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PEAK INTERNATIONAL LIMITED
(Exact Name of Registrant as Specified in its Charter)
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Not Applicable
(Translation of Registrant's Name Into English)
Bermuda
(State or Other Jurisdiction of
Incorporation or Organization)
Units 3, 4, 5 and 7, 37th Floor
Cable TV Tower
9 Hoi Shing Road
Tsuen Wan
N.T., Hong Kong
(Address of Principal Executive Offices)
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Securities registered or to be registered pursuant to Section 12(b) of the
Act.
Title of each class
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Common Stock, par value US $0.01 per share
Name of each exchange on which registered
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Nasdaq Stock Market National Market
Securities registered or to be registered pursuant to Section 12(g) of the
Act.
NONE
(Title of Class)
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Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
Common Stock, par value US$0.01 per share........... 13,521,849
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) 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]
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[LOGO OF PEAK]
Annual Report On Form 20-F
1999
As filed with the Securities and Exchange Commission on September 23, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1999
Commission file number: 0-29332
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TABLE OF CONTENTS
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Page
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PART I.................................................................... 1
Item 1. Description of Business........................................ 1
Item 2. Description of Property........................................ 20
Item 3. Legal Proceedings.............................................. 21
Item 4. Control of Registrant.......................................... 21
Item 5. Nature of Trading Market....................................... 22
Item 6. Exchange Controls and Other Limitations Affecting Security
Holders................................................................ 22
Item 7. Taxation....................................................... 23
Item 8. Selected Consolidated Financial Data........................... 26
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 27
*Item 9A. Quantitative and Qualitative Disclosures About Market Risk.... 31
Item 10. Directors and Executive Officers of Registrant................. 33
Item 11. Compensation of Directors and Executive Officers............... 34
Item 12. Options to Purchase Securities from Registrant or
Subsidiaries........................................................... 35
Item 13. Interest of Management in Certain Transactions................. 37
PART II................................................................... 38
**Item 14. Description of Securities to be Registered.................... 38
PART III.................................................................. 38
Item 15. Defaults Upon Senior Securities................................ 38
Item 16. Change in Securities and Changes in Security for Registered
Securities............................................................. 38
PART IV................................................................... 39
Item 17. Financial Statements........................................... 39
Item 18. Financial Statements........................................... 39
Item 19. Financial Statements and Exhibits.............................. 39
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*Included in Item 9.
**Omitted because item is not applicable.
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PART I
All references to the "Company," "we," "us" or "our" herein are references
to Peak International Limited, a company incorporated under Bermuda law on
January 3, 1997, and, unless the context otherwise requires, its subsidiaries
and predecessors. All references to "Peak (HK)" herein are to Peak Plastic &
Metal Products (International) Limited, a company incorporated in Hong Kong
and a wholly-owned subsidiary of the Company and, unless the context otherwise
requires, its subsidiaries and predecessors. References in this Annual Report
on Form 20-F ("Annual Report") to our historical business and operations
assume that the corporate reorganization in 1997 (the "Restructuring") by
which, among other things, Peak (HK) became a wholly-owned subsidiary of the
Company and the Company acquired its other subsidiaries, had already occurred
as of the times to which the references relate. Any discrepancies in the
tables included in this Annual Report between the amounts indicated and the
totals thereof are due to rounding. All references to "US Dollars," "US$" or
"$" herein are to United States Dollars, references to "HK Dollars" or "HK$"
are to Hong Kong Dollars and references to "Fiscal 1994," "Fiscal 1995,"
"Fiscal 1996," "Fiscal 1997," "Fiscal 1998," "Fiscal 1999" and "Fiscal 2000"
are to the years ended March 31, 1994, 1995, 1996, 1997, 1998, 1999 and 2000,
respectively.
This Annual Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended. The forward-looking
statements reflect our view at the time of this Annual Report with respect to
future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties including among others dependence
on the semiconductor and electronics industries, competition, dependence on
significant customers, issues relating to its operations in China, the
resolution of recently filed shareholder litigation and other matters that
could cause actual results to differ materially from the statements made
herein. The words "believes," "expects," "anticipates," "intends," "plans,"
"estimates" and similar expressions, identify forward-looking statements,
which speak only as of today. The principal risks and uncertainties that may
cause actual results to vary materially from the forward looking statements
contained herein include those described in the section entitled "Description
of Business--Risk and Uncertainties" as well as a wide variety of other
factors, many of which are outside of our control. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise. Investors are
cautioned not to place undue reliance on these forward-looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
General
We are a leading supplier of precision engineered packaging products for the
storage, transportation and automated handling of semiconductor devices and
other electronic components. Our products are designed to interface with
automated handling equipment used in the production and testing of
semiconductor and electronic products. Our customers include semiconductor
companies such as Texas Instruments, ST Microelectronics, Philips and
Motorola, as well as subcontract assembly and test companies such as ASAT,
STATS and ASE. Our products are designed to ensure that semiconductor devices
and electronic components, which are often delicate and may have significant
value, are protected from mechanical and electrical damage during storage,
transportation and automated handling.
We produce principally matrix trays, shipping tubes, reels and carrier tape.
We also produce leadframe boxes and interleaves used in the storage and
transportation of leadframes. In addition, we collect and sell recycled matrix
trays using the name "SemiCycle." We believe that our recycling programs,
whereby we collect and recycle products we manufacture and products
manufactured by others, enable us to expand our customer base by providing us
with opportunities to supply both newly-manufactured and recycled products to
customers.
Our principal production facilities, located in Shenzhen, China, are
equipped with injection molding machines, extruders, carrier tape machines,
mixing machines, ultrasonic welding machines and other machinery and
equipment. We maintain in-house tooling facilities capable of producing the
molds used for production, dies
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and tooling for sale and spare parts for machines used in its production
processes. We also have in-house compounding capabilities for the mixing,
blending and pelletizing of PVC raw materials used in our production
processes. In addition, we maintain computer aided design ("CAD") stations
which are linked electronically to our sales offices to enable the sharing of
design information. Finalized designs are transmitted electronically to our
in-house tooling facilities for the production of molds, dies and tooling.
We maintain recycling programs through which we, our agents and independent
contractors collect used trays, at approximately 430 locations in Asia and
Europe. We recycle trays manufactured by us or by others, collected from end
users, such as Surface Mount Technology ("SMT") companies and other types of
assemblers of circuit boards and manufacturers of electronic products and
systems. Most of the trays collected are then transported to our production
facilities in Shenzhen, China, where we process them through inspection,
cleaning and anti-static coating, if appropriate. We then place the trays into
inventory in our warehousing facilities pending sale to customers. Recycled
trays that do not meet our quality requirements, or for which there is
insufficient demand, are ground and reused in the manufacturing processes for
new products. Currently, we collect approximately 3.0 million trays, each
month for recycling. By using recycled trays in our operations, we decrease
our cost of goods sold, and increase our operating margin without increasing
prices.
We maintain five sales offices, located in Hong Kong; Singapore; Penang,
Malaysia; Milpitas, California; and Austin, Texas whereby direct sales are
made to customers, and three representative offices in Shenzhen and Shanghai,
China and Rome, Italy that provide customers with technical information. We
also sell our products through five sales agents located in Japan (three);
Seoul, South Korea; and Taipei, Taiwan. We maintain, either directly or
through our local sales representatives, a network of 23 Just-in-Time ("JIT")
warehouses located in Asia, North America and Europe, near our customers'
production facilities.
Our principal executive offices are located in Units 3, 4, 5 and 7, 37th
Floor, Cable TV Tower, 9 Hoi Shing Road, Tsuen Wan, N.T., Hong Kong and our
main telephone number is (852) 2402-5100.
Strategy
Our objective is to increase our market presence in serving the
semiconductor and electronics industries by providing top quality service,
precision engineered packaging solutions and recycling alternatives to
manufacturers of semiconductor devices and electronic components through our
integrated manufacturing capability and our recycling programs. The key
elements of our business strategy are as follows:
Maintain Close Customer Relationships. We plan to maintain close
relationships with our customers through an extensive network of strategically
located sales, customer service and product distribution sites and by working
closely with our customers in developing precision engineered packaging
solutions for the storage, transportation and automated handling of their
products. We believe that our ability to distribute our products to customers
located in Asia, North America and Europe allows us to compete effectively
with other suppliers of packaging products to the semiconductor and
electronics industries, a number of which distribute only within certain
geographic regions. Customer reliance on quick delivery drives our product
strategy with respect to both new and recycled products. We believe that our
recycling programs enable us to expand our customer base by providing us with
opportunities to supply both newly manufactured and recycled products to
customers.
Shorten Delivery Time. We plan to attract and retain customers based on our
ability to deliver large quantities of products on short notice to meet
customer demand. We believe that short delivery time is of particular
importance to our customers because in the semiconductor and electronics
industries requirements for packaging products are sometimes difficult to
forecast accurately. We believe that stocking certain key products in our
network of JIT warehouses, maintained either by us or by our local sales
representatives reduces the amount of time required for the delivery of our
products to our customers, thereby improving our responsiveness to customer
requirements for flexibility in delivery and generally facilitating the
improvement of inventory management by our customers. In addition, our in-
house tooling facilities and raw material mixing and compounding capabilities
obviate the necessity of working with sub-contractors and enable us to achieve
shorter production cycles.
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Offer a Broad Range of Products. Our current product offerings, which
include matrix trays, tubes, tape-and-reel and other carrier products, allow
us to service a broad range of customers who often have needs across multiple
product categories. In recent years, we have expanded our product offerings
from tubes to include matrix trays, recycled matrix trays and tape-and-reel
products. We are also currently engaged in the study and development of new
products, with an emphasis on packaging products designed to carry high-value
semiconductor and electronics components. Our production facilities have been
formally approved or "qualified" by a number of our customers across our
product categories. We believe that our customers value the range of our
product offerings allowing us to compete effectively. Our in-house design and
tooling capabilities reduce the cycle time needed for the development of new
products and product features and facilitates our development of "custom"
products which typically require different prototype stages during product
development. Our in-house design and tooling capabilities have also
facilitated our development of new product features such as the "enhanced
pocket strength," "anti-reflective wall" and "high strength ring pedestal"
features for our carrier tape products, for which we have patent applications
pending. In addition, our in-house raw material mixing and compounding
capabilities enable us to better control the quality of our products to meet
customer specifications with respect to characteristics such as color,
transparency and hardness. Our recycling programs also enable us to supply a
broad range of recycled trays to our customers.
Increase Volume Supply Capabilities. We plan to continue the expansion of
our production and tooling capacities and our recycling programs so as to
increase our high volume supply capabilities. Since 1992, we have expanded the
production capacity of our facilities in Shenzhen, China in order to meet
growing demand for our products. We have been constructing an additional plant
to be located approximately three miles from the existing production
facilities, which has the potential to greatly increase our production
capacity. We have put the completion of this facility on hold and are
reviewing whether our manufacturing requirements in the foreseeable future
warrant the additional capacity.
Emphasize Quality Assurance and Process Control. We plan to maintain our
high standards of quality products. We maintain a quality assurance and
process control department which, as of March 31, 1999, consisted of
approximately 35 engineers and 275 on-line process controllers. Quality
assurance and process control procedures are performed at each major stage of
production. These include the inspection of incoming raw materials,
statistical process control at the injection molding (for trays and reels) and
extrusion (for tubes) stages of production and the inspection and testing of
finished products. Our production facilities in Shenzhen, China obtained
International Standard Organization ("ISO") 9002 certification in October 1994
and are subject to follow-up surveillance audits conducted semi-annually
thereafter in accordance with normal ISO procedures. In addition, before
making high volume purchases from us, customers generally require us to
undergo a one- to two-month "qualification" process. Such qualification
processes often include on-site certification of our production facilities by
members of the customer's engineering and quality control staff. Our
production facilities in Shenzhen, China have been qualified by many of our
customers including Intel, Texas Instruments, Motorola, Philips, ST
Microelectronics, Hewlett Packard and others. We believe that in addition to
our quality assurance and process control department, our in-house design and
tooling facilities and raw material compounding capabilities have enabled us
to better control the quality of our products.
History
We commenced operations in 1975, principally as a manufacturer of integrated
circuit ("IC") shipping tubes, with production facilities located in Tsuen
Wan, Hong Kong. In 1987, we relocated our production facilities to Shenzhen,
China. In 1992, we were acquired by Mr. T.L. Li, a semiconductor industry
entrepreneur and investor. See "Directors and Executive Officers of
Registrant." In the same year, our in-house tooling capability was
substantially augmented and we commenced the production and sale of matrix
trays. At the same time, we commenced the establishment of a distribution
network of JIT warehousing facilities located near areas of semiconductor
manufacturing activity. Additionally, we commenced the operation of our
recycling programs through subsidiaries doing business under the trade name
"SemiCycle." In 1994, we commenced the sale of the reels used in tape-and-reel
IC carriers and in 1996, we commenced the sale of the tape used in such
carriers. Since 1992, we have expanded the production capacity of our
facilities in Shenzhen, China in order to meet growing demand.
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Markets That We Serve
Our products are used for the storage and transportation of semiconductor
devices and other electronic components such as connectors, resistors and
capacitors. We design our products to interface with automated handling
equipment used in the manufacture and testing of semiconductor and electronics
products.
Semiconductors
Semiconductors are the basic building blocks used to create a variety of
electronic products and systems. Continual improvements in semiconductor
process and design technologies have enabled the production of complex, highly
integrated circuits which provide faster execution, increased functionality
and greater reliability. As a result, semiconductor demand has experienced
growth in markets for such products as computers, communications, consumer
electronic devices, automotive products and industrial automation and control
systems.
Semiconductors are often classified as either discrete devices (such as
individual diodes or transistors) or IC's. In ICs, thousands of functions are
combined on a single "chip" of silicon to form a more complex circuit, which
is then encapsulated in plastic, ceramic or other materials (forming a
"module") for connection to a circuit board.
In pin-through-hole ("PTH") technology, modules are attached by pins, also
called I/O (for input/output) "leads," inserted through or soldered to plated
holes in the printed circuit board. PTH is one of the earliest technologies in
the assembly of printed circuit boards. PTH semiconductor devices, such as
PDIP (Plastic Dual In-Line Package) modules, are typically sorted and
transported in IC shipping tubes such as those we produce.
In the technologically more advanced SMT, the leads on ICs and other
electronic components are soldered to the surface of the printed circuit board
rather than inserted into holes. SMT can accommodate a substantially higher
number of leads than PTH, thereby permitting the board to interconnect a
greater number of integrated circuits. This, in turn, allows tighter component
spacing which permits a reduction in the dimensions of the printed circuit
board. Because of their high lead counts, most very large scale integrated
circuits are configured for surface mounting. Additionally, SMT allows
components to be placed on both sides of the board thereby permitting even
greater density. The substantially higher number of leads and finer lead-to-
lead spacing or "pitch" in SMT products requires packaging solutions which are
more exacting than for PTH products. In addition, certain SMT products are
sensitive to moisture absorption and typically undergo a baking process before
surface mounting, and consequently require robust packaging solutions which
are resistant to high temperature. SMT semiconductor devices are typically
stored and transported in matrix trays or tape-and-reel carriers such as those
we produce.
In recent years, as a general trend, we experienced increased demand for our
products as a result of unit volume growth and other developments in the
global semiconductor industry. First, the increasing complexity of
semiconductor devices and use of automated production equipment continued to
shift the use of packaging products by semiconductor companies away from
traditional products, such as tubes, in favor of products such as trays and
carrier tapes which require higher precision engineering. Second, the
continued proliferation of SMT with its increasing lead-count and finer lead-
to-lead spacing resulted in an increase in the production of semiconductor
devices that are more susceptible to mechanical damage during shipment. As a
result, the use of higher precision engineered packaging products such as
matrix trays has again increased. Third, we believe that the continuing trend
in the global semiconductor industry towards increased out-sourcing of various
steps of the IC production process, such as assembly and testing, also
benefitted us as semiconductor companies increasingly looked for suppliers of
packaging products with the ability to supply large quantities of a wide range
of products on short notice to different subcontractor assembly and test
companies at various locations.
The growth in the market for our products is related to the growth in unit
volume, namely the number of semiconductor devices produced, which may differ
from the growth in the demand for semiconductor devices, as a result of
variation over time in the average selling price per semiconductor device. For
more information see the discussion under the heading "Risks and
Uncertainties--Dependence on Semiconductor and Electronics Industries."
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Electronic Components
Peak products are used to package other electronic components, including
connectors, resistors and capacitors. Connectors are electro-mechanical
devices that allow an electronic signal to pass from one device to another.
They are used to connect wires, cables, printed circuit boards, flat cable and
other electronic components to each other and to related equipment. Connectors
are found in virtually every electronic product including computers, printers,
disk drives, modems, VCRs, radios, medical instruments, airplanes, appliances,
cellular telephones, pagers and automobiles. Original equipment manufacturers
in the electronics industry generally use connectors to complete the design
and manufacture of their products.
Resistors are basic components used in all forms of electronic circuitry to
adjust and regulate levels of voltage and current. They vary widely in
precision and cost, and are manufactured in numerous materials and forms.
Resistive components may be either fixed or variable, depending on whether the
resistance is adjustable (variable) or not (fixed). Resistors can also be used
as measuring devices, such as resistive sensors. Resistive sensors or strain
gages are used in experimental stress analysis systems as well as in
transducers for electronic measurement of loads (scales), acceleration and
fluid pressure.
Capacitors perform energy storage, frequency control, timing and filtering
functions in most types of electronic equipment. The more important
applications for capacitors are electronic filtering for linear and switching
power supplies, decoupling and bypassing of electronic signals for ICs and
circuit boards, and frequency control, timing and conditioning of electronic
signals for a broad range of applications.
Our products serve only portions of the markets for various electronic
components, principally those for SMT components such as SMT ceramic chip
capacitors and SMT chip resistors. For more information, see the discussion
under the heading "--Risks and Uncertainties--Dependence on Semiconductor and
Electronics Industries."
Products and Production Processes
We produce matrix trays, tubes and tape-and-reel products such as reels and
carrier tape. We also sell recycled matrix trays. In addition, we produce a
limited number of leadframe boxes and leadframe interleaves used in the
storage and transportation of leadframes for affiliates of QPL International
Holdings Limited Group ("QPL Holdings"). Leadframes are sheets of metal,
etched or stamped with various patterns of I/O leads which allow for
interconnections between silicon chips and printed circuit boards. Leadframes
are generally stored and transported in stacks housed in plastic boxes, with
individual leadframes separated by plastic or paper interleaves. Lead frame
boxes and interleaves accounted for less than 3% of gross revenues in Fiscal
1999.
Our products are typically categorized by their dimensions and
configurations, the type and size of semiconductor devices they carry, and
their physical characteristics, in particular their resistance to deformation
or "warpage" at various temperatures. Our products are also categorized by
their electrostatic properties as "conductive," "dissipative" or "anti-
static." Conductive and dissipative products are manufactured by adding carbon
fibre or carbon powder to the plastic compound. Anti-static characteristics
are achieved by applying a coating to the surface of the product to prevent
the accumulation of surface electrostatic charges.
Tray Products
Our tray products may be used to store and transport SMT semiconductor
devices. The outer dimensions of matrix trays are generally fixed by industry
standards prescribed by electronics industry associations such as JEDEC in the
United States and EIAJ in Japan. We sell high temperature trays (which may be
baked to temperatures over 150(degrees)C), low temperature trays up to
150(degrees)C and non-bakeable trays.
At the beginning of the tray production process, samples of incoming raw
materials are inspected and tested for key material properties. Virgin raw
materials are mixed and blended with other materials in accordance with our
proprietary processes and production techniques and formed by injection
molding machines into trays. The formed trays are then cleaned of surface
contaminants. Trays that require anti-static coating are subsequently dipped
in anti-static solution and dried. Trays made to be heat resistant undergo a
baking process. Thereafter, we inspect samples of new trays from each
manufactured lot for visible defects and warpage, test for electrostatic
discharge characteristics and check their dimensions prior to shipment.
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Tube Products
Our tube products may be used to store and transport certain SMT
semiconductor devices that are configured differently from those requiring our
tray products, PTH semiconductor devices and other products used in the
electronics industry, such as connectors.
At the beginning of the tube production process, samples of incoming raw
materials are inspected for conformity to specifications. Raw materials are
mixed and blended and made into pellets, based on compounding formulae which
vary depending on the characteristics, such as color, transparency and
hardness, required for the product. We extrude the pellets into tubes, which
we further process by hole punching, silk screen marking and applying an anti-
static coating. Following this process, we inspect samples of the new tubes
for visible defects and test them for electrostatic discharge prior to
shipment.
Tape-and-Reel Products
Our tape-and-reel products may be used to store and transport SMT
semiconductor devices and other modules, as well as other products used in the
electronics industry, such as connectors. Tape-and-reel carriers comprise
three parts: reel, carrier tape and cover tape. The semiconductor devices and
other products to be carried are placed in pockets formed in the carrier tape,
which is sealed with cover tape and wound around reels for storage and
transportation. We commenced sales of reels in 1994 and sales of carrier tape
in December 1996.
