UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM 20-F
¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2011
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-14542
ASIA PACIFIC WIRE & CABLE
CORPORATION LIMITED
(Exact name of Registrant as specified in its charter)
Bermuda
(Jurisdiction of incorporation or organization)
7/Fl. B, No. 132, Sec. 3
Min-Sheng East Road
Taipei, 105, Taiwan
Republic of China
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class | Name of each exchange on which registered | |
Common Shares, par value 0.01 per share | NASDAQ Capital Market |
Common Shares, par value 0.01 per share
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
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.
13,830,769 Common Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yeso¨Noþx
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yeso¨Noþx
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 12 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. YesþxNoo¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesoxNo¨ No
o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAPþx International Financial Reporting Standards as issued by the International Accounting Standards Boardo¨ Othero¨
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17o¨Item 18o¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso¨Noþx
Our disclosure and analysis in this Annual Report on Form 20-F contain some forward-looking statements. Forward-looking statements give our current beliefs or expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as “anticipate,” “estimate,” “expect,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance.
Such statements are not promises or guarantees and are subject to a number of known and unknown risks and uncertainties that could cause our future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause or contribute to such differences include our ability to maintain and develop market share for our products; global, regional or national economic and financial conditions, including events such as the financial crisis that commenced in 2008 and the consequent economic recession, and their individual or collective impact on demand for our products and services; the introduction of competing products or technologies; our inability to successfully identify, consummate and integrate acquisitions; our potential exposure to liability claims; the uncertainty and volatility of the markets in which we operate; changes in laws or regulations applicable to the Company in the markets in which we conduct business; the availability and price of copper, our principal raw material; our ability to negotiate extensions of labor agreements on acceptable terms and to successfully deal with any labor disputes; our ability to service, and meet all requirements under, our debt, and to maintain adequate credit facilities and credit lines; our ability to make payments of interest and principal under our existing and future indebtedness; our ability to increase manufacturing capacity and productivity; the fact that we have operations outside the United States that may be materially and adversely affected by acts of terrorism, war and political and social unrest, or major hostilities; increased exposure to political and economic developments, crises, instability, terrorism, civil strife, expropriation and other risks of doing business in foreign markets; economic consequences arising from natural disasters and other similar catastrophes, such as floods, earthquakes, hurricanes and tsunamis; the fact that Asia Pacific Wire & Cable Corporation Limited (“APWC” or the “Company”) is a holding company that depends for income upon distributions from operating subsidiaries, most of which are not wholly-owned and for which there may be restrictions on the timing and amount of distributions; price competition and other competitive pressures; the impact of climate change on our business and operations and on or customers; our ability to avoid limitations on utilization of net losses for income tax purposes; fluctuations in currency, exchange and interest rates, operating results and the impact of technological changes and other factors that are discussed in this report and in our other filings made with the Securities and Exchange Commission (the “SEC” or the “Commission”).
In particular, these statements include, among other things, statements relating to:
1
• our prospects for future revenues and profits in the markets in which we operate;
• the impact of political, legal or regulatory changes or developments in the markets in which we do business;
• our dependence upon the level of business activity and investment by our customers for the generation of our sales revenue;
• the fact that our Common Shares are now traded on a national exchange in the United States;
• our dependence on a limited number of suppliers for our raw materials and our vulnerability to fluctuations in the cost of our raw materials; and
• our liquidity.
We undertake no obligation to update any forward-looking statements or other information contained in this Annual Report, whether as a result of new information, future events or otherwise, except as required by law. You are advised, however, to consult any additional disclosures we make in our filings with the SEC. Also note that we provide a cautionary discussion of risks and uncertainties under the “Risk Factors” section of this Annual Report. These are factors that we think couldthinkcould cause our actual results to differ materially from expected results. Other factors besides those listed there could also adversely affect us.
This discussion is permitted by the Private Securities Litigation Reform Act of 1995.
OTHER CONVENTIONS
Unless otherwise specified, all references in this Annual Report to “Thailand” are to the Kingdom of Thailand, all references to “Singapore” are to The Republic of Singapore, all references to “Taiwan” are to Taiwan, The Republic of China, all references to “China” and to the “PRC” are to The People’s Republic of China (for the purpose of this Annual Report, excluding Hong Kong and Macau), all references to “Australia” are to the Commonwealth of Australia and all references to the “U.S.” are to the United States of America.
Most measurements in this Annual Report are given according to the metric system. Standard abbreviations of metric units (e.g., “mm” for millimeter) have been employed without definitions. All references in this Annual Report to “tons” are to metric tons, which are equivalent in weight to 2,204.6 pounds.
With respect to measurements relating to the manufacture of wire and cable products, references to “pkm” are to kilometers of twisted pairs of copper wire.
2
Dollar amounts in this Annual Report are expressed in thousands ($000), except where otherwise indicated or with respect to earnings per share.
Part I
Item 1: Identity of Directors, Senior Management and Advisers
(Not applicable)
Item 2: Offer Statistics and Expected Timetable
(Not applicable)
Item 3: Key Information
3.1 Selected Consolidated Financial Data
The following selected consolidated financial data is derived from the consolidated financial statements of Asia Pacific Wire & Cable Corporation Limited (the “Company”)the Company for the years ended December 31, 2006, 2007, 2008, 2009, 2010 and 2010,2011, prepared in accordance with U.S. GAAP.
The selected data set forth below should be read in conjunction with, and is qualified in its entirety by, the discussion in “Item 5: Operating and Financial Review and Prospects” and the consolidated financial statements and the notes thereto included in “Item 18: Financial Statements.”
(Figures in 2007, 2008, 2009, and 2010 were restated to reflect the results of discontinued operations of Shandong Pacific Fiber Optics Co. Ltd. (“SPFO”). For details, see “Item 5.3: Operating Results”)
| For the Year Ended December 31, | ||||
| 2007 | 2008 | 2009 | 2010 | 2011 |
| (in US$ thousands) | ||||
Income Statement Data: |
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Net sales | $497,848 | $484,218 | $326,238 | $446,594 | $471,946 |
Cost of sales | (453,734) | (473,911) | (285,595) | (389,571) | (428,051) |
Gross profit | 44,114 | 10,307 | 40,643 | 57,023 | 43,895 |
Operating expenses | (28,351) | (26,586) | (24,151) | (28,371) | (33,220) |
Impairment loss | — | — | (77) | — | — |
Impairment of goodwill | — | — | — | — | (8,791) |
Operating profit (loss) | 15,763 | (16,279) | 16,415 | 28,652 | 1,884 |
Exchange gain (loss) | 864 | (1,712) | 507 | 3,041 | (1,346) |
Net interest expense | (5,715) | (4,107) | (1,139) | (872) | (808) |
Share of net income (loss) of equity investees | 124 | (142) | (40) | (21) | (58) |
Gain on liquidation of subsidiary | — | — | 568 | — | — |
Gain (loss) on sale of investment | 35 | — | — | — | (68) |
Impairment of investment | (95) | — | — | — | — |
Others | 2,066 | 2,861 | 2,111 | 1,032 | 1,032 |
Income (loss) from continuing operations before income taxes | 13,042 | (19,379) | 18,422 | 31,832 | 636 |
Income taxes | (6,298) | (2,132) | (4,647) | (6,441) | (4,566) |
Net income (loss) from continuing operations | 6,744 | (21,511) | 13,775 | 25,391 | (3,930) |
Income (loss) from operations of discontinued SPFO | 118 | (689) | 1,150 | 446 | 1,075 |
Income tax expenses | 0 | 0 | (697) | (450) | (229) |
Income (loss) from discontinued operations | 118 | (689) | 453 | (4) | 846 |
Net income (loss) | 6,862 | (22,200) | 14,228 | 25,387 | (3,084) |
Net income (loss) attributable to non-controlling interests | 2,029 | (8,551) | 4,139 | 11,247 | 2,355 |
Net income (loss) attributable to APWC | $4,833 | $(13,649) | $10,089 | $14,140 | $(5,439) |
Basic and diluted earnings (loss) per share from continuing operations(1) | $0.35 | $(0.96) | $0.71 | $1.02 | $(0.49) |
Basic and diluted earnings (loss) per share from discontinued operations(1) | $0.00 | $(0.03) | $0.02 | $(0.00) | $0.10 |
Basic and diluted earnings (loss) per share(1) | $0.35 | $(0.99) | $0.73 | $1.02 | $(0.39) |
For the Year Ended December 31, | ||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||
Net sales | $ | 468,117 | $ | 510,841 | $ | 500,798 | $ | 362,231 | $ | 469,330 | ||||||||||
Cost of sales | (410,823 | ) | (465,165 | ) | (488,048 | ) | (315,840 | ) | (407,642 | ) | ||||||||||
Gross profit | 57,294 | 45,676 | 12,750 | 46,391 | 61,688 | |||||||||||||||
Operating expenses | (27,612 | ) | (29,451 | ) | (29,044 | ) | (27,855 | ) | (31,194 | ) | ||||||||||
Impairment loss | (86 | ) | (95 | ) | — | (77 | ) | — | ||||||||||||
Operating profit/(loss) | 29,596 | 16,130 | (16,294 | ) | 18,459 | 30,494 | ||||||||||||||
Exchange gain/(loss) | 5,464 | 864 | (1,712 | ) | 528 | 3,041 | ||||||||||||||
Net interest (expense) | (5,181 | ) | (6,063 | ) | (4,779 | ) | (2,139 | ) | (1,959 | ) | ||||||||||
Share of net income/(loss) of equity investees | 73 | 124 | (142 | ) | (40 | ) | (21 | ) | ||||||||||||
Gain on liquidation of subsidiary | 1,801 | — | — | 568 | — | |||||||||||||||
(Loss)/gain on sale of investment | (729 | ) | 35 | — | — | — | ||||||||||||||
Impairment of investment | — | — | — | — | (346 | ) | ||||||||||||||
Others | 1,536 | 2,070 | 2,859 | 2,196 | 1,069 | |||||||||||||||
Income/(loss) before income taxes and minority interests | 32,560 | 13,160 | (20,068 | ) | 19,572 | 32,278 | ||||||||||||||
Income taxes | (10,257 | ) | (6,298 | ) | (2,132 | ) | (5,344 | ) | (6,891 | ) | ||||||||||
Non-controlling interests | (9,330 | ) | (2,029 | ) | 8,551 | (4,139 | ) | (11,247 | ) | |||||||||||
Net income/(loss) attributable to APWC | $ | 12,973 | $ | 4,833 | $ | (13,649 | ) | $ | 10,089 | $ | 14,140 | |||||||||
Earnings/(loss) per share(1) | $ | 0.94 | $ | 0.35 | $ | (0.99 | ) | $ | 0.73 | $ | 1.02 |
(1) The calculation of the earnings (loss) per share is based on 13,830,769 basic and diluted weighted Common Shares issued and outstanding for the years ended December 31, 2007, 2008, 2009, 2010, and 2011.
| As of December 31, | ||||
| 2007 | 2008 | 2009 | 2010 | 2011 |
(in thousands) | |||||
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Balance Sheet Data: |
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Cash and cash equivalents | $29,127 | $37,510 | $41,534 | $63,217 | $76,672 |
Working capital | 132,409 | 100,428 | 127,139 | 170,653 | 170,956 |
Total assets | 396,116 | 309,798 | 296,052 | 386,923 | 337,289 |
Total debt | 104,146 | 59,694 | 38,917 | 69,083 | 54,545 |
Total APWC shareholders’ equity. | 136,783 | 114,129 | 127,392 | 153,194 | 146,510 |
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As of December 31, | ||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 24,664 | $ | 29,127 | $ | 37,510 | $ | 41,534 | $ | 63,217 | ||||||||||
Working capital | 108,084 | 132,409 | 100,428 | 127,139 | 170,653 | |||||||||||||||
Total assets | 364,565 | 396,116 | 309,798 | 296,052 | 386,923 | |||||||||||||||
Total debt | 100,195 | 104,146 | 59,694 | 38,917 | 69,083 | |||||||||||||||
Total shareholders’ equity | 118,765 | 136,783 | 114,129 | 127,392 | 153,194 |
Unless otherwise specified, all references in this Annual Report to “$,” “U.S. dollars” or “US$” are to United States dollars; all references to “Bt,” “Thai Baht” or “Baht” are to Baht, the legal tender currency of Thailand; all references to “S$” are to Singapore dollars, the legal tender currency of Singapore; all references to “A$” are to Australian dollars, the legal tender currency of Australia; and all references to “RMB” are to Chinese Renminbi, the legal tender currency of China.
Unless otherwise noted, for the convenience of the reader, translations of amounts from Baht, Singapore dollars, Renminbi and Australian dollars to U.S. dollars have been made at the respective noon buying rates in New York City for cable transfers in those currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) on December 31, 2010.2011. The respective Noon Buying Rates on December 31, 201030, 2011 were US$1.00 = Bt 30.1600;31.51; S$1.2885; 1.295; RMB 6.600;6.294; and A$0.9879.0.976. The respective Noon Buying Rates on May 2, 2011,April 13, 2012, the latest practicable date before publication of this Annual Report, were US$1.00 = Bt 30.0424;30.730; S$1.2463;1.247; RMB 6.5267 6.302 and A$1.0588. 0.964. No representation is made that the foreign currency amounts could have been or could be converted into U.S. dollars on these dates at these rates or at any other rates.
Sources: Federal Reserve Bulletin, Board of Governors of the Federal Reserve System. Federal Reserve Statistical Release H.10(512), from the website of the Board of Governors of the Federal Reserve System athttp://www.federalreserve.gov.
Thailand
The Thai Baht is convertible into foreign currencies and is subject to a managed float against a basket of foreign currencies, the most significant of which is the U.S. dollar. The composition of the basket for determining the value of the Baht is not made public by the Bank of Thailand. The following tables set forth, for the periods indicated, certain information concerning the Noon Buying Rate of the Thai Baht. No representation is made that the Baht or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or Baht, as the case may be, at any particular rate or at all.
Year Ended December 31, | At Period End | Average(1) | High | Low |
| (Bt per $1.00) | |||
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2007 | 29.50 | 32.02 | 35.96 | 29.28 |
2008 | 34.72 | 33.13 | 35.72 | 29.36 |
2009 | 33.33 | 34.30 | 36.25 | 33.10 |
2010 | 30.16 | 31.66 | 33.18 | 29.49 |
2011 | 31.51 | 30.46 | 31.76 | 29.68 |
Year Ended December 31, | At Period End | Average(1) | High | Low | ||||||||||||
(Bt per $1.00) | ||||||||||||||||
2006 | 36.10 | 37.68 | 40.76 | 35.19 | ||||||||||||
2007 | 29.50 | 32.02 | 35.96 | 29.28 | ||||||||||||
2008 | 34.72 | 33.13 | 35.72 | 29.36 | ||||||||||||
2009 | 33.33 | 34.30 | 36.25 | 33.10 | ||||||||||||
2010 | 30.16 | 31.66 | 33.18 | 29.49 |
4
(1) Average means the average of the Noon Buying Rates on the last day of each month during a year.
Month | High | Low |
October 2011 | 31.24 | 30.48 |
November 2011 | 31.38 | 30.65 |
December 2011 | 31.76 | 30.75 |
January 2012 | 31.81 | 30.97 |
February 2012 | 30.93 | 30.29 |
March 2012 | 30.91 | 30.50 |
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Month | High | Low | ||||||
November 2010 | 30.26 | 29.49 | ||||||
December 2010 | 30.16 | 29.98 | ||||||
January 2011 | 31.01 | 30.05 | ||||||
February 2011 | 30.90 | 30.55 | ||||||
March 2011 | 30.52 | 30.19 | ||||||
April 2011 | 30.26 | 29.86 |
Singapore
The Singapore dollar is convertible into foreign currencies and floats against a trade-weighted basket of foreign currencies, the composition of which is not made public by Singapore’s central bank, the Monetary Authority of Singapore, but of which the U.S. dollar is a component. The following tables set forth, for the periods indicated, certain information concerning the Noon Buying Rate of the Singapore dollar. No representation is made that the Singapore dollar or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or Singapore dollars, as the case may be, at any particular rate or at all.
Year Ended December 31, | At Period | Average(1) | High | Low |
| (S$ per $1.00) | |||
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2007 | 1.436 | 1.501 | 1.543 | 1.436 |
2008 | 1.438 | 1.410 | 1.529 | 1.347 |
2009 | 1.404 | 1.452 | 1.557 | 1.380 |
2010 | 1.289 | 1.359 | 1.423 | 1.282 |
2011 | 1.295 | 1.260 | 1.314 | 1.202 |
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At | ||||||||||||||||
Period | ||||||||||||||||
Year Ended December 31, | End | Average(1) | High | Low | ||||||||||||
(S$ per $1.00) | ||||||||||||||||
2006 | 1.534 | 1.580 | 1.652 | 1.534 | ||||||||||||
2007 | 1.436 | 1.501 | 1.543 | 1.436 | ||||||||||||
2008 | 1.438 | 1.410 | 1.529 | 1.347 | ||||||||||||
2009 | 1.404 | 1.452 | 1.557 | 1.380 | ||||||||||||
2010 | 1.289 | 1.359 | 1.423 | 1.282 |
(1) Average means the average of the Noon Buying Rates on the last day of each month during a year.
The high and low exchange rates for the six months preceding the date of this Annual Report were:
Month | High | Low | ||||||
November 2010 | 1.322 | 1.282 | ||||||
December 2010 | 1.317 | 1.294 | ||||||
January 2011 | 1.299 | 1.279 | ||||||
February 2011 | 1.283 | 1,271 | ||||||
March 2011 | 1.282 | 1.260 | ||||||
April 2011 | 1.261 | 1.223 |
Month | High | Low |
October 2011 | 1.314 | 1.242 |
November 2011 | 1.312 | 1.268 |
December 2011 | 1.309 | 1.278 |
January 2012 | 1.297 | 1.253 |
February 2012 | 1.265 | 1.242 |
March 2012 | 1.269 | 1.251 |
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5
China
The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign currencies and through restrictions on foreign trade. The following tables set forth, for the periods indicated, certain information concerning the Noon Buying Rate of the Renminbi. No representation is made that the Renminbi or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or Renmimbi, as the case may be, at any particular rate or at all.
Year Ended December 31, | At Period End | Average(1) | High | Low |
| (RMB per $1.00) | |||
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2007 | 7.295 | 7.581 | 7.813 | 7.295 |
2008 | 6.823 | 6.919 | 7.295 | 6.780 |
2009 | 6.826 | 6.830 | 6.847 | 6.818 |
2010 | 6.600 | 6.760 | 6.833 | 6.600 |
2011 | 6.294 | 6.460 | 6.636 | 6.294 |
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At Period | ||||||||||||||||
Year Ended December 31, | End | Average(1) | High | Low | ||||||||||||
(RMB per $1.00) | ||||||||||||||||
2006 | 7.804 | 7.958 | 8.070 | 7.804 | ||||||||||||
2007 | 7.295 | 7.581 | 7.813 | 7.295 | ||||||||||||
2008 | 6.823 | 6.919 | 7.295 | 6.780 | ||||||||||||
2009 | 6.826 | 6.830 | 6.847 | 6.818 | ||||||||||||
2010 | 6.600 | 6.760 | 6.833 | 6.600 |
(1) Average means the average of the Noon Buying Rates on the last day of each month during a year.
The high and low exchange rates for the six months preceding the date of this Annual Report were:
Month | High | Low |
October 2011 | 6.383 | 6.353 |
November 2011 | 6.384 | 6.340 |
December 2011 | 6.373 | 6.294 |
January 2011 | 6.333 | 6.294 |
February 2012 | 6.312 | 6.294 |
March 2012 | 6.332 | 6.298 |
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Month | High | Low | ||||||
November 2010 | 6.689 | 6.633 | ||||||
December 2010 | 6.675 | 6.600 | ||||||
January 2011 | 6.636 | 6.581 | ||||||
February 2011 | 6.597 | 6.552 | ||||||
March 2011 | 6.574 | 6.548 | ||||||
April 2011 | 6.548 | 6.490 |
Sources: Federal Reserve Bulletin, Board of Governors of the Federal Reserve System. Federal Reserve Statistical Release H.10(512)H.10 (512), from the website of the Board of Governors of the Federal Reserve System at http://www.federalreserve.gov.
Australia
The following tables set forth, for the periods indicated, certain information concerning the Noon Buying Rate of the Australian dollar. No representation is made that the Australian dollar or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or Australian dollars, as the case may be, at any particular rate or at all.
Year Ended December 31, | At Period End | Average(1) | High | Low |
| (A$ per $1.00) | |||
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2007 | 1.139 | 1.184 | 1.295 | 1.067 |
2008 | 1.141 | 1.177 | 1.647 | 1.021 |
2009 | 1.114 | 1.252 | 1.587 | 1.067 |
2010 | 0.988 | 1.087 | 1.224 | 0.985 |
2011 | 0.976 | 0.968 | 1.058 | 0.907 |
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At Period | ||||||||||||||||
Year Ended December 31, | End | Average(1) | High | Low | ||||||||||||
(A$per $1.00) | ||||||||||||||||
2006 | 1.268 | 1.319 | 1.417 | 1.264 | ||||||||||||
2007 | 1.139 | 1.184 | 1.295 | 1.067 | ||||||||||||
2008 | 1.141 | 1.177 | 1.647 | 1.021 |
6
At Period | ||||||||||||||||
Year Ended December 31, | End | Average(1) | High | Low | ||||||||||||
(A$ per $1.00) | ||||||||||||||||
2009 | 1.114 | 1.252 | 1.587 | 1.067 | ||||||||||||
2010 | 0.988 | 1.087 | 1.224 | 0.985 |
Month | High | Low |
October 2011 | 1.071 | 0.945 |
November 2011 | 1.032 | 1.037 |
December 2011 | 1.010 | 1.030 |
January 2012 | 0.979 | 0.939 |
February 2012 | 0.941 | 0.925 |
March 2012 | 1.080 | 1.033 |
Month | High | Low | ||||||
November 2010 | 1.042 | 0.986 | ||||||
December 2010 | 1.034 | 0.985 | ||||||
January 2011 | 1.013 | 0.980 | ||||||
February 2011 | 1.002 | 0.983 | ||||||
March 2011 | 1.018 | 0.965 | ||||||
April 2011 | 0.967 | 0.929 |
Sources: Federal Reserve Bulletin, Board of Governors of the Federal Reserve System. Federal Reserve Statistical Release H.10(512)H.10 (512), from the website of the Board of Governors of the Federal Reserve System at http://www.federalreserve.gov.
3.3 Risk Factors
You should carefully consider the following risks before you decide to buy our common shares.Common Shares. If any one of these risks or uncertainties were to occur, our business, financial condition, results and performance could be seriously harmed and/or the price of our common sharesCommon Shares might significantly decrease. The risks and uncertainties described in this Annual Report on Form 20-F are not the only ones facing us. Additional risks and uncertainties that currently are not known to us or that we currently believe are immaterial also may adversely affect our businesses and operations.
3.3.1 Risks Related to PCAOB Inspection
Our auditor, like other independent registered public accounting firms operating in Hong Kong, is not permitted to be subject to inspection by Public Company Accounting Oversight Board (“PCAOB”), and as such, investors may be deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and applicable professional standards. Because our auditor is located in Hong Kong, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the relevant local authority, our auditor, like other independent registered public accounting firms operating in Hong Kong, is currently not inspected by PCAOB.
Inspections of other firms that PCAOB has conducted outside of Hong Kong have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in Hong Kong makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
3.3.2 Risks Related toFailure to Comply with Loan Covenants
Our credit facility agreement with Bangkok Bank Hong Kong Branch (the “Bank”) was entered into on March 17, 2011 with a total cash loan of $14 million and a trade facility of $8 million. The cash loan carries an interest rate of Singapore Inter-bank Borrowing Rate (“SIBOR”) plus 2.5%, with a term of 5.5 years. This agreement requires us to maintain at all times certain financial covenants and non-financial covenants for both the guarantor, APWC, and borrower, Crown Century Holdings Ltd. (“CCH HK”). As of December 31, 2011, CCH HK was not in compliance with certain financial covenant ratios and APWC was not in compliance with a certain non-financial covenant relating to its disposal of a certain subsidiary when the Company failed to provide formal notification and to obtain the Bank’s consent. As such, the cash loan would become callable on demand if the bank were to declare an event of default (which it has not to date). The outstanding loan balance was therefore classified as current liability as of December 31, 2011. The Company started negotiations with the Bank on revision of the loan agreement and possibility of issuance of waivers with regard to those covenants. Up to date of this annual report, the negotiation is still on going.
However, in addition to certain financial covenants relating to our financial position, operating performance and liquidity, the restrictions contained in our loan agreement may limit our ability to, among other things:
Ÿincur additional indebtedness for CCH HK for factory expansions, if any;
Ÿcreate liens on CCH HK’s assets
Ÿenter into business combinations (if it would be interpreted as major change in our business) or disposal of subsidiaries under CCH HK and under APWC; and
Our ability to comply with the requirements of the loan agreement is subject to certain risks, including:
Ÿviolation of a covenant that stipulates that we must maintain our listing on the NASDAQ Stock Market, Inc. (“NASDAQ”) and cannot be suspended for more than ten days, in the remote likelihood that APWC’s stock price falls under $1 for consecutive thirty 30 days on NASDAQ;
Ÿ our ability to sustain the net worth requirements for CCH HK and APWC, if our organic growth in future years for CCH HK and for APWC is not sufficient;
Ÿ our ability to meet the proposed waivers which are still under negotiation with the Bank if our actual operational performance is not sufficient; and
Ÿ future covenant compliance issues, in the event of a rise in copper prices that leads to an increase in the Company’s indebtedness
Our ability to comply with the loan covenants may also be affected by economic, financial and industry conditions, commodity prices such as copper and other factors beyond our control.
3.3.13.3.3 Risks Related to the Global Economic and Financial Crisis
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There is still considerable risk of further downward revisions to the forecast, in particular due to the euro zone’s festering sovereign debt problem. Although the European Central Bank has extended an important financial lifeline to the region’s ailing banking institutions, the delay in implementing the much-needed structural and fiscal reforms risks further contagion and financial market shocks. Such developments would aggravate already unsustainable debt burdens in many of the affected countries, and exacerbate existing economic strains. Also of concern is the potential for a sharp reversal in historically low government bond yields, driven by increasing investor angst if the expected improvement in the quality of government balance sheets fails to materialize. A sharply rising debt burden would force many governments among the developed nations to implement further reductions in government expenditures that could eventually result in much weaker economic performances. The decline in China’s speed of growth could also accelerate, with a bigger slide in exports triggering broader production and employment cuts that would undermine consumer spending, the country’s buoyant real estate market, and the demand for commodities. Recurring geopolitical problems remain an important threat to global stability as well. Any disruption to the world’s high-growth economies recorded the biggest GDP gains — China (+10.1%), Taiwan (+8.3%), India (+8.3%), Brazil (+7.5%), and South Korea (+6.1%). China also became the world’s largest exporter. Continuing uncertainties in real estate and financial markets resulted in slower growth in Japan (+3.0%), the US (+2.8%), and the European Union (+1.7%). In 2010, global unemployment continued to creep upwards, reaching 8.8%. Underemployment, on the other hand, especiallyoil supply chain in the developing world, remained much higher. Global gross fixed investment stabilized at about 23% of GWP, after a significant drop in 2009. World trade appears to be returning to pre-2009 patterns, with current account surplusesMiddle or deficits rising for a majority of countries. World external debt, however, dropped again in 2010 - about 5% from the 2009 level, as many countries reduced borrowing. Many, if not most, countries pursued expansionary monetaryFar East could send gas pump prices sharply higher and fiscal policies. The global money supply, both narrowly and broadly defined, increased roughly 10%, as countries tried to keep interest rates low; the global budget deficit stabilized at roughly $3.5 trillion, as countries tried to rein in spending and slow the rise of public debt.
Actual and Possible Impacts on the Company
The lukewarm recoveryfluctuation of economic conditions worldwidecopper prices in 2011 has further impacted the Company’s ability to improve its overall financial performance, particularly in the latter part of 2011. The increase in average London Metal Exchange (“LME”)copper price over 2010 was higher than the increase in our prevailing selling price for manufactured products, resulting in a gross margin lower than in 2010 has helpedfor operations in China. Elsewhere in Thailand, the Company regain some momentumnet sales were slightly lower than that of last year as our production and our ability to ship our products was curtailed by the nationwide flooding that affected Thailand and severely disrupted many business operations in termsthat country. In Australia and Singapore, we witnessed an increase in net sales, as the copper price rose during the first three quarters of overall financial performance. In certain markets, sales2011 and production volume also increased as there has been an increased commitment to of infrastructure development by governmental entities in certain instances29.8% and in capital expenditures and construction by private companies in anticipation of the a projected increased demand in the residential and commercial building markets. Many of the Company’s customers have also moved forward with their construction projects in the current market environment. The decrease in enameled wire sales in 2009 have come back and shown stronger demand in 2010. 31.2%, respectively.
Copper prices on the London Metal Exchange (LME) bounced back to the very high level in 2010 to reach $9,514 per metric tonLME dropped at the end of 2010.last quarter 2011 to $7,500. Consistent with industry practice, customers would expect that the Company is typically able to pass on the increaseselling prices of our products, particularly of copper based wires, would therefore be lower than that in cost of raw material to its customers, This2010. The decrease in copper prices and other commodity prices also resulted in a betterdecreased turnover for the entirelast part of the year, as customers delayed placing orders with the Company or reduced the quantity of 2010. With the increasesuch orders in anticipation of a possible further reduction in copper and commodity prices in 2010, customers have sometimes been rushing in with order placements in the expectation that prices mayprices. A further increase. However, commodity prices, including copper, are highly volatile. The benefits to the Company arising from copper price increases would not be sustainable in the event of a downturndecrease in copper pricing.prices would likely have an adverse effect on the revenues of the Company. In such a case, the Company could find itself with overvalued inventory that requires a valuation write-down, which has happenedwrite-down.
When compared with 2010 sales, sales in 2011 increased by 5.7%, boosted by an increase in sales in the past.
The Company is unable to determine the precise impact of the Euro zone fiscal crises, and the fragile state of the global economic recovery, on its operations and cash flow, since its operating results are also affected by factors that are, or may be, unrelated to the economic improvement,turmoil, such as the completion of routine purchase
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Macroeconomic events and those specific to the Companyconditions may have a material adverse impact on the Company’s business operations until such time as the global financial crisis has substantially abated and financial and economic conditions have materially improved. The Company notes, however, that the foregoing is subject to a number of unknown variables, including the impact of actions taken or that may be taken in the future by governmental entities to address the capital needs of banks and other financial institutions and to increase the flow of credit to businesses.
3.3.23.3.4 Risks Related to the Common Shares and Corporate Governance
Consolidation of Charoong Thai Group Accounts
As of December 31, 2010,2011, the Company effectively owned 50.93% of the issued and outstanding shares of Charoong Thai Wire and Cable Public Company Limited (“Charoong Thai” or “CTW”). That percentage ownership constitutes, a decrease from the Company’s initial ownership percentage andwhich is attributable to the exercise of warrants or conversion of convertible securities by third parties. The Company’s present intention is to maintain majority ownership of the voting securities of Charoong Thai. However, there may be circumstances under which the Company cannot maintain majority ownership of Charoong Thai. In the event Charoong Thai determinedwere to make a further offering of voting securities, or securities convertible into or exchangeable for voting securities, and the Company was not in a position to fund or finance its participation in the offering, the ownership interest of the Company in Charoong Thai could fall below 50%. If the Company’s share holdingownership percentage in Charoong Thai were to fall below 50%, the accounts of the Charoong Thai group, which includes all of the Company’s Thailand operations, willwould not be consolidated but instead willwould be accounted for under the equity accounted.method. In such an event, the Company’s accounts willwould show a decrease in revenue and most categories of assets and liabilities, which events could have a material adverse effect on the value of the Common Shares.
Potential Illiquidity of Common Shares
Approximately 75.4% of our Common Shares are either unregistered securities or registered securities held by affiliates, which are subject to restrictions on trading. Accordingly, approximately 75% of our Common Shares are not fully liquid investments. In the recent past years,Since April 2011, when APWC was listed on NASDAQ, the volume of trading in our Common Shares has not been substantial. This illiquidity may negatively impactpicked up fractionally. However, the value of our Common Shares may be impacted negatively by their relative illiquidity when compared to the Common Shares.
Control of the Company Rests with Majority Shareholder; Controlled Company Exemption; Risks Related to PEWC
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The Common Shares of the Company are traded on the NASDAQ Capital Markets tier. However, in listing on NASDAQ, as the Company has a more than fifty percent (50%) shareholder, the Company wasis entitled to rely upon a “controlled company exemption” to the requirement that exempts it from havinga company have a board of directors comprised of a majority of independent directors.directors in order to be listed on NASDAQ. At present, a majority of the board of directors of the Company is affiliated with PEWC.
PEWC was delisted from the Taipei Stock Exchange in 2003 following the disclosure of a major corporate scandal involving fraud and embezzlement by certain former executives of PEWC, one or more of whom are now serving prison sentences for their actions. Commencing in 2004, PEWC brought a number of actions in different jurisdictions against those former executives and others seeking to recover substantial assets that had been misappropriated. Some of those actions are ongoing. PEWC is still seeking to recover financially, and in terms of its market reputation, from the malfeasance of those former executives. The financial and governance problems experienced by PEWC render more uncertainincrease the uncertainty regarding its ability to perform under the Composite Services Agreement between PEWC and the Company, although to date PEWC has met its obligations under that agreement. (See—section(See---section 10.3 Material Contracts).
Limited Trading Volume
Although our Common Shares are traded on the NASDAQ Capital Markets tier. Tradingtier, trading in, and demand for, our Common Shares has been limited. As a consequence, shareholders may find that their ability to sell their Common Shares quickly or in substantial amounts is adversely affected by the limited public trading market. Thinly-traded equity can be more volatile than equity securities traded in an active trading market. The high and low daily closing price for our Common Shares during the past 24 months (April 2009 — April 2011)(March 2010 – March 2012) has been $7.50$7.85 and $0.50,$1.92, respectively. In the future, our Common Shares may experience significant price fluctuations which could adversely affect the value of your ownership interest in the Company.
Disclosure Controls and Procedures and Internal Control Overover Financial Reporting
Our management is responsible for establishing and procedures and itsmaintaining adequate internal control over financial reporting, as defined under Rule 13a-15(f) under the Securities Exchange Act of 1934.
Based on the Company’s evaluation under the applicable framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), our management concluded that a material weakness in the Company’s internal controls over financial reporting was identified.
