services rendered by them, in connection with the Albatronics
project and potential litigation between NTEI and Price
Waterhouse (Hong Kong).
<PAGE> 2
2. In connection with all trip expenses, NTEI will provide Chan
with a non-refundable allowance of $6,000 (CDN).
3. NTEI will provide to Chan a non-refundable payment of
$250,000.00 (CDN) in connection with the matter described in
paragraph 1 hereof.
4. Chan will not enter into any agreement with Price Waterhouse
(Hong Kong) on behalf of NTEI in connection with the matter
described in paragraph 1 hereof or any other matters, without
first obtaining the consent of NTEI to the agreement.
5. Chan will be paid an additional amount of $50,000.00 (CDN) if
he is able to negotiate, on behalf of NTEI, an agreement with
Price Waterhouse (Hong Kong) which results in NTEI paying to
Price Waterhouse (Hong Kong) at most $500,000.00 (HK)
inclusive of all monies already paid by NTEI or any subsidiary
company, in connection with the statement of account rendered
by Price Waterhouse (Hong Kong) regarding the Albatronics
project.
6. Chan will be responsible for paying all taxes and other moneys
which may be owed to any Governmental jurisdiction in
connection with the payments described in paragraphs 2, 3 and
5 of this Agreement. Chan hereby agrees to indemnify NTEI and
all the other Companies in the Nam Tai Group and all of their
directors, officers, employees and agents with respect to any
taxes or other moneys which may be claimed by a
<PAGE> 3
Governmental jurisdiction with respect to the payments
described in paragraph 2, 3 and 5 of this Agreement.
7. In respect of payments described in paragraphs 2 and 3, NTEI
will wire transfer before Monday, January 18, 1999 at 5:00
p.m. Hong Kong time $256,000 (CND) to the following bank
account:
Standard Chartered Bank
Account Name: Chan Ka Hung
Account Number: 413-1-007511-2 Canadian dollar account
8. It is agreed that the Termination Agreement (including the
resignation letter) between Chan and Nam Tai Electronics
(Canada) Ltd. dated January 11, 1999 shall be void if the
payments specified in paragraph 7 above are not made as
required.
IN WITNESS WHEREOF this Agreement has been executed by the parties hereto as of
the day, month and year first above written.
Nam Tai Electronics, Inc.
Per:
_____________________________________
SIGNED AND DELIVERED BY )
EDWARD K. W. CHAN in the presence of: )
)
_____________________________________ _________________________
Name ) Edward K. W. Chan
_____________________________________ )
_____________________________________ )
Address )
)
_____________________________________ )
Occupation
<PAGE> 1
EXHIBIT 2.6
October 5, 1998
Nam Tai Electronics, Inc
c/o 999 West Hastings Street
Suite 1500
Vancouver, B.C. V6C 2W2
CANADA
Attention: Mr. M.K. Koo
Chairman
Gentlemen:
This agreement ("Agreement") is made and entered into effective this
5th day of October, 1998 (the "Effective Date") between NAM TAI ELECTRONICS,
INC. (the "Company") and National Securities Corporation (the "Consultant").
In consideration of and for the mutual promises and covenants contained
herein, and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. Purpose. The Company hereby retains the Consultant on a
non-exclusive basis during the term specified to render consulting advice to the
Company relating to financial and similar matters, upon the terms and conditions
as set forth herein.
2. Term and Compensation. This Agreement shall be effective for a
period of three years commencing on the Effective Date (the "Engagement
Period"). The Company shall issue to Consultant 300,000 common stock purchase
warrants (the "Warrants") exercisable for a period of three (3) years, with an
exercise price equal to the average daily closing price of the Company's common
stock for the twenty (20) business days immediately preceding execution of this
agreement. The Warrants shall be in such form as may be agreed upon between the
parties, which agreement shall be evidenced by the signature of the respective
parties thereto.