The production process for reels is similar to that for trays except that we
use different raw materials and that an additional process of ultrasonic
welding is required following the injection molding process to weld two parts
of the reel together. In the production of carrier tape, we purchase
polystyrene or polycarbonate tape from suppliers in large rolls which we then
slit to desired widths. We form the carrier tape by a combination of thermal,
air pressure and hole punching processes, and thereafter inspect the new
carrier tape for visible defects prior to shipment. We resell cover tape
purchased from outside sources.
Other Products
In addition to the standard products in our three principal product lines,
we also produce an array of "custom" products which include customer-specific
designs of trays, tubes, reels, carrier tape and an assortment of other
carriers. We also produce leadframe boxes and leadframe interleaves which we
sell to leadframe suppliers for use in the storage and shipping of their
products.
Product Development
We are currently engaged in the study and development of new products, with
an emphasis on packaging products designed for the carriage of high-value
components related to the semiconductor and electronics industries. We
undertake on-going research and development efforts which emphasize the
development of features that require precision engineering in order to better
serve our customer base. We have developed new product features for our
carrier tape products, such as the "enhanced pocket strength," "anti-
reflective wall" and "high strength ring pedestal" features, for which we have
patent applications pending in the United States. The "enhanced pocket
strength" feature improves the vertical crush resistance of the pockets in the
carrier tape by corrugating the vertical sidewalls of the pockets. The "high
strength ring pedestal" feature improves the lateral crush resistance of the
pockets in the carrier tape by means of a trapezoidal shaped pedestal and a
ring at the bottom of the pocket. The "anti-reflective wall" feature enables
our customers to more effectively utilize their automated optical inspection
equipment to inspect the semiconductor or electronic components placed in the
carrier tape that we manufacture. By placing a chamfered corner in the wall of
the carrier tape pocket, we reduce the amount of reflection which could
interfere with the workings of the automated optical inspection equipment.
Research and development expenditures were $551,000, $538,000 and $375,000 for
Fiscal Year 1999, Fiscal Year 1998 and Fiscal Year 1997, respectively.
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Recycling Programs
We conduct our collection operations through our subsidiaries and
independent contractors doing business using the trade name "SemiCycle." We
recycle trays and reels collected from end users at approximately 430
locations in Asia and Europe. During Fiscal 1999, we purchased $2.0 million of
used trays and reels collected in the United States by The SemiCycle
Foundation, a Texas non-profit corporation. We have discontinued our
relationship with The SemiCycle Foundation, as of August 6, 1999, because we
have substantial inventories, and believe that we can obtain recycled units
from sources in Europe and Asia at a lower cost. For more information, see
"Interest of Management in Certain Transactions." Tube products and carrier
tape products are generally not recycled. Currently, we collect approximately
3.0 million trays, each month for recycling. We also purchase products to
recycle from independent dealers.
The trays collected through our recycling programs are principally
transported to the Company's production facilities in Shenzhen, China where we
process them, including sorting, inspection, cleaning and anti-static coating,
if appropriate. We then put them into inventory in our warehousing facilities
pending sale to customers. Typical end users include SMT using companies, and
other types of assemblers of circuit boards and manufacturers of computers and
other end products. Recycled trays that do not meet industry quality
requirements, or for which there is insufficient demand, are ground and reused
in the manufacturing processes for new products.
Some jurisdictions in which our packaging products are sold or used have
adopted or proposed laws and regulations with a view to promote, among other
things, the recycling of packaging materials. In addition, the ISO has
incorporated environmental considerations in formulating its new ISO 14000
quality standards. We believe that our recycling programs provide our
customers with opportunities to select the packaging products that best meet
their requirements in terms of cost and environmental preferences. We believe
that our recycling programs help our customers comply with environmental
regulations and meet ISO standards with respect to environmental issues in two
ways. First, we provide a recycling alternative to the traditional disposal
methods of landfill and incineration. Second, our offerings of recycled
products assist our customers in complying with or meeting "recycle-content"
and "green product" regulations, standards or goals.
Customers
We averaged approximately 240 customers per month in Fiscal 1999, including
semiconductor and component companies as well as subcontract assembly and test
companies. We also sold products to manufacturers of connectors, sockets,
resistors and capacitors and other types of electronic components. In Fiscal
1999, our top customers were Texas Instruments, QPL Holdings, Philips, Amkor-
Anam, Motorola, ASE, Hewlett Packard, LSI, Analog Device and ST
Microelectronics. Texas Instruments, Philips, QPL Holdings, Amkor-Anam and
Motorola were the only customers which individually accounted for more than 5%
of the our net sales in Fiscal 1999. In the aggregate, the top ten customers
accounted for 50.5% of our net sales in Fiscal 1999. We have received awards
from customers such as Texas Instruments, Motorola, Hewlett-Packard and Lucent
Technologies in recognition of the quality of our products and services.
A significant portion of our net sales have historically been and are
expected to continue to be derived from companies in the QPL Holdings.
Companies in the QPL Holdings together accounted for approximately 8.0% of our
net sales in Fiscal 1999. The bulk of this business came from ASAT Limited,
which we believe has historically ordered a significant portion of its needs
for packaging products from us. A contract is in place with a financial
institution to purchase a 50% interest in ASAT Limited, removing it from the
exclusive control of QPL Holdings. Over time, this might result in ASAT
Limited fulfilling less of its needs with orders from us. EEMS Italia S.p.A.
("EEMS"), a memory IC assembly and test company, acted as our sales agent in
Europe since 1995. This relationship was terminated in December 1998. For more
information, see the discussion under the headings "--Risks and
Uncertainties--Relationship with Principal Shareholder and Potential Conflicts
of Interest."
7
<PAGE>
Pricing
The price quotations we provide generally contemplate the delivery of
products within two weeks of the receipt of purchase orders. We charge higher
prices when the customer desires shorter delivery time or additional services,
such as local warehousing, special packaging provisions or special markings on
the product. As a general policy, we price our recycled products at a discount
to the price of corresponding new products.
Sales and Marketing
We maintain five sales offices: Hong Kong; Singapore; Penang, Malaysia;
Milpitas, California, U.S.A.; and Austin, Texas, U.S.A. where we make direct
sales to customers. We also maintain three representative offices in Shenzhen
and Shanghai, China and Rome, Italy that provide customers with technical
information. In addition, we sell our products through five sales agents
located in Japan (three); Seoul, South Korea; and Taipei, Taiwan.
We generally make our sales pursuant to purchase orders from our customers.
Therefore, for the most part we do not have long-term agreements with or
commitments from our customers for the purchase of products. While customers
typically provide us with one- to two-month forecasts of their requirements,
forecasts do not constitute binding orders.
The following table sets forth the geographic distribution of our net sales
for the periods indicated. For more details, see Note 13 of Notes to our
Consolidated Financial Statements.
<TABLE>
<CAPTION>
Year Ended March
31,
-------------------
1997 1998 1999
<S> <C> <C> <C>
North Asia.............................................. 47.5% 53.8% 54.9%
South Asia.............................................. 29.4 21.3 24.3
North America........................................... 19.9 22.1 17.0
Europe.................................................. 3.2 2.8 3.8
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
North Asia represents China and Hong Kong, Philippines, Taiwan, Japan and
Korea while South Asia represents Singapore, Malaysia and Thailand.
Distribution
We maintain, either directly or through our sales representatives, a network
of warehouses located near the production facilities of our customers. The
following table sets forth the locations of the warehouses that we or our
local sales representatives maintain.
<TABLE>
<S> <C> <C>
Asia North America Europe
Japan (six) Milpitas, California Rome, Italy
Malaysia (two) Dublin, Ireland
Shenzhen, China Malta
Shanghai, China
Tianjin, China
Hong Kong
Keelung, Taiwan
Kaohsiung, Taiwan
Taipei, Taiwan
Bangkok, Thailand
Manila, Philippines
Singapore
Seoul, South Korea
</TABLE>
8
<PAGE>
We also offer drop shipment services for our products, which provide for the
shipment of our products directly to end-users designated by our customers.
Because drop shipment prohibits our customers from inspecting our products
before their receipt by the end user, the quality of our products is an even
more important consideration than usual for our customers.
Customers generally place purchase orders with our sales office or a sales
agent near their location. The orders are then forwarded together with the
requested shipping date to our production facilities in Shenzhen, China via
our internal electronic mail system, with a copy to our Hong Kong office for
invoicing and accounting purposes. Employees at our production facilities in
Shenzhen, China generally respond to the local sales office upon receipt of
the order with a committed shipping date.
Our office in Hong Kong is responsible for invoicing local sales offices and
sales agents, who in turn record customer invoices and handle collections.
Raw Materials
We generally can purchase the raw materials we use in the production of
trays and reels from a variety of sources worldwide that charge similar
prices. We purchase tray raw materials principally from two suppliers located
in the United States and Malaysia. We purchase PVC resin, the principal raw
material for tubes, and certain additives used in the production of tubes
principally from three suppliers located in Singapore, Japan and Germany. We
purchase the polystyrene tape and polycarbonate tape used in our carrier tape
production process, as well as cover tape, from two suppliers located in Japan
and the United States.
We generally purchase the various raw materials used in our production
processes one and a half months before the materials are delivered to us. We
try to maintain in Shenzhen, China inventories of raw materials for
approximately two to three months of estimated production requirements. For
more information, see the discussion in the section "Management's Discussion
and Analysis of Financial Condition and Results of Operations." From time to
time, we try to make strategic purchases of raw materials when we believe the
prices are favorable. Recycled trays that we or our agents collect are
initially accounted for as part of our inventory of raw materials. Following
sorting and processing, recycled trays are subsequently accounted for as part
of our inventory of finished products.
Quality Assurance and Process Control
We maintain a quality assurance and process control department. We perform
quality assurance and statistical process control procedures at each major
stage of production, including the inspection of raw materials, statistical
process control at the injection molding (for trays and reels) and extrusion
(for tubes) stages of production and the inspection and testing of finished
products. We also conduct "qualification" procedures for our raw material
suppliers. We believe that, in addition to our quality assurance and process
control department, our in-house design and tooling facilities and compounding
capabilities have enabled us to control the quality of our products and that
such integrated quality assurance system enables us to ensure end-product
integrity and maximize customer value.
Our production facilities in Shenzhen, China were certified as meeting the
ISO 9002 quality standards by the ISO in October 1994, and are subject to
follow-up surveillance audits conducted semi-annually thereafter in accordance
with normal ISO procedures. The ISO is an organization formed by delegates
from member countries to establish international quality assurance standards
for products and manufacturing processes. The certification process involves
subjecting our production processes and our quality management systems to
review and surveillance for periods as long as nine months. The ISO 9002
certification is required by certain European countries in connection with
sales of industrial products in such countries. In addition, such
certification provides independent verification to our customers as to the
quality control in our manufacturing processes and many of our customers
require ISO certification as a prerequisite for purchasing from the Company.
9
<PAGE>
Before making high volume purchases from us, prospective customers generally
require our production facilities to undergo a one- to two-month
"qualification" process. These qualification processes often include on-site
certification of our production facilities by members of a customer's
engineering and quality control staff. Our production facilities in Shenzhen,
China have been qualified by customers including Intel, Texas Instruments,
Motorola, Hewlett Packard, Philips and others.
Competition
The markets for our products and services are highly competitive. Our
products compete with similar products manufactured by other companies, some
of which have substantially greater financial resources than we do.
We classify our competitors as large diversified manufacturers, large
single-product manufacturers and small local job-shop style manufacturers.
Large diversified manufacturers are typically divisions of large multinational
companies which compete with us in markets for more than one product. Large
single-product manufacturers typically have international operations similar
to ours. Small local job-shop style manufacturers typically operate only
within certain geographic regions, such as Taiwan and Singapore. We are not
aware that any of our major competitors offer the range of products and
services that we offer. We believe that we compete with large diversified
manufacturers through our focus on serving the semiconductor and electronics
industries, with large single-product manufacturers through our broad range of
product offerings and with smaller local job-shop style manufacturers through
our international organization which enables us to meet the requirements of
multinational customers with several production facilities at various
locations. We also believe that our collection and use of recycled materials
allows us to compete favorably while maintaining better than average operating
margins.
We believe that the principal competitive factors in the markets for our
products and services are responsiveness and flexibility (including short
delivery cycles and the ability to supply large quantities on short notice),
price, product quality and range of products and services available.
Environmental Matters
We are subject to various laws, rules and regulations in the Peoples
Republic of China (the "PRC") regulating the discharge of materials into the
environment or otherwise relating to the protection of the environment. We
believe that we are in substantial compliance with applicable laws, rules and
regulations relating to the protection of the environment.
Employees
As of March 31, 1999, we had 144 employees at our offices located in Asia,
North America and Europe. Our employees are not covered by any collective
bargaining agreements. In late March of 1999, approximately 30 of our
employees, including 13 management level employees, resigned or were
terminated over disagreements with our Board of Directors. Among these
employees was then vice president Steven Dezso. On December 2, 1998, our Board
of Directors terminated then President and Chief Executive Officer, Richard
Brook. For more information, see the discussion under the Section "Directors
and Executive Officers." We have replaced many of the employees who resigned
or were terminated, principally by promoting employees already within our
organization. In some instances we have determined that replacement was
unnecessary. In spite of the resignations and terminations, we experienced no
work stoppages, and only minor operational difficulties including a reduction
in our margins resulting from the use of more virgin plastic relative to
recycled material during the first quarter of Fiscal 2000, resulting in the
loss of less than $350,000 in gross margin on sales. This was a temporary
difficulty, and the quality of our products never suffered.
We believe that certain of our former employees continue to communicate with
our current employees in an effort both to glean information with respect to
our business and operations and to disrupt our operations. Based on our
experience since April 1999, we also believe that our current employee base
has stabilized.
10
<PAGE>
Since June 1996, we have established defined contribution benefit plans for
our employees in Hong Kong, and have made contributions to such plans based on
5.0% of the monthly base salaries of participating employees. The assets of
such plans are held under provident funds managed by independent trustees. In
addition, we make contributions to employee Retirement schemes as required by
local authorities in certain jurisdictions, such as Singapore, in which we
have operations. For more information, the discussion under see Note 10 of the
Notes to our Consolidated Financial Statements.
On April 23, 1999 we issued to our employees options to purchase an
aggregate of 384,036 shares of our common stock at a purchase price of $3-
21/32. 120,000 of the option so granted vested immediately while the balance
will vest in full and become exercisable on October 1, 1999. Additionally, on
April 22, 1999, we issued options to Mr. Calvin Reed, in connection with his
appointment as our President and Chief Executive Officer. Specifically, we
issued Mr. Reed options to purchase 150,000 shares of our common stock at a
purchase price of $3-21/32 per share, 150,000 shares of our common stock at a
purchase price of $7 per share and 100,000 shares at a purchase price of $10
per share. These options, except for options to purchase 100,000 shares of our
common stock at a purchase price of $3--21/32, were not issued pursuant to
either the 1997 or the 1998 Share Option Plan. On May 5, 1999, in connection
with their appointment as directors, we issued to Jack Menache and Doug
Broyles options to purchase 10,000 shares of our common stock at a purchase
price of $3 7/8 per share under our 1998 Share Option Plan. Since this grant
we have accelerated the vesting of these options so that as of the date of
this Annual Report they have vested. On July 28, 1999, in connection with his
appointment as our Vice President of Administration, Secretary and General
Counsel, we issued to Jack Menache options to purchase 100,000 shares of our
common stock at a purchase price of $5 7/8 per share under our 1997 Share
Option Plan. Also on July 28, 1999, in connection with his appointment as a
director, we issued to William Snyder options to purchase 10,000 shares of our
common stock at a purchase price of $5 7/8 per share under our 1998 Share
Option Plan. For more information, see the discussion in the Section "Options
to Purchase Securities from Registrant or Subsidiaries."
Our existing production facilities in Shenzhen, China are operated by an
unaffiliated PRC company pursuant to a processing agreement initially entered
into in May 1987 and subsequently amended and renewed in May 1994 and December
1996. We entered into the processing agreement with the PRC company which was
formed by the Shenzhen Municipal Longgang District Foreign Economic Service
Company, a company controlled by the local government of the Longgang District
of Shenzhen. The current term of the processing agreement expires on May 28,
2016. Under the processing agreement, the PRC company has agreed to provide
the personnel for the operation of our facilities in Shenzhen, China and
renders assistance in dealing with all matters relating to the import and
export of raw materials and our products. Such personnel are not our
employees. We agree to pay each worker no less than a fixed sum each month,
which is revised every two years, in addition to an annual fee to the PRC
company (which has been waived for the current term of the agreement) based on
the quantity of products manufactured each year. In October 1995, we entered
into a similar processing agreement with a different PRC company, also
unaffiliated with us, which has a term of fifty years, for the operation of
our additional production facilities being constructed in Shenzhen, China. As
of March 31, 1999, the personnel at our production facilities in Shenzhen,
China numbered approximately 1,765, including personnel in production and
quality assurance and process control, warehousing and inventory control,
tooling and molding, engineering and product development, and purchasing,
financing and other support functions.
Insurance
We maintain insurance policies covering risks of losses due to fire, flood
and other natural disasters. Our insurance policies cover certain of our
buildings, machinery and equipment, raw materials and inventory. We also
maintain business interruption insurance. Significant damage to any of our
production facilities, whether as a result of fire or other causes, would have
a material adverse effect on our results of operations and financial
condition. Additionally, we maintain directors and officers insurance covering
the payment and defense of certain claims asserted against our directors and
officers. We are not insured against the loss of our key personnel.
11
<PAGE>
Recent Developments
During Fiscal 1999, and continuing into Fiscal 2000, we have taken
substantial measures to examine our business and operations, and have made
substantial changes at all levels of management.
We Hired a New CEO and President
On April 23, 1999, we hired Calvin Reed as our new President and CEO.
Concurrently, we appointed Mr. Reed to our Board of Directors. For more
details regarding Mr. Reed's qualifications, see the Section "Directors and
Executive Officers of Registrant." Mr. Reed replaced Jerry Mo who had been
acting as temporary CEO and President pending our search to permanently fill
those positions. We had appointed Mr. Mo as temporary CEO and President
following the termination of Richard Brook on December 2, 1998.
On December 2, 1998, we released Mr. Brook pursuant to the terms of his
employment contract with us, "without cause," pending completion of a review
of his conduct and retaining our right to consider his release "for cause."
Because we released Mr. Brook without cause, we continued to pay him a monthly
salary of $26,950 per month, that would have continued for an additional 3
years and 1 month. Based upon our investigation, and upon actions we believe
Mr. Brook has taken both prior and subsequent to December 2, 1998, we consider
his release "for cause," and have terminated payments to him.
We Hired a New Vice President of Administration, Secretary and General
Counsel
On July 28, 1999, we hired Jack Menache as our new Vice President of
Administration, Secretary and General Counsel. In connection with this
appointment, Mr. Menache resigned from our Board of Directors. At the same
time, we appointed William Snyder to sit on the Board in place of Mr. Menache.
For more details regarding the qualifications of either Mr. Menache or Mr.
Snyder, see the Section "Directors and Executive Officers of Registrant."
We Have Reconstituted Our Board of Directors
As of September 1, 1999, our Board of Directors is composed of four members,
only one of whom is an inside director. The following individuals resigned
from our Board of Directors on the dates indicated:
<TABLE>
<S> <C>
Mr. Francis Leung.......................................... October 21, 1998;
Mr. Robin Nicholson........................................ March 23, 1999;
Mr. Hon Ying Ng............................................ March 23, 1999;
Mr. Kong Chi Wong.......................................... March 23, 1999;
Mr. Jerry Mo............................................... April 23, 1999;
Mr. Jack Menache........................................... July 28, 1999.
</TABLE>
Additionally, our Shareholders, including majority shareholder Luckygold 18A
("Luckygold"), removed Mr. Richard Brook from the Board of Directors on March
10, 1999.
We selected our current directors after careful consideration in order to
provide us with a high level of technological expertise and experience in the
conduct of international business in general. For a complete list of the
current members of our board of directors, see the discussion under the
Section "Directors and Executive Officers of Registrant."
We Have Conducted an Intensive Investigation of Certain Allegations Relating
to Our Business and Operations
After a period of time in which tensions were rising between the Board and
Mr. Brook, then President and Chief Executive Officer of the Company, on
November 22, 1998, the Board communicated its informal determination that we
would be better served if Mr. Brook would leave his position as President and
Chief
12
<PAGE>
Executive Officer. Although we entered into a standstill agreement to permit
negotiation directed toward an amicable departure, on November 28, Mr. Brook
abruptly terminated those discussions. Later the same day, Mr. Brook wrote the
first of a series of memoranda to the Board charging various improprieties by
us and Mr. T.L. Li, our Chairman. This was followed by two more memoranda
amplifying the allegations delivered between that date and December 2, 1998,
when the Board terminated Mr. Brook's employment. The Board instructed our
Audit Committee, consisting of two independent directors, to investigate these
allegations. The Audit Committee then engaged independent counsel for that
purpose.
During the pendency of this investigation, the directors who had presided on
the Audit Committee resigned. They were replaced with two new outside
directors, one of whom (Jack Menache) resigned (in connection with his
employment by the Peak) and was simultaneously replaced, who received and
reviewed reports from the independent counsel previously hired before issuing
their report to our Board of Directors. For more information, see the
discussion under the heading "Employees," and in the section "Directors and
Executive Officers of Registrant."