In connection with the audit of our consolidated financial statements as of and remediating allfor the year ended December 31, 2011, our independent registered public accounting firm determined also the existence of a material weaknesses, and asweakness. A material weakness is a result, both disclosure controls and procedures anddeficiency, or a combination of deficiencies, in internal control over financial reporting were classified as effective assuch that there is a reasonable possibility that a material misstatement of December 31, 2008, but ineffective as of December 31, 2009 due to the development of material weaknesses. registrant’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
Deficiencies were noted in our controls over complex and non-routine aspects oftransactions in our financial statement closing process, including the accounting for foreign currency transactionsof revenue recognition under bill-and-hold arrangements and translationconsignment arrangement whereby foreign currency translation amounts were improperly recorded in other comprehensive income instead of the statement of operations,revenue was inappropriately recognized; the calculation and recording of individual income tax, liability, allowance for deferred tax assets fixed asset residual value,(and the related valuation allowance), inventory and recurring consolidation entries.related impairment accounts, and the misclassification of a number of intercompany balances. These deficiencies were attributable to our decentralized reporting structure, our complex and manual consolidation process and inadequate reviews over account balances at the reporting date. In making our assessment, we evaluated that theThe aggregate effect of these deficiencies represented a material weaknessweakness. Based on this assessment, the Company’s management, including its CEO and CFO, concluded that the Company’s internal control over financial reporting was ineffective as of December 31, 2009. However, we have implemented the
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The Company is currently compliant with its reporting obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and believes that it has addressed thecertain corporate governance obstacles that led to its delinquency in filing its 2004, 2005 and 2006 annual reports. However, the Company cannot provide assurances that it will continue to be compliant in its reporting obligations under the Exchange Act.report five years ago. As a foreign private issuer, the Company is not required by the rules of the Commission to provide financial results on a quarterly or semi-annual basis. In addition, Bermuda law does not require the Company to provide interim financial information to its shareholders, whether on a quarterly or semi-annual basis. As such, investors may not have the same access to financial information of the Company as they customarily receive in the case of a domestic issuer disclosing quarterly results on a Form 10-Q.
Potential Conflict of Certain Officers and Directors
In March 2011, the Company appointed a third independent director.director as required by NASDAQ. Other than thoseour three independent directors, all of the members of the Board of Directors are also directors or officers or otherwise affiliated with PEWC, the majority shareholder. Certain of our officers are also affiliated with PEWC. In each case, they may be subject to potential conflicts of interest. In addition, certain of our officers and directors who are also officers and/or directors of PEWC may be subject to conflicts of interest in connection with, for example, pursuing corporate opportunities in which we and PEWC or one of its affiliates have competing interests, and the performance by us and PEWC of our respective obligations under existing agreements, including the Composite Services Agreement (discussed in section 10.3). In addition, some of these persons will devote time to the business and affairs of PEWC and its affiliates as is appropriate under the circumstances, which could reduce the amount of time available for overseeing or managing our business and affairs. Notwithstanding any such potential conflicts, however, such individuals, in their capacities as our directors and officers, are subject to fiduciary duties to our shareholders.
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Obligations under the Amended and Restated Shareholders Agreement
Pursuant to the original shareholders agreement dated June 28, 2007 SOF Investments, L.P. (“SOF”(the “Shareholders Agreement”), a Delaware limited partnership, acquired 2,766,154 Common Shares, representing 20% of the issued and outstanding Common Shares (the “SOF Shares”), from Sino-JP Fund Ltd (“Sino-JP”), an institutional shareholder. On that same date, the Company entered into the Shareholders Agreement with PEWC and SOF, pursuant to which the Company granted to SOF certain rights and protections.protections (now held by COF, as successor-in-interest to SOF, as explained below). Under the Shareholders Agreement, the Company agreed to indemnify SOF and its partners and certain of its affiliates (the “SOF Indemnified Persons”), for any additional taxes, interest, penalties and other costs that might be imposed upon or incurred by the SOF Indemnified Persons in the event that the Company is determined by the Internal Revenue Service (the “IRS”) to be a “controlled foreign corporation” (a “CFC”) or a “passive foreign investment company” (a “PFIC”), as such terms are interpreted and defined under IRS rules and regulations. The Company has determined that it was not a CFC or PFIC at any time during the 2011 fiscal year and does not believe that it is now or is likely to become a CFC or a PFIC; however, the Company cannot provide any assurances that it will not become a CFC or a PFIC in the future.
In addition, the Company granted certain registration rights to SOF with respect to the SOFits Common Shares (the “Registrable Securities”) in the Shareholders Agreement. In particular, the Company agreed to use its reasonable best efforts to prepare and file, and cause to go effective, as soon as practicable, a shelf registration statement covering the resale of the Registrable Securities on a delayed or continuous basis. The Company also agreed to use its reasonable best efforts to keep its shelf registration statement effective until all Registrable Securities have been sold or until all Registrable Securities may be sold without restriction pursuant to Rule 144 promulgated pursuant to the Securities Act of 1933, as amended. In addition, the Company granted to SOF two demand registration rights for underwritten offerings and customary piggyback registration rights with regard to the Registrable Securities. Moreover, the Company agreed to use its reasonable best efforts to cause the Common Shares to be listed on a national “Securities Market,” which means any of the NASDAQ Stock Market, Inc. (Global Market or Global Select Market), the American Stock Exchange LLC (now known as NYSE Amex Equities) or the New York Stock Exchange LLC, not later than January 31, 2009, subject to notice and a sixty (60) day cure period. All of the costs and expenses of the Company in connection with the fulfillment of its obligations under the Shareholders Agreement were to be paid by the Company, other than underwriting fees, discounts and commissions attributable to the sale of Common Shares held by SOF.
Under the terms of the Shareholders Agreement, if the Company failed to fulfill its obligations thereunder, SOF maywould have a claim for damages against the Company. No such claim has been made. In addition, if the Company fulfilled its reasonable best efforts undertakings but failed to meet one or more of the stated goals, SOF maywould have a put right of their Common Shares to PEWC. In accordance with those terms, on February 2, 2009, SOF delivered to PEWC notice of its exercise of the put right under the Shareholders Agreement due to the fact that the Common Shares were not listed on a national Securities Market as of January 31, 2009. On March 27, 2009, SOF sold 51% of its Common Shares to PEWC pursuant to the terms of a share purchase agreement between those parties. Upon the consummation of that share purchase agreement, SOF held 1,355,415 registered Common Shares of the Company and PEWC held 1,410,739 registered Common Shares, respectively, representing 9.8% and 10.2% of the outstanding Common Shares, with PEWC holding an additional 7,664,615 unregistered Common Shares, giving it an aggregate of 65.6% of the total issued and outstanding Common Shares. In connection with this transaction,
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In addition, sales of Common Shares held by SOFCOF and registered under the shelf registration statement, or any registration statement that goes effective following an exercise of demand registration rights, will increase theincreasethe number of Common Shares available for purchase in the public market and may adversely affect the value of the Common Shares held by other shareholders. Even without substantial sales by SOFCOF or PEWC of their respective Registrable Securities, the possibility of such sales may create a “market overhang” that has the effect of depressing the trading price of the Common Shares.
The Company has also granted to SOFCOF preemptive rights in the event of any issuance of additional equity securities (or securities convertible into or exchangeable for equity securities) by the Company, such that SOFCOF may subscribe for additional securities in order to maintain its then percentage ownership interest in the issued and outstanding equity securities of the Company.
Holding Company Structure; Potential Restrictions on the Payment of Dividends
We have no direct business operations other than our ownership of the capital stock of our subsidiaries and joint venture holdings. While we have no present intention to pay dividends, should we decide in the future to do so, as a holding company our ability to pay dividends and meet our other obligations will depend upon the amount of distributions, if any, received from our operating subsidiaries and other holdings and investments. Our operating subsidiaries and other holdings and investments, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants contained in loan agreements, restrictions on the conversion of local currency earnings into U.S. dollars or other hard currency and other regulatory restrictions. For example, PRC legal restrictions permit payments of dividends by our business entities in the PRC only out of their retained earnings, if any, determined in accordance with relevant PRC accounting standards and regulations. Under PRC law, such entities are also required to set aside a portion of their net income each year to fund certain reserve funds. These reserves are not distributable as cash dividends. The foregoing restrictions may also affect our ability to fund operations of one subsidiary with dividends and other payments received from another subsidiary.
Requirement to Maintain Effectiveness of the Registration Statement and to List on a National Securities Exchange; Effect of the Put of the SOFCOF Shares to PEWC
Under the Amended and Restated Shareholders Agreement, SOFCOF has retained the right to sell its remaining Common Shares (the “SOF“COF Shares”) to PEWC if the Company does not achieve a listing on a national Securities Market within the time frame provided in the agreement. The Company’s Common Shares are currently listed on the NASDAQ Capital Markets tier. The Company intends to apply to list the Common Shares on the Global Markets tier after the Company is satisfied that it qualifies in all respects for that tier. However, there are no assurances that the Common Shares will qualify for the Global Markets tier or that the Company’s application, when filed, will be approved. In addition, the Company has agreed to maintain the effectiveness of the registration statement on Form F-1,F-3, for the benefit of SOF,COF, and if the Company fails to do so for any period of thirty (30) consecutive trading days or an aggregate of sixty (60) trading days during any twelve month period,
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Corporate Matters; Limited Recourse; Limited Enforceability
We are incorporated in and organized pursuant to the laws of Bermuda. In addition, all of our directors and officers reside outside the United States and our material assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon such persons or to realize against them in courts of the United States upon judgments predicated upon civil liabilities under the United States federal securities laws. Even if investors are successful in realizing against such persons in courts of the United States, the laws of Taiwan may render such investors unable to enforce the judgment against the Company’s assets or the assets of its officers and directors. Also, investors may have difficulty in bringing an original action based upon the United States federal securities law against such persons in the Taiwan courts. Additionally, we have been advised by our legal counsel in Bermuda, Appleby (Bermuda) Limited, that there is doubt as to the enforcement in Bermuda, in original actions or in actions for enforcement of judgments of United States courts, of liabilities predicated upon U.S. federal securities laws, although BermudaalthoughBermuda Courts will enforce foreign judgments for liquidated amounts in civil matters subject to certain conditions and exceptions. As a result, shareholders may encounter more difficulties in enforcing their rights and protecting their interests in the face of actions taken by management, the Board of Directors or controlling shareholders than they would if the Company were organized under the laws of the United States or one of the states therein, or if the Company had material assets located within the United States or some of the directors and officers were resident within the United States. See “Enforceability of Certain Civil Liabilities” for additional information.
3.3.33.3.5 Risks Relating to Our Business
Risks Relating to Copper
Copper is the principal raw material we use, accounting for a majority of the cost of sales. We purchase copper at prices based on the average prevailing international spot market prices on the London Metal Exchange (the “LME”)LME for copper for the one month prior to purchase. The price of copper is affected by numerous factors beyond our control, including international economic and political conditions, supply and demand, inventory levels maintained by suppliers, actions of participants in the commodities markets and currency exchange rates. As with other costs of production, changes in the price of copper may affect the Company’s cost of sales. Whether this has a material impact on our operating margins and financial results depends primarily on the Company’s ability to adjust selling prices to its customers, such that increases and decreases in the price of copper are fully reflected in those selling prices. Most of our sales of manufactured products reflect the cost of copper used to manufacture those products at the time the products are ordered. In the ordinary course of business we maintain inventories of raw materials and finished products reasonably necessary for the conduct of our business. These inventories typically reflect the cost of copper prevailing in the market at the time of purchase. A long-term decrease in the price of copper would require the Company to revalue its inventory at periodic intervals to the then net realizable value, which could be below cost. Copper prices have been subject to considerable volatility and it is not always possible to manage our copper purchases and inventory so as to neutralize the impact of copper price volatility. Accordingly, significant volatility in copper prices could have an adverse effect on our operations. In the fourth quarter of 2011, there was a dramatic decline in the price of copper on global markets. This decline impacted adversely on the Company’s fourth quarter and year-end results, as much of the Company’s copper inventory was procured prior to the fourth quarter price decline. No assurance can be given that such volatility will not recur.
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Our sales of manufactured and distributed products are made primarily to customers that use our products as components in their own products or in construction or infrastructure projects in which they participate. The volume of our sales is dependent largely on general economic conditions in the markets in which we compete, including how much our customers invest in their own product manufacturing or project development. Increases or decreases in economic activity and investment in the markets where we operate generally will result in higher or lower sales volume and higher or lower net income for the Company.
Risks relating to Force Majeure Events
Operations and other business conducted at our plants and other facilities are at risk to acts of god consisting of uncontrollable natural and climatic events (often referred to as force majeure events), such as the 2011 flooding in much of Thailand that severely disrupted our manufacturing operations at our Thai plant controlled by our subsidiary, Charoong Thai. The severe flooding affected much of our Thai operations and forced the suspension of operations for a period of 5 months. The temporary suspension of operations at Siam Pacific Electric Wire & Cable Company Limited (“Siam Pacific”), which is 100% owned by Charoong Thai impacted adversely on its 2011 sales, which experienced a 20% reduction in product sales in 2011 compared with that of 2010. With the help of its affiliated companies such asPacific Electric Wire & Cable (Shenzhen) Co., Ltd. (“PEWS”)andShanghai Yayang Electric Co., Ltd. (“Shanghai Yayang” or “SYE”), together with our parent company, PEWC, Siam Pacific partially restored its operations in January and February with shipments of 281 tons and 588 tons, respectively. Full production is expected to resume in the second quarterof 2012. The insurance coverage includes flood, fire, and theft but does not include losses due to business interruption.
Risks Relating to China
We conduct substantial business operations in China. Accordingly, our results of operations and prospects are likely to be materially impacted by economic, legal and other developments in China.
Economic Reform Measures in the PRC May Adversely Affect the Company’s Operations or Financial Condition
The PRC government has gradually moved away from a planned economic model and implemented economic reform measures emphasizing decentralization, utilization of market forces in the development of the economy and a high level of management autonomy. While such economic reform measures are generally viewed as a positive development for foreign businesses investing or establishing operations in China, many of the reforms are unprecedented and may be subject to revision, modification or termination based on the outcome of such economic changes and other considerations, such as their social impact. There is not sufficient administrative or judicial precedent to permit the Company to determine with any degree of certainty how the reforms will impact our business in China.
PRC Civil Law System May Limit the Company’s Remedies
The Chinese legal system is a civil law system based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since the late 1970s, the central government has promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. In particular, since 1979, the PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investment in China. Foreign investment laws and regulations in China are evolving and the interpretations of many laws, regulations and rules are not always uniform. Accordingly, enforcement of these laws, regulations and rules involves uncertainties, which may limit the remedies available to us in the event of any claims or disputes with third parties. In addition, any litigation in China may be protracted and could result in substantial costs and diversion of resources and management attention.
PRC Control over the Convertibility of Currency May Restrict the Payment of Dividends
The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and in certain cases, the remittance of currency out of China. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade related transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, approval from SAFE or its local branch is required where Renminbi is to be converted into foreign currency andis remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies.currencies unless SAFE has pre-approved the amortization schedule of the foreign currency loan in question. The PRC government may also at its discretion restrictput restrictions on access in the future to foreign currencies for current account transactions. Shortages in
Pursuant to the availabilityForeign Exchange Administration Regulation promulgated on January 29, 1996, as amended on January 14, 1997 and August 5, 2008, and various regulations issued by the SAFE and other relevant PRC government authorities, the Renminbi is freely convertible only with respect to current account items, such as trade-related receipts and payments, interest and dividends. Capital account items, such as direct equity investments, loans and repatriations of investments, require the prior approval of the SAFE or its local branches for conversion of Renminbi into foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC. Payments for transactions that take place within the PRC must be made inRenminbi. Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities, or their competent local branches.
On August 29, 2008, the SAFE promulgated SAFE Circular No. 142, a notice regulating the conversion by a foreign-invested company of foreign currency into Renminbi by restricting how converted Renminbi may restrictbe used. This notice requires that Renminbi converted from the foreign currency-denominated capital of a foreign-invested company only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise in its business scope. In addition, the SAFE strengthened its oversight of the flow and use of Renminbi funds converted from the foreign currency-denominated capital of a foreign-invested company. The use of such Renminbi may not be changed without SAFE’s approval and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used for purposes within the Company’s approved business scope. Violations of SAFE Circular No. 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Regulation. As a result, SAFE Circular No. 142 may impose an additional layer of bureaucratic compliance and could, under certain circumstances, limit our ability to transfer the proceeds from our non-RMB denominated borrowing arrangements outside of our subsidiaries in
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Pursuant to pay dividendsSAFE Circular No. 75, (i) a PRC resident must register with the local SAFE branch before establishing or other payments to us,controlling an overseas special purpose vehicle(“SPV”), for the purpose of obtaining overseas equity financing using the assets of or otherwise satisfy their foreign currency-denominated obligations.
Political or Social Instability in the PRC May Adversely Affect the Company’s Operations or Financial Condition
Political or social instability in China could also adversely affect our business operations or financial condition. In particular, adverse public health epidemics or pandemics in China could not only interfere with our ability to operate our PRC subsidiaries, but could also affect the country’s overall economic growth, which could in turn affect the sales of our products in China. In addition, as our corporate headquarters are located in Taipei, any escalation in political tensions between the PRC and the government of Taiwan could impact adversely our ability to manage our Chinese operations efficiently or without third party interference.
Inflation in the PRC May Adversely Affect the Company’s Operations or Financial Condition
The rapid growth of the PRC economy has historically resulted in high levels of inflation, coupled with a rise in the currency value of RMB against USU.S. dollars. The PRC government has publicly announced its commitment to control inflation, and the anti-inflation policies of the PRC government may have an adverse effect on the business climate and growth of private enterprise in the PRC. An economic slowdown may increase our costs. If inflation is significant, our costs would likely increase, and there can be no assurance that we would be able to increase our prices to an extent that would offset the increase in our expenses.
PRC Power Shortages and Lack of Insurance May Adversely Affect the Company’s Operations or Financial Condition
We consume substantial amounts of electricity in our manufacturing processes at our production facilities in China. Certain parts of China have been subject to power shortages in recent years. We have experienced a number of power shortages at our production facilities in China to date, particularly in Shenzhen where numerous clusters of factories are situated. We are sometimes given advance notice of power shortages and in relation to this we currently have a backup power system at certain of our production facilities in China. However, there can be no
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The insurance industry in China is still at an early stage of development and foreign insurance companies are limited to operate only in a certain number of big cities. In particular, PRC insurance companies do not offer extensive business insurance products. As a result, we have limited business liability and disruption insurance coverage for our operations in China. Any business disruption, litigation or natural disaster might result in our incurring substantial costs and the diversion of resources.
PRC Tax Treatments May Affect the Company’s Operations or Financial Condition
On March 16, 2007, the National People’s Congress of the PRC, or NPC, passed the new PRC Enterprise Income Tax Law (the “New EIT Law”). Under the New EIT Law, effective January 1, 2008, China adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises) and revoked the then current tax exemption, reduction and preferential treatments applicable to foreign-invested enterprises. However, there is a transition period for enterprises, whether foreign-invested or domestic, that were receiving preferential tax treatments granted by relevant tax authorities at the time the New EIT Law became effective. Enterprises that are subject to an enterprise income tax, or EIT, rate lower than 25% may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after the effective date of the New EIT Law. Enterprises that are currently entitled to exemptions or reductions from the standard income tax rate for a fixed term may continue to enjoy such treatment until the fixed term expires. Pacific Electric Wire & Cable (Shenzhen) Co., Ltd. (“PEWS”)PEWS is the only subsidiary of the Company in the PRC that still enjoys a reduced tax rate under the transitional period. The preferential income tax rate of PEWS under the revised tax incentive regulations was 22% in 2010 and is scheduled to be 24% in 2011, and is 25% in 2012.
Labor Law Legislation in the PRC May Adversely Affect the Company’s Operations or Financial Condition
The Labor Contract Law became effective on January 1, 2008. It formalizes workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. Considered one of the strictest labor laws in the world, among other things, this new law requires an employer to conclude an “open-ended employment contract” with any employee who either has worked for the employer for ten years or more or has had two consecutive fixed-term contracts. An “open-ended employment contract” is in effect a lifetime, permanent contract, which is terminable only in specified circumstances, such as a material breach of the employer’s rules and regulations, or for a serious dereliction of duty. Such employment contracts with qualifying workers would not be terminable if, for example, the Company determined to downsize its workforce in the event of an economic downturn. Under the new law, downsizing by 10% or more (or more than 20 persons) may occur only under specified circumstances, such as a restructuring undertaken pursuant China’s Enterprise Bankruptcy Law, or where a company suffers serious difficulties in production and/or business operations. Any of the Company’s staff employed to work exclusively within the PRC are covered by the new law and thus, the Company’s ability to adjust the size of its operations when necessary in periods of recession or less severe economic downturns has been curtailed. Accordingly, if the Company faces future periods of decline in business activity generally or adverse economic periods specific to the Company’s business, this new law can be expected to exacerbate the adverse effect of the economic environment on the Company’s results of operations and financial condition. Additionally, this new law has affected labor costs of ourofour customers which may result in a decrease in such customers’ production and a corresponding decrease in their purchase of our products.
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Changes in exchange rates influence our results of operations. Our principal operations are located in Thailand, Australia, Singapore and China, and a substantial portion of our revenues is denominated in Baht, Australian dollars, Singapore dollars or Renminbi. Nearly all of the raw materials for these operations are imported and paid for in U.S. dollars and a substantial portion of our future capital expenditures are expected to be in U.S. dollars. We require a significant amount of U.S. dollars for our ongoing equipment upgrade and maintenance programs. Any devaluation of the Baht, the Australian dollar, the Singapore dollar or the Renminbi against the U.S. dollar would increase the effective cost of foreign manufacturing equipment and the amount of foreign currency denominated expenses and liabilities and would have an adverse impact on our operations.
Although our reporting currency is U.S. dollars, the functional currency of our Thai operations, which accounted for 40.6%42.0% of our sales in 2010,2011, is the Thai Baht. The functional currency of our Singapore operations, which accounted for 7.3%15.7% of our sales in 2010,2011, is the Singapore dollar. The functional currency of our Australian operations, which accounted for 9.6%13.0% of our sales in 2010,2011, is the Australian dollar. The functional currencies for our China operations, which in total accounted for 31.7%29.3% of our sales in 2010,2011, are divided into two groups: for Shangdong joint venturesShandong Pacific Rubber Cable Company, Ltd. (“SPRC”, equity investee with 25% equity owned by APWC, accounting under equity method for consolidation purpose),SPFO (which was disposed of on December 1, 2011) and Shanghai Yayang,SYE, their functional currency is Renminbi, while for CCH HK, PEWS and Epan Industries Pte. Ltd (“Epan Industries”) in Singapore, their functional currency is U.S. dollars. Accordingly, the functional currency accounts of these operations are all translated into U.S. dollars utilizing, for the year, the balance sheet exchange rate for balance sheet accounts, and an average exchange rate for the year for the income statement accounts. Such translation of the functional currency accounts is recognized as a separate component of shareholders’ equity. Any devaluation of the Baht, the Australian dollar, the Singapore dollar, or the Renminbi against the U.S. dollar would adversely affect our financial performance measured in U.S. dollars.
Competition
The wire and cable industry in the Asia Pacific region is highly competitive. Our competitors include a large number of independent domestic and foreign suppliers. Certain competitors in each of our markets have substantially greater manufacturing, sales, research and financial resources than we do. We and other wire and cable producers increasingly compete on the basis of product quality and performance, reliability of supply, customer service and price. To the extent that one or more of our competitors is more successful with respect to the primary competitive factors, our business could be adversely affected.
Risks associated with Required Productivity Increases
Our business strategy includes a focus on increasing profitability through increased efficiency and productivity. In the event we are not able to implement measures to increase efficiencies and productivity, we may be limited in achieving increased profitability or may become less profitable. Moreover, productivity increases are linked to capacity utilization rates. A drop in the utilization rate of our manufacturing capacity would adversely impact productivity.
Indebtedness
As of December 31, 2010,2011, the Company had a total of $310.5$316.4 million in credit available to itself, or one or more of its operating subsidiaries. The available credit is provided by a total of 3414 banks in the various regions/territories in which we operate. Out of $310.5 million intotal available credit, $100.8$224.6 million was unused. The Company, collectively and on individual basis, is not highly leveraged and management does not consider it to be likely that the Company will become highly leveraged. Weighted average borrowing rate, for all the outstandingtheoutstanding loans combined, would sum up to be 3.6%3.71%, which runs slightly higher than like-kind borrowing rates in the marketplace, i.e., three month LIBOR (data of March 31, 2011)April 24, 2012) of 0.3045%0.47% plus 2.5%.
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We engage in transactions in the ordinary course of business with PEWC, including the purchase of certain raw materials and the distribution of PEWC products in various countries in the Asia Pacific region. We and PEWC have entered into a composite services agreement dated November 7, 1996, as amended and supplemented (the “Composite Services Agreement”), which contains provisions that define our relationship and the conduct of our respective businesses and confers certain preferential benefits on us. The Composite Services Agreement is renewable at our option and is currently in force. However, we are unable to predict whether PEWC would, at some future date, seek to limit, or be unable to perform in whole or in part, the business it conducts with the Company pursuant to the terms of the Composite Services Agreement.
Risks Relating to Thailand
A substantial portion of our Thai operations, which accounted for approximately 40.6%42.0% of our net sales in 2010,2011, consists of the manufacture of telecommunications and power cable and sales of those products for use in large-scale telecommunications projects and various construction projects in Thailand. As a result, our future performanceresults will depend in part on the political situation in Thailand and the general state of the Thai economy. Recent civil unrestflooding in Thailand particularly in the greater Bangkok area, has abated somewhat.caused a tremendous amount of damage to all industries, including one of our factories belonging to Siam Pacific. APWC immediately organized an emergency rescue team comprising of engineers, technicians, and electricians to help restore the factory back to its operational mode. So far 90% of the machinery is restored and shipment to customers resumed with 281 tons in January 2012 and 588 tons shipped out in February. However at the moment, Siam Pacific has experienced a slight delay in renewing its insurance policy in 2012, as most of insurance companies covering the Thai market are reluctant to bear the risk of providing companies with flood insurance coverage.
While the political situation remains volatileturmoil in Thailand has subsided since 2010, the continuing political uncertainty and unpredictable. Elections scheduled to take placethe risk of further social unrest lessens the attractiveness of the local market for foreign investment, and diminishes the focus of the government on infrastructure development, both of which considerations may adversely impact on the volume of business of the Company’s actual and potential customers in June 2011 add to the uncertain political climate.Thai market. The Company’s Thai operations are increasinglyremain vulnerable to uncertainties with regard to payment for current sales and the award of future contracts in view of the ongoing political crisisinstability in Thailand. Additionally, in recent years the Thai economy has been highly cyclical and volatile, depending for economic growth in substantial part on a number of government initiatives for economic expansion. Moreover, the Baht remains volatile and subject to significant fluctuations in relation to the U.S. dollar. Such fluctuations in the value of the Baht may negatively impact our performance.
Environmental Liabilities
We are subject to certain environmental protection laws and regulations governing our operations and the use, handling, disposal and remediation of hazardous substances used by us. A risk of environmental liability could arise from our manufacturing activities in the event of a release or discharge by us of a hazardous substance. Under certain environmental laws, we could be held responsible for the remediation of any hazardous substance contamination at our facilities and at third party waste disposal sites and could also be held liable for any consequences arising out of human exposure to such substances or other environmental damage. There can be no assurance that the costs of complying with environmental, health and safety laws and requirements in our current operations or the liabilities arising from past releases of, or exposure to, hazardous substances, will not result in future expenditures by us that could materially and adversely affect our financial results, cash flows or financial condition.
Alternative Transmission Technologies
Our fiber optic and copper-based telecommunications business is subject to competition from other transmission technologies, principally wireless-based technologies. Fiber optic cable is presently being used in telecommunications trunks and feeder cable businesses and minimally in the access cable business. In November 2011 we sold our entire 51% equity interest in SPFOto a group of buyers in China for a cash consideration of $2.9 million, due to its low profit margin generation and fierce competition in the local fiber optic cable market. In the Asia Pacific markets where we compete, wireless telecommunications businesses have sometimes made substantial inroads in early emerging markets where sufficient funding may not then be available to install the infrastructure necessary for market-wide fixed line telecommunications. In addition, the ease of use of wireless telecommunications may make that medium an attractive alternative in circumstances where access to fixed line telecommunications is limited. While these technologies do present significant competition in the markets in which we conduct or plan to conduct business, the Company believes that demand for its fixed wire products will remain strong. However, no assurance can be given that the future development and use of such alternative technologies will not adversely affect our results of operations.
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We are subject to risks specific to our international business operations, including: the risk of supply disruption,disruption; production disruption or other disruption arising from events of force majeure, such as the severe weather and climatic events that caused the 2011 floods in Thailand; the outbreak of highly infectious or communicable diseases such as Severe Acute Respiratory Syndrome, swine influenza or pandemics of a similar nature; the risk of potential conflict and further instability in the relationship between Taiwan and the PRC; risks related to national and international political instability, such as disruptions to business activities and investment arising out of the political unrest and turmoil in Thailand; risks related to the recent global economic turbulence and adverse economic developments in a number of Asian markets; unpredictable consequences on the economic conditions in the U.S. and the rest of the world arising from terrorist attacks, and other military or security operations; unexpected changes in regulatory requirements or legal uncertainties regarding tax regimes; tariffs and other trade barriers, including current and future import and export restrictions; difficulties in staffing and managing international operations in countries such as Australia, Singapore, the PRC, Thailand and Taiwan; risks that changes in foreign currency exchange rates will make our products comparatively more expensive; limited ability to enforce agreements and other rights in foreign countries; changes in labor conditions; longer payment cycles and greater difficulty in collecting accounts receivable; burdens and costs of compliance with a variety of foreign laws; limitation on imports or exports and the possible expropriation of private enterprises; and reversal of the current policies (including favorable tax and lending policies) encouraging foreign investment or foreign trade by our host countries. Although we have not experienced any serious harm in connection with our international operations, we cannot assure you that such problems will not arise in the future.
Item 4:4 Information on the Company
4.1 History and Development of the Company
General
Asia Pacific Wire & Cable Corporation Limited was formed on September 19, 1996 as a Bermuda exempted limited liability company under the Companies Act. The address of the Company’s principal place of business is 7/Fl. B, No. 132, Sec. 3, Min-Sheng East Road, Taipei, 105, Taiwan, Republic of China, and its telephone number is (886) 2-2712-2558. Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711, is the Company’s agent for service of process in the United States.
The Company is principally engaged in the manufacture and distribution of telecommunications (copper and fiber optic) and power cable and enameled wire products in the Asia Pacific region, primarily in Thailand, China, Singapore and Australia. The Company manufactures and distributes its own wire and cable products (“Manufactured Products”) and also distributes wire and cable products (“Distributed Products”) manufactured bymanufacturedby its principal shareholder, PEWC. The Company also provides project engineering services in the supply, delivery and installation (“SDI”) of power cables to certain of its customers.
Principal Capital Expenditures and Divestitures
Total purchases of property, plant and equipment amounted to $3.4 million in 2008 and $3.3 million in 2009, and $3.7 million in 2010. Those purchases related mainly to the capacity expansion of certain subsidiaries2010, and $8.9 million in Thailand2011, mostly for old machinery replacements for Australia Pacific Electric Cable Pty Limited (“APEC”) and China, particularly Charoong Thai,Sigma Cable Company (Private) Limited (“Sigma Cable”), and to the replacement of oldfor newly purchased production machinery and equipment at various operating facilities.
4.2.1 Certain Recent Events
On April 30, 2012, the Company announced certain of its financial results for the fiscal year ended December 31, 2011, which included gross revenue of $471.9 million, net loss from continuing operations of $3.9 million and loss per share from continuing operations of $0.49.
On March 21, 2012, the Company announced that it has been awarded three new supply contracts in Singapore valued at approximately $87 million.
On February 9, 2012, the Company announced the appointment of MZ-HCI as APWC’s new investor relations firm. The contract with MZ-HCI would provide APWC with total solution in terms of investor relations work, investor relations website design, press releases and XBRL report printing with reduced costs.
On October 7, 2011, the Company’s shareholders passed a resolution at the Annual General Meeting (“AGM”) adopting the third amended and restated bye-laws of the Company (the “Bye-Laws”), which allowthe Company to purchase its own shares for cancellation or acquire them to be held as treasury shares, as provided for in Section 42B of the Companies Act, and to be applied or allotted for any of the purposes permitted by said Section 42B. At the AGM, the shareholders also elected to the Board each of the Directors named in Item 6 of this Annual Report.
On September 7, 2011, the Commission declared effective the Company’s Post‑Effective Amendment No. 8 to a registration statement on Form F‑1 reporting on and converting to Form F‑3, covering 2,766,154 Common Shares, of which 1,410,739 Common Shares are held by PEWC and 1,355,415 Common Shares are held by COF.
On April 29, 2011, the Common Shares of the Company commenced trading on the NASDAQ Capital Markets tier.
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4.2.2 Managing Our Business in Current Market Conditions
In order to address the continuing market challenges facing our business, the Company has taken and plans to continue to implement a number of measures in order to maintain efficient operations.
Specifically, the Company has continued to focus on increased efforts to collect its receivables on a timely basis. The days of sales outstanding in 20102011 have improved from 100102 days to 9692 days. The Company focusescontinues to focus on working actively with all of its significant customers to reduce collection times and minimize write offs.write-offs. The Company has also reduced its inventory levels through planned lowerreductions in raw material purchases while negotiating with suppliers to reduce costs of raw materials and supplies. The Company has focused also on reducing operating costs where practicable. Overall the Company has increased itsdecreasedits headcount by 10092 since the beginning of 2011, which reflectsreflected management’s view that the business of APWC continues to gradually pick up.would experience some slowness in 2011, which would also cause an erosion on net income for the fiscal year. ��Accordingly, headcount reduction became one of the cost containment measures taken by the Company. The Company has entered into certain copper futures contracts in Singapore and at CTW in several instances in order to reduce the effect of the current volatility in copper prices on its operations. The Company ishas also negotiatingnegotiated and
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We believe that the successful implementation of these actions has had a positive effect on our cash resources, and we intend to continue these measures in order to preserve our liquidity. The Company is seeking toliquidity and maintain a strong cash position. None of the Company’s material lines of credit has been terminated. As of December 31, 2010,2011, the Company had available and unused lines of credits from suppliers, banks and other lenders totaling, in the aggregate, approximately $186.0$224.6 million, a decreasean increase of $25.2$38.6 million from a year ago. This reflects the greater capital commitment of the Company to increased purchases of raw materials and other capital outlays, as the volume of business increased during the course of 2010. We believe however that available and unused amountamounts of credit isare sufficient to support our current working capital needs.