3. Duties of Consultant. During the term of this Agreement, the
Consultant will provide the Company with such regular and customary consulting
advice as is reasonably requested by the Company, provided that the Consultant
shall not be required to undertake duties not reasonably within the scope of the
consulting advisory services contemplated by this Agreement. In performance of
these duties, the Consultant shall provide the Company with the benefits of its
best judgment and efforts. It is understood and acknowledged by the parties that
the value of the Consultant's advice is not measurable in any quantitative
manner. The Consultant's duties may include, but not necessarily be limited to:
1
<PAGE> 2
A. Providing sponsorship and exposure in connection with the
dissemination of corporate information regarding the Company to the investment
community at large.
B. Assisting in the Company's financial public relations, including
discussions between the Company and the financial community.
C. Advice regarding the financial structure of the Company and its
divisions or subsidiaries or any programs and projects, as such issues relate to
the public market for the Company's equity securities.
D. Rendering advice with respect to any acquisition program of the
Company, as such program relates to the public market for the Company's equity
securities.
E. Rendering advice regarding the public market for the Company's
securities and the timing and structure of any future public offering or private
placement of the Company's equity securities.
5. Relationships with others. The Company acknowledges that the
Consultant or its affiliates is in the business of providing financial service
and consulting advice (of all types contemplated by this Agreement) to others.
Nothing herein contained shall be construed to limit or restrict the Consultant
in conducting such business with respect to others, or in rendering such advice
to others. In connection with the rendering of services hereunder, Consultant
has been or will be furnished with confidential information concerning the
Company including, but not limited to, financial statements and information,
cost and expense data, production data, trade secrets, marketing and customer
data, and such other information not generally obtained from public or published
information or trade sources. Such information shall be deemed "Confidential
Material" and, except as specifically provided herein, shall not be disclosed by
Consultant without prior written consent of the Company. In the event Consultant
is required by applicable law or legal process to disclose any of the
Confidential Material, it is agreed that Consultant will deliver to the Company
prompt notice of such requirement prior to disclosure of same to permit the
Company to seek an appropriate protective order and/or waive compliance of this
provision. If, in the absence of a protective order or receipt of written
waiver, Consultant is nonetheless, in the written opinion of counsel, compelled
to disclose any Confidential Material, Consultant may do so without liability
hereunder provided that notice of such prospective disclosure is delivered to
the Company prior to actual disclosure. Following the termination of this
Agreement, Consultant shall deliver to the Company all Confidential Material.
6. Consultant's Liability. In the absence of gross negligence or
willful misconduct on the part of the Consultant or the Consultant's breach of
this Agreement, the Consultant shall not be liable to the Company or to any
officer, director, employee, stockholder or creditor of the Company, for any act
or omission in the course of or in connection with the rendering or providing of
advice hereunder. Except in those cases where the gross negligence or willful
misconduct of the Consultant or the breach by the Consultant of this Agreement
is alleged and proven, the Company agrees to defend, indemnify and hold the
Consultant harmless from and against any and all claims, liabilities and
reasonable costs and expenses (including attorneys' fees paid in the defense of
the Consultant) which may in any way result from services rendered by the
Consultant pursuant to or in any connection with this Agreement.
7. Expenses. The Company, upon receipt of appropriate supporting
documentation, shall reimburse the Consultant for any and all reasonable
out-of-pocket expenses incurred in connection with
2
<PAGE> 3
the consulting services provided to the Company under this Agreement, subject to
prior approval of the Company.
9. Limitation Upon the Use of Advice and Services.
(a) No person or entity, other than the Company or any of its
subsidiaries or directors or officers of each of the foregoing, shall be
entitled to make use of or rely upon the advice of the Consultant to be given
hereunder, and the Company shall not transmit such advice to, or encourage or
facilitate the use or reliance upon such advice by others without the prior
consent of the Consultant.