Specifically, the allegations made by Mr. Brook (other than allegations
concerning our operations in China, which we address separately), and our
Audit Committee's findings were as follows:
1. Mr. Brook alleged that around October of 1997, Messrs. Li and Mo
invested $11 million of our funds in notes issued by Peregrine Investment
Holdings Limited ("Peregrine"), without Board approval, even though at the
time, Mr. Francis Leung was one of our directors and a Peregrine director.
Mr. Brook further alleged that when Peregrine went bankrupt, Messrs. Li and
Mo arranged for the repayment of lost funds through a sale of the Peregrine
notes to a related party. Mr. Brook alleged that our disclosure with
respect to these events was insufficient.
Our Audit Committee found that we invested approximately $12 million in
the Peregrine notes, that we were repaid a portion of that sum at the
notes' maturity and that the remainder was exchanged for a note issued by
the Linmark group, Ltd. ("Linmark"), a British Virgin Islands company, not
affiliated with Peak, or Messrs. Li and Mo. We lost no money--principal or
interest--on this series of transactions. Since Mr. Leung, who resigned
from our Board on October 21, 1998, had been both our director and a
Peregrine director at the time the transaction was made, the Audit
Committee recommended that we institute a set of procedures for both the
investment of corporate funds, and the prior independent review and
approval of related party transactions.
2. Mr. Brook alleged that around October of 1997, Messrs. Li and Mo
invested approximately $3 million in a note issued by CA Pacific
Investments Limited ("CA Pacific"), without Board approval, that this money
was lost when CA Pacific went bankrupt, and that Messrs. Li and Mo arranged
for the repayment of the funds through the sale of the CA Pacific note to a
related party. Mr. Brook alleged that our disclosure with respect to these
events was insufficient.
Our Audit Committee found that we did invest funds in a CA Pacific note
in December of 1997. They also found that one week later, we exchanged this
note for a note from Linmark due in March 1998, the principal of and
interest on which was paid in full, on time. Accordingly, we lost no money
on these transactions. CA Pacific is not related to us or to Messrs. Li and
Mo. The Audit Committee issued the same recommendations with respect to
this allegation as described above.
3. Mr. Brook alleged that we advanced legal fees on behalf of Mr. Li, in
connection with the offering of the TrENDS by Peak TrENDS Trust without an
appropriate written agreement with Mr. Li, providing for interest, and that
Mr. Li should have more promptly reimbursed us for these outlays.
The Audit Committee found that from May to November of 1998, we paid
$833,000 for expenses that Mr. Li had an obligation to reimburse, and that
Mr. Li repaid $600,000 on September 28, 1998, and paid the remainder on
December 9, 1998. The Audit Committee recommended that Mr. Li compensate us
for the loss of the use of funds outlaid on his behalf. Interest at then
market rates totaled $8,824, which Mr. Li has paid.
13
<PAGE>
4. Mr. Brook alleged that in November of 1998, Mr. Mo as CFO
countermanded Mr. Brook's authority by ordering shipment to buyers
affiliated with Mr. Li in spite of payment delinquency by those buyers, and
that such preferences should be subject to Board and Audit Committee
review.
The Audit Committee found insufficient evidence to show that we, as a
general policy, favor related party buyers over independent third-party
buyers. The Audit Committee also found that although some related party
buyers were behind in their payments to us in August and November of 1998,
this was corrected by the end of November of 1998, prior to the alleged
incident.
5. Mr. Brook alleged that Mr. Mo spent time working on Mr. Li's personal
financial matters when he should have been working for us.
The Audit Committee found this allegation to be unsubstantiated.
6. Mr. Brook alleged that in November of 1998, when we received a non-
binding indication of interest in purchasing us (the "Offer"), Mr. Mo began
working on the transaction prior to obtaining a confidentiality agreement,
that the offer was leaked to the market, and that it resulted in unusual
trading activity in our shares of common stock.
The Audit Committee found that in fact Mr. Brook had disclosed the offer
to one or more of our investors, placing us at risk of a possible
securities law violation and necessitating a premature press release to
control that risk. The Audit Committee found no evidence that other leaks
had taken place, and that while the price of our common shares rose at this
time, trading volumes were not unusual. The Audit Committee recommended
that we establish appropriate guidelines with respect to purchases and
sales of our shares by insiders.
7. Mr. Brook also alleged that prior to the offering of TrENDS by Peak
TrENDS Trust, we inflated our reported sales through artificially large
purchases of our products by related parties.
The Audit Committee found that all sales to related party purchasers were
bona fide sales. The Audit Committee recommended that we institute a policy
to monitor our sales to related party purchasers, in order to discover and
prevent any possible manipulation of sales figures.
The allegations presented by Mr. Brook form the basis of the claims
against us in the Complaint (as defined below). For more information
regarding the Complaint, see the discussion under the heading "We have Been
Named In a Class Action Lawsuit" in the Section "Risks and Uncertainties"
and the Item "Legal Proceedings." In summary, the Audit Committee found no
evidence of wrongdoing by Mr. Li or Mr. Mo and no evidence that we suffered
materially from any of the conduct complained of. The Audit Committee did
identify a number of instances in which our operations could benefit from
codified procedures, many of which have been adopted by the Board.
To date, the investigation of our business and operations described
above, has cost us approximately $900,000. We have tendered a claim for
some of these expenses with our insurance carrier, however, we cannot
assure that we will recover any of these costs.
We Have Discovered and Attempted to Remedy Apparent Improprieties in Our
Operations in China
In addition to the investigation discussed above, we have conducted
investigations with respect to our Chinese operations. These investigations
have yielded the following results.
. One or more of the employees at our Chinese facility, responsible for
obtaining Chinese currency to pay the employees at that facility, may have
engaged in a scheme to profit from unauthorized exchanges of Hong Kong
Dollars for Chinese Renminbi. Since our revenues are denominated primarily
in dollars, while many of our operating and construction costs are in
Renminbi, the currency of the PRC, we must regularly exchange foreign
currency for Renminbi. We believe we are currently converting our currency
in accordance with
14
<PAGE>
PRC law, but we may not have done so at all times in the past. While we have
not lost any money because of this scheme, it could expose us to potential
sanctions from the Chinese government.
. One or more managers of our Chinese facility who resigned or were terminated
or suspended in March, 1999, may have engaged in substantial mismanagement
and self-dealing with respect to our Chinese Operations. Although the
results of our investigation were inconclusive, we have credible indications
that these individuals took the following actions:
. rigging the bidding system for choosing a contractor for the construction
of our new factory in China to allow a contractor that they control to be
awarded the contract at an above market price;
. diverting waste, raw materials and partially processed materials,
specifically PVC resin and tubes, into an unauthorized manufacturing and
sales operation, conducted from our Chinese facility, but concealed from
non-PRC executives; and
. employing an exclusive "purchasing agent" who took unrecorded and
unjustified commissions from transactions involving our lease of warehouse
properties from the Chinese government and who charged as much as twice the
market rate for supplies and maintenance of equipment.
Although we have conducted an investigation into these incidents, the
manager(s) in question did not keep complete records of these matters making
it difficult to conclusively identify any improprieties they may have
committed, and practically impossible to quantify their results in terms of
monetary loss. Accordingly, this conduct may have had a material adverse
effect on our operations through the end of Fiscal 1999.
We have of course terminated the employees known to have participated in the
above actions, and have appointed a new Vice President in charge of Chinese
operations. Additionally, we have renegotiated our contract with respect to
the construction of our new factory in China to bring it into line with the
market. Since the resignation, termination and suspension of the responsible
management level employees in our Chinese facility in March, 1999, we are
confident that the activities discussed above have ceased.
With respect to the customs issues, we have worked with the Chinese customs
authorities to reconcile our accounts. As a party to a contract processing
agreement, Peak has an arrangement that allows us to import materials into the
PRC for processing with the understanding that all finished products will
subsequently be exported. All materials imported under this arrangement are
free from both import duties and Value Added Tax. Subsequent to the departure
of the previous plant management, we discovered that some PVC materials
imported for the manufacturing of tubes were "missing" when customs records
were compared to Peak's physical inventory records. In order not to jeopardize
the renewal of our import license, we reported this to the customs
authorities. We reached a settlement with the customs authorities in August
such that we would voluntarily pay the import duties and VAT on the missing
PVC. As we reported this shortfall voluntarily, no penalty was levied by the
custom authorities. The total charge amounted to US$500,000 which has been
reported as part of the Cost of Sales for the year ended March 31, 1999.
It is still possible that a levy or fine will be imposed on us and/or that
we will be requested to post a sizeable bond with the government of China.
Both the levy or fine or the requirement of a cash bond could have a material
and adverse effect on our ability to conduct operations in China and our
results from operations generally.
We Have Delayed Construction of Our New Factory in China
We have determined that at this time our current facilities are sufficient
to meet our requirements for product in the foreseeable future. Management is
undertaking a review of its production needs and has determined that the
additional facilities may not be required for some time ahead depending on
market conditions, and has decided to delay the completion of the plant
construction. Currently, we have committed to spend approximately $30 million
and have constructed approximately 800,000 square feet of the building shell.
The Company has incurred expenditure at March 31, 1999 of $20,273,000 on the
construction of a new plant as part of the expansion of the Company's
production capacity. Up to September 1999 the Company has incurred additional
costs of approximately $8.0 million. The Company has evaluated these assets
and determined that a provision for impairment of $9.0 million be made based
on an independent appraisal of the current market value.
15
<PAGE>
We Have Filed Litigation Against Some of Our Former Employees
On August 25, 1999, we filed a complaint in the 201st Judicial District,
Travis County, Texas, entitled Peak International, Inc. and Peak
International, Ltd. v. Jeffrey Blaine, Steve R. Dezso and Jason D. Brown
against the named defendants, all of whom are former Peak employees for
misappropriation of trade secrets, violation of the Texas Theft Liability Act,
breach of fiduciary duty, tortious interference with contractual relations
and/or business relationships, unfair competition, civil conspiracy,
conversion, business disparagement, defamation and breach of contract. We seek
to recover actual and punitive damages in excess of the jurisdictional amount
required as well as attorneys' fees and injunctive relief. Additionally, on
September 16, 1999, we filed a complaint in the 353rd Judicial District,
Travis County, Texas entitled Peak International Inc. v. The SemiCycle
Foundation, Tim Jarvis, Steve R. Dezso and Schenae Rourke for tortious
interference with contractual relations and/or business relationships,
business disparagement and defamation. We seek to recover actual and punitive
damages in excess of the jurisdictional amounts required and for attorneys'
fees as well as injunctive relief. We believe the claims put forth in these
complaints are meritorious and that we will ultimately prevail. Nevertheless,
no discovery has been undertaken to date and, consequently, we are unable to
predict the outcome of either of these lawsuits with any certainty.
Our Net Sales Continue to Increase
We achieved net sales of $18.8 million for the first quarter of Fiscal 2000,
a 19 percent increase over net sales of $15.8 million for the same quarter in
Fiscal 1999. Moreover, our gross profit margin increased to 42.8 percent for
the first quarter of Fiscal 2000 from 40.1% for the same quarter in Fiscal
1999. Additionally, we have signed contracts with two premiere semi-conductor
companies, Conexant and Motorola, expanding our existing relationships with
each client.
Risks and Uncertainties
In evaluating our business, shareholders should consider carefully the
following factors in addition to the other information presented herein. We
are a holding company and our major operating asset is our ownership interest
in Peak (HK). Our only source of cash flow is our share of the dividends, if
any, paid by Peak (HK) and other of our subsidiaries.
Variability of Operating Results
Our operating results are affected by a wide variety of factors that
could materially affect revenues and profitability or lead to significant
variability of quarterly or annual operating results. These factors
include, among others:
. the price of raw materials;
. factors relating to conditions in the semiconductor and electronics
industries including:
. lower demand for products;
. increased price competition;
. downturns and deterioration of business conditions;
. technological changes; and
. changes in production processes in the semiconductor and electronics
industries which could require changes in packaging products;
16
<PAGE>
. capital requirements and the availability of funding;
. the Company's expansion plan and possible disruptions caused by the
installation of new equipment or the construction of new facilities;
. the lack of long-term purchase or supply agreements with customers;
. the loss of key personnel or the shortage of available skilled
employees;
. international political or economic events or developments, including
those relating to Hong Kong and the PRC;
. currency fluctuations; and
. fines, penalties and bonds required by the PRC due to past violations
of its rules and regulations.
Unfavorable changes in the above or other factors could materially and
adversely affect our results of operations or financial condition. For more
information, see the Section "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Dependence on Semiconductor and Electronics Industries
Our revenues depend on increased demand for our products from manufacturers
of semiconductor and electronic components. Any deterioration of business
conditions in the semiconductor industry, including lower demand for
semiconductor products, decreased unit volume of semiconductor products
shipped or other factors resulting in decreased demand for packaging products,
or increased price competition in the semiconductor industry could result in
increased price pressure on suppliers to the semiconductor industry, and could
have a material adverse effect on our results of operations and financial
condition. The semiconductor industry is characterized by rapid technological
change leading to more complex products, evolving industry standards, intense
competition and fluctuations in demand. From time to time, demand for
electronic systems, which generally includes both semiconductors and
electronic components, has suffered significant downturns which in some cases
have been prolonged. These downturns have been characterized by diminished
product demand, product overcapacity and accelerated erosion of average
selling prices. No assurance can be given that any future downturn in the
semiconductor or electronics industries will not be severe or that our results
of operations or financial condition will not be materially and adversely
affected by such downturns or other developments.
Dependence on Significant Customers
In the aggregate, our top ten customers accounted for 51.2%, 53.5% and 50.5%
of our net sales in Fiscal 1997, Fiscal 1998 and Fiscal 1999, respectively.
Our ability to maintain close, mutually beneficial relationships with our
leading customers is important to the ongoing growth and profitability of our
business. Although our sales to specific customers have varied from year to
year, our results of operations have been dependent on a number of significant
customers and the conditions of their respective industries. All of our
customers operate in the global semiconductor and electronics industries which
historically have been highly cyclical. As a result of the concentration of
our customer base, the loss or cancellation of business from, or significant
changes in scheduled deliveries or decreases in the prices of products or
services provided to, any of these customers could materially and adversely
affect our results of operations and financial condition. Our sales are made
pursuant to purchase orders, and therefore, we generally have no agreements
with or commitments from our customers for the purchase of products. Although
customers typically provide us with forecasts of their requirements, such
forecasts are not binding. We cannot assure that our customers will maintain
or increase their sales volumes or orders for our products or that we will be
able to maintain or add to our existing customer base.
One of our largest customers, ASAT Limited is a subsidiary of QPL Holdings
and is indirectly controlled by our majority shareholder. A contract is in
place with a financial institution to purchase a 50% interest in ASAT Limited,
removing it from the exclusive control of QPL Holdings, and therefore from the
control of our majority shareholder. Over time, this may result in ASAT
Limited fulfilling less of its needs with orders from us.
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Concentration of Operations in the PRC and Considerations Relating to Hong
Kong
As of March 31, 1999, substantially all of our fixed assets and inventories
were located in Shenzhen, China. Our main production facilities are located in
Shenzhen, China and are operated by an unaffiliated PRC company under a
processing agreement, pursuant to which such company provides all of the
personnel for the operation of our facilities and renders assistance in
dealing with matters relating to the import of raw materials and the export of
our products. Our additional production facilities will be operated under
similar arrangements. Our existing production facilities in Shenzhen, China
are, and our additional facilities in Shenzhen, China will, if we elect to
complete them, be located on land leased from the PRC government by one of our
wholly-owned subsidiaries under land use certificates and agreements with
terms of fifty years. Our assets and facilities located in the PRC and the PRC
company's operation of such facilities are subject to the laws and regulations
of the PRC and our results of operations in the PRC are subject to the
economic and political situation in the PRC.
The operations of our production facilities in Shenzhen, China may be
adversely affected by changes in the laws and regulations of the PRC (or the
interpretation thereof), such as those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other
matters. We currently export all the products manufactured at our production
facilities in Shenzhen, China. Accordingly, we are not subject to certain PRC
taxes and are exempt from customs duties on imported raw materials and
exported products.
Although we have tried to remedy the effects of past improprieties at our
Chinese facility, it is possible that one or more of these improprieties may
subject us to classification by the Chinese customs authorities in a manner
that would require us to supply a substantial bond against customs duties that
we would have to pay if we were importing material for ultimate sale in the
PRC, and may be subject to significantly higher administrative importation
costs generally. Being subjected to these measures could materially and
adversely affect our ability to manufacture products at a competitive price
and our results from operations. For a detailed description of the past
improprieties at our Chinese Facility, see the discussion under the heading
"We Have Discovered and Attempted to Remedy Apparent Improprieties in our
Operations in China" in the Section "Recent Developments."
Even if we suffer no ill effects from the improprieties, we cannot assure
that we will not become subject to PRC taxes or will not be required to pay
customs duties in the future. In the event that we are required to pay PRC
taxes or customs duties, our results of operations could be materially and
adversely affected. We believe that our operations in Shenzhen, China are now
in compliance with applicable PRC legal and regulatory requirements. However,
we cannot assure that the central or local governments of the PRC will not
impose new, stricter regulations or interpretations of existing regulations
which would require additional expenditures.
The economy of the PRC differs from the economies of many countries in such
respects as structure, government involvement, level of development, growth
rate, capital reinvestment, allocation of resources, self-sufficiency, rate of
inflation and balance of payments position, among others. In the past, the
economy of the PRC has been primarily a planned economy subject to State
plans. Since 1978, the PRC government has been reforming the PRC's economic
and political systems. Such reforms have resulted in significant economic
growth and social change. We cannot assure, however, that the PRC government's
policies for economic reforms will be consistent or effective. Our results of
operations and financial position may be adversely affected by changes in the
PRC's political, economic or social conditions.
We maintain our principal executive offices, a sales office and a warehouse
in Hong Kong. Additionally, our general invoicing and accounting functions are
centralized at our offices in Hong Kong. On July 1, 1997, sovereignty over
Hong Kong reverted from the United Kingdom to the PRC, and Hong Kong has
become a Special Administrative Region ("SAR") of the PRC. The Joint
Declaration signed by the PRC government and the government of the United
Kingdom on December 19, 1984 (the "Joint Declaration") provides that the basic
policies of the PRC regarding Hong Kong will be stipulated in the basic law of
Hong Kong which was enacted by the National People's Congress of the PRC on
April 4, 1990 (the "Basic Law"). Although the Basic Law provides that Hong
Kong will have a high degree of legislative, judicial and economic autonomy,
we cannot
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<PAGE>
assure that the general economic position of Hong Kong, and our results of
operations and financial condition, will not be materially and adversely
affected as a consequence of the exercise of PRC sovereignty over Hong Kong.
We Have Been Named In a Class Action Lawsuit
We have been sued by a purported class of persons who were initial
purchasers of the TrENDS. For information concerning the lawsuit, see Item 3,
"Legal Proceedings." Although we have begun investigating the allegations in
the Complaint, at this time it is impossible for us to predict an outcome. A
judgment against us based on the allegations in the Complaint could have a
material and adverse effect on our results of operations. Additionally, even
if we prevail in litigating this action, we cannot assure that the expenses of
litigation will not materially and adversely affect our results of operations.
Economic Conditions in the Asia Pacific Region
A significant portion of our revenue is derived from sales to customers in
Hong Kong, Singapore, the Philippines and other countries in East and
Southeast Asia (the "Asia Pacific Region"). Accordingly, our financial
condition and results of operations and the market price of shares of our
common stock may be affected by:
. economic and political instability;
. changes in regulatory requirements, tariffs, customs, duties and other
trade barriers;
. transportation delays;
. fluctuations in currency exchange rates;
. currency convertibility and repatriation;
. taxation of our earnings and the earnings of our personnel; and
. other risks relating to the administration of or changes in, or new
interpretations of, the laws, regulations and policies of the
jurisdictions in which we conduct our business.
None of these factors are within our control. In Fiscal 1999, many countries
in the Asia Pacific Region experienced considerable currency volatility and
depreciation, high interest rates, stock market volatility and declining asset
values which contributed to net foreign capital outflows, an increase in the
number of insolvencies, a decline in business and consumer spending and a
decrease in economic growth as compared with prior years.
Economic developments in the Asia Pacific Region has had a material adverse
effect on the Asia Pacific Region's business and on consumer demand for
products that use semiconductor and electronics devices. That demand generally
rises as the overall level of economic activity increases and falls as such
activity decreases. In addition, currency devaluations in the Asia Pacific
Region could result in accelerated price erosion of semiconductor and
electronic products as products manufactured in countries whose currencies
have devalued significantly against the US dollar become less expensive in US
dollar terms. Any adverse effect on the global semiconductor and electronics
industries as a result of slower demand for products in the Asia Pacific
Region or accelerated product price erosion arising from currency devaluations
in the Asia Pacific Region could have a material and adverse effect on our
financial condition or results of operations, especially if negative business
and economic conditions in the Asia Pacific Region do not improve or if these
conditions worsen.