4.2.3 Recent Business Trends
APWC experienced a 30%5.7% growth in overall revenues in 2011 over 2010, over 2009, and also experienced an increase of 33%but suffered a decrease in gross margins of 3.5% in 2011 when compared with that of 2010. Operating profit was down from $28.7 million in 2010 over 2009. These positive developmentsto $1.9 million in 2011, due to the fact that the Company wrote off goodwill in the amount of $8.8 million and Siam Pacific incurred flood damage of $3.9 million. The gross margin erosion in 2011 can be attributed primarily to two factors: 1) the copper price per tonnage in 2011 increased by 17% whereas our average selling price only increased by 11.7% and 2) our factory machinery utilization rate was below the optimal level. The cost of sales increased as a result of the 2011 drop in our factory utilization rate. The material decline in gross margin, and the other factors that impacted adversely on our results, yielded loss per share of $0.49 per share in 2011 compared to earnings per share of $1.02 in 2010, which was approximately a 40% increase over 2009. The positive revenue trends that played out during the course of 2010 have continued into the early part of 2011. For example, countries like Singapore or Brunei have placed their orders with Sigma Cable during 2011, particularly in the low to medium voltage transmission, with expected more to come in the foreseeable future. In addition, the re-bound in the trading prices of many public companies and the increases in major indices on a number of national exchanges since the lows of March 2009 have been coupled with a material increase in customer purchases of the Company’s products for expenditures for either private or government sponsored projects. As part of the rebound in our business, the operating subsidiaries expect to encounter less difficulty in raising new banking facilities and loans to support their working capital requirements in the current environment where banks are more frequently willing to offer new facilities. Governments in certain countries, such as China, Thailand and Singapore, have pledged to increase infrastructure and construction spending to boost or maintain economic growth. Assuming those pledges are acted upon, those developments will have a favorable impact on our sales of manufactured products. The Company’s results for the first half of 2010 benefitted from a modest increase in governmental spending on infrastructure development, whereas the second half of 2010 results — better than the first half, did indicate that the government spending increased further over the first half, particularly when the focus of governments was on building more housing and on infrastructure improvement. While the global economic recovery continues to confront significant challenges, as does our business and the markets in which we operate, and we are not able to forecast future results, the Company believes that its preliminary results for the early part of 2011 are trending consistent with its improved performance in 2010.
4.3 Business Overview
The Company is a holding company that operates its business through operating subsidiaries and joint ventures, principally located in Thailand, China, Singapore and Australia.
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Thailand
The Company’s Thai operations are conducted through Charoong Thai, Wire and Cable Public Company Limited (“Charoong Thai” or “CTW”), Siam Pacific Electric Wire & Cable Company Limited (“Siam Pacific”) and Pacific-Thai Electric Wire & Cable Co. Ltd. (“Pacific Thai”), which. Pacific Thai was transferred into Siam Pacific in March 2011.
Charoong Thai is a publicly-traded Thai corporation, the shares of which are listed on the Stock Exchange of Thailand (“SET”). It manufactures aluminum and copper electric wire, medium and high voltage power cable and telecommunications cable. It has subsidiaries and affiliates in the businesses of optic fiber cable manufacturing and telecommunication and network services. Charoong Thai was established in Thailand in 1967 as a limited public company. As of December 31, 2010,2011, the Company effectively owned 50.93% of the issued and outstanding shares of Charoong Thai. The Company’s present intention is to maintain majority ownership of the voting securities of Charoong Thai. The board of directors of Charoong Thai may authorize the issuance of additional shares of common stock of Charoong Thai. The Company has preemptive rights to purchase its pro rata share of any additional authorized shares, less amounts reserved for directors, officers and employees. In the event the board of Charoong Thai decides to cause it to issue additional shares, the Company may decide not to exercise its preemptive right,rights, in which case the Company’s interest may be diluted..
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Pacific Thai (now transferred into Siam Pacific) was established in 1989 as a wholly-owned subsidiary of Siam Pacific. Pacific Thai producesproduced enameled wire for export only and has a special tax status which exempts it from import duties on raw materials used in export manufacturing. This special tax status is phasing out, and by the time the business consolidation is completed, the special tax status will expire.
Based on information published by the Thai Ministry of Commerce on sales by dollar value, the Company believes that Siam Pacific and Charoong Thai are two of leading telecommunications and power cable and wire manufacturers in Thailand and are two of a very limited number of the government-approved suppliers of telecommunications cablecables for major public telecommunications projects in Thailand.
In a restructuring that included the transfer of the business of Pacific Thai into Siam Pacific, the Company achieved a reorganization, which has generated cost savings while improving overall efficiency. The Company believes the synergistic effect of merging these operations will continue to produce significant savings in overhead cost as it facilitates the centralization of decision making and resource allocation for the Thai operations. Management of Pacific Thai and Siam Pacific was consolidated into Charoong Thai in order to enhance synergies and provide greater sharing of expertise. For example, each of Charoong Thai and Siam Pacific’s manufacturedPacific manufactures and distributedistributes enameled wire and they are now in a better position to share technical expertise and resources. Under the restructuring, APWC owns 50.93% of Charoong Thai, which owns 100% of Siam Pacific. However, Siam Pacific continues to report its results separately to APWC headquarters.
China
The Company’s China operations are conducted through sixseven business entities.entities – Shanghai Yayang, CCH HK, PEWS, NPC, SPFO (which was disposed of in December 2011), SPRC (equity investee), and SHP (equity investee). The operating entities include Shanghai Yayang, Electric Co., Ltd. (“Shanghai Yayang“or “SYE”), formerly known as Shanghai Pacific Electric Co., Ltd., a joint venture in Shanghai incorporated in June 1998 to manufacture enameled wire.wires. The Company’s effective holding in Shanghai Yayang is 54.41%. Shanghai Yayang manufactures enameled wirewires with a diameter between 0.05mm and 2.5mm for sale and distribution in the eastern part of China, including to local and Taiwanese based end-users. Sitting inon the board are six directors, either members of management of Shanghai Yayang who are expatriated from Taiwan or Thai representatives, also expatriated from or designated by APWC or PEWC.
The Company owns Crown Century Holdings Limited (“100% of CCH HK”),HK, a Hong Kong registered company, and its wholly-owned subsidiary company, Pacific Electric Wire & Cable (Shenzhen) Co., Ltd. (“PEWS”).PEWS. PEWS manufactures enameled wirewires for electric, video and audio products primarily for export and with a little portion sold domestically. CCH HK, since theSince a restructuring in the first quarter of 2010, CCH HK is no longer the trading arm of PEWS, and transfersas it transferred its distribution role to Epan Industries Pte Ltd (“Epan”). The contributions of Epan and PEWS to the Company’s annual operating results have increased substantially.in Singapore. The Company believes that PEWS is one of the leadingmajor manufacturersof enameled wire products in the southern Chinese market.
Until 2006, the Company’s China Southoperations included NPC, a telecommunications cable manufacturing joint venture located in Ningbo Yin County, Zhejiang Province in eastern China. The other owner of NPC is China Ningbo City Yin Jiang County Yin Jiang Town Industrial Corporation. NPC used to manufacture a range of telecommunications cable and local area network (“LAN”) electronic cables for sale and distribution in the Chinese domestic market and export market. In 2006, the Company decided to cease operations at NPC, as it concluded that the prospects for reversing the losses and achieving profitability were too remote. Thereafter, the Company liquidated certain machinery and equipment through sales to third parties. The land, building and some leftover machinery and equipment remained with NPC. In December 2009, the Company started a series of discussions with Bangkok Bank Hong Kong branch on a possible loan which would provide a cash infusion and a trade finance facility, each aimed at re-building NPC to be a viable operation focusing on producing electronic wiring. The new business draws upon the experience of, and technology from, our parent company, PEWC. The loan facility agreement was finalized in March 2011, thereby allowing for a total cash contribution of $14 million and a trade credit line of $8 million, with the first tranche of capital funding of $5 million infused to NPC at the end of May 2011, increasing APWC’s ownership to 95.80%. Theconstruction of NPC’s factory is divided in two phases with the existing plant finished in October 2011 and the new plant targeted to be completed by the end of 2012.
In November 2011, the Company sold its 51% interest in SPFO, a joint venture company in Yanggu County, Shandong Province, China. SPFO was established to manufacture fiber optic cables for the China market. The Company ownsdetermined that its resources in the China market are better deployed in further developing its core wire and cable business, rather than seeking to establish itself in the fiber optic business.
The Company holds a 51.0%25.0% interest in SPFO, withSPRC, which manufactures rubber cable for the China market. The remaining interest75% is owned by the joint venture partner, Shandong Yanggu Wire & Cable CompanyCorp. Ltd. (“Shandong Yanggu”), an established cable manufacturer in Shandong Province that produces a wide range of cable products and is considered one of the leadingmajor cable producers in China.
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Singapore
The Company’s Singapore operations are principally conducted through its 98.3%-owned subsidiary, Sigma Cable Company (Private) Limited (“Sigma Cable”).Cable. The Company believes that Sigma Cable is one of the leadingmajor suppliers of power cable products in Singapore. Sigma Cable manufactures and sells a range of low voltage power cable products, used mainly in infrastructure projects and commercial and residential developments. Sigma Cable is also the exclusive distributor in Singapore of medium and high voltage wire and cable products manufactured by PEWC.
Sigma Cable also has project engineering operations in Singapore to supply, deliver and install (“SDI”) primarily medium and high voltage cable to power transmission projects. While the Company currently obtains its supply of medium and high voltage power cable for its SDI operations from PEWC, other suppliers are also available if necessary. The Company anticipates that there will be increasingmodest demand for medium and high voltage power cable and related turnkey installation projects insponsored by Singapore as two new SDI projects totaling $14.1 million contract sum are entered into by Sigma Cable with customers in the first quarter of 2011 and the Company is seeking to increase its business volume in its project engineering business segment.
The Company also holds a 100% interest in Sigma-Epan InternationalIndustries, Pte. Ltd. (“Sigma-Epan”), a group of companies with its headquarters and limited operations in Singapore and Malaysia. Sigma-Epan group has its headquarters in Singapore. Prior to ceasing manufacturing operations in
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Australia
The Company went through a group restructuring exercise in March 2010. CCH HK acquired 51% of Australia Pacific Electric Cable Pty Limited (“APEC”)APEC shares from Sigma Cable, thereby increasing the Company’s effective interests in APEC from 98.53% to 99.4% (through Sigma Cable at 34.61%, and APWC at 13.79%). APEC is located near Brisbane and is one of three major wire and cable manufacturers in Australia. APEC produces a range of power cables supplemented by imports from overseas sister companies. APEC possesses a substantial marketing and distribution infrastructure with a network of sales offices and warehouses in the major capital cities of Brisbane, Sydney, Melbourne and Perth.
4.3.1 Products and Services
The Company engages in three principal business lines consisting of the manufacture of wire and cable products, the distribution of its own manufactured products and of certain wire and cable products manufactured by PEWC, as well as some third party products, and the provision of project engineering services to certain of its customers. The Company manufactures and sells a wide variety of wire and cable products primarily in fourthree general categories: telecommunications cable, power transmission cable, and enameled wire and, until May 2007, electronic cables, which the Company ceased to manufacture as of that date. wires.The Company’s telecommunications and power cables are used in a range of infrastructure projects and in commercial and residential developments. The Company’s enameled wire is used in the manufacturing of components and sub-components of household appliances and small machinery. The electronic cables, which include cable harnesses, are used in the electronics, computer, building automation, audio and communication industries. In addition, the Company acts as the Singapore distributor of wire and cable products manufactured by PEWC. The Company also offers SDI project engineering services of medium and high voltage cable for power transmission projects in Singapore.
Distribution Products
The Company has a sales and marketing force for the distribution of its manufactured productsManufactured Products in the markets where it has manufacturing facilities and in certain other Asian markets. In addition, the Company is a distributor of wire and cable products manufactured by PEWC. The leading PEWC products sold by the Company are medium and high voltage power cable (with capacities ranging from 3.3 kilovolts to 69 kilovolts), with the vast majority of such sales made in Singapore. The PEWC products sold by the Company do not compete with the Company’s manufactured products.Manufactured Products. In addition, certain subsidiaries also sell distributed products from other suppliers in Thailand and Australia during 2010.
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Based on trendsupon the needs of government and the private sector expansion and upgrading ofwith regard to residential and commercial buildings and infrastructure projects in Singapore, the Company anticipates modest demand for medium and high voltage power and for value added services in the power supply industry. To take advantage of these opportunities, the Company has developed its SDI project engineering capability. The SDI project engineering involves supply, delivery and installation primarily of medium and high voltage cable to power transmission projects in Singapore. After entering into a contract to supply, deliver and install cable for a power transmission project, the Company delivers medium and high voltage cables and enters into subcontracting agreements with local companies to install the cable as required by the project. Because of these changes,As reported in a Company press release on March 20, 2012, Sigma Cable in Singapore is able to be awarded two significant contracts in the first quarter of 2011cable has additionally won three new SDI projects totaling US$87 million with contracts valued at $14.1 million.
4.3.2 Manufacturing
Copper rod is the base component for most of the Company’s products. The manufacturing processes for these products require that the rod be “drawn” and insulated. In the “drawing” process, copper rod is drawn through a series of dies to reduce the copper to a specific diameter. For certain applications, the drawn copper conductor is then plated with tin. Copper used in cable is covered with various insulating materials that are applied in an extrusion process. The insulated wires are then combined, or “cabled” to produce the desired electrical properties and transmission capabilities. Then, depending upon the cable, some form of protective coverprotectivecover is placed over the cabled wires. A summary of the manufacturing process used for the Company’s primary wire and cable products is set forth below.
Telecommunications Cable
The Company produces a wide range of bundled telecommunications cable for telephone and data transmissions with different capacities and insulations designed for use in various internal and external environments principally as access cable to connect buildings and residents to trunk cables. Telecommunications cables produced by the Company include copper-based and fiber optic cables.
Production of copper-based telecommunications cable begins by drawing a copper rod until it has reached the desired diameter, after which the drawn wires are subjected to a process called “annealing” in which the wires are heated in order to make the wires softer and more pliable. Utilizing an extrusion process, which involves the feeding, melting and pumping of a compound through a die to shape it in final form as it is applied to insulate the wire, the wires are then covered by a polyethylene (“PE”) or polyvinyl chloride (“PVC”) compound and foam skin, suitable for different installations and environmental conditions. In order to reduce the cross-talk between pairs of communication wires, the insulated wires are then “twinned” or twisted so that two insulated single wires are combined to create a color-coded twisted pair. The twisted pairs of wire are then “cabled” or “stranded” into units of 25 twisted pairs for combination with other 25 pair units to form cable of various widths and capacities. The appropriate number of units areis cabled together after stranding to form a round cable core. Depending upon the planned environment, a petroleum jelly compound may then be added to fill the cable core to seal out moisture and water vapor. Aluminum or copper tape is used to “shield” the cable and, finally, the shielded cable core is covered by plastic outer sheathing. The Company manufactures telecommunications cable with capacities and sizes ranging from 25 to 3,000 pairs of 0.4 mm-diameter wire to 10 to 600 pairs of 0.9 mm-diameter wire.
Power Cable
The Company produces a range of armored and unarmored low voltage power transmission cable. Low voltage power cable, generally considered to be cable with a capacity of 1 to 3.3 kilovolts, is typically used to transmit electricity to and within commercial and residential buildings, as well as to outdoor installations such as street lights, traffic signals and other signs. Armored low-voltage power cable is usually used for public lighting and power transmission running to buildings and installed either above or below ground. Unarmored low voltage
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Production of unarmored cable begins by drawing and annealing of copper rods. The drawn copper wires are then stranded or “bunched” into round or sector-shaped conductors in sizes ranging from 1.5 square millimeters to 1000 square millimeters. The copper conductors are then covered in an extrusion process with a plastic insulator such as PVC, after which 2-5 conductors are twisted into a circular cable core in a cabling process and covered by a plastic outer cover.
Unarmored cable is composed of one or more cores of copper wire, insulated by substances such as PVC. Armored cable is produced in the same manner and the same range of configurations as unarmored cable, but with the addition of an outer layer of galvanized steel or iron wires to protect the cable from damage.
Enameled Wire
The Company also produces several varieties of enameled wire. Enameled wire is copper wire varnished, in an enameling process, by insulating materials. The enameling process makes the wire more resistant to oil, heat, friction and fusion, and therefore suitable for use in machinery and components and sub-components of manufactured goods. The Company manufactures enameled wire in sizes that range from 0.02 mm to 4.00 mm in diameter, varnished by various types of petroleum insulation materials including polyvinyl formal, polyurethane wire and polyester, among others. Enameled wire products are used in the assembly of a wide range of electrical products, including oil-filled transformers, refrigerator motors, telephones, radios, televisions, fan motors, air conditioner compressors and other electric appliances.
4.3.3 Raw Materials
Copper is the principal raw material used by the Company for copper-based products. The Company purchases copper at prices based on the average prevailing international spot market prices on the London Metal Exchange (the “LME”)LME for copper for the one month prior to purchase. The price of copper is influenced heavily by global supply and demand as well as speculative trading. As with other costs of production, changes in the price of copper may affect the Company’s cost of sales. Whether this has a material impact on the Company’s operating margins and financial results depends primarily on the Company’s ability to adjust selling prices to its customers, such that increases and decreases in the price of copper are fully reflected in those selling prices. Most sales of the Company’s manufactured productsManufactured Products reflect copper prices prevailing at the time the products are ordered. A long-term decrease in the price of copper would require the Company to revalue the value of its inventory at periodic intervals to the then net realizable value, which could be below cost.
The Company purchases copper in the form of rods and cathodes. Copper cathodes are thin sheets of copper purified from copper ore. Copper purchased by the Company in the form of cathodes must be sent to subcontractors to be melted and cast into the copper rods necessary for the manufacturing processes, for a processing fee equal to approximately 3.5% (based on the Company’s past experience) of the copper cathode purchase price. The Company presently relies on the services of Thai Metal Processing Co., Ltd., the Company’s long term equity investment, to process its copper cathodes into copper rods in Thailand, although the Company has a variety of processing companies from which to obtain these services. Construction of such a processing facility could also be an additional source of revenues and profit, to the extent that sales are made to unaffiliated parties. Copper rods are drawn into copper wire for the production of telecommunications cable, power cable and enameled wire.
The Company has historically purchased a substantial portion of its copper rods from PEWC. Under the Composite Services Agreement between the Company and PEWC, PEWC agreed to supply to the Company on a priority basis its copper rod requirements at prices at least as favorable as prices charged to other purchasers in the same markets purchasing similar quantities. PEWC continues to be the principal supplier of copper rods to the Company’s operations in other Asian countries. Under the Company’s copper rod supply arrangements, orders will be
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The Company purchases both copper cathodes which are subjected to a 1.0% import tariff, and copper rods which normally are subject to a 5.0% import tariff for its Thailand operations. The key suppliers are Sterlite Industries (India) Ltd —- India, PEWC.-Taiwan,PEWC-Taiwan, Prime Global Corp.-Korea, Lanexang Mineral Ltd.-Laos and the Mitsubishi Corporation Unimetal Ltd.-Japan, Mitsubishi Corporation, Glencore International AG., and Marubeni Corporation. The Company has regularly signssigned one-year contracts with each of the copper suppliers, pursuant to which the companyCompany agrees to purchase a set quantity of copper each month. Under the terms of such contracts, the price of copper is usually pegged to the monthly average of the spot price of copper on the LME for the delivery month (M-0), or 1 month before delivery month (M-1) plus a premium. The Company has almost two decades of good relationships with many copper suppliers, and currently believes that the copper suppliers will not have a shortagebe capable of providing an adequate supply of copper.copper for the Company’s requirements. The Company does not anticipate any change in relations with its copper suppliers in the near term.
The Company attempts to maintain approximately a three to five week supply of copper rods and cathodes for its Thai operations and approximately a two to four week supply in Singapore. In PEWS, the Company was able to maintaingenerally maintains one to two weeks of supply of copper rods and cathodes. In APEC, the copper supply was maintained at one to two weeks in 2010.during 2011. In Epan Industries whose copper is purchased through CCH HK, approximately three weeks of copper supply is preserved for manufacturing purpose.purposes. The Company has never experienced a material supply interruption or difficulty obtaining a sufficient supply of copper rod or cathode.
Other raw materials used by the Company include aluminum used as a conductor in power cable and petroleum-based insulation materials such as PE, PVC and jelly compounds for insulating covers on cables and varnishes on enameled wire; aluminum foils for sheathing of communication cable; and galvanized steel wire for the production of armored wire. The Company has not had any difficulty in maintaining adequate supplies ofsuppliesof these raw materials and expects to continue to be able to purchase such raw materials at prevailing market prices.
Other than import tariffs in Thailand, the Company does not face any restriction or control on the purchase or import of its raw materials. The Company may freely choose its suppliers and negotiate the price and quantity of material with its suppliers. The Company formulates consumption plans for raw materials regularly and continually monitors market conditions in respect of the supply, price and quality of raw materials.
Inflation would increase the cost of raw materials and operating expenses for the Company. The Company would try to maintain its gross margins by increasing the prices of its products.
4.3.4 Quality Control
The Company places a significant emphasis on product quality. The Company has implemented a range of quality control procedures with stringent quality standards under the supervision of dedicated quality control staff. Quality control procedures are implemented from the raw material to the finished product stages at each of the Company’s major production facilities. Raw materials are inspected to ensure they meet the necessary level of quality before production begins. During the manufacturing process, quality control procedures are performed at several stages of production. Upon completion, finished goods are brought to quality control centers set up in the factory for inspection and testing of different electrical and physical properties.
Depending on the requirements of its customers, the Company has the capability to manufacture its products to meet a variety of different quality and production standards. These include local standards and certifications, such as the Singapore Institute of Standards and Industrial Research Quality Mark and the Thailand Industrial Standard, as well as other standards including the National Electrical Manufacturers Association Standard, the British Standard, the Japan Industrial Standard and Underwriters Laboratories Inc. Standard, as applicable.
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4.3.5 Sales and Marketing
The Company’s telecommunications cable and power cable products are primarily sold in the domestic markets of the countries where they are manufactured, whereas most of the enameled wire manufactured by the Company in Thailand is exported to take advantage of Pacific Thai’s tax status exempting it from paying import duties on raw materials used in the manufacture of export product. With the transfer, this tax exemption is phasing out. On the other hand, for enameledexported. Enameled wire which are sold by Epan Industries in Singapore areis manufactured by PEWS in Shenzhen, China. The enameled wire is also exported to the customers in thethroughout Southeast Asia. However, these sales of enameled wire do not enjoy any tax exemption. The following table sets forth the Company’s sales revenues for the periods indicated among its three business segments — i.e., Manufactured Products, Distributed Products, and Supply, Delivery, and Installation (“SDI”)SDI and, within the Manufactured Products segment, by geographic locations of manufacturing, together with their respective percentage share of total sales for such periods:periods.
2008 | 2009 | 2010 | ||||||||||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||||||||
Manufactured Products: | ||||||||||||||||||||||||
Thailand | 216,364 | 43.2 | % | 117,954 | 32.6 | % | 190,364 | 40.6 | % | |||||||||||||||
Singapore | 35,318 | 7.0 | % | 34,583 | 9.5 | % | 34,248 | 7.3 | % | |||||||||||||||
Australia | 61,167 | 12.2 | % | 33,935 | 9.4 | % | 45,053 | 9.6 | % | |||||||||||||||
China | 134,999 | 27.0 | % | 113,649 | 31.4 | % | 148,958 | 31.7 | % | |||||||||||||||
Total | 447,848 | 89.4 | % | 300,121 | 82.9 | % | 418,623 | 89.2 | % | |||||||||||||||
Distributed Products (1) | 32,415 | 6.5 | % | 28,102 | 7.8 | % | 27,107 | 5.8 | % | |||||||||||||||
SDI Project Engineering (2) | 20,535 | 4.1 | % | 34,008 | 9.4 | % | 23,600 | 5.0 | % | |||||||||||||||
Total Net Sales | 500,798 | 100.0 | % | 362,231 | 100.0 | % | 469,330 | 100.0 | % | |||||||||||||||
(Figures in 2009 and 2010 were restated to reflect the results of discontinued operations of SPFO. For details, see “Item 5.3: Operating Results”)
|
| Years ended December 31, | |||||||
|
| 2009 |
| 2010 |
| 2011 | |||
|
| $ | % |
| $ | % |
| $ | % |
Manufactured Products: |
|
|
|
|
|
|
|
|
|
Thailand |
| 117,954 | 36.2% |
| 190,364 | 42.6% |
| 186,034 | 39.4% |
Singapore |
| 34,583 | 10.6% |
| 34,248 | 7.7% |
| 52,353 | 11.1% |
Australia |
| 33,935 | 10.4% |
| 45,053 | 10.1% |
| 58,932 | 12.5% |
China |
| 77,656 | 23.8% |
| 126,394 | 28.3% |
| 132,155 | 28.0% |
Total |
| 264,128 | 81.0% |
| 396,059 | 88.7% |
| 429,475 | 91.0% |
Distributed Products (1) |
| 28,102 | 8.6% |
| 26,935 | 6.0% |
| 25,500 | 5.4% |
SDI Project Engineering (2) | 34,008 | 10.4% |
| 23,600 | 5.3% |
| 16,972 | 3.6% | |
Total Net Sales |
| 326,238 | 100.0% |
| 446,594 | 100.0% |
| 471,946 | 100.0% |
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(1) Distributed products are sold in Singapore, Thailand, and Australia. | |||||||||
(2) All SDI project Engineering is supplied in Singapore. |
Sales within Thailand and Singapore are made directly by the sales department of the Company’s local subsidiaries in accordance with terms and pricing set by the local subsidiaries. The local subsidiaries are also responsible for sales planning, marketing strategy and customer liaison. The Company’s sales staff is knowledgeable about the Company’s products and frequently must render technical assistance, consulting services and repair and maintenance services to the Company’s customers. In order to ensure quality service and maintain sensitivity to market conditions, the Company does not conduct sales through independent sales agents on a commission basis but uses its own sales employees located at the operating subsidiaries.
As copper constitutes the costliestmost significant component of the Company’s wire and cable products, the price of the Company’s products depends primarily upon the price of copper. In order to minimize the impact of copper price fluctuations, the Company attempts to determine the prices of its products based on the prevailing market price of copper. However, theThe Company may be affected, to a degree, in the short term by significant fluctuations in the price of copper.
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Products are marketed under the respective names of each company. For instance, products manufactured by Siam Pacific are marketed under the “Siam Pacific”. Products manufactured by Sigma Cable are sold under the “Sigma Cable” brand.
Thailand
The Company produces and sells telecommunication cable, enameled wire and power cable in Thailand throughThailand. Charoong Thai which is one of the leading cable manufacturers in Thailand. Our distribution channels are both direct sell and to agencies representingto the government and private sectors. The major customers of the Company are many prominent clients working with the government and contractors (for example, (True Corporation Plc (“True”), TT&T (Triple T)(“Triple T”), etc.), subcontractors, and distributors for the private sector. Charoong Thai successfully concluded many projects, for instance, Suwannabhumi International Airport, Government Center, PTT Maptaput, and BRT (Bus Rapid Transit).
Singapore
The Company produces and sells low voltage power cable in Singapore. In addition, the Company sells a wide range of wire and cable products produced by PEWC. Power cables manufactured by the Company and PEWC are primarily sold to SP Powerassets, a quasi-public entity responsible for power delivery in Singapore, and to a large number of private contractors and construction firms. The Company also offers project engineering services for the SDI of medium and high voltage power cable to power transmission projects in Singapore.
In Singapore alone, sales of manufactured productsManufactured Products in 20102011 accounted for 48.8%70.6% of the net sales in Singapore; sales of distributed productsDistributed Products in 20102011 accounted for 17.5%7.8%, the remaining 33.7% comprising of21.6% representing SDI project engineering services. While the Company is seeking to increase the volume of business in its SDI business segment, in 2010In 2011, sales of SDI project engineering services to SP Powerassets Ltd. accounted for 100% of the Company’s SDI sales. Such sales are under a comprehensive contract, with purchase orders placed from time to time with the Company by SP Powerassets. Powerassets Ltd. Sales of copper wire and cable products purchased from PEWC since 2008 are as follows (in thousands):
Year ended December 31, | ||||||||||||
(figures are in thousands of US$) | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Manufactured Product: | ||||||||||||
Power Cable | 6,435 | 11,519 | 34,248 | |||||||||
Electronic Wire | 194 | 692 | — | |||||||||
Total | 6,629 | 12,211 | 34,248 | |||||||||
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| Years ended December 31, | ||
| 2009 | 2010 | 2011 |
Manufactured Product: |
|
|
|
Power Cable | 34,583 | 34,248 | 52,353 |
Total | 34,583 | 34,248 | 52,353 |
China
The Company produces and sells copper-based telecommunication cable fiber optic cables and enameled wire in China. The Company’s China operations are conducted through six fivebusiness entities. Copper-based telecommunication cables and fiber optic cables are generally sold to the national, provincial or local offices of the fixed-line and mobile telecommunications network operators or sub-contractors of such agencies. The Company generally sells enameled wire directly to manufacturers of electric motors for use in various consumer appliances.
4.3.6 Competition
The wire and cable industry in the Asia Pacific region is highly competitive. The Company’s competitors include a large number of independent domestic and foreign suppliers. Certain competitors in each of the Company’s markets have substantially greater manufacturing, sales, research and financial resources than the Company. The Company and other wire and cable producers increasingly compete on the basis of product quality and performance, reliability of supply, customer service and price. To the extent that one or more of the Company’s competitors is more successful with respect to the primary competitive factors, the Company’s business could be adversely affected.
Thailand
The wire and cable industry in Thailand is highly competitive. In its various product lines, the Company competes with a total of approximately thirty local wire and cable manufacturers and, to a lesser extent, with foreign producers for sales in Thailand of telecommunications cable, power cable and enameled wire. The Company is one of the five largest producers in the Thai market. These five largest producers are the only producers of telecommunications cable approved by the Thai Industrial Standards Institute and, therefore, the only cable producers whose products may be used in government-commissioned projects. Stringent governmental approval processes, tariffs and other import restrictions have limited competition in the Thailand market from foreign wire and cable producers. The Company also experiences significant competition from a number of smaller producers with regard to sales of enameled wire products.
Singapore
The Company believes that Sigma Cable is one of the leadingmajor suppliers of power cable products in Singapore, it experiences significant competition from other local producers. There is no tariff or other barriersbarrier against foreign competition in the local Singapore market and potential competitors are free to enter the industry. However, because of high capital costs, the Company believes it is unlikely that there will be new domestic entrants to the wire and cable industry in Singapore in the near future.
Australia
Currently, besides APEC, there are two major wire and cable producers in Australia: Olex Cables (owned by Nexans) and Prysmian Cables, with factories in the states of Victoria and New South Wales, respectively. Also, Advance Cable, a cable producer with a factory in Victoria, has recently obtained a bigger market share. In addition, a significant portion of the Australian market is serviced by two importers: (i) General Cables Australia, which imports cables from its parent company General Cables, which manufactures cables in New Zealand and (ii) Electra Cables, which imports cables from factories in China. These companies are APEC’s principal competitors. During fiscal year 2010, APEC was
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China
PEWS manufactures enameled wirewires in the Shenzhen Special Economic Zone in Guangdong Province for electronic, video and audio products for the South China market and for export. After thea restructuring, Epan Industries, one of the subsidiaries of Sigma-Epan, becomesbecame the trading arm of PEWS. Based on information provided by customers and suppliers, the Company believes that, based on production capacity, PEWS is one of the largest enameled wire manufacturers amongst the six manufacturers in Shenzhen. It supplies mainly to overseas transformer, motor and coil manufacturers in and around Shenzhen.manufacturers. It faces competition principally from overseas imports and local manufacturers.
Shanghai Yayang is the only major enameled wire producer in Shanghai and it supplies mainly to transformer, motor and coil manufacturers in Shanghai.the eastern part of China. It faces competition principally from overseas imports and manufacturers from other provinces.
In 2011, the Company believes that SPFO is one ofmade a strategic decision to exit the largest manufacturers of fiber optic cablescable market in Shandong Province based on sales by dollar value. It supplies mainly to government controlleddisposing of our 51% equity interest in SPFO. We observed increasing consolidation, and licensed telecommunications network operators such as China Telecom, China Mobile and China Unicom. It faces competition, principally from a number ofin the larger domestic fiber optic cable manufacturers.business in Shandong and concluded that our resources were better deployed by concentrating on our principal lines of copper-based Manufactured Products in that market.
4.3.7 Regional Considerations
The principal Asian markets in which we do business displayhave displayed exceptional overall economic growth in recent years compared to the United States and a number of other more developed markets, subject to occasional episodes of economic and currency exchange volatility attributable to various factors including the increased risks of emerging market investment, actual or potential political instability and pandemics such as the SARS health crisis several years ago. In some countries, the International Monetary Fund (the “IMF”) exerts considerable influence over economic policy and provides support to stabilize the domestic economy. In general, the Asian markets in which we do business have been export-driven in recent years and have in the case of China and Singapore, for example, accumulated considerable capital reserves, which contributes to a more stable business environment.
Thailand
A substantial portion of the Company’s Thai operations, whichwhose Manufactured Products accounted for approximately 40.6%39.4% of the Company’s net sales in 2010,2011, consists of the manufacture of telecommunications and power cable and sales of those products for use in large-scale telecommunications projects and various construction projects in Thailand. The volume of sales of these products tends to correlate with the general level of economic activity in Thailand. As a result, the performance of the Company’s Thai operations depends in significant part on the general state of the Thai economy. Infrastructure development and related construction projects in Thailand depend significantly upon government sponsored initiatives. In recent years, the level of government involvement in infrastructure development has tended to track increases or contractions in Thailand’s gross domestic product (“GDP”). Overall, the construction industry and infrastructure projects have slowed considerably, thereby affecting local sales, placing competitive pressure on prices and prompting the Company to rationalize Thai operations and actively seek overseas export markets.
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Sales of the Company’s telecommunication products in Thailand have depended to a significant degree on the substantial investment in and development of the telecommunications sector by the Thai government. In particular, the Company’s sales of manufactured productsManufactured Products are affected by the dollar value of contracts awarded by the government for telecommunications and other infrastructure projects.