(b) Use of the Consultant's name in annual reports or any other report
of the Company or releases by the Company must have the prior approval of the
Consultant unless the Company is required by law to include Consultant's name in
such annual reports, other report or release of the Company, in which event
Consultant will be furnished with copies of such annual reports or other reports
or releases using Consultant's name in advance of publication by the Company.
10. Severability. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is deemed unlawful or invalid for any
reason whatsoever, such unlawfulness or invalidity shall not affect the validity
of this Agreement.
11. Miscellaneous.
(a) Any notice or other communication between parties hereto shall be
sufficiently given if sent by certified or registered mail, postage prepaid, or
faxed and confirmed if to the Company, addressed to it at Nam Tai Electronics,
Inc., 999, West Hastings Street, Suite 1500, Vancouver BC, V6C2W2, Canada, or if
to the Consultant, addressed to it at National Securities Corporation, 1001
Fourth Avenue, Suite 2200, Seattle, Washington 98154. Such notice or other
communication shall be deemed to be given on the date of receipt.
(b) If the Consultant shall cease to do business, the provisions hereof
relating to duties of the Consultant and compensation by the Company as it
applies to the Consultant shall thereupon cease to be in effect, except for the
Company's obligation of payment for services rendered prior thereto. This
Agreement shall survive any merger of, acquisition of, or acquisition by the
Consultant and after any such merger or acquisition shall be binding upon the
Company and the corporation surviving such merger or acquisition.
(c) This Agreement embodies the entire agreement and understanding
between the Company and the Consultant and supersedes any and all negotiations,
prior discussions and preliminary and prior agreements and understandings
related to the central subject matter hereof.
(d) This agreement has been duly authorized, executed and delivered by
and on behalf of the Company and the Consultant.
(e) This Agreement shall be construed and interpreted in accordance
with the laws of the State of California, without giving effect to conflicts of
laws.
(f) There is no relationship of partnership, agency, employment,
franchise or joint venture
3
<PAGE> 4
between the parties. Neither party has the authority to bind the other or incur
any obligation on its behalf.
(g) This Agreement and the rights hereunder may not be assigned by
either party (except by operation of law) and shall be binding upon and inure to
the benefit of the parties and their respective successors, assigns and legal
representatives.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date hereof.
NAM TAI ELECTRONICS, INC.
By: /S/ M. K. Koo
----------------------------
Name: Mr. M.K. Koo
Title: Senior Executive Officer
NATIONAL SECURITIES CORPORATION
By: /S/ Steven A. Rothstein
----------------------------
Name: Steven A. Rothstein
Title: Chairman
4
<PAGE> 1
EXHIBIT 2.7
THIS WARRANT AND ANY SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), NOR UNDER ANY STATE SECURITIES LAW AND SUCH SECURITIES MAY NOT BE
PLEDGED, SOLD, ASSIGNED, HYPOTHECATED, OR OTHERWISE TRANSFERRED UNTIL (1) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY
APPLICABLE STATE SECURITIES LAW OR (2) THE COMPANY RECEIVES AN OPINION OF
COUNSEL TO THE COMPANY OR COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES MAY BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED, OR TRANSFERRED WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS.
THE TRANSFER OF THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE HEREOF IS
RESTRICTED AS DESCRIBED HEREIN.
NAM TAI ELECTRONICS, INC.
WARRANT FOR THE PURCHASE OF 300,000 SHARES OF COMMON STOCK,
$0.01 PAR VALUE PER SHARE
No. NS1
<PAGE> 2
THIS CERTIFIES that, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, National Securities
Corporation (the "Holder"), is entitled to subscribe for and purchase from Nam
Tai Electronics, Inc., a corporation organized under the laws of the British
Virgin Islands (the "Company"), upon the terms and conditions set forth herein,
at any time or from time to time, during the period commencing on October 5,
1998 and expiring at 5:00 p.m. on October 4, 2001 (the "Exercise Period"),
300,000 shares of the Company's common stock, $0.01 par value per share ("the
Common Stock"), at a price (the "Exercise Price") per share of Common Stock
equal to $10.25. As used herein, the term "this Warrant" shall mean and include
this Warrant and any Warrant or Warrants hereafter issued as a consequence of
the exercise or transfer of this Warrant in whole or in part. As used herein,
the term "Holder" shall include any transferee to which this Warrant has been
transferred in accordance with the terms hereof.