Relationship with Principal Shareholder and Potential Conflicts of Interests
Mr. T.L. Li, through his ownership of all of the outstanding shares of
Luckygold 18A Limited ("Luckygold"), a company incorporated in the British
Virgin Islands, beneficially owns approximately 58.3% of the outstanding
shares of our common stock. Mr. T.L. Li is in a position to substantially
influence actions that
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require shareholder approval, including the timing and payment of dividends
and certain other actions we may take, and the election of our Board of
Directors. In addition, Mr. T.L. Li serves as director of companies in QPL
Holdings. For more information, see the Sections "Directors and Officers of
the Registrant" and "Interest of Management in Certain Transactions."
A significant portion of our net sales historically has been and is expected
to continue to be made to companies controlled by Mr. T.L. Li, including ASAT
Limited ("ASAT") and companies in QPL Holdings, which together accounted for
approximately 16.1%, 16.3% and 8.0% of our net sales in Fiscal 1997, Fiscal
1998 and Fiscal 1999, respectively. Accordingly, any adverse development in
the operations, competitive position or customer base of ASAT or companies in
QPL Holdings or our relationship with the companies in QPL Holdings could have
a material adverse effect on our results of operations and financial
condition. At least one subsidiary of ASAT has sought financial reorganization
in the last year. For more information see the discussion under the heading
"--Customers" and the Section "Interest of Management in Certain
Transactions." Mr. T.L. Li may take actions as the controlling shareholder of
the companies in QPL Holdings that are not in our best interests or the best
interests of our shareholders.
Both Mr. T.L. Li and the Company have been named, among others, as
defendants in a law suit, filed on behalf of the purchasers of Trust Enhanced
Dividend Securities from Peak TrENDS Trust. Although we are not aware of any
actual conflict of interest between Mr. T.L. Li and the Company, we cannot
assure that such a conflict will not develop over the course of the lawsuit.
For more information, see the Section "Legal Proceedings."
Potential Difficulties in Protecting Shareholder Rights
Our corporate affairs are governed by our Memorandum of Association and Bye-
laws and by the laws governing corporations incorporated in Bermuda. The
rights of our shareholders and the responsibilities of members of our Board of
Directors under Bermuda law are different from those applicable to a
corporation incorporated in the United States and, therefore, our shareholders
may have more difficulty protecting their interests in connection with actions
by our management, members of our Board of Directors or our controlling
shareholders than they would as shareholders of a corporation incorporated in
the United States.
Some Of Our Former Officers and Employees May Act Against Our Interest
We believe that a number of our former officers and employees have
periodically disseminated negative information to our investors, customers and
suppliers in an effort to devalue our stock and to hurt our operations. While
to date the efforts of these individuals to injure our operations have not
succeeded to any material level, we suspect that they have resulted in the
loss of some new orders for our products that we believe we would otherwise
have received. We cannot assure that they will not be more successful in the
future. We also believe that some of these employees may be assisting the
plaintiff class in litigation filed against us. We cannot assure that the
efforts of these individuals will not materially and adversely affect our
business and operations.
ITEM 2. DESCRIPTION OF PROPERTY
Our principal executive offices are located in Units 3, 4, 5 and 7, 37th
Floor, Cable TV Tower, 9 Hoi Shing Road, Tsuen Wan, N.T., Hong Kong and our
main telephone number is (852) 2402-5100.
Our main production facilities are located in Shenzhen, China in a plant
with a total floor space of approximately 305,000 square feet. The plant is
equipped with injection molding machines, extruders, carrier tape machines,
mixing machines, ultra-sonic welding machines and other machinery and
equipment.
In addition to our production facilities in Shenzhen, China, we also
maintained, until April 1998, production facilities located in Penang,
Malaysia, with a total floor space of approximately 3,500 square feet, which
processed tubes extruded at our Shenzhen facilities.
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We were in the process of expanding our production capacity in Shenzhen,
China and have commenced the construction of an additional plant to be located
approximately three miles from the existing production facilities. We have
delayed construction activities on the new plant until demand warrants its
completion. For more details, see the discussion in the Section "Description
of Business--Recent Developments--We Have Delayed Construction of Our New
Factory in China."
We maintain a tooling shop on the premises of our production facilities in
Shenzhen, China that we use to make the molds we need for production, dies and
tooling for sale, and spare parts for equipment used in our production
process. Our in-house tooling machinery and equipment includes computer
numeric control ("CNC") electronic discharge machines ("EDMs"), CNC wire cut
machines, milling machines and miscellaneous lathes, planers, surface grinders
and drill presses. As of March 31, 1999, the tooling shop, with a total floor
space of approximately 24,000 square feet, employed 147 tool makers.
Our existing facilities in Shenzhen, China are, and our additional
facilities in Shenzhen, China, if completed, will be, operated pursuant to
processing agreements with unaffiliated PRC companies. Such facilities are, or
will be, located on land which is leased from the PRC government by our
wholly-owned subsidiary, Warden Development Ltd. ("Warden") under land use
certificates and agreements with terms of fifty years. The buildings
comprising the facilities are, or will be, owned by Warden. The land and the
buildings are, or will be, in turn leased by Peak (HK) from Warden under a
two-year lease which commenced April 1995 and was automatically renewed in
April 1999 for another two years on the same terms. Peak (HK) owns the
machinery and equipment in our Shenzhen facilities. Under current PRC law, all
land belongs to the government, and individuals and enterprises may only lease
land from the government.
ITEM 3. LEGAL PROCEEDINGS
A complaint (the "Complaint") has been filed in the United States District
Court, Southern District of New York by Dorchester Investors, individually and
on behalf of the purported class of all others similarly situated (initial
Purchasers of the TrENDS), against us, Peak TrENDS Trust, Luckygold, Mr. T.L.
Li, Mr. Jerry Mo and Donaldson, Lufkin and Jenrette Securities Corporation.
The Complaint seeks damages pursuant to federal securities laws, based on
alleged misrepresentations and omissions in the documents by which the TrENDS
were offered to the public for initial purchase. The Complaint seeks
compensatory damages and legal expenses. We have begun investigating the
allegations made in the Complaint, however, because of the early stage of this
litigation, we cannot predict the outcome. We are not directly covered under
our directors and officers insurance, which has a maximum coverage (including
fees and expenses) of $10 million for any one claim or for all claims in one
year, for the actions alleged in the Complaint. A judgment against us or
another defendant (to the extent we indemnify them and such liability is not
covered by applicable insurance or other indemnification) based on the
allegations in the Complaint could have a material and adverse effect on our
results of operations. Additionally, even if we prevail in litigating this
action, we cannot assure that the expenses of litigation will not materially
and adversely affect our results of operations.
We have received an Amended and Restated Demand for Arbitration (the
"Demand"), dated July 2, 1999, filed on behalf of Mr. Brook pursuant to his
employment contract. In the Demand, Mr. Brook seeks, among other things either
payment of $32,400 per month or a lump sum payment of $1,036,800, subject to
an appropriate present value discount, from us. In order to achieve this
award, Mr. Brook would have to prove that we did not have grounds under his
employment contract to terminate him "for cause," as defined in that contract.
Although we cannot assure the outcome of this lawsuit, we believe the Demand
is without merit and intend to defend vigorously the allegations in the Demand
and believe that this litigation will not have a material adverse effect on
our business, operations, or financial condition.
Additionally, we are a plaintiff in a pair of lawsuits filed against some of
our former employees. We do not expect either of these lawsuits, separately or
in the aggregate to have a material effect on our business or results of
operations. For more information, see the Section "Recent Developments" under
the heading "We Have Filed Litigation Against Some of Our Former Employees."
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ITEM 4. CONTROL OF REGISTRANT
The following table sets forth certain information regarding the ownership
of shares of our common stock as of March 31, 1999 by (i) each person who is
known by us to own more than 10.0% of our shares and (ii) all of our directors
and executive officers as a group.
<TABLE>
<CAPTION>
Shares Owned as
of June 1, 1999
-----------------------
Identity of Person or Group Number Percent
<S> <C> <C>
Luckygold(1).......................................... 7,888,038(2)(3) 58.4%
All directors and executive officers as a group (9
persons)(3).......................................... 7,888,038(2)(3) 58.4%
</TABLE>
- ---------------------
(1) Mr. T.L. Li is the sole shareholder of Luckygold.
(2) Includes 5,300,000 shares pledged to Peak TrENDS Trust, and held by a
collateral agent, pursuant to a Collateral Agreement, dated as of June 3,
1998, among Luckygold, The Bank of New York, as collateral agent, and Peak
TrENDS Trust. Pursuant to the Collateral Agreement, Luckygold retains
voting control of the pledged shares so long as no default exists under
that agreement. In the event of a default, voting control of these shares
would shift to the Peak TrENDS Trust.
(3) Includes shares held by Mr. T.L. Li through Luckygold. On December 18,
1998, Mr. Richard Brook filed a complaint against Mr. Li and Luckygold in
the District Court of Travis County, Texas, No. 9814103, asserting breach
of contract against Mr. Li and seeking a constructive trust over 692,536
shares of our common stock held by Luckygold. We are not named as a party
to this action and do not believe that this complaint will have any
material effect on us or our operations.
On May 15, 2001, the Peak TrENDS Trust will dissolve, and, subject to a cash
settlement provision, the 5,300,000 shares pledged to the Peak TrENDS Trust
will be distributed to the holders of the trust's securities. We expect that
as a result, Luckygold will no longer hold a sole majority interest in our
shares.
ITEM 5. NATURE OF TRADING MARKET
Effective October 31, 1997, shares of our common stock began to trade on
Nasdaq under the symbol "PEAKF". Prior to October 31, 1997, the shares traded
on Nasdaq under the symbol "PITLF". Public trading of the shares commenced on
June 20, 1997. Prior to that time, there was no public market for the shares.
The following table sets forth the high and low sale prices for the shares as
reported by Nasdaq for the periods indicated:
<TABLE>
<CAPTION>
Price Range of Common Stock
--------------------------------
High Low
<S> <C> <C>
Year Ending March 31, 1998:
1st Quarter (from June 20, 1997)...... $ 12 3/4 $ 11 7/8
2nd Quarter........................... 26 1/8 10 7/8
3rd Quarter........................... 31 1/2 15 1/8
4th Quarter........................... 25 7/8 18 1/2
Year Ending March 31, 1999:
1st Quarter........................... $ 25 5/16 $ 9
2nd Quarter........................... 14 7/16 6 1/4
3rd Quarter........................... 12 3/8 7
4th Quarter........................... 11 2 1/16
</TABLE>
On August 31, 1999 the reported last sale price of the shares on Nasdaq was
$6 5/8 per share. As of August 31, 1999, there were 13 holders of record of
the shares.
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ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
We have been designated as non-resident of Bermuda for exchange control
purposes by the Bermuda Monetary Authority, whose permission for the free
transferability of shares of our common stock has been obtained.
IT MUST BE DISTINCTLY UNDERSTOOD THAT, IN GRANTING SUCH PERMISSION, THE
BERMUDA MONETARY AUTHORITY WILL ACCEPT NO RESPONSIBILITY FOR THE FINANCIAL
SOUNDNESS OF ANY SCHEMES OR FOR THE CORRECTNESS OF ANY OF THE STATEMENTS MADE
OR OPINIONS EXPRESSED HEREIN.
The transfer of shares between persons regarded as resident outside Bermuda
for exchange control purposes and the issue of shares within our current
authorized share capital to or by such persons may be effected without
specific consent under the Exchange Control Act 1972 and regulations
thereunder. Issues and transfers of shares involving any person regarded as
resident in Bermuda for exchange control purposes require specific prior
approval under the Exchange Control Act 1972.
There are no limitations on the rights of holders of shares of our common
stock who are non-resident in Bermuda for exchange control purposes to hold or
vote their shares. Because we have been designated as a non-resident for
Bermuda exchange control purposes, there are no restrictions on its ability to
transfer funds in and out of Bermuda or to pay dividends to United States
residents who are holders of the shares, other than in respect of local
Bermuda currency. We do not anticipate that we will transact business or make
payments of dividends or other distributions in the local Bermuda currency.
In accordance with Bermuda law, share certificates are only issued in the
names of corporations, partnerships or individuals. In the case of an
applicant acting in a special capacity (for example, as trustee), certificates
may, at the request of the applicant, record the capacity in which the
applicant is acting. Notwithstanding the recording of any such special
capacity, we are not bound to investigate or incur any responsibility in
respect to the proper administration of any such trust.
We will not take notice of any other trust applicable to any of our shares
whether or not it has notice of such trust.
As an exempted company, we are exempted from Bermuda laws which restrict the
percentage of share capital that may be held by non-Bermudians, but as an
exempted company we may not participate in certain business transactions
including: (1) the acquisition or holding of land in Bermuda (except that
required for our business and held by way of lease or tenancy for terms of not
more than 21 years), (2) the taking of mortgages on land in Bermuda to secure
an amount in excess of 50,000 Bermuda dollars without the consent of the
Minister of Finance of Bermuda, (3) the acquisition of any bonds or debentures
secured on any land in Bermuda except bonds or debentures issued by the
Bermuda government or a public authority or (4) the carrying on of business of
any kind in Bermuda, except in furtherance of our business carried on outside
Bermuda or under a license granted by the Minister of Finance of Bermuda.
ITEM 7. TAXATION
The following is a summary of certain Bermuda and United States federal
income tax considerations for purchasers of Shares pursuant to the Offering.
This summary does not discuss all aspects of taxation which may be important
to particular shareholders of the Company in light of their individual
investment circumstances, such as Shares held by shareholders of the Company
subject to special tax rules (e.g., financial institutions, insurance
companies, broker-dealers and tax-exempt organizations) or to persons who will
hold the Shares as a position in a "straddle" or as part of a "hedging"
transaction or that have a functional currency other than the United States
dollar, all of whom may be subject to tax rules that differ significantly from
those summarized
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below. This discussion is not exhaustive of all possible tax considerations
and shareholders of the Company are urged to consult their tax advisors
regarding the overall tax consequences of the purchase, ownership and
disposition of the Shares.
Bermuda Taxation
The Company is incorporated in Bermuda. Under current Bermuda law, the
Company is not subject to tax on income or capital gains, and no Bermuda
withholding tax will be imposed upon payments of dividends by the Company to
its shareholders. Furthermore, the Company has received from the Minister of
Finance of Bermuda under the Exempted Undertakings Tax Protection Act of 1966
an assurance that, in the event that Bermuda enacts any legislation imposing
any tax computed on profits or income or on any capital asset, gain or
appreciation, or any tax in the nature of an estate duty or inheritance tax,
the imposition of such tax shall not be applicable to the Company or any of
its operations, nor to the shares, debentures or other obligations of the
Company until March 28, 2016. This assurance does not, however, prevent the
imposition of any Bermuda tax payable in relation to any land in Bermuda
leased to the Company or to persons ordinarily resident in Bermuda.
As an exempted company, the Company is liable to pay to the Bermuda
government an annual registration fee not exceeding Bermuda dollars 26,500 per
annum calculated on a sliding scale basis by reference to its authorized share
capital plus any share premium.
United States Federal Income Taxation
The following is a summary of certain United States federal income tax
considerations for purchasers of Shares pursuant to the Offering and is for
general information purposes only. This summary is based upon existing United
States federal income tax law, which is subject to change, possibly
retroactively. This summary does not discuss any state or local tax
considerations. In addition, except to the extent described below, this
summary does not discuss the tax consequences to investors who are not "U.S.
Holders" (as defined below). This summary assumes that investors will hold
their Shares as "capital assets" (generally, property held for investment)
under the Internal Revenue Code of 1986, as amended (the "Code"). Prospective
investors are urged to consult their tax advisors regarding the United States
federal, state, local, and foreign income and other tax considerations of the
purchase, ownership and disposition of the Shares.
For purposes of this summary, a "U.S. Holder" is a beneficial owner of
Shares that is for United States federal income tax purposes (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized under the laws of the United States or any state or
political subdivision thereof, (iii) an estate whose income is includible in
gross income for United States federal income tax purposes without regard to
the source of its income or (iv) a trust whose administration is subject to
the primary supervision of a United States court and which has one or more
United States persons who have the authority to control all substantial
decisions of the trust.
U.S. Holders
Dividends
Any cash distributions paid by the Company out of earnings and profits, as
determined under United States federal income tax principles, will be subject
to United States federal income tax as ordinary dividend income and will be
includible in the gross income of a U.S. Holder when such distributions are
received in an amount equal to the gross amount (i.e., before any withholding
taxes) of the dividend. Cash distributions in excess of the earnings and
profits of the Company will be treated as a return of capital to the extent of
the U.S. Holder's adjusted tax basis in its Shares, which will not be subject
to tax, and thereafter as gain from the sale or exchange of a capital asset.
Dividends paid in Bermuda dollars will be includible in income in a United
States dollar amount based on the United States dollar-Bermuda dollar exchange
rate prevailing at the time of receipt of such dividends regardless of whether
payment is in fact converted into United States dollars at that time. Such
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<PAGE>
dividend income will constitute foreign source income for United States
federal income tax credit purposes and will not be eligible for the dividends
received deduction allowed to corporations.
Sale or Other Taxable Disposition
A U.S. Holder will recognize capital gain or loss upon the sale, exchange or
other taxable disposition (collectively, a "disposition") of Shares in an
amount equal to the difference between the amount realized upon such
disposition and the U.S. Holder's adjusted tax basis in such Shares. Net
capital gain (i.e., generally, capital gain in excess of capital loss)
recognized by an individual holder upon the disposition of Shares that have
been held for more than twelve months will generally be subject to tax at a
rate not to exceed 20%. Net capital gain recognized from the disposition of
Shares that have been held for twelve months or less will be subject to tax at
ordinary income tax rates. In addition, capital gain recognized by a corporate
holder will be subject to tax at the ordinary income tax rates applicable to
corporations.
Capital gain recognized upon the disposition of Shares will generally be
treated as United States source income for United States federal income tax
purposes. Under current law, it is unclear whether any capital loss recognized
upon the disposition of Shares would be treated as foreign or United States
source loss for United States federal income tax purposes.
Foreign Personal Holding Company Rules
The Company would be a foreign personal holding company ("FPHC") for any
taxable year in which, at any time during the year, more than 50% of the
voting power or value of the Company's stock is owned, directly or pursuant to
rules of attribution, by or for five or fewer individuals who are citizens or
residents of the United States ("U.S. Group").
Mr. T.L. Li is treated as owning 58.4% of the outstanding Shares for
purposes of the FPHC rules. If Mr. Li or his spouse were to become a U.S.
citizen or resident, Shares owned by Mr. Li would be taken into account in
determining the existence of a U.S. Group. Moreover, if a member of Mr. Li's
family, or any individual partner of any partnership of which if Mr. Li is a
partner, were to own one or more Shares and were or were to become a U.S.
citizen or resident, Shares considered owned by Mr. Li would be considered
owned by such family member or partner in determining the existence of a U.S.
Group. Although the Company believes that no U.S. Group presently exists,
there can be no assurance that a U.S. Group will not exist in the future. The
Company does not intend to assess whether a U.S. Group exists in any taxable
year.
If the Company were a FPHC, each U.S. Holder who, or that, owned Shares on
the last day of the Company's taxable year, or, if earlier, the last day of
its taxable year on which a U.S. Group existed with respect to the Company,
would be required to include in gross income, as a dividend, such U.S.
Holder's pro rata share of the Company's undistributed taxable income, subject
to certain adjustments. In addition, an individual U.S. Holder who acquires
Shares from a decedent would be denied the step-up of tax basis of such Shares
to fair market value on the decedent's date of death which would otherwise be
available and instead would have a tax basis equal to the lower of fair market
value or the decedent's tax basis.
Non-U.S. Holders
Dividends received or any gains recognized on the disposition of Shares by
an investor which is not a U.S. Holder will not be subject to U.S. federal
income taxation unless such dividends or gains are treated as effectively
connected with the conduct by such holder of a trade or business in the United
States or, in the case of gains derived by an individual, such individual is
present in the United States for 183 days or more and certain other
requirements are satisfied.
25
<PAGE>
ITEM 8. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated income statement data for the years ended March
31, 1997, 1998 and 1999 and the selected consolidated balance sheet data as of
March 31, 1998 and 1999 set forth below are derived from the Company's audited
financial statements included elsewhere herein and should be read in
conjunction with, and are qualified in their entirety by reference to, such
financial statements, including the notes thereto. The selected consolidated
income statement data for the years ended March 31, 1995 and 1996 and the
selected consolidated balance sheet data as of March 31, 1995, 1996 and 1997
set forth below are derived from the Company's audited financial statements
not included herein. The consolidated financial statements have been prepared
and presented in accordance with U.S. GAAP.