The Company produces and sells copper core telecommunications cable, enameled copper wire and enameled aluminum wire through Charoong Thai to the Thailand market, and also exportsexport enameled wire to overseas markets. Sales of telecommunications cable, one of the Company’s leading product in Thailand, are conducted either by tender for participation in large scale telecommunications projectsproject of the TOT (TelephonetheTelephone Organization of Thailand) CorporationThailandCorporation Plc. (“TOT”), or direct to subcontractors of TT&Triple T (Triple T) and True, Corporation Plc., the two private telephone line contractors which would be licensed by TOT with regard to particular projects. The Company generally sells enameled wire directly to electric applianceselectrical appliance manufacturers or itsan OEM infor both the local and export markets,market, and in smaller units that are sold to local dealers.
Power
In Thailand, the prevailing historical trend has been that economic growth would stimulate rapid growth in the demand for electric power, and annual rates of growth in electricity demand would outpace annual economic growth rates. Despite the rapid growth in electricity demand, electricity consumption in Thailand remains low by international standards. The Company believes that, in the medium to longer term, there will be an increased demand for power supply which will lead to increased demand for the Company’s power cable products from both developers of power production facilities and contractors installing power supply lines.
Singapore
The Company’s distribution and project engineering business segments are concentrated in the Singapore market. SalesIn 2011, the Company realized$17.0 millionin revenues from SDI projects, have been on a downward trend since the close of Casino phase I construction last year, $34 million in 2009 compared with just $23 to$23.6
The Singapore government has established targets to increase the population from 4.6 million in 2007 to approximately 6 million by the end of 2020. This planned growth in population is expected to result in an increase in demand for residential property and construction. In addition, two new SDI projects totaling $14.1 million contract sum are entered into by Sigma Cable with customers in the first quarter of 2011 and theThe Company is seekingcontinues to seek ways to increase its business volume in its project engineering business segment.
China
The economy of China differs from that of most developed free-market economies in a number of respects, including structure, degree of government involvement, level of development, growth rate, capital reinvestment, allocation of resources, rate of inflation and balance of payments position. In recent years, the PRC government has implemented economic reform measures which emphasize decentralization, utilization of market forces and the development of foreign investment projectsof which SPFO and Shanghai Yayang are examples.
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The Company’s manufactured productsManufactured Products are produced at facilities located on premises owned or leased by Siam Pacific, Charoong Thai, Sigma Cable, APEC, Shanghai Yayang, SPFOPEWS, NPC and, PEWS.through November 2011, SPFO. As of December 1, 2011, the Company disposed of its 51% equity interest in SPFO. The following is a summary of the Company’s material facilities and operations as of December 31, 2010.
Siam Pacific owns a 7.45 acre production facility near Bangkok, Thailand, located on a 26.79 acre site that it also owns. Telecommunications cable and enameled wire are manufactured here. The production facility constitutes a portion of certain property and assets which are part of a mortgagepledged to a financial institution.
Charoong Thai owns a 24.7 acre production facility in Chachoengsao province, near Bangkok, Thailand, where telecommunications cable and power cable are manufactured. The production facility is located on a 57.9 acre site which Charoong Thai also owns. Neither the production facility nor the land is mortgaged.
Sigma Cable produces power cable on a 19,373 square meter site in Singapore leased from the Jurong Town Corporation (“JTC”) for 30 years from September 16, 2000 to September 16, 2030. JTC is a government-linked corporation and is Singapore’s largest industrial landlord.
APEC owns a 6,735 square meter power cable manufacturing facility on a 39,000 square meter land parcel in Brisbane, Australia, whichAustralia. The land and building therein is mortgaged to Westpac Banking Corporation of Australia as security for a bank facility of approximately A$10 million.
Shanghai Yayang operates a factory that produces enameled wire,wires, located in an area of approximately 27,839 square meters of state-owned land in an industrial district in Fengxian, Shanghai. The entire factory isAssets consisting of buildings of $0.8 million are pledged to the Agricultural Bank of China for a bank credit line of $6.6 million at an annual interest rate of 5.31%.
PEWS manufactures enameled wire in a facility on 36,000 square meters of state-owned land with a built-up area of 20,367 square meters in Long Gang, Shenzhen, China. A leasehold right of industrial land use for the land has been granted for 49 years. The facilityland and building of $0.8 million is mortgagedpledged to Agricultural Bank of China as security for a RMB 50$7.9 million bank loan granted in 2003 and extended through May 2011. This facility is now further extended for one year to the end of May 2012.
Sigma-Epan leasesan office space from Sigma Cable in Singapore where it employs nine individuals in its trading operations.
NPC manufactured telecommunications cable on 10.9 acresceased to be operational in 2006 due to unsatisfactory results and incompetent management team. The Board passed a resolution in October 2009 to re-construct NPC’s facilities to be used for production of state-ownedelectronic wires. The factory now occupies 44,000 total square meters, with a land usage right expiring July, 2044. NPC is situated in Ing-Chiang Township in Ningbo Yinjiang, ZhejianCity inZhè Jiāng Province, China, with a factory area of 3.3 acres. A leasehold right of industrial land use for the land was granted for 50 years. Manufacturing operations at NPC were terminated in 2006. NPC continues to hold the leasehold right of the land and maintains ten employees. The Company is in negotiations with a bank to finance a resumption of manufacturing operations at NPC, with the Company planning to introduce a new product category. The resumption of operations is subject to, among other things, a successful completion of the bank negotiations and funding of the new business, neither of which can be assured at the present time.
All of the Company’s facilities in Thailand, Singapore, Australia and China use production processes and equipment of international standard imported from Europe, the United States, Taiwan, and Japan.
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4.5 Insurance
The Company maintains insurance policies covering certain buildings, machinery and equipment against specified amounts of damage or loss caused by fire, flooding, other natural disasters and burglary and theft. The Company does not carry insurance for consequential loss arising from business interruptions or political disturbances and does not carry product liability insurance. In addition, the availability of insurance in China is limited, and the Company does not have business liability or disruption insurance for our operations in China. The Company believes that it maintains insurance coverage commensurate with the nature of and risks associated with its business, to the extent that appropriate insurance is available in the markets in which we conduct business. Further,Siam Pacific, however, encountered a slight delay when it was trying to secure insurance coverage for year 2012 as the Company maintains business liability insurance companies operating in China, which coversthe Thai market fear the flooding may re-occur this year. Siam Pacific is reasonably confident that ultimately it will find a suitable insurance company to cover fire, flood, and theft on buildings and inventories.
4.6 Environmental Matters
The Company is subject to a variety of laws and regulations covering the storage, handling, emission and discharge of materials into the environment. The Company believes that all of its operations are in compliance with, and in certain circumstances exceed, all applicable environmental laws and regulations. The Company has not been subject to any legal, regulatory or other action alleging violations or breaches of environmental standards. While it is difficult to accurately estimate future environmental compliance costs and potential liabilities, if any, accurately, the Company does not currently anticipate any material adverse effect on its consolidated results of operations, financial position or cash flows as a result of compliance with these laws.
Item 5: Operating and Financial Review and Prospects
The following discussion should be read in conjunction with the information contained in our audited consolidated financial statements and the notes thereto incorporated by reference herein.(the “Financial Statements”) presented in Item 18 of this Annual Report. Because around 89.2%91.0% of the Company’s revenues arewere derived from its manufactured productsManufactured Products segment for the year ended December 31, 2010,2011, the following discussion is not presented on a segment basis.
5.1 Disclosures of Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated on consolidation. The Company’s investments for which its ownership exceeds 20%, but which are not majority-owned or controlled, are accounted for using the equity method if the Company has the ability to exercise significant influence over the companies’
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Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles accepted in the United States requires management to make estimates, judgments,judgements, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates reflected in the Company’s consolidated financial statements include, but are not limited to, useful lives and residual values of long-lived assets, impairment assessment of long-lived assets and goodwill, allowance for accounts and other receivable, accounting for deferred income tax, income tax position, inventory valuation, valuation allowance of deferred tax assets. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, bank deposits and all short-term highly liquid investments with an original maturity of three months or less when purchasedand are readily convertible to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market value.market. Cost is determined using the first-in, first-out or weighted average method.
If the expected salesselling price less completion costs and costs to execute sales (net realizable value)(market) is lower than the carrying amount, a write-down is charged to expenses in cost of sales for the amount by which the carrying amount exceeds its net realizable value.market. When the finished goods that were previously written down to net realizable valuemarket are subsequently sold at above net realizable value,market, a recovery is credited to cost of sales.
Income Taxes
The Company follows the liability method of accounting for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse.
Current income tax expense is the amount of income taxes expected to be payable for the current year. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. ASC 740, requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent the Company believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of its deferred tax assets, including its recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the carry-forward periods available to the Company for tax reporting purposes, and other relevantfactors. Deferred income tax expense (benefit) is the net change during the year in the deferred income tax asset or liability.
The Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), “AccountingASC 740 to account for Uncertaintyuncertainties in Income Taxes-an interpretation of FASB Statement No. 109.” (codified within FASB Accounting Standards Codification (ASC) 740, “Income Taxes”). FASBincome taxes. ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense.
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Property, plant and equipment are stated at cost less depreciation and any impairment losses. Asset leases qualifying as capital leases are also included in property, plant and equipment. Major renewals and improvements are capitalized and minor replacements, maintenance, and repair expenses are charged to current operations as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the respective lease term, whichever is shorter, as follows:
Land Land use rights | ||
Buildings | ||
Machinery and equipment Motor vehicles Office equipment | Nil 15 - 50 years 5 5 - 10 years | |
3 | ||
3 |
No depreciation expense is charged for construction in progress and machinery and equipment under installation.
Capitalized interest on construction in progress is added to the cost of the underlying asset and is depreciated over the estimated useful life of the asset in the same manner as the underlying asset. NoInterest capitalized for 2010 and 2011 amounted to $nil and $9, respectively. The capitalized interest is capitalizedwas related to and has been included as part of the cost of Ningbo Pacific’s construction in 2009 and 2010.
When property and equipment are retired, sold or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations.
In 2006, the Company terminated the Ningbo Pacific joint venture and liquidated its major equipment at the Ningbo Pacific facility. In October 2009, the Company has made a resolution to acquire additional 5.42% shareholding of Ningbo Pacific from the PRC, itsRepublic of China (“PRC”) joint venture partner. A resolution was passed in the Board of Directors meeting in August 2010 to approve the Ningbo construction plans. The Company plans to resume manufacturing operation with new constructed facilities at the Ningbo Pacific site. The acquisition of additional shareholding is expected to be completed in early 2012.
Goodwill
Goodwill represents the excess of the cost of purchased business over the fair value of the underlying net assets.
In accordance with ASC 350 “Intangible – Goodwill and Others”, (“ASC 350”), the Company performed a two-step test to assess goodwill impairment as of December 31, 2011. First, the Company identifies potential goodwill impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The Company determines fair value using a discounted cash flow approach. If the fair value of a reporting unit exceeds its carrying amount, goodwillapproach and makes reference tothe market capitalization of the reporting unit is not considered impaired.Company. If the carrying amount of a reporting unit exceeds its fair value, the amountsecond step of the goodwill impairment loss, if any, must be measured. The Company measurestest is performed to measure the amount of goodwill impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized as an operating expense.loss.
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Investments
Management determines the appropriate classification of its investmentinvestments at the time of purchase and re-evaluates such designation as of each balance sheet date.
The Company accounts for its long-term investments in equity securities of privately-held companies as cost method investment in accordance to ASC 325, “Investments – Others” as these securities do not have readily determinable fair value. Investments in which the Company does not have a controlling interest or an ownership voting interest to exert significant influence, and which are not publicly traded are accounted for at cost
The Company accounts for its investments in equity securities that represent less than 20 percent ownershiphave readily determinable fair value using ASC 320, “Investments —– Debt and Equity Securities” (ASC 320). Equity securities are classified as available-for-sale, as the Company does not trade in these securities, but rather they are held as longer term investments due to business relationships with the entities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of shareholders’ equity. Realized gains and losses and declines in values judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income.
Investments in entities in which the Company can exercise significant influence but does not haveown a controllingmajority equity interest or an ownership voting interest to exert significant influence, and which are not publicly tradedcontrol are accounted for at cost.
A judgmental aspect of accounting for investments (including investments in equity investees) involves determining whether an other-than-temporary decline in value of the investment has been sustained. If it has been determined that an investment has sustained an other-than-temporary decline in its value, the investment is written down to its fair value, by a charge to earnings. Such evaluation is dependent on the specific facts and circumstances. Factors that are considered by the Company in determining whether an other-than-temporary decline in value has occurred include: the market value of the security in relation to its cost basis; the financial condition of the investee; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery in the market value of the investment.
In 2008, 2009, 2010 and 2010,2011, the Company recorded an impairment charge of $nil, $nil$346 and $346,$nil, respectively, related to investment in certain available-for-sale securities.
Impairment of Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance with ASC 360, “Property, Plant and Equipment”. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such instances, the Company estimates the undiscounted future cash flows that result from the use of the asset and its ultimate disposition. If the sum of the undiscounted cash flows is less than the carrying value, the Company recognizes an impairmentanimpairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset group, determined principally using discounted cash flows.
In 2009, the Company recorded an impairment charge of $77,000$77 related to the impairment of a factory in Thailand (included in the manufactured products segment) that is not being used for operations.operation. The impairment charge was recorded to reduce the carrying value of the identified assets to fair values. Fair values were derived using a variety of methodologies, including cash flow analysis, estimates of sales proceeds and independent appraisals. Where cash flow analyses were used to estimate fair values, key assumptions employed, included estimates of future growth, estimates of gross margins and estimates of the impact of inflation. The charges were primarily the result of management’s revised outlook due to the prolonged unfavorable market conditions.
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Account ReceivableReceivables and Allowanceallowance for Doubtful doubtful accounts
Accounts
Lease obligations
In accordance with ASC 840, Leases, leases for a lessee are classified at the inception date as either a capital lease or an operating lease. The Company assesses a lease to be a capital lease if any of the following conditions exist: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease term is at least 75% of the property’s estimated remaining economic life or d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. The capitalized lease obligation reflects the present value of future rental payments, discounted at the appropriate interest rates. The cost of the asset is amortized over the lease term. However, if ownership is transferred at the end of the lease term, the cost of the asset is amortized as set out below under property, plant and equipment.
Operating lease expenses are recognized on a straight-line basis over the applicable lease term.
Revenue Recognition
Revenue represents the invoiced value of goods sold, net of value added tax and returns, commission income earnedinvoiced value on distribution activities, and service fee income on installation activities. Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized.
Sales of manufactured goods and distribution activitiesdistributed products
The Company recognizes revenue from the sale of manufactured goods and distribution activitiesdistributed products upon passage of title to the customer that coincides with their delivery and acceptance. This method ofThese revenue recognition isare recognized in accordance with ASC 605-15, “Revenue Recognition-Products”.
The Company classifies shipping and handling costs incurred within cost of sales.
Supply, Delivery and Installation
The Company’s supply, delivery and installation services are considered as multiple elements arrangements and are accounted for in accordance with ASC subtopic 605-25, Revenue Recognition: Multiple-Element Arrangements (“ASC 605-25”). Elements such as installation service and sale of cables are considered as separate elements contained in a single arrangement, or in related arrangements with the same customer. The Company allocates revenue to each element based on its relative fair value. The allocation of the fair value to the delivered elements is limited to the amount that is not contingent on future delivery of services or subject to customer-specified return or refund privileges. The Company prospectively adopted Accounting Standards Update (“ASU”) No. 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”), a consensus of the FASB Emerging Issues Task Force that amends ASC 605-25, on January 1, 2011.
In accordance with ASU 2009-13, certain delivered items in multiple-element arrangements, which previously would not qualify for separate units of accounting due to the lack of vendor-specific objective evidence or third-party evidence of selling price, are accounted for as separate units of accounting, to which the total consideration of the arrangements is allocated based on management’s best estimate of the selling price (“BESP”). We consider all reasonably available information in determining the BESP, including both market and entity-specific factors. The adoption of ASU 2009-13 does not have a material effect on our financial statements, the units of accounting and the pattern and timing of revenue recognition is not changed materially.
The Company recognizes revenue from installation activities using the percentage-of-completion method, based on the customer certification of the distance of cable laid with respect to the estimated total contract revenue, and in accordance with ASC 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts”.
Bill-and-hold arrangements
The Company recognizes revenue of sale of cables are containedunder bill-and-hold arrangements requested by certain customers in a single arrangement, or in related arrangements with the same customer, the Company allocates revenue to each element based on its relative fair valueThailand, in accordance with ASC 605-25, “Revenue Recognition-Multiple-Element Arrangements”. The allocation ofSAB 104.
As at December 31, 2009, 2010 and 2011, the fair value torevenue recognized under bill-and-hold arrangements where the cables were not yet delivered elements is limited to the amount that is not contingent on future delivery of services or subject to customer-specified return or refund privileges.
Product WarrantiesCustomers’ incentive
The Company providesoffers sales incentives in connection with power cable sales to wholesalers and distributors. These incentives include both rebates offered to customers for the estimated costpurchasing a certain volume of product warranties based onduring the warranty policyyear and historical experience, and accruessettlement discounts for specific items at the time their existence is known and the amountsearly payment of sales invoices. Both forms of incentives are determinable. Historical warranty liability and related costs have not been significantrecognized as a reduction to the Company’s operations.
Foreign Currency Translation and Transactions
The functional currency of the Company’s international subsidiaries is generally the local currency or U.S. Dollars. For these subsidiaries, the Company translates the assets and liabilities at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year. Resulting currency translation adjustments are recorded directly to accumulated other comprehensive income within stockholders’ equity. Gains and losses resulting from transactions in non-functional currencies are recorded in the consolidated statement of operations.
Foreign currency transactions are recorded at the applicable rates of exchange in effect at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date.
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Foreign Currency Forward Contracts
The Company recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purposes or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders’ equity as a component of comprehensive income depending on whether the derivative financial instruments qualify for hedge accounting, and if so, whether they qualify as a fair value or cash flow hedge.
Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair value of the hedged items that relate to the hedged risks. Changes in fair value of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income net of deferred taxes. Changes in fair value of derivatives used as hedges of the net investment in foreign operations are reported in other comprehensive income as part of the cumulative translation adjustment. Changes in fair values of derivatives not qualifying as hedges are reported in income.
The Company’s subsidiaries use forward foreign exchange contracts to reduce their exposure to foreign currency risk for liabilities denominated in foreign currency. A forward foreign exchange contract obligates the Company to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange. Realized and unrealized gains and losses on foreign exchange contracts are included as foreign exchange gains or losses in the consolidated statements of operations as such contracts do not qualify for hedge accounting.
As of December 31, 2008, 20092010 and 2010,2011, the Company has entered intohad outstanding forward exchange salepurchase contracts with notional values of $3,500, $nil and $nil,$2,317, respectively. There were noThe outstanding foreign forward exchange contracts as of December 31, 2010.2011 matured in January 2012. The Company records these contracts at fair value with the related gains and losses of $nil, $nil and $64, for the years ended December 31, 2009, 2010 and 2011, respectively in statementthe consolidated statements of operations.
Copper Future Contracts
Copper future contracts are designed to manage the Company’s consolidated exposure to changeschange in inventory value due to fluctuations in market prices for selected operating units. Within the ordinary course of business the Company routinely enters into purchase transactions for copper. The company’s commodity futuremajority of these transactions take the form of contracts positionsthat were entered into and continue to be held for the purpose of receipt or delivery of the copper in accordance with the Company’s expected sales or production timing or usage requirements. Such contracts are marked to market at each balance sheet date and all unrealized gains and losses are recognized in income currently.not within the scope of hedging accounting, or derivatives. To date, these contract positions have not had a material effect on the company’sCompany’s financial position, results of operations or cash flow.
Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share are calculated in accordance with ASC 260, “Earnings Per Share”. There are no dilutive equity instruments.
Fair Value Measurements
Effective from January 1, 2008, the Company adopted the provisions of ASC 820, “Fair Value Measurements and Disclosures” for financial assets and liabilities. Under ASC 820, fair value is defined as the price that would have been received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the
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• Level 1 - Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
• Level 2 - Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
• Level 3 - Valuations based on unobservable inputs which are supported by little or no market activity and significant to the overall fair value measurement.
The availability of observable inputs can vary from investment to investment and is affected by a wide variety of factors, including, for example, the type of investment, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment and the investments are categorizedcategorizes as Level 3.
The carrying amounts of financial instruments, carried at cost, including cash and cash equivalents, bank deposits, trade receivables, other current assets, trade payables, related party balances and other liabilities approximate their fair value due to the short-term maturities of such instruments.
Recent Pronouncements
In May 2011, the FASB issued an additional guidance ASU 2011-04 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” which clarifies the application of existing fair value measurement and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Codification (ASC)updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim and annual periods endingwithin those fiscal years, beginning after September 15, 2009. The ASC is an aggregation of previously issued authoritative U.S. generally accepted accounting principles (GAAP) in one comprehensive set of guidance organized by subject area. In accordance with the ASC, references to previously issued accounting standards have been replaced by ASC references. Subsequent revisions to GAAP will be incorporated into the ASC through Accounting Standards Updates (ASU).
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In October 2009, the FASB issued ASU No. 2009-13, “Multiple Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force” (ASU 2009-13) (codified within ASC Topic 605 “Revenue Recognition”). ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company is currently evaluating the impact that the adoption of the amendments to the FASB Accounting Standards Codification resulting from ASU 2009-13 may have on the Company’s consolidated financial statements.
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In December 2010, the FASB issued2011, ASU No. 2010-28, “Intangibles—Goodwill and Other2011-12, “Comprehensive Income (Topic 350)”, which modifies Step 1220): Deferral of the goodwill impairment testEffective Date for reporting units with zero or negative carrying amounts. For those reporting units, an entity is requiredAmendments to perform Step 2the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”. This ASU defers the goodwill impairment test if it is more likely than notchanges in ASU 2011-05 that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist.relate to the presentation of reclassification adjustments and supersedes certain pending paragraphs. ASU No. 2010-282011-12 will be applied retrospectively. ASU 2011-12 is effective for fiscal years, and interim periodperiods within those fiscal years, beginning on or after December 15, 2010. The adoption of ASU No. 2010-28 is not expected to have any impact on the Company’s financial position, results of operations and cash flows.
5.2 Selected Gross Margin Data
This discussion should be read in conjunction with the information contained in our audited consolidated financial statements and notes thereto (the “Financial Statements”)Financial Statements presented in Item 18 of this Annual Report.
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(Figures in 2009 and 2010 were restated to reflect the results of discontinued operations of SPFO. For details, see “Item 5.3: Operating Results”)
| 2009 | 2010 | 2011 |
Net Sales: |
|
|
|
Manufactured Products: |
|
|
|
Telecommunications wire and cable | $26,011 | $44,917 | 28,580 |
Power cable | 102,972 | 148,300 | 200,673 |
Enameled wire | 135,145 | 202,842 | 200,221 |
|
|
|
|
Total Manufactured Products | 264,128 | 396,059 | 429,474 |
Supply, delivery and installation of wires and |
|
|
|
cables | 34,008 | 23,600 | 16,972 |
Distributed Products | 28,102 | 26,935 | 25,500 |
Total net sales | 326,238 | 446,594 | 471,946 |
Gross profit: |
|
|
|
Manufactured Products: |
|
|
|
Telecommunications wire and cable | 3,593 | 13,417 | 6,529 |
Power cable | 8,602 | 25,233 | 26,487 |
Enameled wire | 2,093 | 14,778 | 9,860 |
|
|
|
|
Total Manufactured Products | 14,288 | 53,428 | 42,876 |
Supply, delivery and installation of wires and |
|
|
|
cables | 889 | 242 | 57 |
Distributed Products | 1,517 | 1,379 | 2,955 |
Inventory Impairment | 23,949 | 1,974 | (1,993) |
Total gross profit | 40,643 | 57,023 | 43,895 |
Gross profit margin: |
|
|
|
Manufactured Products: |
|
|
|
Telecommunications wire and cable | 13.8% | 29.9% | 22.8% |
Power cable | 8.4% | 17.0% | 13.2% |
Enameled wire | 1.5% | 7.3% | 4.9% |
|
|
|
|
Total Manufactured Products | 5.4% | 13.5% | 10.0% |
SDI Project engineering | 2.6% | 1.0% | 0.3% |
Distributed Products | 5.4% | 5.1% | 11.6% |
Total gross margin | 12.5% | 12.8% | 9.3% |
2008 | 2009 | 2010 | ||||||||||
Net Sales: | ||||||||||||
Manufactured products: | ||||||||||||
Telecommunications wire and cable | $ | 46,955 | $ | 62,004 | $ | 67,481 | ||||||
Power cable | 179,794 | 102,972 | 148,300 | |||||||||
Enameled wire | 221,099 | 135,145 | 202,842 | |||||||||
Total manufactured products | 447,848 | 300,121 | 418,623 | |||||||||
SDI project engineering | 20,535 | 34,008 | 23,600 | |||||||||
Distributed Products | 32,415 | 28,102 | 27,107 | |||||||||
Total net sales | 500,798 | 362,231 | 469,330 | |||||||||
Gross profit: | ||||||||||||
Manufactured products: | ||||||||||||
Telecommunications wire and cable | 5,120 | 9,341 | 18,045 | |||||||||
Power cable | 29,369 | 8,602 | 25,233 | |||||||||
Enameled wire | 2,778 | 2,093 | 14,778 | |||||||||
Total manufactured products | 37,267 | 20,036 | 58,056 | |||||||||
SDI project engineering | (956 | ) | 889 | 242 | ||||||||
Distributed Products | 1,584 | 1,517 | 1,416 | |||||||||
Recovery (allowance) for inventory reserve | (25,145 | ) | 23,949 | 1,974 | ||||||||
Total gross profit | 12,750 | 46,391 | 61,688 | |||||||||
Gross profit margin: | ||||||||||||
Manufactured products: | ||||||||||||
Telecommunications wire and cable | 10.9 | % | 15.1 | % | 26.7 | % | ||||||
Power cable | 16.2 | % | 8.4 | % | 17.0 | % | ||||||
Enameled wire | 1.3 | % | 1.5 | % | 7.3 | % | ||||||
Total manufactured products | 8.3 | % | 6.7 | % | 13.9 | % | ||||||
SDI Project engineering | (4.7 | )% | 2.6 | % | 1.0 | % | ||||||
Distributed Products | 4.9 | % | 5.4 | % | 5.2 | % | ||||||
Total gross margin | 2.5 | % | 12.8 | % | 13.1 | % | ||||||
Note: Inventory impairment is separated from calculation of total manufactured gross profit margin by manufactured products excludes recovery or allowance for inventory reserve, but that recovery or allowance for inventory reserve is included in the total gross margin.profit.
5.3 Operating Results
The Company is 65.6% owned and controlled by PEWC, a Taiwanese company. An additional 9.8% of the Common Shares are owned and controlled by a U.S.-based private equity fund. The remaining 24.6% of the outstanding Common Shares are publicly-traded in the United Statesand listed on NASDAQ.NASDAQ. Based upon a review of Schedule 13D and 13G filings made with the Commission by shareholders, and a review of the share register maintained by the Company’s transfer agents in Bermuda and the U.S., the Company is not aware that it has any shareholders resident in the jurisdictions where the Company has business operations.
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5.3.1Year Ended December 31, 2011 Compared with Year Ended December 31, 2010
General
Results of operations are determined primarily by market demand and government infrastructure projects, market selling prices of our products, our ability to manufacture high quality products efficiently in quantities sufficient to meet demand and to control production and operating costs. Our results are also influenced by a number of factors, including currency stability in the countries in which our operations are located, competition and the cost of raw materials, especially copper, which accounted for majority of the cost of sales in 2011.
In order to minimize the impact of copper price fluctuations, we attempt to “peg” the prices of our products to the prevailing market price of copper and pass changes in the cost of copper through to customers as much as possible. In certain circumstances, however, we remain affected by fluctuations in the price of copper. A recent rise or decline in copper prices may not be fully reflected under this pricing scheme for several months.
Average copper prices per metric ton have increased by 17% from $7,534 in 2010 to $8,826 in 2011 (four quarters average). Gross profit margins for Manufactured Products in 2010 were on average at 13.5% compared to 10.0% in 2011.
Copper prices indicated in this report are quoted from the LME index. The 2010 and 2011 copper prices are as follows:
|
| 2011 | 2010 |
Average LME copper price ($/Ton) | 1Q | 9,641 | 7,232 |
| 2Q | 9,314 | 7,027 |
| 3Q | 8,710 | 7,242 |
| 4Q | 7,641 | 8,636 |
| Year | 8,826 | 7,534 |
The average copper price in February 2012 on the LME was $8,591 per metric ton.
Net Sales
Total sales of manufactured product increased by $33.4 million, or 8.4%, from $396.1 million in 2010 to $429.5 million in 2011. Sales of power cable increased by $52.4 million in 2011, or 35.3%, due to an increasing demand in Thailand and Australia as a result of expanded government and private construction contracts. Sales of enameled wire on the other hand decreased by $2.6 million, due to reduced customer demand in all of the enameled wire manufacturing sites, i.e., Charoong Thai, Siam Pacific, PEWS, and Shanghai Yayang. Sales of telecommunication cable were reduced by $16.3 million, as the government projects in Thailand shrank.
Revenue from supply, delivery and installation of wires and products in Singapore decreased in 2011 by $6.6 million, or 28.1% due to reduced Singapore government budget. However, we do perceive some positive signs that the government’s spending is getting back on track and more tenders are expected in 2012 and beyond.
Revenue from Distributed Products was at $25.5 million in 2011, down from $26.9 million in 2010. An overall strategy to boost sales and gross margin is underway beginning the second quarter 2012.
The following table shows the percentage share and dollar value (in thousands) of net sales of the respective geographical locations of manufacturing plant of Manufactured Products only and all products and services with respect to our total sales in 2011:
| Manufactured | All products | ||
Thailand | 43.3% | $186,034 | 42.0% | $198,077 |
Singapore | 12.2% | $52,353 | 17.6% | $74,227 |
Australia | 13.7% | $58,932 | 13.0% | $61,457 |
China | 30.8% | $132,155 | 27.4% | $138,185 |
Total | 100.0% | $429,474 | 100.0% | $471,946 |
Gross Profit
Gross profit for 2011 was $43.9 million, representing a decrease of $13.1 million, or 23.0% down compared to $57.0 million in 2010. The decrease was primarily attributable to the raw material (copper) cost that we were unable to pass on fully to our customers. In addition, our factory utilization was less than that of 2010, and thus we were unable to pass on the increased cost to our customers.
Apart from the inventory impairment of $2.0 million, gross profit contributed by sales of manufactured products was $42.9 million in 2011 compared to $53.4 million in 2010, a decrease of 19.7%, for the reason given above. The relative contribution to gross profit from Manufactured Products for 2010 and 2011 is as follows:
| 2010 | 2011 |
Manufactured Products: |
|
|
Telecommunications wire and cable | 25.1% | 15.2% |
Power cable | 47.2% | 61.8% |
Enameled wire | 27.7% | 23.0% |
|
|
|
Total | 100.0% | 100.0% |
The contribution to gross profit from each segment line (and the components within the manufactured products segment) for 2010 and 2011 is as follows:
| 2010 | 2011 |
Manufactured Products: |
|
|
Telecommunications wire and cable | 23.5% | 14.9% |
Power cable | 44.3% | 60.3% |
Enameled wire | 25.9% | 22.5% |
Total | 93.7% | 97.7% |
Supply, delivery and installation of wires and cables | 0.4% | 0.1% |
Distributed Products | 2.4% | 6.7% |
Inventory impairment | 3.5% | (4.5%) |
Total | 100.0% | 100.0% |
Overall gross profit margins decreased from 12.8% in 2010 to 9.3% in 2011 (reason as given above). Gross profit margins for Manufactured Products also decreased from 13.5% in 2010 to 10.0% in 2011. Manufactured Products and SDI project segments posted lower gross margin (reason as given before), as the competition from four Korean contractors, i.e., ILJIN Electric Co. Singapore Branch, LS Cable & System Ltd. Singapore Branch, Taihan Electric Wire Co., Ltd., and Hi Power Pte. Ltd., are bidding at the lowest price possible, thus driving down the gross margin generation for this sector. Gross profit from telecommunication cables posted a lower margin, as the price competition has become more and more intense.
Operating Profit
In 2011, we recorded a reversal of allowance for doubtful accounts of $1.5 million, owing to the fact that one of the major customers of Siam Pacific, A.S. Associated Engineering (1964) Co., Ltd. continued to settle the long outstanding trade receivables. Our internal controls provide that we perform a detailed review of our outstanding receivables, and make adjustments to our estimate to reflect significant delinquent accounts receivable. The Company is not aware of any significant delinquent accounts receivable that have not already been adequately reserved. In addition, we believe that our periodic allowance for doubtful accounts will continue to not have a material impact on our liquidity.
Overall Selling, General and Administrative (“SG&A”) expenses increased by $1.8 million, mainly due to the increase in transportation charges in APEC by $0.8 million resulted from the increase in fuel cost. The remaining variance was owing to currency translation adjustment.
Accounts receivable, net of allowance for doubtful accounts, decreased by $46.1 million from December 31, 2010 of $144.5 million to $98.3 millionas of December 31, 2011. The decrease in accounts receivable reflects our continuous effort in collecting outstanding debt in a time of global economic uncertainty. The overall Day of Sales Outstanding stands at approximately 92 days, improved as compared to that of 2010 where the number showed 102 days to get the sales proceeds collected.
Exchange Gain/Loss
The exchange rates at end of December 31, 2010 and 2011 are listed below, based on the Noon Buying Rate. However, they do not actually reflect the ongoing rates during the year when transactions actually took place.
| December 31, | December 31, |
Foreign currency to US$1: |
|
|
Thai Baht | 30.16 | 31.51 |
Singapore $ | 1.29 | 1.295 |
Australian $ | 1.00 | 0.976 |
Chinese RMB | 6.60 | 6.294 |
Based on the above rates, the revaluation of assets and liabilities denominated in U.S. dollars or other foreign currencies in the Company resulted in unrealized and realized foreign exchange loss of $1.3 million in 2011.
Impairment of Investment
There have been no investment impairment losses recorded in 2011.
Other Income5.3.1
Other income refers to scrap sales of copper as a result of testing and quality control process and dividend income received.