The number of shares of Common Stock issuable upon exercise of
the Warrants (the "Warrant Shares") and the Exercise Price may be adjusted from
time to time as hereinafter set forth.
1. Subject to the provisions of Section 2, this Warrant may be exercised during
the Exercise Period, as to the whole or in any lesser number exceeding 25,000
whole Warrant Shares, by transmission by telecopy of the Election to Exercise,
followed within three (3) business days by the surrender of this Warrant (with
the Election to Exercise attached hereto duly executed) to the Company at its
office at c/o 999 West Hastings Street, Suite 1500, Vancouver, B.C., Canada, V6C
2W2, or at such other place as is designated in writing by the Company, together
with a certified or bank cashier's check payable to the order of the Company in
an amount equal to the product of the Exercise Price and the number of Warrant
Shares for which this Warrant is being exercised (the "Aggregate Exercise
Price").
2. Upon each exercise of the Holder's rights to purchase Warrant Shares, the
Holder shall be deemed to be the holder of record of the Warrant Shares issuable
upon such exercise, notwithstanding that the transfer books of the Company shall
then be closed or certificates representing such Warrant Shares shall not then
have been actually delivered to the Holder. Within five (5) business days after
each such exercise of this Warrant and receipt by the Company of this Warrant,
the Election to Exercise and the Aggregate Exercise Price, the Company shall
issue and deliver to the Holder a certificate or certificates for the Warrant
Shares issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the
Warrant Shares (or portions thereof) subject to purchase hereunder.
2
<PAGE> 3
3. Any Warrants issued upon the transfer or exercise in part of this Warrant
shall be numbered and shall be registered in a warrant register (the "Warrant
Register") as they are issued. The Company shall be entitled to treat the
registered holder of any Warrant on the Warrant Register as the owner in fact
thereof for all purposes and shall not be bound to recognize any equitable or
other claim to or interest in such Warrant on the part of any other person, and
shall not be liable for any registration of transfer of Warrants which are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge of the general counsel of the
Company that a fiduciary or nominee is committing a breach of trust in
requesting such registration of transfer. In all cases of transfer by an
attorney, executor, administrator, guardian, or other legal representative, duly
authenticated evidence of his or its authority shall be produced. Upon any
registration of transfer, the Company shall deliver a new Warrant or Warrants to
the person entitled thereto. This Warrant may be exchanged, at the option of the
Holder thereof, for another Warrant, or other Warrants of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Warrant Shares (or portions thereof), upon surrender
to the Company or its duly authorized agent. Notwithstanding anything contained
herein to the contrary, the Company shall have no obligation to cause Warrants
to be transferred on its books to any person if, in the opinion of counsel to
the Company, such transfer does not comply with the provisions of the Act and
the rules and regulations thereunder.
4. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the rights to purchase all Warrant Shares granted pursuant to
the Warrants, such number of shares of Common Stock as shall, from time to time,
be sufficient therefor. The Company covenants that all shares of Common Stock
issuable upon exercise of this Warrant, upon receipt by the Company of the full
Exercise Price therefor, shall be validly issued, fully paid, nonassessable, and
free of preemptive rights.
5. The Exercise Price in effect at any time and the number and kind of
securities purchasable upon the exercise of this Warrant shall be subject to
adjustment from time to time upon the happening of certain events as detailed in
Section 5(a) below:
(a) In case the Company shall (i) declare a dividend or make a distribution on
its outstanding shares of Common Stock, in each case, in shares of Common Stock,
(ii) subdivide or reclassify its outstanding shares of Common Stock into a
greater number of shares, or (iii) combine or reclassify its outstanding shares
of Common Stock into a smaller number of shares, the Exercise Price in effect at
the time of the record date for such dividend or distribution or of the
effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the Exercise
Price by a fraction, the denominator of which shall be the number of shares of
Common Stock
3
<PAGE> 4
outstanding after giving effect to such action, and the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
action. Such adjustment shall be made successively whenever any event listed
above shall occur.