The consolidated financial data set forth below have been presented as if
the Company, which was incorporated on January 3, 1997, had been in existence
for all periods presented and 100% of Peak (HK) and other subsidiaries of the
Company had been transferred to the Company and that they had been
consolidated for Fiscal 1994 and subsequent years. The consolidated financial
data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes thereto, included
elsewhere herein.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
(In thousands, except Share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales............... $ 35,115 $ 54,944 $ 57,594 $ 73,705 66,235
Cost of goods sold...... (27,593) (33,931) (32,676) (41,048) (39,487)
---------- ---------- ---------- ---------- ----------
Gross profit............ 7,522 21,013 24,918 32,657 26,748
Operating expenses:
General and
administrative and
research and
development.......... (2,616) (5,385) (4,730) (6,194) (7,264)
Selling and
marketing............ (1,802) (3,294) (4,198) (5,487) (5,801)
Special charge........ -- -- -- -- (2,000)
Asset impairment...... -- -- -- -- (9,000)
---------- ---------- ---------- ---------- ----------
Income from operations.. 3,104 12,334 15,990 20,976 2,683
Other income............ 234 1,133 83 926 812
Net interest (expense)
income................. (405) (750) (1,320) 517 680
---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 2,933 12,717 14,753 22,419 4,175
Provision for income
taxes.................. (192) (1,227) (1,236) (1,825) (1,338)
---------- ---------- ---------- ---------- ----------
Net income.............. $ 2,741 $ 11,490 $ 13,517 $ 20,594 $ 2,837
========== ========== ========== ========== ==========
Dividends paid........ $ -- $ 9,719 $ 1,294 $ -- --
Earnings per Share:
Basic................. $ 0.26 $ 1.10 $ 1.29 $ 1.61 $ 0.21
========== ========== ========== ========== ==========
Diluted............... $ 0.26 $ 1.10 $ 1.29 $ 1.59 $ 0.21
========== ========== ========== ========== ==========
Shares outstanding
Basic (1)............. 10,461,538 10,461,538 10,461,538 12,804,004 13,503,584
Diluted............... 10,461,538 10,461,538 10,461,538 12,972,060 13,550,188
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
As of March 31,
---------------------------------------
1995 1996 1997 1998 1999
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............ $ 1,828 $ 924 $ 1,814 $19,214 $10,598
Total assets......................... 35,210 38,423 53,795 89,540 93,653
Short-term debt (2).................. 13,879 19,156 21,170 89 --
Long-term debt....................... -- -- -- -- --
Shareholders' equity................. 11,701 13,960 26,272 77,582 80,970
</TABLE>
- ---------------------
(1) Shares outstanding for each period presented (except for Fiscal 1998 and
Fiscal 1999) is based on 10,461,538 Shares outstanding prior to the
Company's initial public offering in June 1997, after giving effect to the
Restructuring. Shares outstanding in Fiscal 1998 and Fiscal 1999 is based
on the weighted average number of Shares and common stock equivalents
outstanding during such period.
(2) Short-term debt consists of bank borrowings and amount due to shareholder
(except as of March 31, 1997 and 1998, for which short-term debt consists
only of bank borrowings).
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information is based on, and should be read in conjunction
with, our consolidated financial statements and the related notes thereto
included elsewhere in this Annual Report.
General
We produce matrix trays, shipping tubes, reels and carrier tape for the
storage, transportation and automatic handling of semiconductor devices and
other electronic components. We also produce leadframe boxes and interleaves
used in the storage and transportation of leadframes. In addition, we sell
recycled matrix trays collected under the trade name "SemiCycle." In Fiscal
1999, we made all of our sales to customers located in Asia, North America and
Europe. For more information see the section "Description of Business" under
the heading "Sales and Marketing."
Although the market shrank during the first half of Fiscal 1999, it has now
rebounded significantly. Unit volume of semiconductor and electronic
components shipped is an important determinant of demand for our products.
There has been an industry trend to integrate more semiconductors and
electronic components onto a single chip, which could in the future have an
adverse effect on our results of operations and financial condition. Our
consolidated net sales decreased by 10.1% to $66.2 million in Fiscal 1999
compared to $73.7 million in Fiscal 1998, and our consolidated net income
decreased by 86.2% to $2.8 million in Fiscal 1999, compared to $20.6 million
in Fiscal 1998. During the last three years, our consolidated net sales
increased from $57.6 million in Fiscal 1997 to $73.7 million in Fiscal 1998
and then decreased to $66.2 million in Fiscal 1999. Our consolidated net
income increased from $13.5 million in Fiscal 1997 to $20.6 million in Fiscal
1998, then dropped to $2.8 million in Fiscal 1999. In Fiscal 1999, our margin
dropped to 40.4% from 44.3% in Fiscal 1998. The drop in performance in Fiscal
1999 was attributed to the down turn of the semiconductor industry in the
first half of that fiscal year, the provisions of a $2 million special charge
in December 1998 in relation to the termination of the employment contract of
Mr. Brook, a $9.0 million asset impairment related to the construction of the
new plant and a $500,000 special duties charge in relation to the settlement
of the missing PVC issue with the PRC customs authorities.
We have expanded our production capacity significantly in recent years and
have substantially completed construction of an additional facility in
Shenzhen, China. We have delayed construction activities on the new plant
until demand warrants its completion. Depreciation expense decreased 20.4% to
$4.0 million in Fiscal 1999 from $5.0 million in Fiscal 1998 due to revision
of asset lives of certain classes of property, plant and equipment as detailed
in Note 2 to our Consolidated Financial Statements. We expect that
depreciation expense will increase correspondingly with the increase in value
of property, plant and equipment. As of the date of this Annual
27
<PAGE>
Report, we have committed to spend approximately $30.0 million for the
construction of the new facility in Shenzhen, China. For more information, see
the discussion under the heading "Liquidity and Capital Resources."
Results of Operations
The following table sets forth, for the years indicated, certain income
statement items for the Company as a percentage of net sales.
<TABLE>
<CAPTION>
Year Ended March
31,
-------------------
1997 1998 1999
<S> <C> <C> <C>
Net sales............................................. 100.0% 100.0% 100.0%
Cost of goods sold.................................... (56.7) (55.7) (59.6)
----- ----- -----
Gross profit.......................................... 43.3 44.3 40.4
Operating expenses:
General and administrative and research and
development........................................ (8.2) (8.4) (11.0)
Selling and marketing............................... (7.3) (7.4) (8.8)
Special charge...................................... -- -- (3.0)
Asset impairment.................................... -- -- (13.6)
----- ----- -----
Income from operations................................ 27.8 28.5 4.0
----- ----- -----
Income before income taxes............................ 25.6 30.4 6.3
Provision for income taxes............................ (2.1) (2.5) (2.0)
----- ----- -----
Net income............................................ 23.5% 27.9% 4.3%
===== ===== =====
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Net Sales. Net sales decreased by 10.1% to $66.2 million in Fiscal 1999 from
$73.7 million in Fiscal 1998, primarily as a result of the reduction in volume
demand of our tube products and reels, partly offset by the increase in sales
volume of trays and carrier tape. Sales in the first half of Fiscal 1999 were
$31.1 million compared to $34.0 million in the same period in Fiscal 1998 and
were $35.2 million in the second half of Fiscal 1999 compared to $39.7 million
in Fiscal 1998. The average sales price of trays decreased primarily
reflecting the change in demand from high priced high temperature trays to
lower priced low temperature trays. The average sales price of carrier tape
also decreased, again reflecting a change in product mix. Whilst the average
sales price of tubes was steady compared to Fiscal 1998, the average sales
price of reels improved in Fiscal 1999.
Gross Profit. Gross profit decreased by 18.1% to $26.7 million in Fiscal
1999 from $32.7 million in Fiscal 1998. Cost of goods sold decreased by $1.6
million to $39.5 million in Fiscal 1999 from $41.0 million in Fiscal 1998. Our
gross margin declined to 40.4% in Fiscal 1999 from 44.3% in Fiscal 1998,
primarily as a result of the drop in margin for trays due to a change in
product mix, partly offset by the improvement in margins for carrier tape,
reels, and tubes, and also because of a special duties charge in Fiscal 1999
of $500,000 in relation to the settlement of the missing PVC issue with the
PRC customs authorities and an increased provision for slow moving inventories
of $0.9 million.
Income from Operations. Operating income decreased by 87.2% to $2.7 million
in Fiscal 1999 from $21.0 million in Fiscal 1998. Our operating margin
declined to 17.6% in Fiscal 1999 from 28.5% in Fiscal 1998, primarily as a
result of the reduction in gross margin, the increase in operating expenses a
special charge in Fiscal 1999 of $2 million for the termination of Mr. Brook's
contract of employment with us and an asset impairment charge of $9.0 million
relating to the new plant.
General and Administrative Expenses. General and administrative expenses
increased by 18.7% to $6.7 million in Fiscal 1999 from $5.7 million in Fiscal
1998 primarily due to an increase in legal and professional charges.
Selling and Marketing Expenses. Selling and marketing expenses increased by
5.7% to $5.8 million in Fiscal 1999 from $5.5 million in Fiscal 1998,
primarily as a result of additional staff hired in connection with the
expansion of our sales force in Asia.
28
<PAGE>
Special charge. The special charge of $2 million in Fiscal 1999 related to
the termination of the employment contract of Mr. Brook, and included
estimated anticipated costs of settlement under the contract as well as
associated legal and professional fees. After we paid him $185,000 on his
contract, we stopped paying him in May of 1999, when we determined that his
termination was "for cause." We still have $857,000 accrued for any possible
future settlement.
Asset Impairment. Asset impairment of $9.0 million in Fiscal 1999, based on
an independent appraisal, related to the delay in the construction of a new
plant as part of the expansion of the Company's production capacity for which
the Company had incurred expenditures of $20.3 million up to March 31, 1999.
Net Income. Net income decreased by 86.2% to $2.8 million in Fiscal 1999
from $20.6 million in Fiscal 1998. Net income as a percentage of sales
decreased to 4.3% in Fiscal 1999 from 27.9% in Fiscal 1998. This decline
primarily reflected the effects of the foregoing factors.
Fiscal 1998 Compared to Fiscal 1997
Net Sales. Net sales increased by 28.0% to $73.7 million in Fiscal 1998 from
$57.6 million in Fiscal 1997. This increase was primarily as a result of an
increase in the volume of our tray products, tube products, reels, carrier
tape and other products sold, partially offset by lower average realized sales
prices of our products.
Gross Profit. Gross profit increased by 31.1% to $32.7 million in Fiscal
1998 from $24.9 million in Fiscal 1997. Cost of goods sold increased by 25.6%
to $41.0 million in Fiscal 1998 from $32.7 million in Fiscal 1997. Our gross
margin improved to 44.3% in Fiscal 1998 from 43.3% in Fiscal 1997, primarily
as a result of lower raw material costs and the increased proportion of our
product mix represented by tape and reel products, which tend to generate
higher gross margins than trays or tubes.
Income from Operations. Operating income increased by 31.2% to $21.0 million
in Fiscal 1998 from $16.0 million in Fiscal 1997. Our operating margin
improved to 28.5% in Fiscal 1998 from 27.8% in Fiscal 1997, primarily as a
result of improvements in our gross margin, partially offset by an increase in
operating expenses.
General and Administrative and Research and Development Expenses. General
and administrative and research and development expenses increased by 31.0% to
$6.2 million in Fiscal 1998 from $4.7 million in Fiscal 1997 primarily due to
an increase in research and development expenses incurred in connection with
the continuing development of our tape and reel product line. General and
administrative and research and development expenses increased as a percentage
of total sales to 8.4% in Fiscal 1998 from 8.2% in Fiscal 1997, primarily due
to an increase in sales.
Selling and Marketing Expenses. Selling and marketing expenses increased by
30.7% to $5.5 million in Fiscal 1998 from $4.2 million in Fiscal 1997,
primarily as a result of additional staff hired in connection with the
expanded sales and marketing of our existing products as well as new products
such as tape and reel products.
Net Income. Net income increased by 52.4% to $20.6 million in Fiscal 1998
from $13.5 million in Fiscal 1997. Net income as a percentage of sales
improved to 27.9% in Fiscal 1998 from 23.5% in Fiscal 1997. This increase
reflected the foregoing factors, as well as a decrease in interest expense for
short-term bank borrowings and an increase in other income (including interest
on deposits) due to increased funds available from our initial public offering
in June 1997.
Fiscal 1997 Compared to Fiscal 1996
Net Sales. Net sales increased by 4.8% to $57.6 million in Fiscal 1997 from
$54.9 million in Fiscal 1996. Net sales of trays increased by $1.2 million
over the period reflecting the effects of a 16.3% increase in sales volume,
substantially offset by a 11.1% decrease in average realized sales price. The
increase in the aggregate sales volume of our tray products reflected
principally an increase in sales volume of recycled, low temperature and non-
bakeable trays, partially offset by decreases in the sales volume of high
temperature trays. Average realized sales price for our tray products
decreased in the period reflecting principally a decrease in the average
29
<PAGE>
realized sales price for recycled trays and high temperature trays, partially
offset by increases in the average realized sales price for our other tray
products. The average realized price for recycled trays decreased primarily as
a result of a change in the product mix of our recycled trays reflecting
increased sales of lower-priced low temperature trays, principally in Taiwan
and Japan. Net sales of tubes decreased 18.5% to $8.6 million in Fiscal 1997
from $10.5 million in Fiscal 1996, while net sales of reels increased by 52.7%
to $2.1 million in Fiscal 1997 from $1.4 million in Fiscal 1996, reflecting an
increase in the proportion of our product mix represented by newer products
such as reels.
Gross Profit. Gross profit increased 18.6% to $24.9 million in Fiscal 1997
from $21.0 million in Fiscal 1996. Cost of goods sold decreased 3.7% to $32.7
million in Fiscal 1997 from $33.9 million in Fiscal 1996. Such decrease
resulted primarily from lower raw material costs due principally to our
purchase of lower volumes of raw materials as a result of our increase in the
use of recycled materials in manufacturing using our proprietary processes and
production techniques. In addition, raw material costs were lower in Fiscal
1997 compared to Fiscal 1996 as a result of the lower average price of PVC
resin. Our gross margin improved to 43.3% in Fiscal 1997 from 38.2% in Fiscal
1996 primarily as a result of lower raw material costs and the increased
proportion of our product mix represented by reels, which tend to generate
higher gross margin than tubes (which represented a lower proportion of our
Company's product mix in Fiscal 1997 compared to Fiscal 1996).
Income from Operations. Income from operations increased by 29.6% to $16.0
million in Fiscal 1997 from $12.3 million in Fiscal 1996. Our operating margin
improved to 27.8% in Fiscal 1997 from 22.4% in Fiscal 1996 primarily as a
result of improvements in our gross margin, partially offset by an increase in
selling and marketing expenses.
General and Administrative and Research and Development Expenses. General
and administrative and research and development expenses decreased 12.2% to
$4.7 million in Fiscal 1997 from $5.4 million in Fiscal 1996 primarily as a
result of reduced collection and administrative expenses relating to our
recycling operations in the United States as we began purchasing recycled
trays collected by the SemiCycle Foundation instead of collecting such trays
ourself. This arrangement was terminated in August, 1999, due to lower costs
of used trays in Asia. See "Interest of Management in Certain Transactions."
Selling and Marketing Expenses. Selling and marketing expenses increased
27.4% to $4.2 million in Fiscal 1997 from $3.3 million in Fiscal 1996
primarily as a result of additional staff hired in connection with the sales
and marketing of new products such as tape and reel products.
Net Income. Net income increased 17.6% to $13.5 million in Fiscal 1997 from
$11.5 million in Fiscal 1996. This increase reflected the foregoing factors,
as well as a decrease in our effective tax rate to 8.4% in Fiscal 1997
compared to 9.6% in Fiscal 1996, partially offset by an increase in interest
expense to $1.4 million in Fiscal 1997 from $0.8 million in Fiscal 1996. The
decrease in the effective tax rate was due primarily to the effects of a lower
proportion of our profits in Fiscal 1997 accounted for by our operations
located in the United States, which have higher applicable tax rates. The
increase in interest expense was due to the increase in bank borrowings
incurred for working capital purposes.
Liquidity and Capital Resources
We historically met a significant portion of our cash requirements from cash
flow from operations and, prior to our initial public offering in June 1997,
shareholder loans, generally at no interest, from Mr. T.L. Li, as well as
short-term bank loans guaranteed by Mr. T.L. Li. Our primary uses of cash have
been to fund capital expenditures related to the expansion of our facilities
and operations, dividend payments and working capital requirements. We intend
to continue to retain our earnings to finance the development and expansion of
our business operations and do not intend to pay dividends for the foreseeable
future. Our net cash provided by operating activities was $20.5 million in
Fiscal 1999, compared to $15.5 million in Fiscal 1998 and $9.5 million in
Fiscal 1997.
30
<PAGE>
We incurred capital expenditures of $11.5 million for the acquisition of new
equipment in our current facility and $17.6 million for the construction of an
additional facility in Shenzhen, China during Fiscal 1999. We incurred capital
expenditures of $15.7 million in Fiscal 1998 and $7.2 million in Fiscal 1997,
primarily for the acquisition of new equipment in our existing facility. For
more information, see Note 13 of the Notes to our Consolidated Financial
Statements. As of March 31, 1999, we had commitments for capital expenditures
of $15.1 million. In connection with our construction of the additional
facility in Shenzhen, China and the acquisition of equipment for the new
facility, we have committed to aggregate capital expenditures of approximately
$30.0 million for Fiscal 1999 and Fiscal 2000. The actual amounts of capital
expenditures may vary substantially from those budgeted or estimated for a
variety of reasons, including changes in market conditions, unavailability or
changes in scheduled delivery of specific equipment, changes in interest rates
and other factors. In addition, we plan to continue to expand capacity in
future periods from cash on hand, including cash flow from operations and new
bank borrowings as required.
As of March 31, 1999, we had no outstanding indebtedness although bank
borrowings are available at floating interest rates which, as of March 31,
1999, had a weighted average rate of 7.8%. Mr. T.L. Li no longer guarantees
any of our bank loans or overdrafts, however, neither our ability to obtain
bank financing nor our cost of funds has been materially affected. As of March
31, 1999, we had available certain unused short-term lines of credit. For more
information, see Note 5 of Notes to our Consolidated Financial Statements.
If the Chinese customs authorities require us to post a bond in connection
with our exemption status from PRC duties on imported raw materials and
exported products, we will experience a substantial drain of our liquid
resources. We cannot assure that we will be able to provide the required bond
at a commercially feasible cost, or at all.
From time to time, we may evaluate possible investments or acquisitions and
may, if a suitable opportunity arises, make such an investment or acquisition.
We currently have no commitments to make any material investments or
acquisitions.
PVC Resin Price
PVC resin, the principal raw material used in the manufacture of tubes,
together with additives used in the manufacture of tubes accounted for 24.2%,
17.4% and 14.5% of our total raw material costs in Fiscal 1997, Fiscal 1998
and Fiscal 1999, respectively. While we believe principally as a result of
increased production capacity by suppliers, that a severe shortage in the
supply of PVC resin is unlikely to occur in the foreseeable future, there can
be no assurance that such shortage will not occur. Any price increases would
result in higher costs, which could have a material adverse effect on our
results of operations and financial condition. We currently maintain
approximately two to three months stock of PVC resin and other raw materials
used in our production processes, and increase such stock when we believe
prices are favorable. We do not, and do not intend to, enter into future
contracts or use any financial instruments to hedge our exposure to
fluctuations in the price of PVC resin or other raw materials used in our
production processes.
Currency Exchange Rate Fluctuations
Our sales are denominated primarily in US Dollars while our costs of goods
sold are generally incurred in US Dollars, Hong Kong Dollars and Renminbi, and
our operating expenses are generally denominated in Renminbi, Hong Kong
Dollars and US Dollars. In addition, a substantial portion of our capital
expenditures, primarily for the purchase of equipment, has been and is
expected to continue to be denominated in US Dollars and Japanese Yen.
Consequently, a portion of our costs and operating margins may be affected by
fluctuations in exchange rates, primarily between the US Dollar and other
currencies. Our results of operations and financial condition could be
adversely affected by fluctuations in currency exchange rates or the
imposition of new or additional currency controls in the jurisdictions in
which we operate. Primarily in response to recent developments in the
Southeast Asian currency markets, we from time to time engage in derivatives
trading activities, such as entering into forward contracts, to hedge our
currency exchange exposure. The Company does not utilize market-risk sensitive
instruments for speculative purposes.
31
<PAGE>
At March 31, 1999, we had outstanding foreign currency exchange contracts
that represented a commitment to sell US dollars of approximately US $4.0
million over a period of three months at a weighted average rate of HK $7.811.
Additionally, at March 31, 1999, we had outstanding foreign currency exchange
contracts that represented a commitment to buy RMB of approximately RMB
33,670,000 over a period of four months at a weighted average exchange rate of
US $0.119. Fluctuation in the exchange rates of these currencies has not
resulted in any material gain or loss to the Company and we do not expect it
to do so in the near future. For more information, see Note 11 to the Notes to
our Consolidated Financial Statements.
In addition, many of our competitors are located in countries whose
currencies devalued significantly against the US Dollar beginning in the
second half of 1997. As a result of such devaluation, these competitors'
products have become less expensive in US dollar terms. This reduction could
result in our customers purchasing products from these competitors rather than
from us, which could have a material and adverse effect on our net sales and
results of operation.
Remediation of Improprieties at Our Facility in China
As discussed above, we have discovered, but cannot quantify, losses that we
have sustained as a result of suspected employee improprieties at our facility
in China. In the event that these improprieties resulted in a material loss,
the cessation of these improprieties should result in a material positive
effect to our future results from operations.