Bill-and Hold Transactions
During 2011, Charoong Thai entered into bill-and-hold arrangements with certain customers in Thailand. The Company recognized the revenue under such bill-and-hold arrangements in accordance withSAB Topic 13A.3.a,“Bill-and-hold Arrangements”. As of December 31, 2011, the revenue recognized under bill-and-hold arrangements where the cables were yet delivered was $8.6 million, compared to $17.9 million as of December 31, 2011.
Discontinued Operations
The divesture of Shandong Pacific Fiber Optics Co. Ltd (“SPFO”) was an important goal, and accomplishment, of the Company’s board of directors and management to enable the Company to focus on its core wire and cable businesses that are more profitable and thereby increase shareholder value.
While SPFO has been one of the larger manufacturers of fiber optic cable in Shangdong Province, the Company believes that an oversupply of fiber-optic cable products limits the opportunities for sustained development of what is a non-core product line for the Company. In addition, the fiber-optic cable sector throughout China has been dominated by a few large players, who together account for more than 80% of sales of fiber-optic cable products. This market concentration has made competition difficult for companies, such as the Company, that have not committed substantial resources to the fiber optic industry, and SPFO faces additional challenges, such as obtaining raw materials like optical fiber at prices that are competitive in the market place. Moreover, the Chinese government is encouraging further consolidation of fiber and cable manufacturers, and it is not part of the Company’s current business strategies to put substantial investment in this market sector.
The Company successfully entered into an agreement to sell its 51% interest in the SPFO joint venture to a group of third party investors in exchange for a total cash consideration of RMB 18.5 million (approximately $2.9 million), effective upon the directors approval on September 7, 2011. The share transfer was completed on December 1, 2011. Consequently, the Company’s deconsolidated SPFO effective December 2011. The Company recognized $2.0 million gain on disposal of a subsidiary in the consolidated of operations.
Goodwill Impairment
Goodwill of $8.8 million as of December 31, 2010 relating to the manufactured products segment and the changes in the carrying amount of goodwill are as follows:
Balance, December 31, 2010 | $ 8,801 | |||
Disposal of a subsidiary | (10) | |||
Impairment | (8,791) | |||
Balance, December 31, 2011 | $ – |
In accordance with ASC 350, the Company assessed the fair value of the reporting unit as of December 31, 2011. The Company adopted the discounted cash flow approach and, considering that the reporting unit constituted the majority of the overall consolidated group, by reference to the closing price of its Common Shares on that date as well as an assumed control premium. From January 2011 to December 2011, the stock market downturn caused a decline in the Company’s stock price by 54.8%, which resulted in a significant reduction in the Company’s market capitalization. As of December 31, 2011, the assessed fair value was below the carrying value of the reporting unit. The Company then performed a hypothetical purchase price allocation using the fair value of reporting unit and determined that the goodwill was fully impaired. As a result, the Company recognized a goodwill impairment charge of $8.8 million for the year ended December 31, 2011 as a separate item in the consolidated statements of operations.
Thailand Flood Losses
Siam Pacific suspended operations temporarily in the fourth quarter of 2011 due to damage sustained from the region’s recent flooding. The Siam Pacific facility, located 30 kilometers (18.6 miles) north of Bangkok, manufactures enameled wire and communication wire. The facility sustained water damage, as the water level reached approximately 1.5 meters which damaged some of the machinery and equipment in the plant, as well as some of the inventory in the warehouse. As a result, the Company recorded $3.9 million of flood-related charges, including fixed asset impairments, recovery charges and a write-down of damaged inventory and recognized $0.9 million of deferred tax asset related to the charges in 2011. These charges are separately stated as a line item, “Charges related to flooding” within operating expense on the consolidated statements of operations.
The Company’s insurance policy covers the flood damage to the building, machinery, and inventory; however, it does not cover losses due to the business disruption. The process of submitting claims to the Company’s insurers is in its early stages and the Company is unable to determine how much of its losses will be covered by insurance.
Income Taxes
Income tax expense was $4.6 million in 2011 compared to $6.4 million in 2010. The fluctuation was mainly due to the decrease in pre-tax income and non-deductible expense of goodwill impairment.
5.3.2Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
General
Results of operations are determined primarily by market demand and government infrastructure projects, market selling prices of our products, our ability to manufacture high quality products efficiently in quantities sufficient to meet demand and to control production and operating costs. Our results are also influenced by a number of factors, including currency stability in the countries in which our operations are located, competition and the cost of raw materials, especially copper, which accounted for majority of the cost of sales in 2010.
In order to minimize the impact of copper price fluctuations, we attempt to “peg” the prices of our products to the prevailing market price of copper and pass changes in the cost of copper through to customers as much as possible. In certain circumstances, however, we remain affected by fluctuations in the price of copper. For example, the price of telecommunications cable sold for use in public projects in Thailand is determined semi-annually and is based upon the average spot market price of copper on the LME during the six-month period commencing on January 1 and July 1 prior to the month of order. Thus, a recent rise or decline in copper prices may not be fully reflected under this pricing scheme for several months.
Average copper prices per metric ton have increased by 48.9% from $5,150 in 2009 to $7,534 in 2010 (four quarters average). Gross profit margins for manufactured products in 2009 were on average at 12.8% compared to 13.1% in 2010.
Copper prices indicated in this report are quoted from the London Metals Exchange (LME) index. The 2010 and 2009 copper prices are as follows:
|
| 2010 | 2009 |
Average LME copper price ($/Ton) | 1Q | 7,232 | 3,428 |
| 2Q | 7,027 | 4,663 |
| 3Q | 7,242 | 5,859 |
| 4Q | 8,636 | 6,648 |
| Year | 7,534 | 5,150 |
The average copper price in April 2011 on the LME was $9,483 per metric ton.
Net Sales
Sales of manufactured product increased by $118.5$131.9 million, or 39.5%50.0%, from $300.1$264.1 million in 2009 to $418.6$396.1 million in 2010. Sales of power cable increased by $45.3 million in 2010, or 44%, due to aan increasing demand in Thailand as a result of expanded government and private construction contracts, coupled with increase in Australia due to much higher sales prices. Sales of enameled wire also increased, actually by far the largest increase in the group, up to 50.1% to $202.8 million. In Thailand, enameled wire sales increased by $28.9 million due to much more demand locally. Elsewhere enameled wire sales in CCH HK also increased to produce over $86.8 million in 2010 compared to $64.3 million in 2009. Shanghai Yayang even increase its sales of enameled wire up to nearly $40$40.0 million in 2010 compared to $23.3 million in 2009 due to the heavy demand from eastern part of China customers. Sales of telecommunication cable, on the contrary, showed signs of a sluggish decline in Shandong because of saturation in the marketplace,; however in Thailand, the fiber optic business (i.e. telecommunication cable) picked up to $44.9 million in 2010 from $26.0 million in 2009.
46
Revenue from Distributed Products was at $27.1 million in 2010, down from $28.1 million in 2009.
The following table shows the percentage share and dollar value (in thousands) of net sales of the respective geographical locations of manufacturing plant of Manufactured Products and provision of distributed productsDistributed Products and SDI services with respect to our total sales in 2010:
| Manufactured | All products | ||
Thailand | 48.0% | $190,364 | 45.6% | $203,758 |
Singapore | 8.7% | $34,248 | 14.5% | $64,783 |
Australia | 11.4% | $45,053 | 10.4% | $46,289 |
China | 31.9% | $126,394 | 29.5% | $131,764 |
Total | 100.0% | $396,059 | 100.0% | $446,594 |
Manufactured | All products | |||||||||||||||
products only | and services | |||||||||||||||
Thailand | 45.5 | % | $ | 190,364 | 43.4 | % | $ | 203,758 | ||||||||
Singapore | 8.2 | % | $ | 34,248 | 13.8 | % | $ | 64,783 | ||||||||
Australia | 10.8 | % | $ | 45,053 | 9.9 | % | $ | 46,289 | ||||||||
China | 35.5 | % | $ | 148,958 | 32.9 | % | $ | 154,500 | ||||||||
Total | 100.0 | % | $ | 418,623 | 100.0 | % | $ | 469,330 | ||||||||
* Figures in 2010 were restated to exclude revenue of SPFO which was presented as discontinued operations. See ”Item 5.3.1.”
Gross Profit
Gross profit for 2010 was $61.7$57.0 million, representing an increase of $15.3$16.4 million, or 33.0%40.3% compared to $46.4$40.6 million in 2009. The increase was primarily attributable to the raw material cost increases and which we were in large part able to pass on to our customers, while some of the fixed costs would stay pretty much at the same level. The upward adjustment of copper prices was in line with the general increase over the course of 2010 in commodity prices.
Apart from the write-back of minimal allowanceinventory impairment of inventory reserve of $1.9$2.0 million, gross profit contributed by sales of manufactured productsManufactured Products was $58.1$53.4 million in 2010 compared to $20$14.3 million in 2009, an increase of 189.8%273.4%. The increase in gross profit from sale of manufactured productsManufactured Products is due to the higher sales price chargeable to customers across various markets in which the Company operates. The relative contribution to gross profit from manufactured productsManufactured Products for 2009 and 2010 is as follows:
| 2009 | 2010 |
Manufactured Products: |
|
|
Telecommunications wire and cable | 25.1% | 25.1% |
Power cable | 60.2% | 47.2% |
Enameled wire | 14.7% | 27.7% |
|
|
|
Total | 100.0% | 100.0% |
2009 | 2010 | |||||||
Manufactured Products: | ||||||||
Telecommunication cable | 46.6 | % | 31.1 | % | ||||
Power cable | 42.9 | % | 43.5 | % | ||||
Enameled wire | 10.5 | % | 25.4 | % | ||||
Total | 100.0 | % | 100.0 | % | ||||
The contribution to gross profit from each segment line (and the components within the manufactured products segment) for 2009 and 2010 is as follows:
| 2009 | 2010 |
Manufactured Products: |
|
|
Telecommunications wire and cable | 8.8% | 23.5% |
Power cable | 21.2% | 44.3% |
Enameled wire | 5.2% | 25.9% |
Total | 35.2% | 93.7% |
Supply, delivery and installation of wires and cables | 2.2% | 0.4% |
Distributed Products | 3.7% | 2.4% |
Recovery of inventory impairment | 58.9% | 3.5% |
Total | 100.0% | 100.0% |
2009 | 2010 | |||||||
Manufactured Products: | ||||||||
Telecommunication cable | 20.1 | % | 29.2 | % | ||||
Power cable | 18.6 | % | 40.9 | % | ||||
Enameled wire | 4.5 | % | 24.0 | % | ||||
Electronic cable | — | — | ||||||
Total | 43.2 | % | 94.1 | % | ||||
SDI Project Engineering Services | 1.9 | % | 0.4 | % | ||||
Distributed Products | 3.3 | % | 2.3 | % | ||||
Recovery (allowance) for inventory reserve | 51.6 | % | 3.2 | % | ||||
Total | 100.0 | % | 100.0 | % | ||||
47
Operating Profit
In addition to estimating an allowance for doubtful accounts based on historical sales and collection data, we perform a detailed review of our outstanding receivables, and make adjustments to our estimate to reflect significant delinquent accounts receivable. The Company is not aware of any significant delinquent accounts receivable that have not already been adequately reserved. In addition, our periodic allowance for doubtful accounts will continue to not have a material impact on our liquidity.
Other than allowance for doubtful accounts, overall SG&A expenses increased by $3.8$4.7 million, as a portion of the corporate expenditure went to attending the road shows and investor relationship related activities in 2010. In addition, when business picks up, the headcount inevitably will increase, headcount number has increased by 102, up from 1,602 from beginning of 2010. Total SG&A expenses, when compared with that of 2009, went downincreased by 1.0%19.4%. Recovery for doubtful accounts in 2010 was amounted to $1.3$0.9 million, mostly relating to a trade receivable in Thailand as the repayment progress has exceeded management’s expectations.
Accounts receivable, net of allowance for doubtful accounts, increased by $42.7 million from December 31, 2009 of $101.8 million to $144.5 millionas of December 31, 2010.2010. The increase in accounts receivable was attributable to more sales have been generated. The overall Day of Sales Outstanding stands at approximately 95.891 days, improved as compared todown from that of 2009 where the number showed 99.689 days to get the sales collected.
Exchange Gain/Loss
The exchange rates at end of December 31, 2009 and 2010 are listed below, based on the Noon Buying Rate. However, they do not actually reflect the ongoing rates during the year when transactions actually took place.
| December 31, | December 31, |
Foreign currency to US$1: |
|
|
Thai Baht | 33.33 | 30.16 |
Singapore $ | 1.40 | 1.29 |
Australian $ | 1.11 | 1.00 |
Chinese RMB | 6.83 | 6.60 |
December 31, | December 31, | |||||||
2009 | 2010 | |||||||
Foreign currency to US$1: | ||||||||
Thai Baht | 33.33 | 30.16 | ||||||
Singapore $ | 1.40 | 1.29 | ||||||
Australian $ | 1.11 | 1.00 | ||||||
Chinese RMB | 6.83 | 6.60 |
Based on the above rates, the revaluationforeign currency transactions which took place in 2010 in all of assets and liabilities denominated in U.S. dollars or other foreign currencies in the Company resulted in unrealized andall operating units reported a realized foreign exchange gains of $3.0 million in 2010.million. The realized exchange gains, mainly arising from Thailand operation,operations, was due to 1) the appreciation of Thai Baht during 2010 and 2) the early settlement of trust receipts denominated in Thai Baht, when the trust receipts were bought in at a lower exchange rate.
Impairment of Investment
The impairment of investment in 2010 represents the impairment loss in TT&T securities in Thailand, owned by Siam Pacific. In the past, the unrealized loss, net of tax, was reported in separate component of shareholders’ equity. In 2010, the Company considered the continuing
48
Other Income
Other income in 2010 decreased by $1.1$1.08 million, compared with that of 2009 at $2.2$2.1 million. The decrease in 2010 consisted of less scrap sales, and less dividend from other long-term investment when compared with that of 2009.
Income Taxes
Income tax on income or capital gains, nor is withholding tax of Bermuda imposed upon payments of dividends by the Company to its shareholders.
49
2009 | 2008 | |||||||||||
Average LME copper price ($/Ton) | 1Q | 3,428 | 7,796 | |||||||||
2Q | 4,663 | 8,443 | ||||||||||
3Q | 5,859 | 7,680 | ||||||||||
4Q | 6,648 | 3,905 | ||||||||||
Year | 5,150 | 6,956 | ||||||||||
50
Manufactured | All products | |||||||||||||||
products only | and services | |||||||||||||||
Thailand | 39.3 | % | $ | 117,954 | 32.9 | % | $ | 119,225 | ||||||||
Singapore | 11.5 | % | $ | 34,583 | 26.2 | % | $ | 94,782 | ||||||||
Australia | 11.3 | % | $ | 33,935 | 9.6 | % | $ | 34,574 | ||||||||
China | 37.9 | % | $ | 113,649 | 31.4 | % | $ | 113,650 | ||||||||
Total | 100.0 | % | $ | 300,121 | 100.0 | % | $ | 362,231 | ||||||||
51
2008 | 2009 | |||||||
Manufactured Products: | ||||||||
Telecommunication cable | 13.7 | % | 46.6 | % | ||||
Power cable | 78.8 | % | 42.9 | % | ||||
Enameled wire | 7.5 | % | 10.5 | % | ||||
Electronic cable | — | — | ||||||
Total | 100.0 | % | 100.0 | % | ||||
2008 | 2009 | |||||||
Manufactured Products: | ||||||||
Telecommunication cable | 40.2 | % | 20.1 | % | ||||
Power cable | 230.3 | % | 18.6 | % | ||||
Enameled wire | 21.8 | % | 4.5 | % | ||||
Electronic cable | 0.0 | % | 0.0 | % | ||||
Total | 292.3 | % | 43.2 | % | ||||
SDI Project Engineering Services | (7.5 | )% | 1.9 | % | ||||
Distributed Products | 12.4 | % | 3.3 | % | ||||
Recovery (allowance) for inventory reserve | (197.2 | )% | 51.6 | % | ||||
Total | 100.0 | % | 100.0 | % | ||||
52
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Foreign currency to US$1: | ||||||||
Thai Baht | 33.33 | 34.72 | ||||||
Singapore $ | 1.40 | 1.44 | ||||||
Australian $ | 1.11 | 1.14 | ||||||
Chinese RMB | 6.83 | 6.82 |
53
As of December 31, 20102011 we had $63.2$76.7 million in cash and cash equivalents, primarily in bank accounts and cash on hand, and none of which was in unrestricted or restricted short-term bank deposits. Our current sources of cash are our cash on hand, cash generated by our operations and our credit facilities. Our primary financing needs will continue to be available to fund the growth in our operations, and the purchase and replacement of property, plant and equipment and future acquisitions.
We have no direct business operations other than our ownership of the capital stock of our subsidiaries and joint venture holdings. Consequently, our subsidiaries have been and will continue to be the primary source of funds generated by operations. Corporate needs are funded primarily through distributions from our subsidiaries. Although we have no current intention to pay dividends, we would rely upon distributions of dividends from our subsidiaries in order to do so. As noted in our risk factors, our operating subsidiaries and other holdings and investments, from time to time, may be subject to restrictions on their ability to make distributions to us. Such restrictions could result from restrictive covenants contained in our loan agreements, restrictions on the conversion of local currency earnings into U.S. dollars or other currency and other regulatory restrictions. For example, PRC legal restrictions permit payments of dividends by our business entities in the PRC only out of their retained earnings, if any, determined in accordance with relevant PRC accounting standards and regulations. Under PRC law, such entities are also required to set aside a portion of their net income each year to fund certain reserve funds. These reserves are not distributable as cash dividends. The foregoing restrictions may also affect our ability to fund operations of one subsidiary with dividends and other payments received from another subsidiary. We are not aware of any other restrictions in other countries in which we do business other than those discussed in the “Risk Factors” section. Distributions may also be restricted as the result of objections by minority shareholders of our subsidiaries and current cash requirements byof the operating subsidiaries. Consequently, we periodically need to manage our corporate cash needs with the timing of distributions.
We maintain several working capital and overdraft credit facilities with various commercial bank groups and financial institutions. Under our line of credit arrangements for short-term debt with our banks, we may borrow up to approximately $310.5$316.4 million, including letters of credit for commodity purchases, on such terms as we and the banks mutually agreed upon. These arrangements do not have termination dates but are reviewed annually for renewal. As of December 31, 2010,2011, the unused portion of the credit lines was approximately $209.6$224.6 million.
54
Net cash used inprovided by operating activities in the fiscal year ended December 31, 20102011 was $2.6$22.6 million, as compared to $18.4$2.6 million of net cash generated fromused by operating activities in the fiscal year ended December 31, 2009.2010. Days of sales outstanding (DSO)(“DSO”) is a measure of the average collection period of accounts receivable, and although the calculation is influenced by the period used and the timing of sales within that period, it canprovide insight into the variances in collections from period to period. Our days of sales outstanding as December 31, 20102011 were 10292 days, as compared to 109102 days as of December 31, 2009.2010. The improvement in DSO as of December 31, 20102011 is due to re-enforcing collection efforts based on various company policies across the group. However, because sales increased by nearly 30% in 2010, the increase in accounts receivable has a large negative impact on the cash flow amounting to $31.8 million in the current year. Also contributing to the net cash used inprovided by operations in 2010 was a2011 were two non-cash items 1) Impairment of goodwill of $8.8 million and 2) depreciation of $6.5 million, and one cash outflowitem: reduction in accounts receivable of $8.6 million resulted from the increase in our inventories balance as at December 31, 2010. The increase in inventories was due to sales increase as the operation needs more inventory to back up its pipeline, although our inventory turnover days has dropped down from 37 days in 2009 to 32 days in 2010. Reduction in our accounts payable, accrued expenses, and other liabilities as of December 31, 2010 has contributed to the increase in our cash flow by $13.4 million in the current year.
We engage in various transactions with PEWC, including the purchase of certain raw materials and the distribution of PEWC products mainly in Singapore. The Composite Services Agreement contains provisions that define our relationship and the conduct of our respective businesses and confers certain preferential benefits on us. Under the Composite Services Agreement, the material terms of which are summarized in the “Material Contracts” section, there are no obligations binding on the Company in favor of PEWC, nor are there any pre-established purchase commitments for copper. As such, the Composite ServiceServices Agreement should not impact cash flows or liquidity until such time as actual purchases are made in the ordinary course of business such as for the purchase of raw materials. The Composite Service Agreement may, however, impact operations to the extent that PEWC is not able to fulfill its obligations, such as supplying copper, and copper is not otherwise readily available on comparable terms from other market sources. Cash generated by operations and borrowings, when needed, from our credit facilities have been the primary sources of funding purchases under the Composite ServiceServices Agreement, and we believe these sources will continue to provide sufficient funds for future purchases under this agreement.
On December 1, 2011, the Company hasexited from a non-core business in Shandong Province, China with the sale for approximately $2.9 million of its 51% interest in SPFO, a fiber optic cable joint venture. The Company had previously invested an aggregatea total of $2.5 million in SPFO, in whichto start up and develop the Company possesses a 51.0% shareholders’ interest. The Company’s joint venture partner, Shandong Yanggu, owns the remaining 49% shareholders’ interest inbusiness at SPFO. Investments in SPFO have been directed at capacity expansion, and the joint venture has shown a slight decrease in sales despite the large improvement in sales in 2009. The Company also has carrying value of $0.9 million in the investment in SHP.
We believe funds generated by our operating activities, our cash on hand and amounts available to us under our credit facilities will provide adequate cash to fund our requirements through at least the next twelve months. We continue to have sufficient liquidity to meet our anticipated working capital, capital expenditures, general corporate requirements, and other short-term and long-term obligations as they come due. We may further enhance our liquidity in the future, as needs arise, by establishing additional lines of credit, with the support of one or more of our principal shareholders if necessary and available. We currently anticipate that we will retain all of our earnings to fund our operations and do
55
5.5 Research and Development
The Company does not currently engage in its own research and development. For the new product anticipated to be launched when the Ningbo facility resumes operations, we expect to utilize the technologies and know-how from our parent company, PEWC to produce electronic wiring. Under the Composite Services Agreement with PEWC described herein, the Company benefits from research and development conducted by PEWC at little or no cost to the Company. Most recently, the Company utilized technology from its parent company, PEWC, to assist in developing the Company’s new business line of electronic wire being manufactured in NPC’s facility. Accordingly, the Company has not made material expenditures on or commitments to research and development since formation.
5.6 Trend Information
We are not aware of any trend, commitment, event or uncertainty that can reasonably be expected to have a material effect on our current or future business other than the following, each of which has materially impacted our financial results in the past and may do so in the future:
·Uncertainty arising from the volatility in the cost of copper, our principal raw material. In 2011, the copper prices have gone from $9,555 per metric ton in the beginning of the year to less than $7,600 per metric ton at end of year. This decrease caused the Company to provide more of its inventory impairment, which amounted $2 million in year 2011. The copper price however bounced back in the beginning of 2012 and reached over $8,400 per metric ton. Our impairment will be completely consumed if the price remains stable for first half year of 2012.
·Fluctuations in the demand for our products in the markets in which we do business, based upon variations in the level of governmental and private investments in communications, power and industrial projects and programs that utilize our products.
See “Quantitative and Qualitative Disclosures About Market Risk.”
5.7 Off-Balance Sheet Arrangements
There have been no off-Balance Sheet arrangements for the Companyyear ended December 31, 2011 and up to have any material off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, resultsdate of operations, liquidity, capital expenditures or capital resources that would be material to investors.
5.8 Contractual Obligations
The following table sets forth our obligations and commitments to make future payments under contracts and other commitments as of December 31, 2010:2011:
| Payments due by period | ||||
Contractual obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years |
Bank loans and overdrafts | $67,351 | $67,351 | - | - | - |
Capital lease obligations (principal amount only) | $1,135 | $882 | $253 | - | - |
Finance charges on capital lease obligations | $57 | $40 | $17 | - | - |
Operating lease obligations | $4,662 | $866 | $1,093 | $349 | $2,354 |
Capital commitment relating to installation of equipment and acquisition of machinery | $1,000 | $1,000 |
|
|
|
Capital commitment relating to repair and maintenance consulting service | $3,200 | $3,200 |
|
|
|
Purchase obligations for copper cathodes | $242,958 | $242,958 | - | - | - |
| $320,363 | $316,297 | $1,363 | $349 | $2,354 |
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Payments due by period | ||||||||||||||||||||
More | ||||||||||||||||||||
Contractual obligations | Less than 1 | 1-3 | 3-5 | than 5 | ||||||||||||||||
(In thousands of US$) | Total | year | years | years | years | |||||||||||||||
Capital lease obligations (principal amount only) | $ | 728 | $ | 305 | $ | 423 | — | — | ||||||||||||
Finance charges on capital lease obligations | $ | 65 | $ | 27 | $ | 38 | — | — | ||||||||||||
Operating lease obligations | $ | 5,343 | $ | 860 | $ | 1,727 | $ | 172 | $ | 2,584 | ||||||||||
Purchase obligations for copper cathodes | $ | 308,733 | $ | 308,733 | — | — | — | |||||||||||||
$ | 314,869 | $ | 309,925 | $ | 2,188 | $ | 172 | $ | 2,584 | |||||||||||
Item 6: Directors, Senior Management and Employees
6.1 Directors and Senior Management
There is only one class of directorships and no one or more directors possesses any veto power over matters presented to the Board or any other special or enhanced voting rights. The Bye-lawsBye-Laws provide that a quorum consists of a majority of the directors then in office. As of December 31, 2010,2011, there were a total of 9 directors on the Board, including twothree independent directors, Mr. Anson Chan, Dr. Yichin Lee, and Dr. Yichin Lee. Lambert Ding. On October 7, 2011, at the Annual General Meeting, the shareholders passed a resolution wherebythe minimum number of directors be fixed at two (2), the maximum number of directors be fixed at ten (10) and that one (1) vacancy shall exist on the Board of Directors, which shall be deemed to be a casual vacancy, which may be filled from time to time by the Board of Directors in accordance with the provisions of the Bye-Laws.Each director is entitled to one vote, and approval of any matter requires a simple majority assuming a quorum is present. On March 17, 2011, the Board passed a written resolution where it 1) accepted the resignation of one of the directors — Mr. Lee Gai Poo, 2) appointed a new member — Dr. Lambert Ding, to the Board who became the third independent director and also was appointed to serve on the audit committee, 3) amended the audit committee charter to clarify that appointment of the independent auditors requires shareholder approval.
Name | ||||
| Date of Birth | Position | ||
Appleby Services (Bermuda) Ltd. | N/A |
| Assistant Resident Secretary | |
Anson Chan | November 3, 1963 | Independent director, Audit Committee Chairman | ||
Andy C.C. Cheng | April 29, 1958 | Director and Non-Executive Chairman of the Board | ||
Fang Hsiung Cheng | May 31, 1942 | Director | ||
Alex Erskine | September 7, 1963 | Resident Secretary in Bermuda | ||
Daphne Hsu | August 12, 1962 | Financial Controller | ||
Lambert L. Ding | October 12, 1959 | Independent director, Audit Committee Member | ||
Michael C. Lee | September 28, 1951 | Director | ||
Yichin Lee | January 4, 1961 | Independent director, Audit Committee Member | ||
Ching Rong Shue | March 4, 1950 | Director | ||
David Sun | December 22, 1953 | Director | ||
Yuan Chun Tang | November 26, 1960 | Director, Chief Executive Officer | ||
Carson Tien | May 16, 1945 | Chief Operating Officer | ||
Frank Tseng | March 17, 1957 | Chief Financial Officer; Non-Resident Secretary |
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Mr. Anson Chan has been an independent member of the Company’s Board of Directors and a member and Chairman of the Audit Committee and compensation committee since 2007. Mr. Chan is also a Managing Director of the Bonds Group of Companies and was a Senior Advisor to Elliott Associates from 2005 to 2008.
Mr. Andy C.C. Cheng was a member of the Company’s Board of Directors from 2004 to 2005 and was re-elected in 2007. Mr. Cheng was appointed as Chairman of the Board in 2009. From 1987 to 2003, Mr. Cheng served as Vice President in charge of procurement at PEWC. Mr. Cheng has been an Executive Vice President at PEWC since 2004 and Chairman of each of the investment divisions of PEWC, Tai Ho Investment Co., Ltd. and You Chi Investment Co., Ltd., since June 2008. Mr. Andy C.C. Cheng is not related to Mr. Fang Hsiung Cheng.
Mr. Fang Hsiung Cheng has been a member of the Company’s Board of Directors since 2006. He also serves as Assistant Vice President of PEWC. Mr. Fang Hsiung Cheng is not related to Mr. Andy C.C. Cheng.
Mr. Alex Erskine was appointed as resident Secretary in Bermuda in October 2008. Mr. Erskine is a partner in the Bermuda law firm of Appleby, where he is the local team leader of the funds and investment services practice group, which group he joined in 1999. From March 2007 until October 2008, Mr. Erskine was the managing partner of the British Virgin Islands office of Appleby. Prior to joining Appleby, Mr. Erskine was Deputy Legal and Compliance Director of the Asset Management Division of UBS AG.
Ms. Daphne Hsu has been Financial Controller of the Company since March 2005, prior to which she served as Financial Controller for ten years in Taiwan and China at a Thomson SA joint venture.
Dr. Lambert Ding was appointed March 17, 2011.2011 as an independent member of the Board of Directors. Dr. Ding is the president and CEO of Union Environmental Engineering Services and before that, he was an associate professor at Yuan Ze University.Dr. Ding holds a Doctor of Philosophy degree from the University of Southern California, awarded in 1989. He is also a Registered Environment Assessor and holds several patents.
Mr. Michael C. Lee has been a member of the Company’s Board of Directors since 2004 and is also Chief Executive Officer of PEWC and Chairman of Pacific USA Holdings, Ltd. Mr. Michael C. Lee is not related to Dr. Yichin Lee.
Dr. Yichin Lee has been an independent member of the Company’s Board of Directors and served on the Audit Committee since 2007. He is also a member of the compensation committee. Dr. Lee is also the Managing Director of Giant Management Consulting LLCFCC partners, Inc. and an independent directorCEO of Giga Media Limited. Dr. Yichin Lee holds a doctorate degree in resource planningResource Planning and managementManagement from Stanford University. Dr. Yichin Lee is not related to Mr. Michael C. Lee.
Mr. Ching Rong Shue has been a member of the Company’s Board of Directors since 2006. He also serves as Vice President of PEWC.
Mr. David Sun has been a member of the Company’s Board of Directors since 2007. He also serves as President of PEWC and Managing Director of Charoong Thai Wire and Cable Public Company Limited.
Mr. Yuan Chun Tang has been a member of the Company’s Board of Directors since 2004 and Chief Executive Officer since 2005. Mr. Yuan served as the Company’s Chairman from 2005 to 2009. He has also served as Chairman of PEWC since 2004 and has been the Director of Pacific Construction Corp. Ltd since 2002. Mr. Yuan served as the Director of Taiwan Co-generation Corp from 2005 to 2008. Mr. Yuan has also been the Chairman of Taiwan Electric Wire & Cable Industries Association since 2004. He has served as the
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Mr. Carson Tien has been with PEWC or one of its affiliates such as APWC for his entire career. He started out as engineer in PEWC’s Tao Yuan, Taiwan plant in 1969 and later was promoted to plant manager in 1977. In 1990 Carson again was promoted to Assistant VP responsible for Engineering and Manufacturing in PEWC. He then in 1996 was transferred from PEWC to APWC to head the Shenzhen, China plant as President of PEWSC.PEWS. In 2005, he was appointed as Chief Operating Officer at APWC headquarters.
Mr. Frank Tseng was appointed as Chief Financial Officer and Non-Resident Company Secretary effective October 22, 2009. Mr. Tseng previously served as the Deputy CFO for ABB Taiwan. Prior to that, he served as the Financial Controller of the Asia Pacific region of Phoenix Technologies Co., a NASDAQ-listed California Silicon Valley-based high-tech company.
On March 15, 2011, Mr. Gai Po Lee resigned from the Board of Directors and on August 23, 2010, Mr. Jack Sun resigned from the Board of Directors.
The Company’s Common Shares are traded on NASDAQ. Notwithstanding that, the Board of Directors is not composed of a majority of independent directors. The Company is relying upon the “controlled company exemption” that is available to issuers under the rules of NASDAQ. In effect, the “controlled company exemption” provides that an issuer is not required to have its Board of Directors consist of a majority of independent directors if a shareholder, or two or more shareholders who constitute a group, have beneficial ownership of more than 50% of the issued and outstanding voting securities of the issuer. PEWC owns and controls, directly or indirectly, 65.6% of the issued and outstanding Common Shares of the Company.
No service contract exists between any director and the Company or any of its subsidiaries providing for benefits upon termination of employment.
The Company has no arrangements or understandings with any major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management.
6.2 Audit Committee
The Audit Committee of the Board of Directors primarily functions to assist the Board in its oversight of: (i) the reliability and integrity of accounting policies and financial reporting and disclosure practices and (ii) the establishment and maintenance of processes to ensure that there is compliance with all applicable laws, regulations and company policy and an adequate system of internal control, management of business risks and safeguard of assets.
The Audit Committee is currently composed of Mr. Anson Chan, Dr. Yichin Lee and Dr. Lambert Ding, who has been appointed as aforementioned on March 17, 2011, with Mr. Chan serving as the committee’s chairman.
The Audit Committee, as currently constituted, complies with the requirements of Regulation 10A-3 of the Exchange Act and the corporate governance requirements of NASDAQ.
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On June 13, 2008, the Board authorized the formation of a Compensation Committee to assist the Company in determining the compensation to be paid to the executive directors of the Company. According to the terms of reference under which it operates, the Compensation Committee is authorized to: (i) review and recommend to the Board, or determine, the annual salary, bonus, stock options, and other benefits, direct and indirect, of the senior management of the Company and its principal operating subsidiaries; (ii) review new executive compensation programs, review on a periodic basis the operationoperations of the Company’s executive compensation programs to determine whether they are properly coordinated, establish and periodically review policies for the administration of executive compensation programs, and take steps to modify any executive compensation programs that yield payments and benefits that are not reasonably related to executive performance; (iii) engage outside auditors and consultants to advise on market compensation; and (iv) establish and periodically review policies in the area of management perquisites.
The BoardCompensation Committee is planning to appoint twocomprised of three independent directors, Mr. Anson Chan, and Dr. Yichin Lee, and Dr. Lambert Ding. Mr. Yuan Chun Tang, the Company’s Chief Executive Officer, serves in a non-voting advisory capacity to serve on the Compensation Committee.