(b) Upon each adjustment of the Exercise Price pursuant to the provisions of
this Section 5, the number of Warrant Shares issuable upon the exercise at the
adjusted Exercise Price of each Warrant shall be adjusted to the nearest number
of whole shares of Common Stock by multiplying a number equal to the Exercise
Price in effect immediately prior to such adjustment by the number of Warrant
Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.
(c) For the purpose of this Warrant, the term "Common Stock" shall mean (i) the
class of stock designated as Common Stock in the Articles of Incorporation of
the Company as amended as of the date hereof, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value, or
from no par value to par value.
(d) In case of any consolidation of the Company with, or merger of the Company
into, another corporation (other than a consolidation or merger which does not
result in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the Holder of this
Warrant shall have the right thereafter (until the expiration of such Warrant)
to receive, upon exercise of such Warrant, the kind and amount of shares of
stock and other securities and property receivable upon such consolidation or
merger by a holder of the number of shares of Common Stock for which such
Warrant might have been exercised immediately prior to such consolidation,
merger, sale or transfer. Such supplemental warrant agreement shall provide for
adjustments which shall be identical to the adjustments provided in this Section
5. The above provision of this subsection shall similarly apply to successive
consolidations or mergers.
(e) No adjustment in the number of Warrant Shares shall be required if such
adjustment is less than one share; provided, however, that any adjustments which
by reason of this Section 5(e) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 5 shall be made to the nearest one-thousandth of a share.
(f) In any case in which this Section 5 shall require that an adjustment in the
number of Warrant Shares be made effective as of a record date for a specified
event, the Company may elect to defer, until the occurrence of such event,
issuing to the Holder, if the
4
<PAGE> 5
Holder exercised this Warrant after the record date, the Warrant Shares, if any,
issuable upon such exercise over and above the Warrant Shares, if any, issuable
upon such exercise prior to such adjustment; provided, however, that the Company
shall deliver to the Holder a due bill or other appropriate instrument
evidencing the Holder's right to receive such additional Warrant Shares upon the
occurrence of the event requiring such adjustment.
(g) Whenever there shall be an adjustment as provided in this Section 5, the
Company shall promptly cause written notice thereof to be sent by certified
mail, postage prepaid, to the Holder, at its address as it shall appear in the
Warrant Register, which notice shall be accompanied by an officer's certificate
setting forth the number of Warrant Shares issuable upon the exercise of this
Warrant if such Warrant were exercisable on the date of such notice, and setting
forth a brief statement of the facts requiring such adjustment and the
computation thereof, which officer's certificate shall be conclusive evidence of
the correctness of any such adjustment absent manifest error.
6. In case at any time the Company shall propose
(a) to pay any dividend or make any distribution on shares of Common Stock in
shares of Common Stock or make any other distribution (other than regularly
scheduled cash dividends which are not in a greater amount per share than the
most recent such cash dividend) to all holders of Common Stock; or
(b) to issue any rights, warrants, or other securities to all holders of Common
Stock entitling them to purchase any additional shares of Common Stock or any
other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding shares of Common
Stock, or any consolidation or merger, described in Section 5; or
(d) to effect any liquidation, dissolution, or windingup of the Company, then,
and in any one or more of such cases, the Company shall give written notice
thereof, by facsimile, registered mail, or postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, or (ii) the date on which
any such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, liquidation, dissolution, or windingup is expected to
become effective, and the date as of which it is expected that holders of record
of shares of Common Stock shall be entitled to exchange their shares for
securities or other property, if any, deliverable upon such
5
<PAGE> 6
reclassification, change of outstanding shares, consolidation, merger, sale,
lease, conveyance of property, liquidation, dissolution, or windingup.