Hong Kong Profits Tax
Under the Hong Kong tax authority's Departmental Interpretation and Practice
Notes, a company based in Hong Kong but with substantially all of its
manufacturing operations located in the PRC conducted pursuant to a processing
agreement entered into with a PRC company can enjoy profit apportionment
through which much of its manufacturing profit is subject to Hong Kong profits
tax. Substantially all of our manufacturing operations are located in
Shenzhen, China and conducted pursuant to a processing agreement entered into
with a PRC company. See "Description of Business--Employees." Effective April
1, 1999, the profits tax rate in Hong Kong is 16.0%, a change from the former
profits tax rate, which was 16.5%. Under our current profits apportionment,
only 50% of our profits are subject to Hong Kong profits tax and, as a result,
we enjoy a lower effective tax rate than would otherwise be the case. We
cannot assure that the Hong Kong tax authority will continue to grant such tax
concession to Hong Kong companies with manufacturing operations in China, or
that we will not lose such concession in the future as a result of changes in
Hong Kong tax law or the interpretation of such law. In the event that such
tax concessions are unavailable to us, our results of operations could be
materially and adversely affected.
Although traditionally, Hong Kong has allowed a company like ours to
apportion only 50% of its profits to activities outside Hong Kong (not subject
to Hong Kong tax), starting in Fiscal 1996, for tax filing purposes, we have
apportioned 80% of our profits to activities outside of Hong Kong. The Hong
Kong tax authorities are examining our activities with respect to several
factors that they use to ascertain the true geographic nature of a company's
activities. Although we believe our apportionment to be justified, we cannot
assure that the Hong Kong tax authorities will not insist on a different
apportionment that would subject us to payment of back taxes. We have taken a
reserve of $3.3 million should payment of back taxes be required.
Impact of the Year 2000
We are aware of the issues associated with the programming code in existing
computer systems as the millennium (year 2000) approaches. The year 2000
problem is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two digit year value to "00." The
issue is whether the computer system will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
32
<PAGE>
We have assessed our systems and believe them to be year 2000 compliant. In
addition, we have received assurance from our major software vendors that the
products we use are year 2000 compliant. The failure of the systems of other
companies on whose services we depend or with whom our system interfaces,
including our significant customers, to be year 2000 compliant could have a
material adverse effect on our results of operations and financial condition.
We intend to carry a larger amount of supplies than usual prior to December
31, 1999, so that in the event that the year 2000 problem interrupts our
channels of supply we will be able to continue operations for a reasonable
period of time.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Members of our Board of Directors are elected by our shareholders. At each
annual general meeting one-third of the directors for the time being shall
retire from office by rotation provided that the Chairman of the Board shall
not, while holding such office, be subject to Retirement by rotation. A
retiring director shall be eligible for re-election. Our Board of Directors
elects our executive officers.
The following table sets forth information with respect to the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Mr. T.L. Li............. 47 Chairman of the Board
Mr. Douglas Broyles..... 57 Director
Mr. Calvin Reed......... 56 President and Chief Executive Officer; Director
Mr. William Snyder...... 55 Director
Mr. Jack Menache........ 56 Vice President of Administration, Secretary and General Counsel
Mr. Jerry Mo............ 40 Chief Financial Officer and Controller
Mr. C.Y. Ng............. 41 Vice President
Mr. Larry Worth......... 61 Vice President
Mr. Danny Tong.......... 31 Vice President
</TABLE>
Mr. T.L. Li has served as our Chairman and Chief Executive Officer since
1990 and, through his ownership of all of the outstanding shares of Luckygold,
controls the majority of our outstanding Shares. Mr. Li holds a Bachelor of
Science degree in chemical engineering from the University of Wisconsin--
Madison and has over 20 years of experience in the semiconductor industry. Mr.
Li is the major shareholder of, and since 1981 has served as the Chairman of
the Board of Directors of, QPL Holdings, a company whose shares are listed on
The Stock Exchange of Hong Kong Limited ("The Hong Kong Stock Exchange").
Until May of 1999, Mr. Li also owned 100% of EEMS, a memory IC assembly and
test business based in Italy. See "Certain Transactions." Mr. Li is the
brother-in-law of Mr. Jerry Mo.
Mr. William Snyder has served as a member of our Board of Directors since
July 1999. Mr. Snyder currently serves as Chief Financial Officer of Etec
Systems, Inc., a multinational capital equipment manufacturer, where he has
served since August of 1997. Prior to that, Mr. Snyder served as Chief
Financial Officer of Integrated Device Technology, Inc., where he served in
that capacity from 1990 to July of 1997. Mr. Snyder has an M.B.A. from the
University of Arizona.
Mr. Douglas Broyles has served as a member of our Board of Directors since
May 1999. He holds patents for image scanning, printing and microprocessor
control techniques. He currently serves as President and Chief Executive
Officer of Avalon Data, which positions he has held since 1996.
Mr. Calvin Reed has served as our President and Chief Executive Officer and
as a member of our Board of Directors since April 1999. Mr. Reed has over
thirty years of experience in the electronics and technology sectors. From
1993 to 1998 Mr. Reed served as the Chairman, President, and Chief Executive
Officer of Valance Technology, Inc., a Nasdaq company.
Mr. Jack Menache has served as our Vice President of Administration,
Secretary and General Counsel since July 1999. He served as a member of our
Board of Directors from May 1999 until July 1999. He holds an
33
<PAGE>
LLB degree from George Washington University Law School, and a Bachelor of
Arts degree from the University of the Americas. He is admitted to the Bars of
Washington, D.C., and the States of Texas and California. He served as a Vice
President, General Counsel and Secretary for Integrated Device Technology,
Inc., an international manufacturer of semiconductors from September 1989
until July 1999.
Mr. Jerry Mo has served as our Chief Financial Officer and Controller since
1996. He holds a Bachelor of Science degree in accounting and data processing
from Leeds University in the United Kingdom. He is a fellow member of the
Institute of Chartered Accountants in England & Wales and an associated member
of the Institute of Chartered Accountants in Australia and the Hong Kong
Society of Accountants. Mr. Mo joined us in November 1996. Prior to joining
us, Mr. Mo worked as the Financial Controller for the Group Administration
Division of Pacific Dunlop Ltd., a major industrial conglomerate in Australia,
from 1992 to 1996. Mr. Mo is the brother-in-law of Mr. T.L. Li.
Mr. C. Y. Ng has served in a capacity roughly equivalent to Vice President
and has been in charge of Chinese Operations since May of 1999. Mr. Ng holds a
Bachelor of Science Degree in Electronics Engineering from the Chinese
University of Hong Kong. Mr. Ng is also a senior member of the Society of
Manufacturing Engineers. Prior to joining us, Mr. Ng was the PRC plant manager
for Honey Technology Ltd.
Mr. Larry Worth has served in a capacity roughly equivalent to Vice
President of Peak and has been in charge of US Marketing and Operations since
April of 1999. Mr. Worth holds a Bachelor of Arts degree in Business and
Management from the University of California, Foothill College and the College
of San Mateo. Prior to joining us, Mr. Worth was the North America Sales
Manager for the Electronic Products Division of Siemens from December of 1998
to April of 1999. Before Siemens, Mr. Worth spent 15 years as the President of
Worth Associates, a manufacturers' representative for semiconductor assembly
materials and services.
Mr. Danny Y.T. Tong has served in a capacity roughly equivalent to Vice
President and has been responsible for the Company's sales and operations in
Asia & Europe since May, 1999. Before taking this position, he was the Vice
President responsible for the Northern Asia sales of the Company since 1995.
He holds a Bachelor of Applied Science degree in mechanical engineering from
the University of Toronto. Mr. Tong joined the Company in 1991.
Board Committees
The Board of Directors formed a Compensation Committee and an Audit
Committee in February 1997. The Compensation Committee makes recommendations
to the Board of Directors relating to salaries and other compensation for the
Company's directors, officers and employees and administers the Share Option
Plan. In March 1999, all of the directors then sitting on the Compensation
Committee resigned. We have not yet appointed any new directors to the
Compensation Committee.
The Audit Committee reviews the results and scope of the annual audit and
other services provided by our independent auditors, reviews and evaluates our
internal audit and control functions, and monitors transactions between us and
our directors, officers, employees and other related parties. The members of
the Audit Committee are Messrs. Snyder and Broyles.
ITEM 11. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The aggregate compensation paid or accrued to individuals serving as our
directors and executive officers, including bonuses and pension, Retirement or
similar benefits, was approximately $0.9 million in both Fiscal 1998 and
Fiscal 1999.
In Fiscal 1999, none of our directors or executive officers received pension
benefits as part of his compensation. Our contributions to such pension plans
in Fiscal 1999 and Fiscal 1998 amounted to $15,277 and $13,913, respectively.
34
<PAGE>
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
1997 Share Option Plan
Our 1997 Share Option Plan (the "1997 Plan") was adopted by the Board of
Directors on March 18, 1997 and approved by the then sole shareholder on March
18, 1997. An aggregate of 700,000 shares has been reserved for issuance under
the 1997 Plan. Under the 1997 Plan, directors, officers, employees of, and
advisors and consultants to us or our affiliates may, at the discretion of the
Board of Directors, or a committee thereof (this board or committee is
sometimes referred to as the "plan administrator"), be granted options to
purchase shares at an exercise price determined by plan administrator. We have
the discretion to determine which eligible individuals are to receive option
grants, the number of shares subject to each such grant and vesting
restrictions and other terms and conditions applicable to the exercise of any
option. No participant in the 1997 Plan, however, may receive grants under
such plan in any calendar year which relate to more than 150,000 shares
without shareholder approval. Under 1997 Plan, we may grant incentive stock
options ("Incentive Stock Options"), non-qualified stock options, or both
types of options. In the case of Incentive Stock Options, the terms and
conditions of grants of such options comply with rules prescribed by Section
422 of the United States Internal Revenue Code of 1986, as amended, and the
regulations implementing such statute. Options granted under both the 1997
Plan which are not Incentive Stock Options are non-qualified stock options. We
have the discretion to establish the exercise price per share at the time each
option is granted, which will not be less than the par value of a share,
except that in the case of an Incentive Stock Option, the exercise price will
generally not be less than the fair market value of the underlying shares on
the date such option is granted.
As of August 15, 1999, we have granted, under the 1997 Plan, options
relating to an aggregate of:
<TABLE>
<CAPTION>
Shares relate to options held by Exercise
Shares directors and officers Price Expiry Date
------ -------------------------------- -------- --------------
<S> <C> <C> <C>
264,671......... 37,592 $12.000 March 17, 2007
29,860......... 7,292 $19.375 March 9, 2008
100,000......... 100,000 $ 5.875 July 28, 2009
</TABLE>
In the event that the plan administrator determines that any dividend or
other distribution or any alternation in the capital structure of the Company
affects the shares such that an adjustment is determined by the plan
administrator to be appropriate in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under the
1997 Plan, the plan administrator shall, subject to certain restrictions and
in such manner as it may deem equitable, adjust any or all of the (the number
of shares with respect to which awards may be granted, (ii) the number of
shares which are subject to outstanding awards and (iii) the exercise price
with respect to any award, or, if deemed appropriate by the plan
administrator, make provision for a cash payment to the holder of outstanding
awards.
The Board of Directors may amend or modify the 1997 Plan at any time. The
1997 Plan will terminate on March 17, 2007, unless sooner terminated by the
Board of Directors.
1998 Share Option Plan
Our 1998 Share Option Plan (the "1998 Plan") was adopted by the Board of
Directors on July 28, 1998 and approved by our shareholders on July 27, 1998.
An aggregate of 700,000 shares was initially reserved for issuance under the
1998 Plan. On September 16, 1999, the Board of Directors approved an
amendment, subject to shareholder approval, to (i) increase the number of
shares reserved for issuance under the 1998 Plan by 1,500,000 shares to
2,200,000 and (ii) increased the number of shares subject to grant under the
1998 Share Option Plan to any one person in any calendar year from 150,000
shares to 200,000 shares.
Under the 1998 Plan, directors, officers, employees of, and advisors and
consultants to us or our affiliates may, at the discretion of the Board of
Directors, or a committee thereof (this board or committee is sometimes
referred to as the "plan administrator"), be granted options to purchase
shares at an exercise price determined
35
<PAGE>
by plan administrator. We have the discretion to determine which eligible
individuals are to receive option grants, the number of shares subject to each
such grant and vesting restrictions and other terms and conditions applicable
to the exercise of any option. If approved by the shareholders, no participant
in the 1998 Plan, however, may receive grants under the share option plan in
any calendar year which relate to more than 200,000 shares without shareholder
approval. Under the 1998 Plan, we may grant Incentive Stock Options, non-
qualified stock options, or both types of options. Options granted under 1998
Plan which are not Incentive Stock Options are non-qualified stock options. We
have the discretion to establish the exercise price per share at the time each
option is granted, which will not be less than the par value of a share,
except that in the case of an Incentive Stock Option, the exercise price will
generally not be less than the fair market value of the underlying shares on
the date such option is granted.
As of August 15, 1999, we have granted, under the 1998 Plan, options
relating to an aggregate of:
<TABLE>
<CAPTION>
Shares relate to options held by Exercise
Shares directors and officers Price Expiry Date
------ -------------------------------- -------- --------------
<S> <C> <C> <C>
76,756......... 13,828 $12.250 July 27, 2008
484,036......... 364,000 $ 3.656 April 23, 2009
20,000......... 20,000 $ 3.875 May 5, 2009
10,000......... 10,000 $ 5.875 July 28, 2009
</TABLE>
In the event that the plan administrator determines that any dividend or
other distribution or any alternation in the capital structure of the Company
affects the shares such that an adjustment is determined by the plan
administrator to be appropriate in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under the
1998 Plan, the plan administrator shall, subject to certain restrictions and
in such manner as it may deem equitable, adjust any or all of the (i) the
number of shares with respect to which awards may be granted, (ii) the number
of shares which are subject to outstanding awards and (iii) the exercise price
with respect to any award, or, if deemed appropriate by the plan
administrator, make provision for a cash payment to the holder of outstanding
awards.
The Board of Directors may amend or modify the 1998 Plan at any time. The
1998 Plan will terminate on July 26, 2008 each unless sooner terminated by the
Board of Directors.
Options Granted to Calvin Reed
Additionally, on April 22, 1999, we issued non-qualified stock options to
Mr. Calvin Reed, in connection with his appointment as our President and Chief
Executive Officer. Specifically, we issued Mr. Reed options to purchase
150,000 shares of our common stock at a purchase price of $3.65625 per share,
150,000 shares of our common stock at a purchase price of $7 per share and
100,000 shares at a purchase of $10 per share (the "Reed Options"). Except for
options to purchase 100,000 shares at a purchase price of $3 21/32 per share,
issued under the 1998 Plan, the Reed Options were not issued pursuant to
either the 1997 Plan or the 1998 Plan. However, the terms and conditions of
the 1998 Plan are incorporated by reference into the Reed Options.
1998 Employee Stock Purchase Plan
On July 27, 1998, the board of directors adopted and our shareholders
approved our 1998 Employee Stock Purchase Plan (the "Purchase Plan") which
allows eligible employees to purchase our common stock at a discount from fair
market value. A total of 160,000 shares has been reserved for issuance under
the Purchase Plan.
The Purchase Plan will be administered by our board of directors, or a
specifically designated committee of the board of directors (this board or
committee is sometimes referred to as the "plan administrator"). The plan
administrator may interpret the Purchase Plan and, subject to its provisions,
may prescribe, amend and rescind rules and make all other determinations
necessary or desirable for the administration of the Purchase Plan.
36
<PAGE>
The Purchase Plan contains overlapping, twenty-four month offering periods
that commence on April 1 and October 1 of each year. The Purchase Plan
consists of six-month accumulation periods that commence on April 1 and
October 1 of each year.
Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, an employee may not be granted the
right to purchase shares under the Purchase Plan if the employee immediately
after the grant would own shares possessing 5% or more of the total combined
voting power or value of all classes of our capital shares.
The number of shares that each participant may purchase under the Purchase
Plan (and all other employee shares purchase plans of the Company or any
parent or subsidiary of the Company) will be limited as follows: (i) in the
case of shares purchased during an offering period that commenced in the
current calendar year, the limit is equal to $25,000 minus the fair market
value of the shares that the participant previously purchased in current
calendar year; (ii) in the case of shares purchased during an offering period
that commenced in the immediately preceding calendar year, the limit shall be
equal to $50,000 minus the fair market value of the shares that the
participant previously purchased in the current calendar year and in the
immediately preceding calendar year; and (iii) in the case of shares purchased
during an offering that commenced in the second preceding
calendar year, the limit is equal to $75,000 minus the fair market value of
the shares that the participant previously purchased in the current calendar
year and in the two preceding calendar years. In addition, the Purchase Plan
provides that the maximum number of shares a participant may purchase during a
single accumulation period is 5,000 shares.
The Purchase Plan permits each employee to purchase common stock through
payroll deductions of up to 20% of the employee's "compensation." Compensation
is generally defined as the total compensation paid in cash to a participant,
including salaries, wages, bonuses, incentive compensation, commissions,
overtime pay and shift premiums, plus (ii) any pre-tax contributions made by
the participant under section 401(k) or 125 of the Code.
Amounts deducted and accumulated by the employee are used to purchase shares
of common stock at the end of each offering period. The price of the common
stock offered under the Purchase Plan is an amount equal to 85% of the lower
of the fair market value of the shares on the last trading day in an
accumulation period or the last trading day before the commencement of the
applicable offering period. Employees may end their participation in the
Purchase Plan at any time during an offering period, in which event, any
amounts withheld through payroll deductions and not otherwise used to purchase
shares will be returned to them. Participation ends automatically upon
termination of employment with us.
Rights granted under the Purchase Plan are not transferable by an employee
other than by will or the laws of descent and distribution. The Purchase Plan
provides that, in the event of a change in control, offering periods and
accumulation periods then in progress will terminate and shares will be
purchased. The Purchase Plan will terminate in 2008. Our board of directors
has the authority to amend or terminate the Purchase Plan.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Mr. T.L. Li, our Chairman of the Board of Directors, through his beneficial
ownership of all of the outstanding shares of Luckygold, is our majority
shareholder. Mr. T.L. Li owns approximately 40.0% of the outstanding shares of
QPL Holdings, a company incorporated under Bermuda law and listed on The Hong
Kong Stock Exchange. QPL Holdings is a holding company of a group of
semiconductor companies which includes QPL, ASAT, Newport Wafer-Fab Limited,
Worltek International Limited and Talent Focus Industries Limited and provides
a wide range of outsourcing services, including leadframe manufacturing, IC
assembly and testing and silicon wafer fabrication. In the leadframe
manufacturing area, QPL Holdings manufactures both etched leadframes through
QPL as well as stamped leadframes through Talent Focus Industries Limited,
both based in Hong Kong. In the IC assembly and test area, QPL Holdings
acquired ASAT in Hong Kong in 1989 and ASAT
37
<PAGE>
S.A. in France in 1993, and founded ASAT (U.K.) Ltd. in the United Kingdom in
1993. In addition, Worltek International Limited, a United States subsidiary
of QPL Holdings, acts as sales agent for both QPL and ASAT, and provides IC
testing services. In the wafer foundry area, QPL Holdings acquired Newport
Wafer-Fab Limited in the United Kingdom through a two-step acquisition in 1992
and 1995. Up until May 30, 1999, Mr. T.L. Li also owned 100% of the
outstanding shares of EEMS, which acted as our sales agent in Europe until
December 1998. Mr. T.L. Li has since sold his entire interest in EEMS. We are
also informed that QPL Holdings has agreed to sell its entire interest in both
ASAT (U.K.) Limited and Newport Wafer-Fab Limited to parties unrelated to us.
See "Directors and Executive Officers of the Registrant."
A significant portion of our product sales has been made to companies
controlled by Mr. T.L. Li, which include QPL, ASAT and other subsidiaries of
QPL Holdings. Our product sales to the subsidiaries of QPL Holdings totaled
approximately $5.3 million in Fiscal 1999 which represented approximately 8.0%
of our net sales. QPL and ASAT are our customers and may engage in
transactions from time to time with the us that are material to our results of
operations.
In the United States, during Fiscal 1999, we purchased used trays and reels
collected by The SemiCycle Foundation, a Texas non-profit corporation which is
a publicly supported organization exempt from federal income tax, as part of
its recycling program. At the same time, we leased office space and provided
certain administrative and accounting services to The SemiCycle Foundation
and, in the past advanced loans to such foundation to help meet its cash
requirements. In August, 1999, we terminated our relationship with the
SemiCycle Foundation. For more information, see Note 12 of Notes to our
Consolidated Financial Statements. Mr. Steve R. Dezso, our resigned Vice
President responsible for United States operations, serves as a director of
The SemiCycle Foundation.
We review related party transactions on an ongoing basis and utilize the
Audit Committee of our Board of Directors for the review of potential
conflicts of interest where appropriate. Our policy is to conduct transactions
with our affiliates, including the companies in QPL Holdings, on an arms-
length basis.