6.4 Compensation
The aggregate amount of compensation paid by the Company to all of the Company’s directors and executive officers, as a group, for services in all capacities during 20102011 was approximately $1.81$1.70 million. As ofMarch 31, 2011,2012, our directors and executive officers beneficially owned approximately 50,000 Common Shares representing approximately0.4% of the issued and outstanding Common Shares. The annual compensation of its executive officers and directors on an individual basis is not a disclosure item under the laws of Bermuda or Taiwan.
The fee payable to independent directors is $20,000 per year and the fee payable to directors who are executive officers of the Company or PEWC is $10,000 per year, together with, in each case, reimbursement of reasonable travel expenses for attendance of meetings of the Board of Directors.
No funds or provisions have been set aside to directors or management except for government mandated programs.
6.5 Employees
The Company employed a total of 1,7041,369 employees as of December 31, 2010,2011 (the headcount number of SPFO is excluded as it was disposed of in December 2011), of which about 18%18.2% were administrative and management personnel. Approximately 52%49% of employees were located in Thailand, 34%36% in China, 9% in Singapore and 4%4.8% in Australia. Production workers are usually organized into two 12-hour shifts or three 8-hour shifts to allow continuous factory operation.
The Company offers a range of employee benefits, which it believes are comparable to industry practice in its local markets. Such benefits include performance-based pay incentives, medical benefits, vacation, pension, housing for a small number of workers in Singapore and in Thailand, and a small housing supplement to other workers. The Company also provides training programs for its personnel designed to improve worker productivity and occupational safety.
Presently, there is no group bonus, profit-sharing or stock option plan. However, some of the Company’s subsidiaries have bonus or profit-sharing plans based on individual performance and the profitability of the
The Company has several defined benefit and defined contribution plans covering its employees in Thailand, Australia, the PRC and Singapore. Contributions to the plans are made on an annual basis and totaled $0.8$1.1 million in 2010.2011. Additionally, the Company has several
60
Approximately 28%27% of the employees of Sigma Cable are members of the United Workers of Electronics & Electrical Industries, an employees’ union in Singapore. Under the terms of a collective agreement signed in June 2003, the Company is required to negotiate salary and wage increases yearly. All other worker benefits and employment terms are included in the collective agreement. The Company believes that approximately 100% and 99% of the employees of PEWS and Shanghai Yayang, respectively, are members of their respective Company Workers’ Unions. These unions generally operate in accordance with related labor regulations in China. Approximately 15% of the employees of APEC are members of the Australian Workers’ Union. None of the employees of the other operating subsidiaries of the Company are members of a union.
The Company has never experienced a strike or other disruption due to labor disputes. The Company considers its employee relations to be satisfactory and has not experienced difficulties attracting and retaining qualified employees. In Singapore, employee turnover is approximately 27% of total employees annually. In Thailand, employee turnover is approximately 8.7% of total employees annually.
Item 7: Major Shareholders and Related Party Transactions
7.1 Major Shareholders
On March 27, 2009, PEWC acquired 1,410,739 Common Shares of the Company. On June 28, 2007, Sino-JP sold allCompany from SOF, which amount represented 51% of itsthe Common Shares to SOF Investments, L.P., a Delaware limited partnership (“SOF”). From September 15, 2005 until March 27, 2009, PEWCthen held 7,664,615 Common Shares, representing 55.4% of the issued and outstanding Common Shares of the Company. On March 27, 2009, SOF sold 1,410,739, or 51%, of its Common Shares to PEWC. Sinceby SOF. Following that sale,transaction, PEWC and SOF have held 65.6% and 9.8% of the issued and outstanding Common Shares of the Company, respectively. As of July 1, 2011, SOF transferred and conveyed its ownership interest in the 1,355,415 Common Shares held by it to COF. The remaining 24.6% of the issues and outstanding Common Shares are publicly traded in the U.S. on the NASDAQ Capital Markets Tier.
The following table sets forth certain information regarding beneficial ownership of the Company’s Common Shares as of March 31, 20112012 by (i) all persons who are known to the Company to own beneficially more than five percent of the Common Shares of the Company and (ii) the officers and directors of the Company as a group. The information set forth in the following table is derived from public filings made by holders and information obtained from directors and officers. The voting rights attaching to the Common Shares below are the same as those attaching to all other Common Shares.
Identity of Person or Group | Number of | Percent of Class |
Pacific Electric Wire & Cable Co., Ltd.(1) | 9,075,354 | 65.617% |
MSD Credit Opportunity Master Fund, L.P.(2) | 1,355,415 | 9.800% |
Directors and Officers of the Company | 50,000 | 0.362% |
(1) PEWC owns 1,410,739 shares directly and owns its remaining shares indirectly, as a result of PEWC’s control of its direct wholly‑owned subsidiary, Moon View Ventures Limited, a BVI company, which beneficially owns 7,307,948 Common Shares, and as a result of PEWC’s control of its indirect wholly‑owned subsidiary, Pacific Holdings Group, a Nevada corporation, which beneficially owns 356,667 Common Shares.
Number of | ||||||||
Identity of Person or Group | Shares | Percent of Class | ||||||
Pacific Electric Wire & Cable Co., Ltd. (1) | 9,075,354 | 65.617 | % | |||||
SOF Investments, L.P. (2) | 1,355,415 | 9.800 | % | |||||
Directors and Officers of the Company | 50,000 | 0.362 | % |
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7.2 Related Party Transactions
The Company (Private) Limited (“Sigma Cable”), a subsidiary in Singapore, were converted into a loan from PEWC. Such loan is repayable in quarterly installments and bears interest at the Singapore Interbank Offered Rate plus 1.52%. As of December 31, 2009 and the latest practicable date, the principal amount of the loan was completely paid off by Sigma Cable. Sigma Cable continues to incurincurs ordinary course trade payables with PEWC in connection with copper purchases under the Composite Services Agreement and the sale by the Company of distributed productsDistributed Products on behalf of PEWC.
As of December 31, 20102011 and the latest practicable date, the Company, including its subsidiaries, had a net principal balance outstanding of $1.7$10.4 million borrowed from subsidiaries of PEWC, including Moon View Venture Limited (“Moon View”).PEWC. This short-term indebtedness is payable on a demand basis and does not accrue interest.
The Company used the proceeds from each of the related party loans described above for working capital and purchases of capital equipment.The terms of borrowing by APWC or any of its subsidiaries from PEWC are on terms at least no less favorable than terms available in arms-length transactions with unaffiliated parties.
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Under the terms of the Composite Services Agreement, APWC pays a management fee to PEWC in connection with the secondment, or temporary assignment and relocation, of certain PEWC managers to APWC facilities in Shenzhen and Thailand. The assigned managers assist APWC in implementing the results of certain research and development conducted by PEWC and made available by PEWC to the Company under the terms of the Composite Services Agreement. The assigned managers also assist APWC in the procurement of raw materials, primarily copper, which is also provided for under the Composite Services Agreement. The amount of such annual management fee was $239,000 as of December 31, 2010.
Additional details regarding related party balances as of December 31, 20102011 and related party transactions, including copper purchases from PEWC, are disclosed in Note 1517 of our audited consolidated financial statements in Item 18: Financial Statements.
There have been no other related party transactions or contracts entered into between PEWC and APWC in 2010.
Item 8: Financial Information
8.1 Legal Proceedings
There are currently no material proceedings in which any director, senior manager, or affiliate is adverse to the Company or has an adverse material interest. There are no legal proceedings to which the Company is a party which may have, or have had in the recent past, significant effects on the Company’s financial position or profitability.
8.2 Dividend Policy
To date, the Company, a Bermuda company formed in 1996, has not paid any dividends. While the Company has no present intention to pay dividends, should it decide in the future to do so, as a holding company the Company’s ability to pay dividends, as well as to meet its other obligations, will depend upon the amount of distributions, if any, received from the Company’s operating subsidiaries and other holdings and investments. The Company’s operating subsidiaries and other holdings and investments, from time to time, may be subject to restrictions on
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8.3 Significant Changes
There have been no material or significant changes in the Company’s affairs since the end of the fiscal year ended December 31, 20102011 that have not been described herein.
Item 9: The Offer and Listing
9.1 Historical Trading Information
The high and low market prices for Common Shares on the Pink Sheets (from January 2007 until April 2008), and on the over-the-counter bulletin board (the “OTC BB”) (until August 2005), on the Pink Sheets (from August 2005April 2008 until April 2008), and again on the OTC BB (since April 2008)2011), and on the NASDAQ since April 29, 2011, for each period specified are as follows:
| Price per Share ($) | |
| High | Low |
Five most recent full financial years: |
|
|
2007 | 7.19 | 2.50 |
2008 | 6.45 | 0.80 |
2009 | 3.39 | 0.50 |
2010 | 7.85 | 2.20 |
2011 | 7.05 | 1.92 |
|
|
|
Two most recent full financial years: |
|
|
2010 |
|
|
First Quarter | 3.00 | 2.20 |
Second quarter | 3.40 | 2.46 |
Third quarter | 5.25 | 2.94 |
Fourth quarter | 7.85 | 4.70 |
2011 | ||
First quarter | 7.05 | 4.50 |
Second quarter | 6.85 | 3.50 |
Third quarter | 4.98 | 2.62 |
Fourth quarter | 3.30 | 1.92 |
Most recent six months: |
|
|
October 2011 | 3.30 | 1.92 |
November 2011 | 3.25 | 2.60 |
December 2011 | 3.05 | 2.54 |
January 2012 | 3.99 | 2.85 |
February 2012 | 3.55 | 2.47 |
March 2012 | 3.60 | 2.97 |
Price per Share ($) | ||||||||
High | Low | |||||||
Five most recent full financial years: | ||||||||
2006 | 3.20 | 0.80 | ||||||
2007 | 7.19 | 2.50 | ||||||
2008 | 6.45 | 0.80 | ||||||
2009 | 3.39 | 0.50 | ||||||
2010 | 7.85 | 2.20 | ||||||
Two most recent full financial years: | ||||||||
2009 | ||||||||
First Quarter | 1.50 | 0.50 | ||||||
Second quarter | 1.98 | 0.90 | ||||||
Third Quarter | 2.90 | 1.45 | ||||||
Fourth Quarter | 3.39 | 2.15 | ||||||
2010 | ||||||||
First Quarter | 3.00 | 2.20 | ||||||
Second quarter | 3.40 | 2.46 | ||||||
Third quarter | 5.25 | 2.94 | ||||||
Fourth quarter | 7.85 | 4.70 | ||||||
2011 | ||||||||
First quarter | 7.05 | 4.50 | ||||||
Most recent six months: | ||||||||
November 2010 | 7.85 | 5.40 | ||||||
December 2010 | 6.80 | 5.35 | ||||||
January 2011 | 7.05 | 6.00 | ||||||
February 2011 | 6.50 | 4.65 | ||||||
March 2011 | 5.75 | 4.50 | ||||||
April 2011 | 6.20 | 4.20 |
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The Company’s Common Shares have been listed on NASDAQ Capital Markets Tier,tier since April 2011.2011 under the symbol “APWC”. Prior to that, the Company was listed on the OTC BB since April 2008 under the symbol “AWRCF,” immediately prior to which the Common Shares were traded on the Pink Sheets. See the risk factor entitled “Potential“Potential Illiquidity of Common Shares.Shares.” The Common Shares are not listed on any other exchanges or otherwise publicly traded within or outside the United States.
10.1 Share Capital
As of December 31, 20102011 and as of the date of the filing of this Annual Report, the Company has an authorized share capital of 50,000,000 Common Shares, par value $0.01 per share, and there were and are 13,830,769 Common Shares issued and outstanding. No capital of the Company is under option or agreed conditionally or unconditionally to be put under option. The Company does not have any classes of capital stock option plan established by the Company in 1996 prior toother than its initial public offering was terminated by the Board of Directors in 2006. No options were ever exercised and no Common Shares were ever issued under that terminated stock option plan.
10.2 Memorandum of Association and Bye-lawsBye-Laws
10.2.1 General
For a detailed description of the Company’s principal activities, see Section 4.1: “History and Development of the Business.” Pursuant to the Company’s Bye-lawsBye-Laws the Board of Directors consists of a single class of directors, each director has one vote on all matters put to the Board, and a quorum consists of a majority of the members of the Board of Directors then in office. The Company’s Bye-Laws were amended on September 8, 2008October 7, 2011 to increaseallow the authorized share capital. The Company’s Bye-laws,Company to purchase its own shares for cancellation or acquire them to be held as sotreasury shares. Such amended wereBye-Laws are filed on February 18, 2009herein as Exhibit 3.2 to Amendment No. 6 to the Company’s registration statement on Form F-1 filed on September 30, 2010.
10.2.2 Description of Shareholder Rights Attaching to Our Common Shares
The Company was incorporated in Bermuda on September 19, 1996 under the Companies Act. The rights of our shareholders are governed by Bermuda law and our memorandum of association and Bye-laws.
The following discussion of our Common Shares and the laws governing the rights of our shareholders is based upon the advice of Appleby (Bermuda) Limited, our Bermuda counsel.
Our authorized share capital as of December 31, 20102011 was $500,000 consisting of 50,000,000 Common Shares, par value $0.01 per share, of which, as of December 31, 20102011 and as of the date of the filing of this Annual Report, there were and are 13,830,769 Common Shares issued and outstanding.
• Holders of the Common Shares have no preemptive, redemption, conversion or sinking fund rights.
• Holders of the Common Shares are entitled to one vote per share on all matters submitted to a poll vote of holders of Common Shares and do not have any cumulative voting rights.
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• Additional authorized but unissued Common Shares may be issued by the Board without the approval of the shareholders.
The holders of Common Shares will receive such dividends, if any, as may be declared by the Board of Directors out of funds legally available for such purposes. We may not declare or pay a dividend, or make a distribution out of contributed surplus, if there are reasonable grounds for believing that:
• we are, or after the payment would be, unable to pay our liabilities as they become due; or
• the realizable value of our assets after such payment or distribution would be less than the aggregate amount of our liabilities and our issued share capital and share premium accounts.
The following is a summary of provisions of Bermuda law and our organizational documents, including our memorandum of association and Bye-laws.Bye-Laws. We refer you to our memorandum of association, and Bye-laws, copiesa copy of which havehas been filed with the SEC.SEC and our Bye-Laws, a copy of which is filed herein. You are urged to read these documents in their entirety for a complete understanding of the terms thereof.
10.2.3 Share Capital
Our authorized capital consists of one class of Common Shares. Under our Bye-laws,Bye-Laws, our Board of Directors has the power to issue any authorized and unissued shares on such terms and conditions as it may determine. Any shares or class of shares may be issued with such preferred, deferred, qualified or other special rights or any restrictions with regard to such matters, whether in regard to dividend, voting, return of capital or otherwise, as we may from time to time by resolution of the shareholders prescribe, or in the absence of such shareholder direction, as the Board of Directors may determine. This provision in the Bye-lawsBye-Laws could be used to prevent a takeover attempt, or to make a takeover attempt prohibitively expensive, and thereby preclude shareholders from realizing a potential premium over the market value of their shares.
10.2.4 Voting Rights
Generally, under Bermuda law and our Bye-laws,Bye-Laws, questions brought before a general meeting are decided by a simple majority vote of shareholders present or represented by proxy, with no provision for cumulative voting. Matters will be decided by way of votes cast by way of show of hands unless a poll is demanded.
If a poll is demanded, each shareholder who is entitled to vote and who is present in person or by proxy has one vote for each Common Share entitled to vote on such question. A poll may only be demanded under the Bye-lawsBye-Laws by:
• the chairman of the meeting;
• at least three shareholders present in person or represented by proxy;
• any shareholder or shareholders present in person or represented by proxy and holding between them not less than one-tenth of the total voting rights of all shareholders having voting rights; or
• a shareholder or shareholders present in person or represented by proxy holding Common Shares conferring the right to vote on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all Common Shares.
Unless the Board of Directors otherwise determines, no shareholder shall be entitled to vote at any general meeting unless all calls or other sums presently payable by that shareholder in respect of all shares held by such shareholder have been paid.
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Under Bermuda law, a company may declare and pay dividends unless there are reasonable grounds for believing that the company is, or would, after the payment, be unable to pay its liabilities as they become due or that the realizable value of the company’s assets would thereby be less than the aggregate of its liabilities and issued share capital and share premium accounts.
Under our Bye-laws,Bye-Laws, the Board may from time to time declare dividends or distributions out of contributed surplus to be paid to the shareholders according to their rights and interests. With the sanction of a shareholders resolution, the Board of Directors may determine that any dividend may be paid in cash or by distribution of specific assets, including paid-up shares or debentures of any other company. The Board of Directors may also pay any fixed cash dividend which is payable on any of our Common Shares half-yearly or on other dates, whenever our position, in the opinion of the Board of Directors, justifies such payment.
Dividends, if any, on our Common Shares will be at the discretion of our Board of Directors, and will depend on our future operations and earnings, capital requirements, surplus and general financial condition as our Board of Directors may deem relevant.
10.2.6 Purchases by the Company of its own Common Shares
Under Bermuda law and as authorized by the Company’s memorandum of association, we may purchase our own Common Shares out of the capital paid up on the Common Shares in question or out of funds that would otherwise be available for dividend or distribution or out of the proceeds of a fresh issue of Common Shares made for the purposes of the purchase. We may not purchase our shares if, on the date on which the purchase is to be effected, there are reasonable grounds for believing that the Company is, or after the purchase would be, unable to pay its liabilities as they become due.
However, to the extent that any premium is payable on the purchase, the premium must be provided out of the funds of the Company that would otherwise be available for dividend or distribution or out of the Company’s share premium account. Any Common Shares purchased by the Company are treated as cancelled and the amount of the Company’s issued capital is diminished by the nominal value of the shares accordingly but shall not be taken as reducing the amount of the Company’s authorized share capital.
10.2.7 Preemptive Rights
Our Bye-lawsBye-Laws generally do not provide the holders of our Common Shares preemptive rights in relation to any issues of Common Shares by us or any transfer of our shares.
However, the Company has in the Amended and Restated Shareholders Agreement granted to SOFCOF preemptive rights in the event of any issuance of additional equity securities (or securities convertible into or exchangeable for equity securities) by the Company, such that SOFCOF may subscribe for additional securities in order to maintain its then percentage ownership interest in the issued and outstanding equity securities of the Company. See the risk factor entitled “Obligations“Obligations under the Amended and Restated Shareholders Agreement.Agreement.”
10.2.8 Variation of Rights
We may issue more than one class of shares and more than one series of shares in each class. The rights attached to any class of shares may be altered or abrogated either:
• with the consent in writing of the holders of more than fifty percent of the issued shares of that class; or
• pursuant to a resolution of the holders of such shares. |
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10.2.9 Transfer of Common Shares
Subject to the “Transfer Restrictions” section below, a shareholder may transfer title to all or any of his shares by completing an instrument of transfer in the usual common form or in such other form as the Board of Directors may approve. The form of transfer is required to be signed by or on behalf of the transferor and also the transferee where any share is not fully paid. The transferor shall be deemed to remain the holder of the shares until the name of the transferee is entered in the Register of Members.
10.2.10 Transfer Restrictions
The Board of Directors may, in its absolute discretion and without assigning any reason therefor,therefore, decline to register any transfer of any share which is not a fully paid share. The Board of Directors may also refuse to register an instrument of transfer of a share unless the instrument of transfer:
• is duly stamped, if required by law, and lodged with us;
• is accompanied by the relevant share certificate and such other evidence of the transferor’s right to make the transfer as the Board of Directors shall reasonably require;
• is in respect of one class of shares; and
• has obtained, where applicable, permission of the Bermuda Monetary Authority.
Our Common Shares are traded on theNASDAQ Stock Market, Inc. in the United States as of April 2011, which qualifies as an “appointed stock exchange” for purposes of the Companies Act and the Bermuda Exchange Control Act and regulations made thereunder, in particular a notice to the public dated 1 June 2005. Accordingly, our Common Shares benefit from a general permission for free transferability for all transfers between persons who are not resident in Bermuda for exchange control purposes, for as long as such Common Shares remain listed on an appointed stock exchange.
The Company, together with PEWC and SOF Investments, L.P.COF (as successor-in-interest to SOF), entered into a shareholders agreement dated as of June 28, 2007 (the “Shareholders Agreement”)are parties to the Amended and Restated Shareholders Agreement which provides, among other things, for certain transfer restrictions, notice requirements and tag-along rights in the event PEWC wishes to transfer any of its Common Shares in certain types of transactions. The Shareholders Agreement was amended and restated on March 27, 2009 (the “Amended and Restated Shareholders Agreement”) in connection with the sale by SOF to PEWC of 51% of the Common Shares held by SOF. The Amended and Restated Shareholders Agreement is binding only upon the three parties to that agreement. Under the Amended and Restated Shareholders Agreement, the Company has beenwas granted an extension until February 2011 to achieve a listing of the Common Shares on a national Securities Market and SOFMarket. Due to market conditions, the Company’s price per Common Share has maintainednot yet risen to the level necessary for a listing on NASDAQ (Global). Accordingly, COF retains its right to sell its remaining Common Shares to PEWCunder the put option provided in the event the Company is not able to achieve that national listing. See Section 4.3: “Certain Recent Events.”
10.2.11 Transmission of Shares
In the event of the death of a shareholder, the survivor or survivors, where the deceased shareholder was a joint holder, and the estate representative, where the deceased shareholder was sole holder, shall be the only persons recognized by us as having any title to the shares of the deceased. “Estate representative” means the person to whom probate or letters of administration has or have been granted in Bermuda, or failing any such person, such other person as the Board of Directors may in its absolute discretion determine to be the person recognized by us for this purpose.
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Under the Companies Act, a director who has an interest in a material contract or a proposed material contract, or a 10% or more interest (directly or indirectly) in an entity that is interested in a contract or proposed contract or arrangement with us, is obligated to declare the nature of such interest at the first opportunity at a meeting of the Board of Directors, or by writing to the Board of Directors. If the director has complied with the relevant sections of the Companies Act and the Bye-lawsBye-Laws with respect to the disclosure of his interest, the director may vote at a meeting of the Board of Directors or a committee thereof on a contract, transaction or arrangement in which that director is interested, in which case his vote shall be counted and he shall be taken into account in ascertaining whether a quorum is present.
10.2.13 Rights in Liquidation
Under Bermuda law, in the event of liquidation dissolution or winding-up of a company, after satisfaction in full of all claims of creditors and subject to the preferential rights accorded to any series of preferred stock, the proceeds of such liquidation dissolution or winding-up are distributed among the holders of shares in accordance with a company’s bye-laws.
Under our Bye-laws,Bye-Laws, if we are wound up, the liquidator may, pursuant to a resolution of the shareholders and any approval required by the Companies Act, divide among the shareholders in cash or other assets the whole or part of our assets, whether such assets shall consist of property of the same kind or not, and may for such purposes set such values as such liquidator deems fair upon any property to be divided and may determine how such division shall be carried out as between the shareholders.
10.2.14 Meetings of Shareholders
Under Bermuda law, a company, unless it elects to dispense with the holding of annual general meetings, is required to convene at least one general meeting per calendar year. The directors of a company, notwithstanding anything in such company’s bye-laws, shall, on the requisition of the shareholders holding at the date of the deposit of the requisition not less than one-tenth of the paid-up capital of the company carrying the right of vote, duly convene a special general meeting. Our Bye-lawsBye-Laws provide that the Board of Directors may, whenever it thinks fit, convene a special general meeting.
Bermuda law requires that shareholders be given at least five days’ notice of a meeting of the Company. Our Bye-lawsBye-Laws extend this period to provide that not less than 20 days’ written notice of a general meeting must be given to those shareholders entitled to receive such notice. The accidental omission to give notice to or nonreceiptnon-receipt of a notice of a meeting by any person does not invalidate the proceedings of a meeting.
Our Bye-lawsBye-Laws state that no business can be transacted at a general meeting unless a quorum of at least two shareholders representing a majority of the issued shares of the Company are present in person or by proxy and entitled to vote.
Under our Bye-laws,Bye-Laws, notice to any shareholders may be delivered either personally or by sending it through the post, by airmail where applicable, in a pre-paid letter addressed to the shareholder at his address as appearing in the share register or by delivering it to, or leaving it at, such registered address. Any notice sent by post shall be deemed to have been served seven (7) days after dispatch. A notice of a general meeting is deemed to be duly given to the shareholder if it is sent to him by cable, telex or telecopiertele-copier or other mode of representing or reproducing words in a legible and non-transitory form and such notice shall be deemed to have been served twenty-four (24) hours after its dispatch.
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Under Bermuda law, members of the general public have the right to inspect the public documents of a company available at the office of the Bermuda Registrar of Companies. These documents include the memorandum of association and any amendment to the memorandum of association.
Under Bermuda law, the minutes of shareholder meetings will be open for inspection by any shareholder or director without charge for not less than two hours during business hours each day, subject to any reasonable restrictions that we may impose. The shareholders shall be entitled to receive a copy of every balance sheet and statement of income and expenditure before a general meeting as required under the Bye-laws.
Under our Bye-laws,Bye-Laws, unless the Board otherwise determines, the register of shareholders of the Company is required to be open for inspection between 10:00 a.m. and 12:00 noon each working day without charge to members of the general public. A company is required to maintain its share register in Bermuda but may, subject to the provisions of the Companies Act, establish a branch register outside of Bermuda. We have established a branch register with our transfer agent, Computershare Limited, which is based in Jersey City, New Jersey.
Under Bermuda law,Law, a company is required to keep at its registered office a register of its directors and officers that is open for inspection for not less than two hours in each day by members of the public without charge. Under our Bye-laws,Bye-Laws, the register of directors and officers is available for inspection by the public between 10:00 a.m. and 12:00 noon every working day.
Bermuda law does not provide a general right for shareholders to inspect or obtain copies of any other corporate records, except for the Bye-lawsBye-Laws of the Company.
10.2.16 Election or Removal of Directors
The Bye-lawsBye-Laws provide that the number of directors will be such number, not less than two, as our shareholders by resolution may from time to time determine. A director will serve until re-elected or his successor is appointed at the next annual general meeting or his prior removal in the manner provided by the Companies Act or the Bye-laws.Bye-Laws. There is no requirement under Bermuda law, the Company’s memorandum of association or its Bye-lawsBye-Laws that a majority of the Company’s directors be independent.
The Bye-lawsBye-Laws provide that each director shall have one vote on all matters presented to the Board for a vote. At the annual general meetingAnnual General Meeting held on September 3, 2010,October 7, 2011, all nine directors then in office were re-elected.
The shareholders may by resolution determine that one or more vacancies in the Board of Directors shall be deemed casual vacancies for the purposes of the Bye-laws.Bye-Laws. The Board, so long as a quorum of directors remains in office, shall have the power at any time and from time to time to appoint any individual to be a director so as to fill a casual vacancy. The shareholders may approve the appointment of alternate directors or may authorize the Board to appoint them. Directors may also appoint and remove their own alternates.
We may, in a special general meeting called for this purpose, remove a director, provided notice of such meeting is served upon the director concerned not less than fourteen days before the meeting and he shall be entitled to be heard at that meeting.
The office of a director will be vacated in the event of any of the following:
• if he resigns his office by notice in writing to be delivered to our registered office or tendered at a meeting of the Board of Directors;
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• if he becomes of unsound mind or a patient for any purpose under any statute or applicable law relating to mental health and the Board of Directors resolves that his office is vacated;
• if he is prohibited by law from being a director; or
• if he ceases to be a director by virtue of the Companies Act or is removed from office pursuant to the Bye-Laws.
10.2.17 Amendment of Memorandum of Association and Bye-Laws
Bermuda law provides that the memorandum of association of a company may be amended by resolution passed at a general meeting of which due notice has been given. An amendment to a memorandum of association does not require the consent of the Minister of Finance save for specific circumstances, for example, the adopting of any authority to carry on restricted business activities.
Under Bermuda law, the holders of:
• an aggregate of not less than twenty percent in par value of a company’s issued share capital or any class thereof; or
• not less in the aggregate than twenty percent of the company’s debentures entitled to object to amendments to its memorandum of association,
have the right to apply to the Supreme Court of Bermuda for an annulment of any amendment of the memorandum of association. Where such an application is made, the amendment becomes effective only to the extent that it is confirmed by the Bermuda Supreme Court. An application for an annulment of an amendment of the memorandum of association must be made within twenty-one days after the date on which the resolution amending the memorandum of association is passed and may be made on behalf of the persons entitled to make the application by one or more of their number as they may appoint in writing for the purpose.
Our Bye-lawsBye-Laws may be amended in the manner provided for in the Companies Act, which provides that the directors may amend the Bye-laws,Bye-Laws, provided that any such amendment shall be effective only to the extent approved by the shareholders.
10.2.18 Merger or Consolidation (Amalgamation)Amalgamation
The Companies Act provides that subjecttwo or more Bermuda companies may merge and their undertaking, property and liabilities shall best in one of such companies as the surviving company (referred to the terms ofas a company’s bye-laws, the merger or consolidation of“merger” under Bermuda law). The Companies Act also provides that a Bermuda company may amalgamate with another company and continue as an amalgamated company (referred to as an “amalgamation” under Bermuda law). A merger or amalgamation requires an merger or amalgamation agreement which must be approved by the board of directors and at a meeting of the shareholders by seventy-five percent of the shareholders present and entitled to vote at such meeting in respect of which the quorum shall be two persons holding or representing by proxy more than one-third of the issued shares of the company. These provisions do not apply where a holding company is merging or amalgamating with one or more of its wholly-owned subsidiaries or where two or more wholly-owned companies of the same holding company are merging or amalgamating.
Under Bermuda law, in the event of a merger or an amalgamation of a Bermuda company, a shareholder who did not vote in favor of the transaction and who is not satisfied that fair value has been offered for the shares, may apply to the Supreme Court of Bermuda within one month of notice of the meeting of shareholders to appraise the fair value of those shares.
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Class actions, as they are commonly understood in the United States, are not available to shareholders under Bermuda law. Derivative actions are generally only available to shareholders under Bermuda law in very limited circumstances. A shareholder may commence an action in the name of a company to remedy a wrong done to the company where the wrongdoers are in control of the company and the act complained of is of a fraudulent character, oppressive, beyond the corporate power of the company, illegal or would have required the approval of a greater percentage of the company’s shareholders than those that actually approved it. A shareholder may not commence such an action where the wrong complained of is capable of ratification by the company in a general meeting by ordinary resolution.
When one or more shareholders believes the affairs of a company are being conducted in a manner which is oppressive or prejudicial to the interest of some of the shareholders, the Supreme Court of Bermuda, upon petition, may make such order as it sees fit, including an order regulating the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company, and in the case of a purchase of the shares by the company, for the reduction accordingly of the company’s capital or otherwise.
10.2.20 Personal Liability of Directors and Indemnity
The Companies Act requires every officer, including directors, of a company in exercising powers and discharging duties, to act honestly in good faith with a view to the best interests of the company, and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The Companies Act further provides that any provision, whether in the bye-laws of a company or in any contract between the company and any officer or any person employed by the company as auditor, exempting such officer or person from liability, or indemnifying him against any liability which by virtue of any rule of law would otherwise attach to him, in respect of any fraud or dishonesty of which he may be guilty in relation to the company, shall be void.
Every director, officer and committee member shall be indemnified out of our funds against all civil liabilities, loss, damage or expense including liabilities under contract, tort and statute or any applicable foreign law or regulation and all reasonable legal and other costs and expenses properly payable, incurred or suffered by him as director, officer or committee member; provided that the indemnity contained in the Bye-lawsBye-Laws will not extend to any matter which would render it void under the Companies Act as discussed above.
10.2.21 Exchange Controls
We have been designated by the Bermuda Monetary Authority as a non-resident under the Exchange Control Act of 1972 (the “Exchange Control Act”). This designation allows us to engage in transactions in currencies other than the Bermuda dollar.
The transfer of Common Shares between persons regarded as resident outside Bermuda for exchange control purposes and the issue of Common Shares to such persons may be effected without specific consent under the Exchange Control Act and regulations thereunder, provided the Common Shares are listed on an appointed stock exchange.
Notwithstanding the recording of any special capacity, we are not bound to investigate or incur any responsibility in respect of the proper administration of any estate or trust.
We will take no notice of any trust applicable to any of our Common Shares whether or not we had notice of such trust.
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10.3 Material Contracts
Composite Services Agreement (“CSA”)
The Company engages in transactions in the ordinary course of business with PEWC, including the purchase of certain raw materials and the distribution of PEWC products in various countries in the Asia Pacific region. The Company and PEWC are parties to a composite services agreement dated November 7, 1996 (the “Composite Services Agreement” or “CSA”), which the Company has renewed annually, at its option. The Composite Services Agreement contains provisions that define the relationship and the conduct of the respective businesses of the Company and PEWC and confers certain preferential benefits on the Company. In 20102011 there were no material changes to the CSA between APWC and PEWC. Pursuant to the Composite Services Agreement,
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• The Company has the right to distribute any wire or cable product manufactured by PEWC in all markets in which the Company presently distributes or develops the capability to distribute in the future such products on such terms as have historically been in effect or on terms at least as favorable as PEWC grants to third parties that distribute such products in such markets. However, PEWC is not required to grant to the Company the right to distribute products manufactured by PEWC in the future in markets where the Company does not currently have the capability to distribute unless and until PEWC has no pre-existing contractual rights which would conflict with the grant of such right to the Company.
• Each of PEWC and the Company will notify the other party prior to entering into any negotiations with a third party concerning the establishment of any facility or similar venture to manufacture or distribute any wire or cable product outside of the markets where the Company currently manufactures or distributes, or intends to develop the capability to manufacture or distribute, any wire or cable product. Unless the Company and PEWC mutually agree otherwise, the Company has the right of first refusal to enter into any definitive agreement with such third party. If, however, such third party would not agree to the substitution of the Company for PEWC or such substitution would prevent the successful completion of the facility or venture, PEWC has agreed to arrange for the Company to participate to the extent possible.
• PEWC agrees to make available to the Company, upon the Company’s request and on terms to be mutually agreed between PEWC and the Company from time to time, certain services with respect to the design and manufacture of wire and cable products, computerization, inventory control, purchasing, internal auditing, quality control, emergency back-up services, and recruitment and training of personnel; such services may include the training of the Company’s employees and managers at PEWC facilities and the secondment of PEWC employees and managers to the Company.
• Without the consent of the Company, PEWC will not compete with respect to the manufacture or distribution of wire and cable products in any market in which the Company is manufacturing or has taken significant steps to commence manufacturing.
• For purposes of the Composite Services Agreement, each province in China is considered the equivalent of a country.