7. The issuance of any shares or other securities upon the exercise of this
Warrant, and the delivery of certificates or other instruments representing such
shares or other securities, shall be made without charge to the Holder for any
tax or other charge in respect of such issuance, other than applicable transfer
taxes. The Company shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issue and delivery of any
certificate in a name other than that of the Holder and the Company shall not be
required to issue or deliver any such certificate unless and until the person or
persons requesting the issue thereof shall have paid to the Company the amount
of such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
8.1(a) If, at any time during the Exercise Period, the Company proposes to
register any of its Common Stock under the Securities Act (otherwise than in
connection with (i) the registration of Common Stock issuable pursuant to an
employee stock option, stock purchase or similar plan, pursuant to a merger,
exchange offer or a transaction of the type specified in Rule 145(a) under the
Securities Act or (ii) the registration of (x) rights granted by the Company pro
rata to all existing holders of Common Stock or (y) the securities issuable upon
exercise of such rights, or (iii) the registration of Common Stock issuable upon
the exercise of outstanding publicly-held warrants) ) it will give written
notice, at least ten (10) days prior to the filing of each such registration
statement, to the Holders of this Warrant or the Warrant Shares of its intention
to do so. At the written request of the Holder delivered to the Company within
five (5) days after the receipt of the notice from the Company, which request
shall state the number of Warrant Shares that the Holder wishes to sell or
distribute publicly under the registration statement proposed to be filed by the
Company, the Company shall use its commercially reasonable efforts, subject to
Section 8.1(b) hereof, to register under the Securities Act such Warrant Shares.
(the "Piggyback Registration"). The Company shall not be obligated to so use its
commercially reasonable efforts more than two (2) times.
(b) If a Piggyback Registration is to be an underwritten offering, the Company
shall so advise the Holder as a part of the written notice given pursuant to
Section 8.1(a). In such event, the right of the Holder to registration pursuant
to Section 8.1(a) shall be conditioned upon the Holder's participation in such
underwriting and the inclusion of the Holder's Warrant Shares in the
underwriting to the extent provided herein. If the Holder intends to distribute
its securities through such underwriting, the Holder shall (together with the
Company and the other holders distributing their securities though such
underwriting) enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters selected by the Company.
Notwithstanding any other provision of this Section 8.1, if the lead underwriter
or representative of the underwriters advises the Holder in writing
6
<PAGE> 7
that marketing factors require a limitation on the number of shares to be
underwritten, the number of shares to be included in the underwriting or
registration shall be allocated: first, the securities the Company proposes to
sell; second, the shares proposed to be sold by the Holder and any other party
having piggyback registration rights which, in the opinion of such lead
underwriter or representative can be sold, allocated pro rata among the holders
of piggyback registration rights on the basis of the total number of shares of
Common Stock requested to be included therein by each such holder, and third,
the shares to be sold by any other holder of securities which the Company
permits to participate in such registration or underwriting up to the number or
dollar amount which, in the opinion of the lead underwriter or representative,
can be sold. For purposes of the allocation provided in this Section 8.1(b), any
officer, director, employee or consultant of the Company who owns any capital
stock of the Company as of the date notice is given by the Company in accordance
with Section 8.1(a) and who participates in the Piggyback Registration shall be
deemed to have piggyback registration rights.
8.2(a) From January 1 through March 31 of each year during the Exercise Period,
but not prior to February 28, 1999, the Holders of a majority Warrant and
Warrant shares shall have the right, exercisable by written notice to the
Company, to have the Company prepare and file with the Securities and Exchange
Commission, on one occasion, a registration statement and such other documents,
including a prospectus, as may be necessary in the opinion of both counsel for
the Company and counsel for the Holder, in order to comply with the provisions
of the Act, so as to permit a public offering and sale by the Holder of the
Warrant Shares. The Company shall use its commercially reasonable efforts to
have such registration statement filed with the Commission within sixty (60)
days and declared effective by the Commission within one hundred twenty (120)
days after the March 31st closest to the date such notice is received by the
Company.