In October of 1997, we invested approximately $12 million in notes issued by
Peregrine. At that time, one of our directors, Mr. Francis Leung, served as
both our director and a Peregrine director. We believe that our investment in
the Peregrine notes was under commercially reasonable terms.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGE IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
None.
38
<PAGE>
PART IV
ITEM 17. FINANCIAL STATEMENTS
The Company is providing Financial Statements pursuant to Item 18 below.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 through F-20
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Consolidated Financial Statements
The following financial statements are filed as part of this annual report.
39
<PAGE>
PEAK INTERNATIONAL LIMITED
Report and Financial Statements
For the Year Ended March 31, 1999
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Contents Page(s)
-------- -------
<S> <C>
Independent Auditors' Report....................................... F-2
Consolidated Balance Sheets as of March 31, 1999 and 1998.......... F-3
Consolidated Statements of Income and Comprehensive Income for the
years ended
March 31, 1999, 1998 and 1997..................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1999, 1998
and 1997.......................................................... F-5
Consolidated Statements of Cash Flows for the years ended March 31,
1999, 1998 and 1997............................................... F-6
Notes to Consolidated Financial Statements......................... F-7 to F-20
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Peak International Limited
We have audited the accompanying consolidated balance sheets of Peak
International Limited and subsidiaries as of March 31, 1999 and 1998 and the
related consolidated statements of income and comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended March 31, 1999. 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, as well as evaluating the overall financial
statements presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Peak International Limited
and subsidiaries as of March 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
Deloitte Touche Tohmatsu
Hong Kong
May 5, 1999,
except for Note 4, as to which the date is
September 21, 1999, and to Note 11(d) as
to which the date is July 2, 1999
F-2
<PAGE>
PEAK INTERNATIONAL LIMITED
CONSOLIDATED BALANCE SHEETS
(United States dollars in thousands, except share data)
<TABLE>
<CAPTION>
March 31,
----------------
1999 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $10,598 $19,214
Investment in certificate of deposit....................... -- 100
Accounts receivable, net of provision of $100 in 1999 and
nil in 1998--trade........................................ 10,916 10,141
Inventories (Note 3)....................................... 26,469 27,941
Other receivables, deposits and prepayments................ 1,241 1,521
Amounts due from related companies (Note 12)............... 912 4,275
------- -------
Total current assets................................... 50,136 63,192
Deposits for acquisition of plant and equipment.............. 1,175 --
Property, plant and equipment, net (Note 4).................. 42,342 26,348
------- -------
Total assets........................................... $93,653 $89,540
======= =======
Current liabilities:
Bank borrowings (Note 5)................................... $ -- $ 89
Accounts payable:
--trade.................................................. 2,534 3,763
--property, plant and equipment.......................... 1,112 557
Accrued payroll and employee benefits...................... 656 668
Accrued special charge (Note 6)............................ 876 --
Accrued other expenses..................................... 1,446 1,910
Income taxes payable....................................... 3,805 3,800
Amounts due to related companies (Note 12)................. -- 353
------- -------
Total current liabilities.............................. 10,429 11,140
Deferred income taxes (Note 9)............................... 1,607 818
Long-term liability (Note 6)................................. 647 --
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock, $0.01 par value; authorized 100,000,000
shares issued and outstanding 13,509,118 shares at March
31, 1999 and 13,461,538 shares at
March 31, 1998............................................ 135 135
Additional paid-in capital................................. 34,620 34,034
Retained earnings.......................................... 46,954 44,117
Cumulative translation adjustments......................... (739) (704)
------- -------
Total shareholders' equity............................. 80,970 77,582
------- -------
Total liabilities and shareholders' equity............. $93,653 $89,540
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PEAK INTERNATIONAL LIMITED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(United States dollars in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------
1999 1998 1997
<S> <C> <C> <C>
Net sales:
--third parties................................. $ 59,794 $ 60,934 $ 47,910
--related companies (Note 12)................... 6,441 12,771 9,684
-------- -------- --------
Total....................................... 66,235 73,705 57,594
Cost of goods sold................................ (39,487) (41,048) (32,676)
-------- -------- --------
Gross profit...................................... 26,748 32,657 24,918
Operating expenses:
General and administrative...................... (6,713) (5,656) (4,355)
Research and development........................ (551) (538) (375)
Selling and marketing........................... (5,801) (5,487) (4,198)
Special charge (Note 6)......................... (2,000) -- --
Asset impairment (Note 4)....................... (9,000) -- --
-------- -------- --------
Income from operations............................ 2,683 20,976 15,990
Other income, net (Note 7)........................ 812 926 83
Interest income (Note 8).......................... 687 907 105
Interest expense.................................. (7) (390) (1,425)
-------- -------- --------
Income before income taxes........................ 4,175 22,419 14,753
Provision for income taxes (Note 9)............... (1,338) (1,825) (1,236)
-------- -------- --------
Net income........................................ 2,837 20,594 13,517
======== ======== ========
Other comprehensive income Adjustments:
Translation adjustment.......................... (35) (725) 30
Unrealized holding gain on marketable
securities..................................... -- -- 59
Less: reclassification adjustment for gains
included in net income......................... -- (59) --
-------- -------- --------
Other comprehensive income...................... (35) (784) 89
-------- -------- --------
Comprehensive income.............................. $ 2,802 $ 19,810 $ 13,606
======== ======== ========
Earnings per share
Basic........................................... $ 0.21 $ 1.61 $ 1.29
Diluted......................................... $ 0.21 $ 1.59 $ 1.29
<CAPTION>
Weighted average number of shares outstanding
Basic........................................... 13,503,584 12,804,004 10,461,538
Diluted......................................... 13,550,188 12,972,060 10,461,538
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PEAK INTERNATIONAL LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(United States dollars in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
holding
Common Stock Additional Cumulative gains on
----------------- paid-in Retained translation marketable
Shares Amount capital earnings adjustments securities Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of March 31,
1996................... 10,461,538 $105 $ 2,564 $11,300 $ (9) $-- $13,960
Net income for the
year................... -- - -- 13,517 -- -- 13,517
Dividend of $0.12 per
share.................. -- -- -- (1,294) -- -- (1,294)
Foreign currency
translation............ -- -- -- -- 30 -- 30
Increase in realized
holding gain for the
year................... -- -- -- -- -- 59 59
---------- ---- ------- ------- ----- ---- -------
Balance as of March 31,
1997................... 10,461,538 105 2,564 23,523 21 59 26,272
Net income for the
year................... -- -- -- 20,594 -- -- 20,594
Issue of shares......... 3,000,000 30 31,470 -- -- -- 31,500
Foreign currency
translation............ -- -- -- -- (725) -- (725)
Holding gain realized
during the year upon
disposal............... -- -- -- -- -- (59) (59)
---------- ---- ------- ------- ----- ---- -------
Balance as of March 31,
1998................... 13,461,538 135 34,034 44,117 (704) -- 77,582
Net income for the
year................... -- -- -- 2,837 -- -- 2,837
Issue of shares......... 47,580 -- 586 -- -- -- 586
Foreign currency
translation............ -- -- -- -- (35) -- (35)
---------- ---- ------- ------- ----- ---- -------
Balance as of March 31,
1999................... 13,509,118 $135 $34,620 $46,954 $(739) $-- $80,970
========== ==== ======= ======= ===== ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PEAK INTERNATIONAL LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOW
(United States dollars in thousands, except share data)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------
1999 1998 1997
<S> <C> <C> <C>
Operating activities:
Net income...................................... $ 2,837 $ 20,594 $ 13,517
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 3,988 5,012 3,570
Deferred income taxes......................... 789 444 (67)
Provision for slow moving inventory charged
(written back) to income..................... 962 64 (453)
Loss on disposal/write-off of plant and
equipment.................................... 104 7 3
Loss on sale of short-term marketable
securities................................... -- (345) (90)
Asset impairment.............................. 9,000 -- --
Changes in operating assets and liabilities
Accounts receivable--trade..................... (775) (356) (1,720)
Inventories.................................... 510 (5,952) (6,991)
Other receivables, deposits and prepayments.... 280 (173) (266)
Bills payable.................................. -- (5,489) 306
Accounts payable--trade........................ (1,229) 1,996 567
(Decrease) increase in accrued payroll and
employee benefits............................. (12) 633 --
Increase in special charge..................... 876 -- --
(Decrease) increase in accrued other expenses.. (464) 589 (554)
Amounts due from/to related companies.......... 3,010 (2,875) (12)
Income taxes payable........................... 5 1,323 1,666
Long-term liability............................ 647 -- --
-------- -------- --------
Net cash provided by operating activities..... 20,528 15,472 9,476
-------- -------- --------
Investing activities:
Acquisition of property, plant and equipment.... (28,549) (15,244) (8,050)
Deposits for acquisition of plant and
equipment...................................... (1,175) -- --
Redemption of certificate of deposits........... 100 -- --
Proceeds from sale of short-term marketable
securities..................................... -- 1,415 612
Purchase of marketable securities............... -- -- (1,592)
-------- -------- --------
Net cash used in investing activities......... (29,624) (13,829) (9,030)
-------- -------- --------
Financing activities:
(Decrease) increase in bank borrowings.......... (89) (15,592) 12,199
Proceeds from issue of common stock............. 586 31,500 --
Dividend paid................................... -- -- (1,294)
Advances from shareholder....................... -- -- 1,570
Repayment of amount due to shareholder.......... -- -- (12,061)
-------- -------- --------
Net cash provided by financing activities..... 497 15,908 414
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents..................................... (8,599) 17,551 860
Cash and cash equivalents at beginning of year... 19,214 1,814 924
Effects of exchange rate changes on cash......... (17) (151) 30
-------- -------- --------
Cash and cash equivalents at end of year......... $ 10,598 $ 19,214 $ 1,814
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest....................................... $ 7 $ 390 $ 1,425
Income taxes................................... 544 58 138
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PEAK INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(United States dollars in thousands, except share data)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Peak International Limited (the "Company") was incorporated as an exempted
company with limited liability in Bermuda under the Companies Act 1981 of
Bermuda (as amended) on January 3, 1997.
Pursuant to a group restructuring in early 1997 (the "Restructuring"), the
interest in various companies in the packaging products business held by Mr.
T.L. Li, the shareholder of the Company, were restructured whereby the Company
became the holding company of these companies. The Restructuring has been
accounted for as a reorganization of entities under common control similar to
a pooling of interests. The financial statements present the results of the
Company and its subsidiaries as if the companies had been combined for all
periods presented.
In June 1997, the Company issued 3,000,000 shares of common stock in an
initial public offering and received net proceeds of approximately $31,500.
The subsidiaries of the Company are principally engaged in the manufacture
and sale of precision engineered packaging products, such as matrix trays,
shipping tubes, reels and carrier tape, leadframe boxes and interleaves used
in the storage and transportation of semiconductor devices and other
electronic components. The Company's principal production facilities are
located in the People's Republic of China (the "PRC") and the Company
maintains sales offices in Hong Kong, the United States of America, Singapore
and Malaysia.
The consolidated financial statements of the Company and its subsidiaries
have been prepared in accordance with generally accepted accounting principles
in the United States of America ("U.S. GAAP") which differ from those used in
the statutory accounts of most of its subsidiaries. There are no material
differences between the U.S. GAAP amounts and the amounts used in the
statutory accounts of the subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out method. Cost of work-in-progress and finished goods
includes costs of direct materials, direct labor and an appropriate proportion
of production overheads. The production overheads are absorbed in work-in-
progress and finished goods based on units of production.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation and amortization is provided using the straight-
line method so as to allocate the cost of depreciable assets in use to
operations based upon the estimated useful lives.
With effect from April 1, 1998, following a review of the asset lives of
certain classes of property, plant and equipment, the useful lives of plant,
machinery, manufacturing equipment, manufacturing leasehold
F-7
<PAGE>
PEAK INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(United States dollars in thousands, except share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
improvements and furniture and fixtures were revised from 5 years to 10 years.
The directors, based on their past experience, are of the opinion that the
revision will give a more realistic measure of the economic useful lives of
these assets. Such revision has resulted in a reduction in depreciation and
amortization expense on property, plant and equipment acquired in previous
years by $2,391 and on new additions in 1999 by $530.
The useful lives of fixed assets adopted for depreciation purposes are as
follows:
<TABLE>
<CAPTION>
Category of assets Estimated useful lives
<S> <C>
Land use rights............................ Over the unexpired lease term
Buildings.................................. Over the unexpired lease term
Plant, machinery, manufacturing equipment,
manufacturing leasehold improvements,
furniture and fixtures.................... 10 years
Molds, motor vehicles, office leasehold
improvements, furniture and fixtures...... 5 years
</TABLE>
Costs incurred in constructing the new factory, including progress payments,
interest costs and other costs relating to the construction are capitalized.
These costs will be transferred to property, plant and equipment on completion
and depreciated from that time. No interest was capitalized in 1999 and
interest capitalized was $23 in 1998 and $11 in 1997.
Valuation of long-lived assets
The Company periodically evaluates the carrying value of long-lived assets
to be held and used when events and circumstances warrant such a review. The
carrying value of a long-lived asset is considered impaired when the
anticipated undiscounted cash flow from such asset is separately identifiable
and is less than its carrying value. In that event, a loss is recognized based
on the amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk
involved. Losses on long-lived assets to be disposed of are determined in a
similar manner, except that fair market values are reduced for the costs to
disposal.
Investment in marketable securities
Management determines the appropriate classification of investment
securities at the time they are acquired and re-evaluates the appropriateness
of such classifications at the balance sheet date. At each balance sheet date,
the investment in marketable equity securities has been classified as
"Available for Sale Securities". This type of security is stated at fair
market value and unrealized holding gains and losses, net of deferred tax, are
reported as other comprehensive income.
Dividends on marketable equity securities, if any, are recognized as income
when declared. Realized gains and losses will be included in income and will
be based upon the actual cost of the security.
Foreign currency translation
The Company uses the United States dollar as its reporting currency.
Monetary assets and liabilities denominated in currencies other than the
United States dollar are translated into the United States dollar at the rates
of exchange ruling at the balance sheet date. Transactions in currencies other
than the United States dollar during the year are converted into the United
States dollar at the rates of exchange ruling at the transaction dates.
Exchange difference are recognized in the statement of income.
F-8
<PAGE>
PEAK INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(United States dollars in thousands, except share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
On consolidation, balance sheets of subsidiaries denominated in currencies
other than the United States dollar are translated into the United States
dollar at the rates of exchange ruling at the balance sheet date. Statements
of income of subsidiaries denominated in currencies other than the United
States dollar are translated into the United States dollars at average
exchange rates. Exchange differences are reported as other comprehensive
income.
The Company enters into foreign exchange contracts to reduce its exposure to
change in exchange rates. Material market value gains and losses are
recognized in the statement of income.
Income taxes
Income taxes are calculated under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Deferred
income taxes include the effects of temporary differences between financial
and taxable amounts of assets and liabilities.
Recognition of revenue
Revenue arising from sale of goods is recognized at the time when the goods
are shipped and title to the goods passes to customers.
Stock options
The Company continues to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", in accounting for its stock
options. As a result, no compensation expense has been recognised as stocks is
issued through non-compensatory plans. The Company has accounted for the stock
options using the intrinsic value method. Proforma disclosures of the effect
on net income and earnings per share as if the Company had accounted for its
employee stock options under the fair value method prescribed by SFAS No. 123,
"Accounting for Stock Based Compensation", are shown in note 15.
Earnings per share
Earnings per share is computed using the weighted average number of shares
outstanding during the year. For the year ended March 31, 1999 and 1998,
diluted earnings per share is computed using a weighted average number of
shares outstanding of 13,550,188 and 12,972,060, respectively, which includes
46,604 and 168,056 additional shares, respectively, being the dilutive effect
of stock options computed using the treasury stock method.
Cash equivalents
The Company considers all highly liquid debt instruments with a maturity of
ninety days or less at the time of acquisition to be cash equivalents.
Financial instruments
The carrying value of financial instruments, which consist of cash and cash
equivalents, investments in certificates of deposit and marketable securities,
accounts receivable, amounts due from related companies, short-term bank
borrowings, accounts payable and foreign exchange contracts, approximates to
fair value due to the short-term nature of these instruments.
New accounting standards adopted
In 1998 the Company adopted SFAS No.130, "Reporting Comprehensive Income"
and SFAS No.131, "Disclosures about Segments of an Enterprise and Related
Information" and comparative information for earlier years has been amended to
conform to the presentation adopted in 1999.
F-9
<PAGE>
PEAK INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(United States dollars in thousands, except share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS No.130, "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No.130 requires that all items that are required
to be recognised under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
SFAS No.131, "Disclosures about Segments of an Enterprise and Related
Information", which supersedes SFAS No.14, "Financial Reporting for Segments
of a Business Enterprise", establishes standards for the way that public
enterprises report information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. SFAS
No.131 defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates. Actual results
could differ from those estimates.
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.
Reclassifications
Certain amounts in the prior period financial statements have been
reclassified to conform to the presentation adopted in 1999.
(3) INVENTORIES
The components of inventories, net of the related reductions to the lower of
cost or market, were as follows:
<TABLE>
<CAPTION>
March 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Raw materials............................................... $18,735 $20,489
Finished products........................................... 8,889 7,645
------- -------
27,624 28,134
Less: Inventory reserve..................................... (1,155) (193)
------- -------
$26,469 $27,941
======= =======
</TABLE>
The inventory reserve represents provision for slow moving inventory
determined after periodic review by management.
F-10
<PAGE>
PEAK INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(United States dollars in thousands, except share data)
(3) INVENTORIES (Continued)
Movements in inventory reserve are as follows:
<TABLE>
<S> <C>
Balance at March 31, 1996............................................. $ 582
Provision for slow moving inventory written back to income............ (453)
------
Balance as of March 31, 1997.......................................... 129
Provision for slow moving inventory charged to income................. 64
------
Balance as of March 31, 1998.......................................... 193
Provision for slow moving inventory charged to income................. 962
------
Balance as of March 31, 1999.......................................... $1,155
======
</TABLE>
(4) PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
March 31,
------------------
1999 1998
<S> <C> <C>
Land use rights and building............................. $ 4,972 $ 4,909
Factory under construction............................... 11,273 2,649
Plant, machinery, moulds and equipment................... 26,874 20,068
Leasehold improvements, furniture, fixtures and motor
vehicles................................................ 18,257 14,177
-------- --------
61,376 41,803
Less: Accumulated depreciation and amortization.......... (19,034) (15,455)
-------- --------
$ 42,342 $ 26,348
======== ========
</TABLE>
A subsidiary of the Company operating in Shenzhen in the PRC owned factory
buildings on certain state-owned land in the PRC and has been assigned the
land use rights for a period of 50 years.
The Company has incurred expenditure at March 31, 1999 of $20,273 on the
construction of a new plant, including land costs, as part of the expansion of
the Company's production capacity. Management is undertaking a review of its
production needs and has determined that the additional facilities may not be
required for some time ahead depending on market conditions, and has decided
to delay the completion of the plant construction. Up to September 1999 the
Company has incurred additional costs of approximately $8,000. Management is
currently reviewing its options with respect to this facility which include
disposal of the facility in its existing state, completion of the facility and
its disposal, or completion of the facility for its ultimate use in the
Company's business. Accordingly, management has reviewed the asset for
impairment and given the change in circumstances concerning its possible
future use, an independent appraisal of the fair value of the asset was
obtained and a provision for impairment of $9,000 made.
(5) CREDIT FACILITIES
<TABLE>
<CAPTION>
March 31,
------------------
1999 1998
<S> <C> <C>
Total unsecured credit facilities available.............. $14,678 $50,518
------- -------
Total utilized unsecured facilities...................... $ -- $ 89
------- -------
Weighted average interest rate on borrowings at end of
year.................................................... -- 9.17%
======= =======
</TABLE>
Interest rates in respect of credit facilities are generally based on the
banks' prime lending rates and the credit lines are normally subject to annual
review. Bank borrowings at March 31, 1998 represented invoice financing and
bank overdrafts with certain commercial banks.
F-11
<PAGE>
PEAK INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(United States dollars in thousands, except share data)
(6) SPECIAL CHARGE
During the year ended March 31, 1999, the Company terminated the employment
of the President and Chief Executive Officer at a cost, including legal and
professional expenses, of $2,000. The amount payable in the year ending March
31, 2000 of $876 is included in current liabilities and the amount payable of
$647 in the year ending March 31, 2001 is reported as a long-term liability.