To the extent that transactions occur in the future between the Company and PEWC or affiliates of PEWC other than under the Composite Services Agreement, such transactions will be entered into on an arm’s length basis on terms no less favorable than those available from unaffiliated third parties.
Amended and Restated Shareholders Agreement
In connection with the 2007 acquisition by SOF of twenty percent (20%) of the Company’s issued and outstanding Common Shares, the Company, PEWC and SOF entered into a shareholders agreement dated as of June 28, 2007 (the “Shareholders Agreement”),Shareholders Agreement, pursuant to which the Company granted to SOF certain rights and protections. Under the Shareholders Agreement, the Company agreed to indemnify the SOF and its partners and certain of its affiliates (the “SOF Indemnified Persons”),Persons for any additional taxes, interest, penalties and other costs that might be imposed upon or incurred by the SOF Indemnified Persons in the event that the Company is determined by the Internal Revenue Service (the “IRS”)IRS to be a “controlled foreign corporation” (a “CFC”)CFC or a “passive foreign investment company” (a “PFIC”)PFIC as such terms are interpreted and defined under IRS rules or regulations. In addition, under the Shareholders Agreement, the Company granted to SOF certain registration rights with respect to the Common Shares owned by it, including the undertaking by the Company to prepare and file a shelf registration statement, and the further right of SOF to exercise two demand registration rights with regard to its Common Shares and to further exercise certain piggyback registration rights in connection with its Common Shares. The Shareholders Agreement was amended and restated on March 27, 2009 (the “Amended and Restated Shareholders Agreement”) in connection with the sale by SOF to PEWC of 51% of the Common Shares held by SOF. However, the foregoing rights of SOF have been preserved in the Amended and Restated Shareholders Agreement notwithstanding its sale of 51% of its original interest in APWC. See Item 7: “MajorAs of July 1, 2011, COF succeeded to all of the right, title and interest in the Common Shares then held by SOF. Each of the rights of SOF under the Shareholders Agreement was conveyed to, and Related Party Transactions.is now held by, COF. For a more detailed description of the Company’s obligations under the Shareholders Agreement, see the risk factor entitled “Obligations under Amended and Restated Shareholders Agreement.”
10.4 Taxation
The following is a summary of the material tax consequences of the acquisition, ownership and disposition of Common Shares based on the tax laws of the United States and Bermuda, subject to the assumptions, qualifications and limitations in our discussion below. Such summary is subject to changes in United States and Bermuda law, including changes that could have retroactive effect. The following summary does not take into account the individual circumstances of an investor, nor does it purport to be a complete technical analysis or examination of all potential tax effects relevant to a decision to purchase Common Shares, including without limitation, the tax laws of the various states or localities within the United States.
10.4.1 United States Taxation
The following is a summary of the material United States federal income tax consequences of the acquisition, ownership and disposition of Common Shares by a U.S. Holder (as defined below) and a Non-U.S. Holder (as defined below), in each case, subject to the assumptions, qualifications and limitations in our discussion below. Such summary is subject to changes in United States law, including changes that could have retroactive effect. The summary does not purport to be a comprehensive description of all possible tax considerations that may be relevant to a decision to purchase Common Shares. This summary is based upon the Internal Revenue Code of 1986, as amended (the “Code”), regulations promulgated under the Code by the U.S. Treasury Department (the “Treasury”) (including proposed and temporary regulations), rulings, current administrative interpretations and official pronouncements of the IRS, and judicial decisions, all as currently in effect and all of which are subject to differing interpretations or to change, possibly with retroactive effect. Such change could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. Further, this summary does not discuss any foreign, state or local tax consequences.
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As used herein, the term “U.S. Holder” means a beneficial owner of Common Shares that is (i) a citizen or resident of the United States, (ii) a corporation (including any entity treated as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States or any state (or the District of Columbia), (iii) an estate, the income of which is subject to United States federal income tax regardless of its source, or (iv) a trust, if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more “United States persons” (as defined in Section 7701(a)(30) of the Code) has the authority to control all substantial decisions of the trust, or, to the extent provided in the Regulations, certain trusts in existence on August 20, 1996, and treated as U.S. Persons prior to such date, that elect to be treated as U.S. Persons.
The term “Non-U.S. Holder” means a beneficial owner of Common Shares that is not a U.S. Holder. As described in “Taxation of Non-U.S. Holders” below, the consequences to a Non-U.S. Holder may differ substantially from the tax consequences to a U.S. Holder.
If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of Common Shares, the U.S. federal income tax consequences to a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. A holder of Common Shares that is a partnership and the partners in such partnership should consult their own tax advisors regarding the U.S. federal income tax consequences of the ownership and disposition of Common Shares.
U.S. Federal Income Taxation of the Company
The Company expects that it will be treated as a foreign corporation for U.S. federal income tax purposes, and it will make no election to the contrary. As a foreign corporation, subject to the rules discussed below, the income, gains, losses, deductions and expenses of the Company will not be passed through to the investors, and all distributions by the Company to the investors will be treated as dividends, return of capital, and/or capital gains.
The Company currently does not conduct activities in the United States and expects that it will continue to conduct activities in a manner so as not to constitute the conduct of a trade or business in the United States or, invest in securities the income from which is treated, for U.S. federal income tax purposes, as arising from a U.S. trade or business. As a result, the income of the Company generally should not be subject to U.S. federal income tax on a net income basis. However, gains realized from certain investments in United States real property interests by foreign persons, such as the Company, may be subject to U.S. federal income tax on a net basis, withholding tax and a branch profits tax. Debt instruments with an equity component linked to a United States real property interest and stock in certain United States corporations holding
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Taxation of U.S. Holders
The discussion in “Taxation of Dividends” and “Taxation of Capital Gains” below assumes that the Company will not be treated as a PFIC for U.S. federal income tax purposes. For a discussion of the rules that apply if the Company is treated as a PFIC, see the discussion in “Passive Foreign Investment Company” below.
Taxation of Dividends
The Company has never declared or paid any cash dividends and dodoes not presently anticipate paying dividends. A U.S. Holder receiving a distribution with respect to Common Shares generally will be required to include such distribution in gross income (as ordinary income subject to regular, and not reduced, tax rates) on the day received as foreign-source dividend income to the extent such distribution is paid from the Company’s current or accumulated earnings and profits (as determined under United States federal income tax principles). Such dividends will not be eligible for the dividends received deduction (generally allowed to certain United States corporations in respect of dividends received from United States corporations). U.S. Holders that are corporations and directly own 10% or more of the voting stock of the Company may be entitled to claim a foreign tax credit for United States federal income tax purposes in respect of foreign taxes paid by the Company and certain subsidiaries.
Under U.S. federal income tax laws, for taxable years beginning before January 1, 2013,a dividend paid to an individual U.S. shareholder from either a domestic corporation or a “qualified foreign corporation” is subject to tax at the reduced rates applicable to certain capital gains. A qualified foreign corporation includes certain foreign corporations that are eligible for benefits of a comprehensive income tax treaty with the United States which the Secretary of the Treasury determines is satisfactory for purposes of this provision and which includes an exchange of information program. In addition, a foreign corporation not otherwise treated as a qualified foreign corporation is so treated with respect to any dividend it pays if the stock with respect to which it pays such dividend is readily tradable on an established securities market in the United States.
In the absence of a comprehensive income tax treaty between the United States and Bermuda, the Company will not be treated as a “qualified foreign corporation” under the treaty test. So long as the Company is not a PFIC (as discussed below), dividends paid by the Company to individual shareholders would qualify for these reduced rates if its stock was treated as readily tradable on an established securities market in the United States.
In Notice 2003-71, 2003-2 C.B. 922, the IRS determined that common or ordinary stock, or an American depositary receipt in respect of such stock, is considered readily tradable on an established securities market in the United States if it is listed on a national securities exchange that is registered under Section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) or on the Nasdaq Stock Market. As stated in the SEC’s Annual Report for 2002, registered national exchanges as of September 30, 2002 include the American Stock Exchange (now known asNYSE Amex Equities)Equities), the Boston Stock Exchange, the Cincinnati Stock Exchange, the Chicago Stock Exchange, the NYSE, the Philadelphia Stock Exchange, and the Pacific Exchange, Inc.
For so long as the Treasury and the IRS were continuingCommon Shares continue to consider, for subsequent years, the treatment of dividends with respect to stock listed only in a manner that did not meet this definition, such asbe traded on the Over-the-Counter Bulletin Board (the “OTC BB”)NASDAQ, or on the electronic Pink Sheets. In particular, the notice indicated that the Treasury and the IRS were considering whether or to what extent treatment of stock that was listed only in such manner as “readilyare readily tradable on anany other established securities market in the United States” should be conditioned on the satisfaction of parameters regarding minimum trading volume, minimum number of market makers, maintenance and publication of historical trade or quotation data, issuer reporting requirements under SEC or exchange rules, or issuer disclosure or determinations regarding PFIC status. The IRS has not yet provided further guidance on whether or in what circumstances, a company like the
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To the extent any distribution exceeds the current and accumulated earnings and profits of the Company for a taxable year, the distribution will be treated as a non-taxable return of capital to the extent of the U.S. Holder’s adjusted tax basis in the Common Shares with respect to which the distribution is made, causing a reduction in the adjusted basis of the Common Shares (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by the U.S. Holder on a subsequent disposition of the Common Shares). To the extent such distribution exceeds the U.S. Holder’s adjusted tax basis in the Common Shares, such excess will be treated as capital gain.
Taxation of Capital Gains
A U.S. Holder will recognize taxable gain or loss on any sale, exchange or other disposition of Common Shares (including a liquidation, dissolution or as a result of a non-pro rata redemption of Common Shares that qualified for treatment as a sale or exchange for United States federal income tax purposes) in an amount equal to the difference between the amount realized for the Common Shares and the U.S. Holder’s adjusted tax basis in the Common Shares. Such gain or loss generally will be treated as capital gain or loss and will be long-term capital gain or loss if the Common Shares have been held for more than one year on the date of the sale, exchange or other disposition thereof, and will be short-term capital gain or loss if the Common Shares have been held for one year or less on the date of the sale or exchange thereof. Any gain recognized by a U.S. Holder generally will be treated as United States source income. In general, an individual’s short-term capital gains are taxable as ordinary income and an individual’s long-term capital gains are subject to U.S. federal income tax at preferential rates.
Long-term capital gains of corporations generally are subject to the U.S. federal income tax at a current maximum marginal rate of 35%. Short-term capital gain generally is taxable at ordinary income rates. Although capital gains of corporations currently are taxed at the same rates as ordinary income, the distinction between capital gain and ordinary income or loss is relevant for purposes of, among other things, limitations on the deductibility of capital losses. Corporations may deduct capital losses only to the extent of capital gains and generally may carry back capital losses to each of the preceding three years and carry forward capital losses to each of the succeeding five years. Individuals may deduct capital losses to the extent of capital gains plus up to $3,000 ($1,500 for married individuals filing separate returns) and may carry forward capital losses indefinitely.
Backup Withholding
In general, information reporting requirements may be applicable to dividend payments (or other taxable distributions) made in respect of Common Shares to non-corporate U.S. Holders, and “backup withholding” at the rate of 28% (which rate is scheduled to increase to 31% after 2012) will apply to such payments (i) if the holder or beneficial owner fails to provide a taxpayer identification number in the manner required by U.S. law and applicable regulations, (ii) if the IRS notifies the payor that the taxpayer identification number furnished by the holder or beneficial owner is incorrect, (iii) if there has been notification from the IRS of a failure by the holder or beneficial owner to report all interest or dividends required to be shown on its United States federal income tax returns or (iv) in certain circumstances, if the holder or beneficial owner fails to comply with applicable certification requirements. In general, payment of the proceeds from a sale of Common Shares to or through a United States office of a broker is subject to both United States backup withholding and information reporting unless the holder or beneficial owner establishes an exemption. U.S. Holders who are required to establish their exempt status generally must provide such certification on IRS Form W-9. Amounts withheld under the backup withholding rules may be credited against a holder’s tax liability, and a holder may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS. Payment of the proceeds from the sale of Common Shares effected outside the United States by a foreign office of certain
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Passive Foreign Investment Company
In general, the Company will be treated as a PFIC for United States federal income tax purposes for any taxable year if either (i) at least 75% of the gross income of the Company is passive income or (ii) at least 50% of the value (determined on the basis of a quarterly average) of the Company’s assets is attributable to assets that produce or are held for the production of passive income. The Company believes, based on its current operations and assets, that it is not a PFIC and does not expect to become a PFIC in the future. This conclusion is a factual determination based on, among other things, a valuation of the Company’s assets, which will likely change from time to time.
If the Company were a PFIC for any taxable year during which a U.S. Holder held Common Shares, the U.S. Holder would be subject to special tax rules with respect to (i) any “excess distribution” by the Company to the U.S. Holder (generally any distribution received by the U.S. Holder in a taxable year that is greater than 125% of the average annual distribution received by the U.S. Holder in the three preceding taxable years, or the U.S. Holder’s holding period for the Common Shares, if shorter) and (ii) any gain realized on the sale or other disposition (including a pledge) of Common Shares.
Under these special tax rules, (i) the excess distribution or gain would be allocated ratably over the U.S. Holder’s holding period for the Common Shares, (ii) the amount allocated to the U.S. Holder’s current taxable year and to any period prior to the first taxable year in which the Company was a PFIC would be includible as ordinary income in the U.S. Holder’s current taxable year and (iii) the amount allocated to a prior year during which the Company was a PFIC would be subject to tax at the highest tax rate in effect for that year, and an interest charge would also be imposed with respect to the resulting tax attributable to each such prior year. The interest charge is computed using the applicable rates imposed on underpayments of United States federal income tax for the relevant periods.
The above rules will not apply if a “mark-to-market” election is available and a U.S. Holder validly makes such an election by filing a properly completed IRS Form 8621. If such election were made, a U.S. Holder generally would be required to take into account the difference, if any, between the fair market value and its adjusted tax basis in the Common Shares at the end of each taxable year as ordinary income or ordinary loss (to the extent of any net mark-to-market gains previously included in income). Thus, the U.S. Holder may recognize taxable income without receiving any cash to pay its tax liability with respect to such income. A U.S. Holder’s tax basis in the Common Shares would be adjusted to reflect any such income or loss amount. In addition, any gain from a sale, exchange or other disposition of the Common Shares would be treated as ordinary income, and any loss would be treated as ordinary loss (to the extent of any net mark-to-market gains previously included in income). A mark-to-market election is available to a U.S. Holder only if the Common Shares are considered “marketable stock” for these purposes. Generally, shares of a PFIC will be considered marketable stock if they are “regularly traded” on a “qualified exchange” within the meaning of applicable U.S. Treasury regulations. A class of shares is regularly traded during any calendar year during which such class of shares is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. A “qualified exchange” is defined to include a national securities exchange registered with the SEC or certain foreign exchanges. As the Common Shares of the Company commenced trading on the NASDAQ beginning on April 29, 2011, the mark-to-market election under the rules discussed above would beis available after that date if the Company were otherwise classified as a PFIC.
The special tax rules described above will also not apply to a U.S. Holder if the U.S. Holder elects to have the Company treated as a “qualified electing fund” (a “QEF election”) and the Company provides certain information to U.S. Holders. If the Company is treated as a PFIC, it will notify the U.S. Holders and provide such holders with the information necessary to make an effective QEF election, including
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A U.S. Holder that makes a valid QEF election will be currently taxable on its pro rata share of the Company’s ordinary earnings and net capital gain (at ordinary income and capital gains rates, respectively) for each taxable year that the Company is classified as a PFIC, regardless of whether distributions are received. Thus, the U.S. Holder may recognize taxable income without receiving any cash to pay its tax liability with respect to such income. The U.S. Holder’s basis in the Common Shares will be increased to reflect taxed but undistributed income. Distributions of income that have been previously taxed will result in a corresponding reduction of basis in the Common Shares and will not be taxed again as a distribution to the U.S. Holder.
A U.S. Holder owning Common Shares during any year that the Company is a PFIC must file IRS Form 8621. U.S. Holders should consult their tax advisors concerning the United States federal income tax consequences of holding Common Shares and of making a mark-to-market or QEF election if the Company is treated as a PFIC in the future.
Controlled Foreign Corporation
A non-U.S. corporation generally will be a CFC for U.S. tax purposes if United States shareholders collectively own more than 50 percent of the total combined voting power or total value of the corporation’s stock on any day during any taxable year. For this purpose, United States shareholders are limited to those U.S. persons who own, directly, indirectly or constructively, 10 percent or more of the total combined voting power of all classes of stock of the non-U.S. corporation. If a corporation is a CFC for an uninterrupted period of 30-days in any tax year, every United States shareholder that owns stock on the last day of the CFC’s tax year,taxyear, must include in gross income such shareholder’s pro rata share of the CFC’s “subpart F income” and income from investments in certain types of U.S. property (i.e., tangible personal property located in the United States, stock of a United States corporation, an obligation of a United States person, or a right to use patents, copyrights, and other similar property in the United States) even if the income has not been distributed to the shareholders in the form of dividends or otherwise. Subpart F income consists of certain specified categories of income including, among others, dividends, interest, rents, royalties, net gains from the sale of property giving rise to such income and income from certain types of transactions involving “related persons” as defined for U.S. federal income tax purposes.
Taxation of Non-U.S. Holders
Taxation of Dividends
Subject to the discussion in “Backup Withholding” below, Non-U.S. Holders generally will not be subject to U.S. federal income tax, including withholding tax, on distributions received on Common Shares, unless the distributions are effectively connected with a trade or business conducted in the United States (and, if an applicable income tax treaty so requires, attributable to a permanent establishment maintained in the United States).
If distributions are effectively connected with a U.S. trade or business (and, if applicable, attributable to a U.S. permanent establishment), Non-U.S. Holders generally will be subject to tax on such distributions in the same manner as U.S. Holders, as described in “Taxation of U.S. Holders — Taxation of Dividends” above. In addition, any such distributions received by a corporate Non-U.S. Holder may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
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Gain realized by Non-U.S. Holders upon the sale or exchange or complete redemption of Common Shares held as a capital asset generally should not be subject to United States federal income tax provided that the gain is not effectively connected with a trade or business conducted in the United States (and, if an applicable tax treaty so requires, attributable to a permanent establishment maintained in the United States). However, in the case of nonresident alien individuals, such gain will be subject to the 30% (or lower tax treaty rate) U.S. flat tax if (i) such person is present in the United States for 183 days or more during the taxable year (on a calendar year basis unless the nonresident alien individual has previously established a different taxable year) and certain other conditions are met; and (ii) such gain is derived from U.S. sources.
Generally, the source of gain upon the sale or exchange or complete redemption of Common Shares is determined by the place of residence of the shareholder. For purposes of determining the source of gain, the Code defines residency in a manner that may result in an individual who is otherwise a nonresident alien with respect to the United States being treated as a United States resident for purposes of determining the source of income only. Each potential individual investor who anticipates being present in the United States for 183 days or more (in any taxable year) should consult a separate, outside tax advisor with respect to the possible application of this rule.
Special rules may apply in the case of shareholders (i) that have an office or fixed place of business in the United States to which a distribution or gain in respect of the Common Shares is attributable; or (ii) that are former citizens or residents of the United States, CFCs, foreign personal holding companies or corporations that accumulate earnings to avoid United States federal income tax. Such persons in particular are urged to consult their United States tax advisors before investing in the Company.
Backup Withholding
In the case of Common Shares held by a Non-U.S. Holder, or held in the United States by a custodian or nominee for a Non-U.S. Holder, U.S. back-up withholding taxes may apply to distributions in respect of such Common Shares unless such Non-U.S. Holder properly certifies as to its non-U.S. status using IRS Form W-8.
Backup withholding is not an additional tax. Amounts withheld as backup withholding from a payment to a Non-U.S. Holder may be credited against his U.S. federal income tax liability and a Non-U.S. Holder may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.
U.S. State and Local Taxes
Future Tax Legislation
Future amendments to the Code, other legislation, new or amended U. S. Treasury Regulations, administrative rulings or guidance by the IRS, or judicial decisions may adversely affect the federal income tax aspects of an investment in the Company, with or without advance notice, and retroactively or prospectively.
U.S. Treasury Circular 230 Notice
Any United States federal tax advice included in this communication (a) was not intended to be used, and cannot be used, for the purpose of avoiding United States federal tax penalties, and (b) was not written to support the promotion or marketing of the transaction(s) or matter(s) addressed in the written advice. The taxpayer should seek advice based upon the taxpayer’s particular circumstances from an independent tax adviser.
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In the opinion of Appleby, the following discussion correctly describes the material tax consequences of the ownership of Common Shares under Bermuda law, subject to the assumptions, qualifications and limitations in the discussion below. Such summary is subject to changes in Bermuda law, including changes that could have retroactive effect.
Under current Bermuda law, there are no taxes on profits, income or dividends nor is there any capital gains tax. Furthermore, the Company has received from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act of 1966, as amended, an undertaking that, in the event that Bermuda enacts any legislation imposing tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax shall not be applicable to the Company or to any of its operations, or the shares, debentures or other obligations of the Company, until March 28, 2016. This undertaking does not, however, prevent the imposition of any such tax or duty on such persons as are ordinarily resident in Bermuda and holding such shares, debentures or obligations of the Company or of property taxes on Company-owned real property or leasehold interests in Bermuda.
As an exempted company, the Company must pay to the Bermuda government an annual government fee calculated on a sliding-scale basis by reference to its assessable capital, that is, its authorized share capital plus any share premium.
There is no stamp duty or other transfer tax payable upon the transfer of shares in the Company by shareholders.
The United States does not have a comprehensive income tax treaty with Bermuda.
10.5 Documents on Display
We are required to comply with the reporting requirements of the Securities Exchange Act, of 1934, as amended (the “Exchange Act”), applicable to a foreign private issuer. We are currently required to file annually a Form 20-F no later than sixfour months after the close of our fiscal year, which is December 31. Any time the Company is delinquent in filing timely any periodic reports, including an Annual Report on Form 20-F,20‑F, with the SEC, that delinquency may adversely affect the Company’s status on any exchange or quotation service on which its shares are listed or quoted and the Company may not be entitled to use certain abbreviated registration statements with the SEC in connection with the registration of any of its securities. We have previously been delinquent in filing our annual reports. As a result, the Company was delisted from the OTC BB and traded on the Pink Sheets. On April 9, 2008,trading in the Common Shares of the Company was restored to the OTC BB under the trading symbol “AWRCF.” On“AWRCF”.On April 29, 2011, the Common Shares of the Company commenced trading on the NASDAQ Capital Market tier under the trading symbol “APWC.”“APWC”.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
Our reports and other information, when so filed, may be inspected and copied (at prescribed rates) at the public reference facilities maintained by the Securities and Exchange Commission (the “SEC”)SEC at Judiciary Plaza, 100 F Street, N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information. In addition, the SEC maintains a web site that contains information filed electronically with the SEC, which can be accessed over the Internet athttp://www.sec.gov.www.sec.gov. We have filed all our reports electronically since November 4, 2002. Such reports can be accessed over the Internet at http://www.sec.gov.
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Item 11: Quantitative and Qualitative Disclosures About Market Risks
The Company has exposure to several quantitative market risks, including fluctuations in interest rates, foreign currency exchange rates and the pricing of commodities, principally copper, the Company’s main raw material. Risk management measures undertaken by the Company include entering into derivative agreements covering foreign exchange rates and copper pricing, as well as copper forward pricing agreements. The Company does not purchase or sell derivative instruments for trading purposes. The Company does not engage in trading activities involving copper contracts for which a lack of marketplace quotations would necessitate the use of fair value estimation techniques.
11.1 Interest Rate Risk
The Company is not currently a party to any derivative instruments to manage interest rate exposure. As in our line of business, derivative instruments would more commonly be employed to hedge the price of commodities, copper in our case.
11.2 Foreign Currency Risk
The Company has exposure to fluctuations in currency exchange rates. The Company’s revenues are generated primarily in the local currency in its principal operating jurisdictions; namely Thailand, China, Singapore and Australia. However, nearly all of the costs associated with the purchase of the Company’s raw materials, including copper, and its capital expenditures, including ongoing equipment upgrade and maintenance programs, are in U.S. dollars. In order to limit the risks that would otherwise result from changes in currency exchange rates, the Company enters into derivative financial instruments on a selective basis from time to time which are foreign exchange forward contracts that are cash flow hedges intended to hedge the currency fluctuations that impact the dollar value of sales revenues generated in the local markets of our operating subsidiaries. The fair value of foreign currency contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based upon quoted market prices. TheAs of December 31, 2011, the Company did not enter into any foreign currencyhad outstanding forward contract in 2010.exchange purchase contracts with notional values of $2.3 million.
As the Company’s operating subsidiaries incur operating costs in the local currency where they operate, the Company believes it is prudent that those operating subsidiaries incur indebtedness in the local currency when debt financing is necessary. The amount of indebtedness incurred by our operating subsidiaries from time to time is a function of our business strategy, the attractiveness of borrowing as opposed to other methods of financing operations and tax implications, among other considerations. The Company has exposure to currency exchange risk when the results of its operating subsidiaries are translated from the local currency into the U.S. dollar. At December 31, 2010 and 2009,2011, the cumulative other comprehensive gain (loss) account included in the total equity section of the consolidated balance sheet included a cumulative gain (loss)currency translation adjustments of $1.8 million and ($10.2 million),$0.9 million, respectively. This sensitivity analysis is inherently limited in that it assumes that multiple foreign currencies will always move in the same direction and to the same degree relative to the U.S. dollar.
In 20082011, we entered into derivative financial instruments on a selective basis throughout the year to mitigate foreign currency fluctuation risks arising from operating activities. The application of these instruments was primarily for currency hedging purposes and not for trading purposes. The Company uses Thai Baht forward foreign exchange contracts to reduce its exposure to foreign currency risk for liabilities denominated in foreign currency. A forward foreign exchange contract obligates the Company to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such
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11.3 Market Risks Relating to Copper
Copper is the principal raw material we use, accounting for a majority portion of the cost of sales in 2010.2011. We purchase copper at prices based on the average prevailing international spot market prices on the London Metal Exchange (the “LME”)LME for copper for the one month prior to purchase. The price of copper is influenced heavily by global supply and demand as well as speculative trading. As with other costs of production, changes in the price of copper may affect our cost of sales. Whether this has a material impact on our operating margins and financial results depends primarily on our ability to adjust our selling prices to our customers, such that increases and decreases in the price of copper are fully reflected in those selling prices. The purchase price of our products is based in part on the cost of copper used to manufacture those products. In addition, in the ordinary course of business we maintain inventories of raw materials and finished products reasonably necessary for the conduct of our business. These inventories typically reflect the cost of copper prevailing in the market at the time we purchase. Most of our sales of manufactured productsManufactured Products reflect copper prices prevailing at the time the products are ordered. A long-term decrease in the price of copper would require the Company to revalue the value of its inventory at periodic intervals to the then net realizable value, which could be below cost. Copper prices have been subject to considerable volatility and it is not always possible to manage our copper purchases and inventory so as to neutralize the impact of copper price volatility. Accordingly, significant volatility in copper prices could have an adverse effect on our operations. No assurance can be given that such volatility will not recur.
In an effort to mitigate the market risks associated with volatility in copper pricing, from time to time the Company enters into copper forward pricingpurchase contracts in order to minimize fluctuations of its cost of copper. These instruments permit the Company to hedge its cost of copper for periods from 10 months to 12 months. These forwardpurchase contracts were entered into with the purpose of securing the source of the copper. The Company entered into certain copper forwardpurchase contracts with copper suppliers in 2010.2011. All of the forwardpurchase contracts are still open as of the reporting date and with a latest due date in the later part of 2011.
11.4 Fair Value of Designated Market-Sensitive Derivative Contracts
(Not applicable)
Item 12: Description of Securities Other Than Equity Securities
(Not applicable)
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Part II
Item 13: Defaults, Dividend Arrearages and Delinquencies
The Company has experienced no material default in the payment of principal, interest, a sinking or purchase fund installment, or any other material default not cured within 30 days relating to the Company’s or any of its consolidated subsidiaries’ indebtedness.
Item 14: Material Modifications to the Rights of Security Holders and Use of Proceeds
(Not applicable)
Item 15: Controls and Procedures
Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the effectiveness of our disclosure controls and procedures in accordance with the provisions of Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended. BasedBased upon that evaluation and for the CEO andreasons stated in the CFOmanagement’s report on internal control over financial reporting below, our management concluded that our disclosure controls and procedures were effectiveineffective as of December 31, 2010.
Management’s report on Internal Control Overover Financial Reporting
Our management including our CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting. We do not expect thatreporting, as defined under Rule 13a-15(f) under the Securities Exchange Act of 1934.
Based on the Company’s evaluation under the applicable framework issued by COSO, our internal control will prevent all errors and all fraud, or eliminate the possibility of fraudulent conduct. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2011, our independent registered public accounting firm also determined the existence of a material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting assuch that there is a reasonable possibility that a material misstatement of December 31, 2010 (the “Assessment Date”). In making its assessment, management used the criteria set forth in Internal Control — Integrated Framework issuedregistrant’s annual or interim financial statements will not be prevented or detected on a timely basis by the Committeecompany’s internal controls.
Deficiencies were noted in our controls over complex and non-routine transactions in our financial statement closing process, including the accounting of Sponsoring Organizations (“COSO”)revenue recognition under bill-and-hold arrangements and consignment arrangement whereby the revenue was inappropriately recognized; the calculation and recording of income tax, deferred tax assets (and the Treadway Commission.related valuation allowance), inventory and related impairment accounts, and the misclassification of a number of intercompany balances. These criteria includedeficiencies were attributable to our decentralized reporting structure, our complex and manual consolidation process and inadequate reviews over account balances at the control environment, risk assessment, control activities, information and communication and monitoringreporting date. The aggregate effect of each of the above criteria.these deficiencies represented a material weakness. Based on this assessment, the Company’s management, including its CEO and CFO, concluded that the Company’s internal control over financial reporting was effectiveineffective as of the Assessment Date. In making its assessment, management determined that no material weaknesses existed as of the Assessment DateDecember 31, 2011.
Management is in the Company’s internal control over financial reporting.
1) engaging qualified accounting professionals with in-depth experience in U.S. GAAP and SEC reporting requirements as well as local GAAP at subsidiary level to ensure local financial information on the financial statement closing process which resulted in audit adjustments at year ended December 31, 2009. Deficiencies were noted in our controls over non-routine aspects of our financial statement closing process, includingreporting package is compliant with US GAAP;
2) improving communications between local subsidiaries’ finance team and local external auditors on existing and new U.S. GAAP issues before submitting U.S. GAAP package to headquarters; and
3) arranging regular constructive training sessions on an ongoing basis for the accounting for foreign currency transactionspersonnel of headquarters’ finance team that cover a broad range of accounting and translation whereby foreign currency translation amounts were improperly recorded in other comprehensive income insteadfinancial reporting topics and tightening the operation of the statement of operations, the calculation and recording of individual income tax liability, allowance for deferred tax assets, fixed assets residual value, and recurring consolidation entries. These deficiencies were attributable to our decentralized reporting structure, our complex consolidation process and inadequate reviews over account balances at December 31, 2009.
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Changes in internal control over financial reporting
Except as indicated in management’s report on internal control over financial reporting,for the remedial measures described above, there were no other changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during ourthe last fiscal year, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 16A. Audit Committee Financial Expert
During 2010 and until April 29, 2011, the Common Shares of the Company were traded on the over-the-counter bulletin board (“OTCBB”). As of April 29, 2011, the Common Shares of the Company trade on NASDAQ Capital market tier. While the Company’s Common Shares were traded on the OTCBB, the Company was not required to have an audit committee that met the requirements of, nor was it required to have an audit committee financial expert as contemplated by, Regulation 10A-3 under the Exchange Act. During those periods of time when the Company did not have any independent directors, our full Board of Directors fulfilled the functions of an audit committee pursuant to Section 3(a)(58)(B) of the Exchange Act. On September 28, 2007, our Board appointed Mr. Anson Chan and Dr. Yichin Lee as independent directors to fill the two casual vacancies on the Board, and on March 17, 2011, a third independent Director —– Dr. Lambert L. Ding was appointed, to constitute the members of the Audit Committee, with Mr. Chan serving as the Audit Committee’s chairman-chairman and financial expert. The Audit Committee of the Company’s Board of Directors now meets the requirements set forth in Regulation 10A-3 under the Exchange Act and under the rules of NASDAQ.
Item 16B. Code of Ethics
On April 26, 2005, the Company adopted a code of ethics applicable to its Chief Executive Officer and senior financial officers. A copy of the Company’s code of ethics for senior executives is on file with the SEC.
Item 16C. Principal Accountant Fees and Services
Audit Fees
The aggregate fees billed for fiscal years 20102011 and 20092010 for professional services rendered by the principal accountant for the audit of the Company’s annual financial statements or services normally provided by the accountant in connection with statutory and regulatory filings or engagements totaled $0.9 million and $0.8$0.9 million, respectively.
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No fees were billed for fiscal year 20102011 or 20092010 for assurance and audit-related services by the principal accountant other than as included in the figures provided in the preceding paragraph.
Tax Fees
The aggregate fees billed for fiscal years 20102011 and 20092010 for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning totaled approximately $34,000 and $121,000 and $19,000, respectively.
All Other Fees
There was IFRS conversion training provided by Ernst and Young taking place at Charoong Thai in the amount of $45,000, and paid for by Charoong Thai. Otherwise, there were no other fees billed for fiscal year 20102011 or 20092010 for products and services provided by the principal accountant, or other than those services described in the preceding paragraphs of this Item 16C.
Audit Committee Approval
The engagement of the accountant to render audit, audit-related and non-audit services is entered into pursuant to pre-approval policies and procedures established in the Charter of the Audit Committee of the Company. Each of the services described in this Item 16C was approved by the Audit Committee.
Item 16D. Exemptions from the Listing Standards for the Audit Committees
The Audit Committee of the Company’s Board of Directors consists of three directors, each of whom is independent, as such term is defined in Regulation 10A-3 promulgated under the Exchange Act, and one of whom is a financial expert.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During 2010,2011, there were no purchases of equity securities made by or on behalf of the Company or any “affiliated purchaser” for the purposes of this Item 16E.