(b) Notwithstanding the provisions of Section 8.2(a), if (i) in the good faith
judgment of the Board of Directors of the Company, such registration would be
seriously detrimental to the Company and the Board of Directors of the Company
concludes, as a result, that it is essential to defer the filing of such
registration statement at such time, and (ii) the Company shall furnish to the
Holder a certificate signed by the principal executive officer of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company for such registration
statement to be filed in the near future and that it is, therefore, essential to
defer the filing of such registration statement, then the Company shall have the
right to defer such filing for the period during which such disclosure would be
seriously detrimental, provided that the Company may not defer the filing for a
period of more than ninety (90) days after receipt of the request of the
7
<PAGE> 8
Holder, and, provided further, that the Company shall not defer its obligation
in this manner more than once in any twelve-month period.
8.3 Holder hereby agrees that if so requested by the Company or any lead
underwriter or representative of the underwriters in connection with any
registration of the offering of any securities of the Company under the
Securities Act , the Holder shall not sell or otherwise transfer any Warrant
Shares or other securities of the Company during the 90-day period following the
effective date of a registration statement of the Company. The Company may
impose stop-transfer instructions with respect to securities subject to the
foregoing restriction until the end of such 90-day period.
8.4 The Company may require the Holder of Warrant Shares to be sold pursuant to
any Registration Statement to furnish to the Company such information regarding
the Holder and the distribution of such Warrant Shares as may be required by
applicable law or regulation for inclusion in such Registration Statement and
the Company may exclude from such registration the Warrant Shares of any Holder
that fails to furnish such information within 15 days after receiving such
request and refuse to file such registration statement if holders of a majority
of the Warrant Shares fail to furnish such information within 15 days after
receiving such request.
8.5(a) Upon the registration of the Warrant Shares, the Company shall indemnify
and hold harmless the Holder and each underwriter, selling agent or other
securities professional, if any, which facilitates the disposition of the
Warrant Shares, and each of their respective officers and directors and each
person who controls the Holder, underwriter, selling agent or other securities,
professional within the meaning of Section 15 of the Securities Act or Section
20 of the Securities Exchange Act of 1934 (the "Exchange Act")(each such person
being sometimes referred to as an "Indemnified Person") against any losses,
claims, damages or liabilities, joint or several, to which such Indemnified
Person may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement under which such Warrant
Shares are registered under the Securities Act, or any Prospectus contained
therein or furnished by the Company to any Indemnified Person, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the Company hereby
agrees to reimburse such Indemnified Person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that the
Company shall not be liable to any such Indemnified Person in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or
8
<PAGE> 9
omission or alleged omission made in such Registration Statement or Prospectus,
or amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by such Indemnified Person expressly for
use therein.
(b) Holder agrees, as a consequence of, and as a condition to, the inclusion of
any of Holder's Warrant Shares in such Registration Statement, and each
underwriter, selling agent or other securities professional, if any, which
facilitates the disposition of Warrant Shares shall agree (or the Holder shall
cause to agree), as a consequence of facilitating such disposition of Warrant
Shares to (i) indemnify and hold harmless the Company, its directors, officers
who sign any Registration Statement and each person, if any, who controls the
Company within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act, against any losses, claims, damages or liabilities to
which the Company or such other persons may become subject, under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in such Registration
Statement or Prospectus, or any amendment or supplement, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such holder, underwriter, selling agent or other securities
professional expressly for use therein, and (ii) reimburse the Company for any
legal or other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim as such expenses are
incurred. Unless such alleged untrue statement of material fact or alleged
omission is proven true the indemnity shall not exceed the gross proceeds in the
offering.