(7) OTHER INCOME, NET
Other income (expense) consists of the following:
<TABLE>
<CAPTION>
Year ended March 31,
----------------------
1999 1998 1997
<S> <C> <C> <C>
Proceeds on sale of short-term marketable securities... $ -- $ 1,415 $ 612
Cost of marketable securities.......................... -- (1,070) (522)
----- -------- ------
Realized gain on marketable securities................. -- 345 90
Foreign currency exchange gain (loss), net............. 812 581 (7)
----- -------- ------
$ 812 $ 926 $ 83
===== ======== ======
</TABLE>
(8) INTEREST INCOME
<TABLE>
<CAPTION>
Year ended March 31,
--------------------
1999 1998 1997
<S> <C> <C> <C>
Interest income from:
--third parties........................................ $687 $901 $ 74
--an affiliated party (note 12)........................ -- 6 31
------ ------ ------
$687 $907 $105
====== ====== ======
</TABLE>
(9) PROVISION FOR INCOME TAXES
Income is subject to taxation in the various countries in which the Company
and its subsidiaries operate. The components of income before income taxes are
as follows:
<TABLE>
<CAPTION>
Year ended March 31,
----------------------
1999 1998 1997
<S> <C> <C> <C>
Hong Kong............................................ $3,789 $21,787 $14,678
Other countries...................................... 386 632 75
------ ------- -------
$4,175 $22,419 $14,753
====== ======= =======
</TABLE>
F-12
<PAGE>
PEAK INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(United States dollars in thousands, except share data)
(9) PROVISION FOR INCOME TAXES (Continued)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended March 31,
----------------------
1999 1998 1997
<S> <C> <C> <C>
Current:
Hong Kong........................................... $ 429 $1,299 $1,223
United States....................................... (38) 52 22
Malaysia............................................ 1 (4) 27
Singapore........................................... 157 34 31
Deferred income tax:
Hong Kong
Current year...................................... 823 450 (28)
Attributable to change in tax rate................ (27) -- --
Malaysia............................................ 7 -- (26)
Singapore........................................... (14) (6) (13)
------ ------ ------
$1,338 $1,825 $1,236
====== ====== ======
</TABLE>
The components of the net deferred income tax liabilities as of March 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
March 31,
--------------
1999 1998
<S> <C> <C>
Deferred income tax liabilities:
Depreciation.............................................. $1,691 $900
Other temporary differences............................... (84) (82)
------ ----
$1,607 $818
====== ====
</TABLE>
The effective tax rate of the Company varies from the Hong Kong profits tax
rate for the following reasons:
<TABLE>
<CAPTION>
Year ended March 31,
----------------------
1999 1998 1997
<S> <C> <C> <C>
Hong Kong profits tax rate............................ 16.0% 16.5% 16.5%
Hong Kong profits tax relief for the PRC operations... (8.0) (8.3) (8.3)
Taxation elsewhere.................................... 1.1 0.4 0.3
Asset impairment...................................... 21.8 -- --
Other items........................................... 1.1 (0.5) (0.1)
------ ------ ------
32.0% 8.1% 8.4%
====== ====== ======
</TABLE>
Under the Hong Kong tax authority's Departmental Interpretation and Practice
Notes, a company based in Hong Kong, but with substantially all of its
manufacturing operations located in the PRC conducted pursuant to a processing
agreement entered into with a PRC company, can enjoy profit apportionment
through which only 50% of its manufacturing profit is subject to Hong Kong
profits tax. Substantially all the Company's manufacturing operations are
located in Shenzhen, PRC, and conducted pursuant to a processing agreement
entered into with a PRC company. Under profits apportionment, only 50% of the
profits of the Company is subject to Hong Kong profits tax. Such tax
concession is granted based on annual application by the Company and there can
be no assurance that the Hong Kong tax authority will continue to grant such
tax concession to the Company and other Hong Kong companies with manufacturing
operations in the PRC, or that the Company will not lose such concession in
the future as a result of changes in Hong Kong tax law or the interpretation
of such law.
F-13
<PAGE>
PEAK INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(United States dollars in thousands, except share data)
(10) EMPLOYEE BENEFIT PLANS
Since June 1, 1996, the Company has established defined contribution benefit
plans for its Hong Kong employees. The assets of the plans are held under
provident funds managed by independent trustees. The employees can elect not
to make contributions to the plans or they can elect to contribute a fixed
percentage from 1% to 5% (in 1% increments) of individual employee's monthly
basic salary. The employer's contributions are based on 5% of individual
employee's monthly basic salary. The employees are entitled to the whole of
the employer's contributions and accrued interest thereon after 10 years of
complete service or at a reduced scale of 90% to 30%, after completion of 9 to
3 years of service, respectively.
In addition, certain subsidiaries of the Company are required to contribute
amounts based on respective employee's salary to the retirement schemes as
stipulated by relevant local authorities. The employees are entitled to the
employer's contributions subject to the regulations of the relevant local
authorities.
Total expense related to the above plans was $184 in 1999, $199 in 1998 and
$143 in 1997.
(11) COMMITMENTS AND CONTINGENCIES
(a) Capital expenditure
As of March 31, 1999, the Company and its subsidiaries had contracted for
capital expenditure on property, plant and equipment of $15,142.
(b) Operating leases
The Company and its subsidiaries lease certain land and buildings under
operating leases, most of which do not contain renewal options and
escalation clauses, which expire through December 2007. Rental expense
under operating leases for the years ended March 31, 1999, 1998, 1997
amounted to $1,599, $1,295 and $1,048, respectively.
The aggregate annual minimum operating lease commitments under all
noncancelable leases as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending March 31,
<S> <C>
2000................................................................ $1,371
2001................................................................ 1,007
2002................................................................ 394
2003................................................................ 334
2004................................................................ 307
Thereafter.......................................................... 624
------
$4,037
======
</TABLE>
(c) Other commitment
As of March 31, 1999 the Company has entered into foreign exchange contracts
totaling approximately $8,000 (1998: $17,614) primarily to purchase Hong Kong
dollars and Renminbi. The Company is exposed to credit risk in the event of
non-performance by the counter parties to the contracts. However, the Company
does not anticipate non-performance because the counter parties are major
financial institutions.
F-14
<PAGE>
PEAK INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(United States dollars in thousands, except share data)
(11) COMMITMENTS AND CONTINGENCIES (Continued)
(d) Litigations
In June 1999, a complaint was filed in the United States District Court of
New York by certain holders of Trust Enhanced Dividend Securities (the
"TrENDS") against the Company, the Chairman and a director of the Company and
others. The complaint seeks compensatory damages and legal expenses, pursuant
to federal securities laws, based on alleged misrepresentations and omissions
in the documents which contains financial information of the Company and by
which the TrENDS were offered to the public for initial purchase. The Company
has begun investigating the allegations made in the complaint. While
management is unable to estimate the ultimate outcome of this litigation, it
does not believe that any adverse outcome would be material to its financial
position or liquidity but could possibly be material to earnings in the year
of settlement.
On July 2, 1999, the Company has received an amended and restated demand for
arbitration filed by the former chief executive officer, who claims either
payment of $32.4 per month or a lump sum payment of approximately $1,037,
subject to an appropriate present value discount, pursuant to his employment
contract after being terminated during the year. Although the outcome of this
lawsuit is yet to be decided, the Company considers that the demand is without
merit and intends to defend vigorously the allegations in the demand and
believes that this litigation will not have a material adverse effect on the
Company.
(12) RELATED AND AFFILIATED PARTY TRANSACTIONS
The Company had the following significant transactions with certain related
and affiliated parties during the relevant years.
<TABLE>
<CAPTION>
Year ended March 31,
---------------------
1999 1998 1997
<S> <C> <C> <C>
Sales to related companies
Certain subsidiaries of QPL International Holdings
Limited ("QPL")....................................... $5,269 $12,046 $9,315
EEMS Italia S.P.A. ("EEMS")............................ 1,172 725 369
------ ------- ------
$6,441 $12,771 $9,684
------ ------- ------
Legal and professional fees to Richards Butler........... $ 241 $ 81 $ 1
Settlement of legal and professional fees on behalf of
Mr. T. L. Li who reimbursed the Company fully prior to
balance sheet date...................................... 891 598 --
Management fee from EEMS, Inc............................ 20 147 144
Commission expense to EEMS............................... 61 100 212
Management fee from SemiCycle Foundation................. -- 101 252
Purchases from SemiCycle Foundation...................... -- 3,000 1,735
Rental income from SemiCycle Foundation.................. -- 98 91
Interest income from SemiCycle Foundation................ -- 6 31
Purchase of interest bearing notes issued by Peregrine
Investments Holdings Limited which either matured or
were sold prior to balance sheet date................... -- 16,661 --
</TABLE>
F-15
<PAGE>
PEAK INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(United States dollars in thousands, except share data)
(12) RELATED AND AFFILIATED PARTY TRANSACTIONS (Continued)
The amounts due from/to related companies as of March 31, 1999 and 1998 were
as follows:
<TABLE>
<CAPTION>
March 31,
-----------
1999 1998
<S> <C> <C>
Amounts due from:
Certain subsidiaries of QPL....................................... $713 $4,068
EEMS.............................................................. 199 207
---- ------
$912 $4,275
==== ======
Amounts due to:
EEMS.............................................................. $-- $36
SemiCycle Foundation.............................................. -- 317
---- ------
$-- $353
==== ======
</TABLE>
The amounts are unsecured, interest free and are repayable on demand.
Mr. T.L. Li, who is a director and shareholder and controls the majority of
the voting rights of the Company, is a director of and has substantial equity
interests in QPL and EEMS. Messrs. Steve Dezso, a corporate officer of a
subsidiary of the Company, and Richard M. Brook were until October 27, 1997
corporate officers of EEMS, Inc. Mr. Steve Dezso was a director of SemiCycle
Foundation. In December 1997, the board of directors of SemiCycle Foundation
was expanded from three to eight directors, and consequently, the Company's
transactions with SemiCycle Foundation are no longer regarded as related and
affiliated party transactions.
Mr. Robin Nicholson, a director of the Company, is a partner of Richards
Butler. Mr. Francis Leung, a director of the Company, had an indirect equity
interest in Peregrine Investments Holdings Limited (in liquidation).
F-16
<PAGE>
PEAK INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(United States dollars in thousands, except share data)
(13) SEGMENT INFORMATION
The Company and its subsidiaries operate in one business segment, which is
to manufacture and sell plastic tubes, trays and other related products.
An analysis of net sales, operating profit and identifiable assets by
geographic location is as follows:
<TABLE>
<CAPTION>
Other
Southeast
Hong Kong United Asian Elimin-
& PRC States countries ations Consolidated
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1999
Net sales to third
parties................... $32,395 $10,755 $16,644 $ -- $59,794
Net sales to related
companies................. 6,441 -- -- -- 6,441
Transfer between geographic
areas..................... 23,067 -- 2,073 (25,140) --
------- ------- ------- -------- -------
Total net sales.......... $61,903 $10,755 $18,717 $(25,140) $66,235
------- ------- ------- -------- -------
Depreciation and
amortization.............. $ 3,761 $ 88 $ 139 $ -- $ 3,988
------- ------- ------- -------- -------
Operating profit (loss).... $ 2,193 $ (146) $ 654 $ (18) $ 2,683
------- ------- ------- -------- -------
Interest income............ $ 643 $ 39 $ 5 $ -- $ 687
------- ------- ------- -------- -------
Interest expenses.......... $ 7 $ -- $ -- $ -- $ 7
------- ------- ------- -------- -------
Income before tax.......... $ 3,844 $ (225) $ 574 $ (18) $ 4,175
------- ------- ------- -------- -------
Income tax................. $ 1,225 $ (38) $ 151 $ -- $ 1,338
------- ------- ------- -------- -------
Inventory reserve.......... $ 1,132 $ -- $ 23 $ -- $ 1,155
------- ------- ------- -------- -------
Capital expenditure........ $28,834 $ 134 $ 136 $ -- $29,104
------- ------- ------- -------- -------
Property, plant and
equipment................. $42,884 $ 372 $ 261 $ -- $43,517
Other identifiable assets.. 34,311 1,539 4,600 (912) 39,538
Corporate assets........... 10,598
-------
Total assets............. $93,653
-------
Year ended March 31, 1998
Net sales to third
parties................... $30,129 $14,457 $16,348 $ -- $60,934
Net sales to related
companies................. 12,771 -- -- -- 12,771
Transfer between geographic
areas..................... 26,683 -- 2,286 (28,969) --
------- ------- ------- -------- -------
Total net sales.......... $69,583 $14,457 $18,634 $(28,969) $73,705
------- ------- ------- -------- -------
Depreciation and
amortization.............. $ 4,824 $ 53 $ 135 $ -- $ 5,012
------- ------- ------- -------- -------
Operating profit........... $20,344 $ 271 $ 457 $ (96) $20,976
------- ------- ------- -------- -------
Interest income............ $ 852 $ 48 $ 7 $ -- $ 907
------- ------- ------- -------- -------
Interest expenses.......... $ 390 $ -- $ -- $ -- $ 390
------- ------- ------- -------- -------
Income before tax.......... $21,213 $ 667 $ 635 $ (96) $22,419
------- ------- ------- -------- -------
Income tax................. $ 1,749 $ 52 $ 24 $ -- $ 1,825
------- ------- ------- -------- -------
Inventory reserve.......... $ 168 $ -- $ 25 $ -- $ 193
------- ------- ------- -------- -------
Capital expenditure........ $15,582 $ 83 $ 66 $ -- $15,731
------- ------- ------- -------- -------
Property, plant and
equipment................. $25,753 $ 294 $ 301 $ -- $26,348
Other identifiable assets.. 38,165 1,985 4,622 (894) 43,878
Corporate assets........... 19,314
-------
Total assets............. $89,540
-------
</TABLE>
F-17
<PAGE>
PEAK INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(United States dollars in thousands, except share data)
(13) SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
Other
Southeast
Hong Kong United Asian Elimin-
& PRC States countries ations Consolidated
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1997
Net sales to third parties.. $22,098 $10,488 $15,324 $ -- $47,910
Net sales to related
companies.................. 9,684 -- -- -- 9,684
Transfer between geographic
areas...................... 21,095 496 2,806 (24,397) --
------- ------- ------- -------- -------
Total net sales........... $52,877 $10,984 $18,130 $(24,397) $57,594
------- ------- ------- -------- -------
Depreciation and
amortisation............... $ 3,383 $ 42 $ 145 $ -- $ 3,570
------- ------- ------- -------- -------
Operating profit............ $16,100 $ 138 $ 197 $ (445) $15,990
------- ------- ------- -------- -------
Interest income............. $ 64 $ 39 $ 2 $ -- $ 105
------- ------- ------- -------- -------
Interest expenses........... $ 1,368 $ 3 $ 54 $ -- $ 1,425
------- ------- ------- -------- -------
Income before tax........... $14,777 $ 276 $ 145 $ (445) $14,753
------- ------- ------- -------- -------
Income tax.................. $ 1,195 $ 22 $ 19 $ -- $ 1,236
------- ------- ------- -------- -------
Inventory reserve........... $ 129 $ -- $ -- $ -- $ 129
------- ------- ------- -------- -------
Capital expenditure......... $ 6,718 $ 144 $ 334 $ -- $ 7,196
------- ------- ------- -------- -------
Property, plant and
equipment.................. $14,995 $ 264 $ 485 $ -- $15,744
Other identifiable assets... 28,432 2,792 4,362 (798) 34,788
Corporate assets............ 3,263
-------
Total assets.............. $53,795
-------
</TABLE>
Intercompany sales between geographic areas are recorded at cost plus a
mark-up. Such transfers are eliminated on consolidation.
Property, plant and equipment and other identifiable assets are those assets
used in the Company's operations in each geographic area. Corporate assets
represent cash and cash equivalents, investment in certificate of deposit,
marketable securities and notes receivable from SemiCycle Foundation.
An analysis of sales by geographic destinations for the relevant years is as
follows:
<TABLE>
<CAPTION>
Year ended March 31,
----------------------
1999 1998 1997
<S> <C> <C> <C>
North Asia........................................... 54.9% 53.8% 47.5%
North America........................................ 17.0 22.1 19.9
South Asia........................................... 24.3 21.3 29.4
Europe............................................... 3.8 2.8 3.2
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
North Asia represents China and Hong Kong, Philippines, Taiwan, Japan and
Korea while South Asia represents Singapore, Malaysia and Thailand.
F-18
<PAGE>
PEAK INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(United States dollars in thousands, except share data)
(14) CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments and trade
accounts receivable.
The Company places its temporary cash investments with various financial
institutions and, by policy, limits the amount of credit exposure to any one
financial institution. The Company believes that no significant credit risk
exists as these investments are made with high-credit, quality financial
institutions.
The Company's business activities and accounts receivable are with customers
in the semiconductor industries, the majority of which are located throughout
Asia and the United States of America. The Company performs ongoing credit
evaluation of its customers. The Company believes that no significant credit
risk exists as credit losses, when realized, have been within the range of
management's expectation. During the year, the Company has not experienced any
significant bad debts and did not maintain any significant allowances for
doubtful accounts.
One customer, representing QPL International Holdings Limited group of
companies, accounted for 8.0%, 16.3% and 16.1% of the Company's net sales
during the years ended March 31, 1999, 1998 and 1997, respectively. Another
customer accounted for 10.9% and 12.5% of the Company's net sales during the
years ended March 31, 1999 and 1998, respectively.
(15) STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
An executive share option plan (the "Share Option Plan") was adopted by the
Board of Directors and approved by the sole shareholder on March 18, 1997.
Another share option plan was approved by the Board of Directors and
shareholders in the annual general meeting on July 27, 1998. An aggregate of
1,400,000 shares has been reserved for issuance under the plans. Under the
plans, directors, officers, employees of, and advisors and consultants to the
Company or its affiliates may, at the discretion of a committee of the Board
of Directors administering the plan, be granted the general options to
purchase shares at an exercise price per share of no less than the par value
of a share. One-third of the options granted in March 1997 vest annually
commencing in April 1998. All the options granted in March and July 1998 vest
in April and August 1998, respectively.
Option activity for the plans is summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
-------------------------
Weighted
average
Number of exercise
shares price per share
<S> <C> <C>
Outstanding at April, 1997........................... 545,817 $ 12.00
Granted (weighted average fair value of $8.94)....... 67,560 19.375
Forfeited............................................ (8,442) 12.00
-------
Outstanding at March 31, 1998........................ 604,935 12.82
Granted (fair value of $6.91)........................ 272,016 12.25
Exercised............................................ (47,580) 12.33
Forfeited............................................ (31,169) 12.27
-------
Outstanding at March 31, 1999........................ 798,202 $ 12.68
=======
</TABLE>
F-19
<PAGE>
PEAK INTERNATIONAL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(United States dollars in thousands, except share data)
(15) STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS (Continued)
The following is additional information relating to options outstanding as
of March 31, 1999:
<TABLE>
<CAPTION>
Number of shares under options
---------------------------------
Exercise Remaining contractual
price per share Outstanding Exercisable life (years)
<S> <C> <C> <C>
$ 12.00 462,720 163,138 8
19.375 64,316 64,316 9
12.25 271,166 271,166 9 2/3
--------------- ---------------
798,202 498,620
=============== ===============
</TABLE>
Proforma information regarding net income and earnings per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of SFAS No. 123. The
weighted average fair value of stock options at date of grant of $6.91, $8.94
and $3.60 per option for the year ended March 31, 1999, 1998 and 1997,
respectively, were estimated using the Black-Scholes option pricing model with
the following assumptions:
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------
1999 1998 1997
<S> <C> <C> <C>
Expected life of options.......................... 3 years 3 years 3 years
Risk-free interest rate........................... 5.49% 5.55% 6.10%
Expected volatility of underlying stock........... 90% 45% 33%
Dividends......................................... -- -- --
</TABLE>
The Black-Scholes options pricing model requires the input of highly
subjective assumptions, including the expected volatility of stock price.
Because changes in subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing model does not
necessarily provide a reliable single measure of the fair value of the stock
options.
If the Company had accounted for its stock option plans by recording
compensation expenses based on the fair value at grant date for such awards
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the proforma amounts as follows:
<TABLE>
<CAPTION>
Year ended March 31,
---------------------
1999 1998 1997
<S> <C> <C> <C>
Proforma net (loss)income.............................. $(1,278) $19,346 N/A
Proforma (loss)earnings per share
--Basic.............................................. $0.09 $1.51 N/A
--Diluted............................................ $0.09 1.49 N/A
</TABLE>
An employee stock purchase plan (the "Stock Purchase Plan") was adopted by
the Board of Directors and approved by shareholders in July 1998. An aggregate
of 160,000 shares has been reserved for issuance under the Stock Purchase
Plan. Under the Stock Purchase Plan, employees of the Company, participating
in the plan, may purchase shares at a price at 85% of the fair market value,
but no less than the par value, of a share of the Company in any accumulation
period. Accumulation periods under the Stock Purchase Plan are for a period of
24 months and commence on April 1 and October 1 each year. Employees may elect
for a minimum of 1% and a maximum of 20% of eligible salary to be withheld for
investment in this plan. On the last day of each accumulation period each
employee shall be deemed to have elected to purchase the number of shares as
calculated using the criteria established in the plan. Employees may withdraw
from the plan at any time and receive a refund of all contributions, without
interest, made in the accumulation period. As of March 31, 1999, contributions
made by the employees to the plan were immaterial.
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Act of 1934, the
Registrant certifies that it meets all 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, in Hong Kong, on September 23, 1999.
Peak International Limited
By /s/ Cal Reed
---------------------------------
Cal Reed
Chief Executive Officer and
President (Principal Executive
Officer)
S-1
<PAGE>
[LOGO OF PEAK(R)]
Printed by R.R. Donnelley Financial Hong Kong, 97482