(c) Promptly after receipt by an indemnified party under subsection (a) or (b)
above of notice of the commencement of any action, such indemnified party shall,
if a claim in respect thereof is to be made against an indemnifying party under
this Section 8.5, notify such indemnifying party in writing of the commencement
thereof; but the omission so to notify the indemnifying party shall not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section 8.5. In case any such action shall be brought against any
indemnified party and it shall notify an indemnifying party of the commencement
thereof, such indemnifying party shall be entitled to participate therein and,
to the extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may
9
<PAGE> 10
be sought hereunder unless such settlement, compromise or judgment (i) includes
an unconditional release of the indemnified party from all liability arising out
of such action or claim and (ii) does not include a statement as to, or an
admission of, fault, culpability or a failure to act, by or on behalf of any
indemnified party.
(d) If the indemnification provided for in this Section 8.5 is unavailable to or
insufficient to hold harmless an indemnified party under subsection (a) or (b)
above in respect of any losses, claims, damages or liabilities (or actions in
respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party and the indemnified party in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative fault of such indemnifying party and indemnified
party shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by such
indemnifying party or by such indemnified party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The amount paid or payable by an indemnified party
as a result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
9. Unless registered as contemplated by Section 8 hereof, the Warrant Shares
issued upon exercise of the Warrants shall be subject to a stop transfer order
and the certificate or certificates evidencing such Warrant Shares shall bear
the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH
SHARES MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT, OR AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT. SUCH SHARES ARE
SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER CONTAINED IN A
WARRANT, DATED OCTOBER ___, 1998, A COPY
10
<PAGE> 11
OF WHICH ARE ON FILE WITH THE SECRETARY OF THE COMPANY."
10. Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction, or mutilation of any Warrant (and upon surrender of any Warrant if
mutilated), and upon reimbursement of the Company's reasonable incidental
expenses and, if reasonably requested, an indemnity reasonably acceptable to the
Company, the Company shall execute and deliver to the Holder thereof a new
Warrant of like date, tenor, and denomination.
11. The Holder of any Warrant shall not have, solely on account of such status,
any rights of a stockholder of the Company, either at law or in equity, or to
any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Warrant.
12. This Warrant shall be construed in accordance with the laws of the State of
California applicable to contracts made and performed within such State, without
regard to principles of conflicts of law.
Dated: October 5th, 1998
NAM TAI ELECTRONICS, INC.
By: /s/ M. K. Koo
-----------------------------
Name: M. K. Koo
Title: Senior Executive Officer
Agreed and Accepted:
NATIONAL SECURITIES CORPORATION
By: /s/ Steven A. Rothstein
-----------------------------
Name: Steven A. Rothstein
Title: Chairman
11
<PAGE> 12
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, _______________________________________________
hereby sells, assigns, and transfers unto __________________ a Warrant to
purchase __________ shares of Common Stock, $____ par value per share, of Nam
Tai Electronics, Inc. (the "Company"), together with all right, title, and
interest therein, and does hereby irrevocably constitute and appoint___________
attorney to transfer such Warrant on the books of the Company, with full power
of substitution.
Dated:_________________________
Signature_________________________
Signature Guaranteed:
NOTICE
The signature on the foregoing Assignment must correspond to
the name as written upon the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
12
<PAGE> 13
To: Nam Tai Electronics, Inc.
999 West Hastings Street
Suite 1500
Vancouver, B.C.
Canada V6C 2WC
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase
_______ Warrant Shares covered by the within Warrant and tenders
payment herewith [in the amount of $_________] in accordance with the
terms thereof, certifies that he owns this Warrant free and clear of
any and all claims, liens and/or encumbrances and requests that
certificates for such securities be issued in the name of, and
delivered to:
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the
Warrant Shares covered by the within Warrant be registered in the name
of, and delivered to, the undersigned at the address stated below.
Dated:_________________________ Name:_________________________
(Print)
Address:
_________________________
(Signature)