Item 16F. Change in Registrant’s Certifying Accountant
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Item 16G. Corporate Governance
The Common Shares of the Company are traded on the NASDAQ Capital Markets tier. However, in listing on NASDAQ, as the Company has a more than fifty percent (50%) shareholder, the Company wasis entitled to rely upon a “controlled company exemption” that exempts it from having a board of directors comprised of a majority of independent directors. At present, a majority of the board of directors of the Company is affiliated with PEWC. The Company also relies on the NASDAQ’s allowance for Foreign Private Issuers to follow home country practices in lieu of the requirement that listed companies have regularly scheduled meetings at which only independent directors are present (“executive sessions”). The independent directors of the Company meet periodically in executive session in their capacity as members of the Audit Committee of the Board of Directors of the Company without other Directors present, but on occasion meet with the independent auditors of the Company present in such executive session. These are the only material differences between the Company’s corporate governance practices and the corporate governance practices set forth for domestic companies under the NASDAQ rules on the subject matter.
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Item 16H. Mine Safety Disclosure
(Not applicable)
Part III
Item 17: Financial Statements
The Company has elected to provide the financial statements and related information specified in Item 18 in lieu of Item 17.
Item 18: Financial Statements
See pages F-1 — F-49.
Item 19: Exhibits
19.1 | ||
| Index to Audited Financial Statements | |
Reports of independent registered accounting firms | ||
Consolidated balance sheets as of December 31, | ||
Consolidated statements of operations for the years ended December 31, | ||
Consolidated statements of shareholders’ equity for the years ended December 31, | ||
Consolidated statements of cash flows for the years ended December 31, | ||
Notes to consolidated financial statements | ||
19.2 | Index to Exhibits | |
3.1 | ||
Memorandum of Association of Asia Pacific Wire & Cable Corporation Limited (incorporated by reference to Exhibit 1.1 of the Company’s annual report on Form 20-F filed with the Securities and Exchange Commission on June 21, 2001). | ||
4.1 | ||
Amended and Restated Shareholders’ Agreement dated March 27, 2009 (incorporated by reference to Exhibit 3.4 of the Company’s Post-Effective Amendment No. 1 to Form F-1 filed with the Securities and Exchange Commission on April 2, 2009). | ||
4.2 | ||
Shareholders’ Agreement | ||
4.3 | ||
Agreement for the Sale and Purchase of (i) Shares in Crown Century Holdings Limited and (ii) Shareholder’s Loan (incorporated by reference to Exhibit 5.1 of the Company’s annual report on Form 20-F filed with the Securities and Exchange Commission on July 1, 2002). | ||
4.4 | ||
Settlement Agreement between Asia Pacific Wire & Cable Corporation, Ltd. and Sino-JP Fund Co., Ltd. (incorporated by reference to Exhibit 4.5 of the Company’s annual report on Form 20-F filed with the Securities and Exchange Commission on November 9, 2007). | ||
10.1 | Composite Services Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Form F-1 filed with the Securities and Exchange Commission on November 13, 1996). | |
10.2 | Summaries of Joint Venture Agreements (incorporated by reference to Exhibit 10.7 of the Company’s Amendment No. 1 to Form F-1 filed with the Securities and Exchange Commission on November 26, 2008). | |
10.3 | Loan Facility Agreement between Crown Century Holdings Limited and Bangkok Bank Public Company Limited dated March 17, 2011(incorporated by reference to Exhibit 10.8 of the Company’s Post-Effective Amendment No. 8 to Form F-1 on Form F-3 filed with the Securities and Exchange Commission on August 31, 2011). | |
14 | ||
Code of |
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15(a) | Amended and Restated Audit Committee Charter(incorporated by reference to Exhibit 16.G of the Form 20-F filed on May 13, 2011. | |
21 | List of significant subsidiaries (see Note 1 to the consolidated financial statements). | |
101 | ||
Interactive Data Files submitted pursuant to Rule 405 under Regulation S-T. |
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ASIA PACIFIC WIRE & CABLE | ||||
Date: | /s/ Yuan Chun Tang | |||
Yuan Chun Tang | ||||
Chief Executive Officer | ||||
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Audited Financial Statements Asia Pacific Wire & Cable Corporation Limited As of December 31, 2010 and 2011 Years ended December 31, 2009, 2010 and 2011 |
INDEX TO FINANCIAL STATEMENTS
CONTENTS
Page | ||||
Report of independent registered public accounting firms | F-2 | |||
2011 | F-3 | |||
2011 | F-5 | |||
2011 | F-7 | |||
2011 | F-8 | |||
F-9 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and StockholdersShareholders of Asia Pacific Wire & Cable Corporation Limited:
We have audited the accompanying consolidated balance sheets of Asia Pacific Wire & Cable Corporation Limited (the “Company”) and subsidiaries (the “Company” or “APWC”) as of December 31, 20102011 and 2009,2010, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years then ended.in the period ended December 31, 2011. 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 auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
F-2
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flowsconsolidated financial position of Asia Pacific Wire & Cable Corporation Limited and subsidiaries at December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the yearthree years in the period ended December 31, 20082011, in conformity with accounting principlesU.S. generally accepted in the United States of America.accounting principles.
Ernst & Young
Hong Kong SAR
April 30, 2012
F-3
CONSOLIDATED BALANCE SHEETS
(In thousands of US Dollars, except share data)
| As of December 31 | |
| 2010 | 2011 |
|
|
|
ASSETS |
|
|
|
|
|
Current assets: |
|
|
Cash and cash equivalents | $ 63,217 | $ 76,672 |
Unrestricted short-term bank deposits (note 5) | − | 2,529 |
Restricted short-term bank deposits (note 5) | 17,422 | 12,024 |
Accounts receivable, net of allowance for doubtful accounts of $6,886 and $4,614 at December 31, 2010 and 2011, respectively (note 10) | 144,454 | 98,329 |
Amounts due from related parties (note 17) | 8,246 | 5,227 |
Inventories (note 10) |
|
|
Distributed products | 639 | 2,243 |
Finished products | 32,781 | 35,786 |
Consignment inventory | 3,051 | − |
Work-in-progress | 19,108 | 16,434 |
Raw materials and supplies | 30,401 | 24,552 |
| 85,980 | 79,015 |
|
|
|
Deferred tax assets (note 11) | 3,320 | 5,185 |
Prepaid expenses | 5,514 | 7,157 |
Other current assets | 1,308 | 2,559 |
Total current assets | 329,461 | 288,697 |
|
|
|
Property, plant and equipment: |
|
|
Land | 6,291 | 5,964 |
Land use rights | 2,999 | 2,900 |
Buildings | 50,199 | 49,749 |
Machinery and equipment | 126,906 | 118,984 |
Motor vehicles | 4,431 | 4,203 |
Office equipment | 6,915 | 6,675 |
Construction in progress | 212 | 2,547 |
| 197,953 | 191,022 |
Accumulated depreciation and amortization | (154,052) | (148,108) |
| 43,901 | 42,914 |
|
|
|
Investments (note 7) | 744 | 618 |
Investments in equity investees (note 21) | 3,242 | 4,435 |
Goodwill (note 6) | 8,801 | − |
Other assets | 97 | 108 |
Deferred tax assets (note 11) | 677 | 517 |
| 13,561 | 5,678 |
|
|
|
|
|
|
Total assets | $ 386,923 | $ 337,289 |
As of December 31 | ||||||||
2009 | 2010 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 41,534 | $ | 63,217 | ||||
Restricted short-term bank deposits (note 5) | 13,145 | 17,422 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $8,694 and $6,886 at December 31, 2009 and 2010, respectively (note 9) | 101,849 | 144,454 | ||||||
Amounts due from related parties (note 15) | 5,664 | 8,246 | ||||||
Inventories, net of allowance for inventories of $3,995 and $2,315 at December 31, 2009 and 2010, respectively (note 9) | ||||||||
Distributed products | 5,295 | 639 | ||||||
Finished products | 30,294 | 32,781 | ||||||
Consigment inventory | 1,655 | 3,051 | ||||||
Products in process | 17,318 | 19,108 | ||||||
Raw materials and supplies | 14,485 | 30,401 | ||||||
69,047 | 85,980 | |||||||
Available-for-sale investments (note 6) | 106 | — | ||||||
Deferred tax assets (note 10) | 2,595 | 3,320 | ||||||
Prepaid expenses | 3,928 | 5,514 | ||||||
Other current assets | 1,180 | 1,308 | ||||||
Total current assets | 239,048 | 329,461 | ||||||
Property, plant and equipment: | ||||||||
Land | 5,470 | 6,291 | ||||||
Land use rights | 2,936 | 2,999 | ||||||
Buildings | 45,130 | 50,199 | ||||||
Machinery and equipment | 112,188 | 126,906 | ||||||
Motor vehicles | 3,724 | 4,431 | ||||||
Office equipment | 6,451 | 6,915 | ||||||
Construction in progress | 352 | 212 | ||||||
176,251 | 197,953 | |||||||
Accumulated depreciation and amortization | (132,611 | ) | (154,052 | ) | ||||
43,640 | 43,901 | |||||||
Available-for-sale investments (note 6) | 580 | 744 | ||||||
Investment in equity investees (note 18) | 3,263 | 3,242 | ||||||
Goodwill | 8,801 | 8,801 | ||||||
Other assets | 107 | 97 | ||||||
Deferred tax assets (note 10) | 613 | 677 | ||||||
13,364 | 13,561 | |||||||
Total assets | $ | 296,052 | $ | 386,923 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CONSOLIDATED BALANCE SHEETS
(In thousands of US Dollars, except share data)
| December 31, | |
| 2010 | 2011 |
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
Current liabilities: |
|
|
Bank loans and overdrafts (note 8) | $ 67,351 | $ 52,813 |
Accounts payable | 41,989 | 22,148 |
Accrued expenses | 13,197 | 10,737 |
Amounts due to related parties (note 17) | 17,140 | 14,693 |
Short-term loans from the immediate holding company (note 17) | 1,732 | 1,732 |
Income tax liabilities (note 11) | 10,627 | 9,835 |
Other current liabilities | 6,772 | 5,783 |
Total current liabilities | 158,808 | 117,741 |
Non-current liabilities: |
|
|
|
|
|
Other non-current liabilities | 822 | 3,678 |
Deferred tax liabilities (note 11) | 1,581 | 1,181 |
Total non-current liabilities | 2,403 | 4,859 |
Total liabilities | 161,211 | 122,600 |
|
|
|
Commitments and contingencies (notes 13) |
|
|
|
|
|
APWC shareholders’ equity: |
|
|
Common stock, $0.01 par value: |
|
|
Authorized shares of 50,000,000 shares at December 31, 2010 and 2011 |
|
|
Issued and outstanding shares – 13,830,769 shares (note 9) | 138 | 138 |
Additional paid-in capital | 111,541 | 111,541 |
Retained earnings | 40,229 | 34,545 |
Accumulated other comprehensive income | 1,286 | 286 |
Total APWC shareholders’ equity | 153,194 | 146,510 |
Non-controlling interests | 72,518 | 68,179 |
Total shareholders’ equity | 225,712 | 214,689 |
Total liabilities and shareholders’ equity | $ 386,923 | $ 337,289 |
December 31, | ||||||||
2009 | 2010 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Bank loans and overdrafts (note 7) | $ | 37,185 | $ | 67,351 | ||||
Accounts payable | 33,706 | 41,989 | ||||||
Accrued expenses | 9,244 | 13,197 | ||||||
Amounts due to related parties (note 15) | 17,487 | 17,140 | ||||||
Short-term loans from the immediate holding company (note 15) | 1,732 | 1,732 | ||||||
Income tax liabilities (note 10) | 7,059 | 10,627 | ||||||
Other current liabilities | 5,496 | 6,772 | ||||||
Total current liabilities | 111,909 | 158,808 | ||||||
Other liabilities | 546 | 822 | ||||||
Deferred tax liabilities (note 10) | 1,005 | 1,581 | ||||||
Total liabilities | 113,460 | 161,211 | ||||||
Commitments and contingencies (notes 12 and 14) | ||||||||
APWC shareholders’ equity (note 8): | ||||||||
Common stock, $0.01 par value: | ||||||||
Authorized shares of 50,000,000 shares at December 31, 2009 and 2010 | ||||||||
Issued and outstanding shares — 13,830,769 shares | 138 | 138 | ||||||
Additional paid-in capital | 111,541 | 111,541 | ||||||
Retained earnings | 25,908 | 40,229 | ||||||
Accumulated other comprehensive (loss) income (note 11) | (10,195 | ) | 1,286 | |||||
Total APWC shareholders’ equity | 127,392 | 153,194 | ||||||
Non-controlling interests | 55,200 | 72,518 | ||||||
Total shareholders’ equity | 182,592 | 225,712 | ||||||
Total liabilities and shareholders’ equity | $ | 296,052 | $ | 386,923 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of US Dollars, except share data)
| Year ended December 31, | ||
| 2009 | 2010 | 2011 |
|
|
|
|
Net sales |
|
|
|
Manufactured products (including sales to related parties amounting to $4,144, $3,806 and $3,663 for the years ended December 31, 2009, 2010 and 2011, respectively (note 17)) | $ 264,128 | $ 396,059 | $ 429,474 |
Distributed products | 28,102 | 26,935 | 25,500 |
Supply, delivery and installation of wires and cables | 34,008 | 23,600 | 16,972 |
| 326,238 | 446,594 | 471,946 |
Costs of sales |
|
|
|
Manufactured products(including purchases from related parties amounting to $36,327, $45,925 and $46,953 for the years ended December 31,2009, 2010 and 2011, respectively (note 17)) | (249,840) | (342,630) | (386,598) |
Distributed products (including purchases from related parties amounting to $23,458, $4,056 and $7,484 for the years ended December 31, 2009, 2010 and 2011, respectively (note 17)) | (26,585) | (25,557) | (22,545) |
Supply, delivery and installation of wires and cables | (33,119) | (23,358) | (16,915) |
Inventory impairment | 23,949 | 1,974 | (1,993) |
| (285,595) | (389,571) | (428,051) |
Gross profit | 40,643 | 57,023 | 43,895 |
|
|
|
|
Selling, general and administrative expenses | (24,259) | (28,965) | (30,760) |
Recovery for doubtful accounts | 108 | 940 | 1,487 |
Impairment of long-lived assets | (77) | − | − |
Impairment of investments | − | (346) | − |
Impairment of goodwill (note 6) | − | − | (8,791) |
Charges related to flooding (note 14) | − | − | (3,947) |
Income from operations | 16,415 | 28,652 | 1,884 |
|
|
|
|
Exchange gain (loss), net | 507 | 3,041 | (1,346) |
Interest income | 458 | 492 | 1,409 |
Interest expenses | (1,597) | (1,364) | (2,217) |
Share of net loss of equity investees | (40) | (21) | (58) |
Gain on liquidation of subsidiaries | 568 | − | − |
Loss on disposal of available-for-sale securities (note 7) | − | − | (68) |
Other income, net | 2,111 | 1,032 | 1,032 |
Income from continuing operations before income taxes | 18,422 | 31,832 | 636 |
Income taxes (note 11) | (4,647) | (6,441) | (4,566) |
Net income (loss) from continuing operations | 13,775 | 25,391 | (3,930) |
Discontinued operations (note 19) |
|
|
|
|
|
|
|
Income from operations of discontinued SPFO (including gain on disposal of $1,962 for the year ended December 31, 2011, purchases from related parties amounting to $nil, $4 and $317, and sales to related parties amounting to $nil, $54 and $693 for the years ended December 31, 2009, 2010 and 2011, respectively (note 17)) |
1,150 |
446 |
1,075 |
Income taxes | (697) | (450) | (229) |
(Loss) Income from discontinued operations | 453 | (4) | 846 |
Net income (loss) | 14,228 | 25,387 | (3,084) |
Net income attributable to non-controlling interests | 4,139 | 11,247 | 2,355 |
Income (loss) attributable to APWC | $ 10,089 | $ 14,140 | $ (5,439) |
Year ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Net sales | ||||||||||||
Manufactured products (sales to related parties amounted to $5,855 in 2008, $4,144 in 2009 and $3,860 in 2010 (note 15)) | $ | 447,848 | $ | 300,121 | $ | 418,623 | ||||||
Distributed products | 32,415 | 28,102 | 27,107 | |||||||||
Sales, delivery and installation of wires and cables | 20,535 | 34,008 | 23,600 | |||||||||
500,798 | 362,231 | 469,330 | ||||||||||
Costs of sales (purchases from related parties amounted to $57,401 in 2008, $59,785 in 2009 and $49,985 in 2010) | ||||||||||||
Manufactured products | (410,581 | ) | (280,085 | ) | (360,567 | ) | ||||||
Distributed products | (30,831 | ) | (26,585 | ) | (25,691 | ) | ||||||
Sales, delivery and installation of wires and cables | (21,491 | ) | (33,119 | ) | (23,358 | ) | ||||||
Recovery (allowance) for inventory reserve | (25,145 | ) | 23,949 | 1,974 | ||||||||
(488,048 | ) | (315,840 | ) | (407,642 | ) | |||||||
Gross profit | 12,750 | 46,391 | 61,688 | |||||||||
Selling, general and administrative expenses | (29,032 | ) | (28,715 | ) | (32,511 | ) | ||||||
Recovery (allowance) for doubtful accounts | (12 | ) | 860 | 1,317 | ||||||||
Impairment of long-lived assets | — | (77 | ) | — | ||||||||
Income (loss) from operations | (16,294 | ) | 18,459 | 30,494 | ||||||||
Exchange gain (loss), net | (1,712 | ) | 528 | 3,041 | ||||||||
Interest income | 990 | 458 | 602 | |||||||||
Interest expense | (5,769 | ) | (2,597 | ) | (2,561 | ) | ||||||
Share of net (loss) gain of equity investees | (142 | ) | (40 | ) | (21 | ) | ||||||
Impairment of investments | — | — | (346 | ) | ||||||||
Gain on liquidation of subsidiaries | — | 568 | — | |||||||||
Other income, net | 2,859 | 2,196 | 1,069 | |||||||||
Income (loss) before income taxes | (20,068 | ) | 19,572 | 32,278 | ||||||||
Income taxes (note 10) | (2,132 | ) | (5,344 | ) | (6,891 | ) | ||||||
Net income (loss) | (22,200 | ) | 14,228 | 25,387 | ||||||||
Less: Net loss (income) attributable to non-controlling interests | 8,551 | (4,139 | ) | (11,247 | ) | |||||||
Net income (loss) attributable to APWC | $ | (13,649 | ) | $ | 10,089 | $ | 14,140 | |||||
Basic and diluted income (loss) per share | $ | (0.99 | ) | $ | 0.73 | $ | 1.02 | |||||
Basic and diluted weighted average common shares outstanding | 13,830,769 | 13,830,769 | 13,830,769 | |||||||||
ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(In thousands of US Dollars, except share data)
|
|
|
|
| Year ended December 31, | ||
| 2009 | 2010 | 2011 |
|
|
|
|
Basic and diluted earnings (loss) per share from continuing operations | $ 0.71 | $ 1.02 | $ (0.49) |
Basic and diluted earnings (loss) per share from discontinued operations | 0.02 | (0.00) | 0.10 |
Basic and diluted earnings (loss) per share | $ 0.73 | $ 1.02 | $ (0.39) |
|
|
|
|
Basic and diluted weighted average common shares outstanding | 13,830,769 | 13,830,769 | 13,830,769 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands of US Dollars, except share data)
Common Stock | Additional paid-in capital |
Retained earnings | Accumulated other comprehensive (loss) income | Total APWC shareholders’ equity | Non-controlling interests | Total Shareholders’ equity | |||||||||||||||||||||
Accumulated |
|
|
| ||||||||||||||||||||||||
other | |||||||||||||||||||||||||||
Common | Additional | Retained | comprehensive | ||||||||||||||||||||||||
Stock | paid-in capital | earnings | income (loss) | Total | |||||||||||||||||||||||
Balance at January 1, 2008 | $ | 138 | $ | 111,541 | $ | 29,468 | $ | (4,364 | ) | $ | 136,783 | ||||||||||||||||
Comprehensive loss | |||||||||||||||||||||||||||
Net loss | — | — | (13,649 | ) | — | (13,649 | ) | ||||||||||||||||||||
Other comprehensive income (loss) , net of tax | |||||||||||||||||||||||||||
Currency translation adjustment | — | — | — | (8,994 | ) | (8,994 | ) | ||||||||||||||||||||
Pension liability adjustments (note 16) | — | — | — | 7 | 7 | ||||||||||||||||||||||
Unrealized loss on available-for-sale securities — net of income tax of $27 | — | — | — | (18 | ) | (18 | ) | ||||||||||||||||||||
Other comprehensive loss, net of tax | (9,005 | ) | |||||||||||||||||||||||||
Comprehensive loss | (22,654 | ) | |||||||||||||||||||||||||
Balance at December 31, 2008 | 138 | 111,541 | 15,819 | (13,369 | ) | 114,129 | |||||||||||||||||||||
Balance at January 1, 2009 | $ 138 | $ 111,541 | $ 15,819 | $ (13,369) | $ 114,129 | $ 48,578 | $ 162,707 | ||||||||||||||||||||
Comprehensive income |
|
|
| ||||||||||||||||||||||||
Net income | — | — | 10,089 | — | 10,089 | – | 10,089 | − | 10,089 | 4,139 | 14,228 | ||||||||||||||||
Other comprehensive income (loss), net of tax | |||||||||||||||||||||||||||
Currency translation adjustment | — | — | — | 3,177 | 3,177 | – | 3,177 | 3,177 | 2,483 | 5,660 | |||||||||||||||||
Pension liability adjustments (note 16) | — | — | — | (4 | ) | (4 | ) | ||||||||||||||||||||
Unrealized loss on sale of available-for- sale securities — net of income tax of $-18 | — | — | — | 1 | 1 | ||||||||||||||||||||||
Other comprehensive income, net of tax | 3,174 | ||||||||||||||||||||||||||
Pension liability adjustments (note 18) | – | (4) | – | (4) | |||||||||||||||||||||||
Unrealized loss on sale of available-for- sale securities – net of income tax expense of $18 | – | 1 | 1 | – | 1 | ||||||||||||||||||||||
Comprehensive income | 13,263 |
|
|
| 13,263 | 6,622 | 19,885 | ||||||||||||||||||||
|
|
| |||||||||||||||||||||||||
Balance at December 31, 2009 | 138 | 111,541 | 25,908 | (10,195 | ) | 127,392 | 138 | 111,541 | 25,908 | (10,195) | 127,392 | 55,200 | 182,592 | ||||||||||||||
Comprehensive income |
| ||||||||||||||||||||||||||
Net income | — | — | 14,140 | — | 14,140 | – | 14,140 | − | 14,140 | 11,247 | 25,387 | ||||||||||||||||
Other comprehensive income (loss), net of tax | |||||||||||||||||||||||||||
Currency translation adjustment | — | — | — | 12,027 | 12,027 |
– |
12,027 |
6,064 |
18,091 | ||||||||||||||||||
Pension liability adjustments (note 16) | — | — | — | (472 | ) | (472 | ) | ||||||||||||||||||||
Pension liability adjustments (note 18) |
– | – |
– | (472) | (472) | – | (472) | ||||||||||||||||||||
Increase in shareholding in a subsidiary | — | — | 181 | — | 181 | – | 181 | − | 181 | (181) | – | ||||||||||||||||
Transfer to loss on impairment of investment — unrealized loss on sale of available-for-sales securities, net of income tax of $84 | — | — | — | (74 | ) | (74 | ) | ||||||||||||||||||||
Other comprehensive income, net of tax | 11,481 | ||||||||||||||||||||||||||
Transfer to impairment of investment – unrealized loss on sale of available-for-sales securities, net of income tax of $84 | – | – | (74) | (74) | 188 | 114 | |||||||||||||||||||||
Comprehensive income | 25,802 |
|
| 25,802 | 17,318 | 43,120 | |||||||||||||||||||||
|
|
| |||||||||||||||||||||||||
Balance at December 31, 2010 | 138 | 111,541 | 40,229 | 1,286 | 153,194 | 72,518 | 225,712 | ||||||||||||||||||||
Comprehensive loss |
| ||||||||||||||||||||||||||
Net loss | – | (5,439) | − | (5,439) | 2,355 | (3,084) | |||||||||||||||||||||
Currency translation adjustment |
– |
(931) |
(2,795) |
(3,726) | |||||||||||||||||||||||
Pension liability adjustments(note 18) | – | (69) | – | (69) | |||||||||||||||||||||||
Unrealized loss of available-for-sale securities |
| (68) | (68) | – | (68) | ||||||||||||||||||||||
Reclassification of unrealized loss of available-for-sale securities upon disposal |
| 68 | 68 | – | 68 | ||||||||||||||||||||||
Increase in shareholding in a subsidiary | – | – | (245) | − | (245) | 245 | – | ||||||||||||||||||||
Dividend paid to non-controlling shareholders of subsidiaries |
|
| − | − | (3,195) | (3,195) | |||||||||||||||||||||
Disposal of a subsidiary |
| − | − | (949) | |||||||||||||||||||||||
Comprehensive loss |
|
| (6,684) | (4,339) | (11,023) | ||||||||||||||||||||||
|
| ||||||||||||||||||||||||||
Balance at December 31, 2010 | $ | 138 | $ | 111,541 | $ | 40,229 | $ | 1,286 | $ | 153,194 | |||||||||||||||||
Balance at December 31, 2011 | $ 138 | $ 111,541 | $ 34,545 | $ 286 | $ 146,510 | $ 68,179 | $ 214,689 | ||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of US Dollars, except share data)
Year ended December 31, | Year ended December 31, | ||||||||||||||
2008 | 2009 | 2010 | 2009 | 2010 | 2011 | ||||||||||
Operating activities: |
| ||||||||||||||
Net income (loss) | $ | (13,649 | ) | $ | 10,089 | $ | 14,140 | $ 14,228 | $ 25,387 | $ (3,084) | |||||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | |||||||||||||||
Adjustments to reconcile net income (loss) to net |
| ||||||||||||||
cash provided (used in) by operating activities: |
| ||||||||||||||
Loss (gain) on disposal of property, plant and equipment | (4 | ) | 6 | (93 | ) | 6 | (93) | (158) | |||||||
Loss on disposal of available-for-sale securities | – | 68 | |||||||||||||
Depreciation | 7,646 | 8,941 | 6,857 | 8,941 | 6,857 | 6,462 | |||||||||
Deferred income taxes | (145 | ) | 1,196 | (213 | ) | 1,196 | (213) | (2,273) | |||||||
(Recovery) allowance for doubtful accounts | 12 | (860 | ) | (1,317 | ) | ||||||||||
(Recovery) allowance for inventory reserve | 25,145 | (23,949 | ) | (1,974 | ) | ||||||||||
Recovery for doubtful accounts | (860) | (1,317) | (1,555) | ||||||||||||
Inventory impairment | (23,949) | (1,974) | 1,993 | ||||||||||||
Share of net loss of equity investees | 142 | 40 | 21 | 40 | 21 | 58 | |||||||||
Impairment of long-lived assets | — | 77 | — | 77 | – | ||||||||||
Impairment of investments | — | — | 346 | – | 346 | – | |||||||||
Impairment of goodwill | – | 8,791 | |||||||||||||
Gain on liquidation of subsidiaries | — | (568 | ) | — | (568) | – | |||||||||
Gain on disposal of a subsidiary | – | (1,962) | |||||||||||||
Pension liability adjustments | 7 | (4 | ) | 14 | (4) | 14 | 1 | ||||||||
Non-controlling interests | (8,551 | ) | 4,139 | 11,247 | |||||||||||
Foreign currency translation adjustment | 2,889 | 623 | (284 | ) | |||||||||||
Changes in operating assets and liabilities net of acquisitions of business: | |||||||||||||||
Unrealized foreign exchange difference, net | 623 | (284) | 974 | ||||||||||||
Changes in operating assets and liabilities |
| ||||||||||||||
Accounts receivable | 36,193 | (552 | ) | (31,779 | ) | (552) | (31,779) | 34,052 | |||||||
Inventories | 7,724 | 30,069 | (8,595 | ) | 30,069 | (8,595) | (5,539) | ||||||||
Other current assets | 406 | 2,470 | (1,510 | ) | 2,470 | (1,510) | (7,508) | ||||||||
Amounts due to related parties | (4,274 | ) | (7,303 | ) | (4,026 | ) | (7,303) | (4,026) | 580 | ||||||
Other long term assets | — | 740 | 1,165 | 740 | 1,165 | (343) | |||||||||
Accounts payable, accrued expenses and other liabilities | 6,506 | (6,747 | ) | 13,365 | (6,747) | 13,365 | (7,933) | ||||||||
Net cash provided by (used in) operating activities | 60,047 | 18,407 | (2,636 | ) | 18,407 | (2,636) | 22,624 | ||||||||
Investing activities: |
| ||||||||||||||
Decrease (increase) in restricted short-term bank deposits | 1,941 | 2,428 | (3,066 | ) | |||||||||||
Increase (decrease) in unrestricted short-term bank deposits | (5,906 | ) | 7,756 | — | |||||||||||
Placement of unrestricted short-term bank deposits to financial institutions |
– |
(2,625) | |||||||||||||
Maturity of unrestricted short-term bank deposits from financial institutions |
7,786 |
− | |||||||||||||
Placement of restricted short-term bank deposits to financial institutions |
(2,251) |
(12,638) |
(13,906) | ||||||||||||
Maturity of restricted short-term bank deposits from financial institutions |
4,656 |
9,696 |
11,326 | ||||||||||||
Purchases of property, plant and equipment | (3,383 | ) | (3,260 | ) | (3,653 | ) | (3,260) | (3,653) | (8,888) | ||||||
Proceed from disposal of an available-for-sale securities | – | 24 | |||||||||||||
Proceeds from disposal of property, plant and equipment | 416 | 153 | 147 | 153 | 147 | 165 | |||||||||
Decrease in investment in equity investee | — | 800 | — | ||||||||||||
Proceeds from disposal of other assets | 2,368 | — | — | ||||||||||||
Purchases of other assets | (592 | ) | — | — | |||||||||||
Decrease in investment in equity investees | 800 | − | |||||||||||||
Net cash provided by (used in) investing activities | (5,156 | ) | 7,877 | (6,572 | ) | 7,884 | (6,448) | (13,904) | |||||||
Financing activities: |
| ||||||||||||||
Repayments of long-term debt | (240 | ) | — | — | |||||||||||
Dividend paid during the year | − | (3,195) | |||||||||||||
Repayments of bank loans | (54,643 | ) | (30,733 | ) | (19,608 | ) | (30,733) | (19,608) | (22,503) | ||||||
Proceeds from bank loans | 10,431 | 9,023 | 46,021 | 9,023 | 46,021 | 31,319 | |||||||||
Net cash (used in) provided by financing activities | (44,452 | ) | (21,710 | ) | 26,413 | (21,710) | 26,413 | 5,621 | |||||||
Effect of exchange rate changes on cash and cash equivalents | (2,056 | ) | (550 | ) | 4,478 | (557) | 4,354 | (886) | |||||||
| |||||||||||||||
Net increase in cash and cash equivalents | 8,383 | 4,024 | 21,683 | 4,024 | 21,683 | 13,455 | |||||||||
Cash and cash equivalents at beginning of year | 29,127 | 37,510 | 41,534 | 37,510 | 41,534 | 63,217 | |||||||||
Cash and cash equivalents at end of year | $ | 37,510 | $ | 41,534 | $ | 63,217 | $ 41,534 | $ 63,217 | $ 76,672 | ||||||
Supplemental disclosure of cash flow information: | |||||||||||||||
Cash paid for interest | $ | 6,037 | $ | 2,918 | $ | 2,056 | $2,918 | $ 2,056 | $ 1,861 | ||||||
Cash paid for income taxes | 5,177 | 1,900 | 3,547 | 1,900 | 3,547 | 7,412 |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. Dollars, except share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Asia Pacific Wire & Cable Corporation Limited (“APWC” or the “Company”), which is a subsidiary of Pacific Electric Wire & Cable Co., Ltd. (“PEWC”), a Taiwanese company, was incorporated as an exempted company in Bermuda on September 19, 1996 under the Companies Act 1981 of Bermuda (as amended) for the purpose of acting as a holding company. The Company is principally engaged in owning operating companies engaged in the power cable, telecommunication cable, enameled wire and electronic cable industry.
The Company’s operating subsidiaries (the “Operating Subsidiaries”) are engaged in the manufacturing and distribution of telecommunications, power cable and enameled wire products in Singapore, Thailand, Australia, the People’s Republic of China (“PRC”) and other markets in the Asia Pacific region. Major customers of the Operating Subsidiaries include government organizations, electric contracting firms, electrical dealers, and wire and cable factories. The Company’s Operating Subsidiaries also engage in the distribution of certain wire and cable products manufactured by PEWC and third parties. In certain markets, the Company also provides project engineering services to customers through its SDI (Supply, Delivery and Installation) business segment.
The Company was listed on the New York Stock Exchange in March 1997. On December 24, 2001, the staff of the New York Stock Exchange (“NYSE”) announced that it had determined that the trading of the common stock of APWC should be suspended prior to December 31, 2001. The decision was reached in view of the fact that the Company’s stock price had fallen below NYSE’s continued listing standards. Following the delisting of the Company’s common stock on the NYSE, the Company’s common stock was traded under the ticker AWRCF, on the Over-the-Counter Bulletin Board (“OTC BB”), operated by the National Association of Securities Dealers, Inc. (“NASD”). After the Company failed to timely file its annual report on Form 20-F for the 2004 fiscal year, the Company was delisted from the OTC BB in August 2005 and thereafter time its shares of common stock were quoted on the “pink sheets” market by Pink Sheets LLC, a privately owned company that provides pricing and financial information for over-the-counter securities.
On June 28, 2007, SOF Investment, L.P. (“SOF”), a Delaware limited partnership controlled by MSD Capital, L.P. acquired 20% of the issued and outstanding shares of the Company from a private equity investor and entered into a shareholders’ agreement with the Company and PEWC.
On April 9, 2008, the Company was listed again and began trading its common stock on the OTC BB after completing all reporting requirements and filing all outstanding financial reports with the US Securities and Exchange Commission (“SEC”). The Company was subject to the reporting requirements under the Securities Exchange Act of 1934.
On March 30, 2009, SOF sold 10.2% of the issued and outstanding shares of the Company to PEWC. PEWC is currently holding 65.6% of the equity of the Company and COF is holding 9.8%. The remaining 24.6% of the issued and outstanding common stock were publicly traded on the Over-the-Counter Bulletin Board (“OTC BB”) prior to that date.
On April 29, 2011, the Company’s common stock commenced trading on NASDAQ (Capital Markets).
As of July 1, 2011, SOF transferred its 9.8% interest in the Company to MSD Credit Opportunity Master Fund, L.P. (“COF”), which became a party to the shareholders agreement, as amended and restated on March 27, 2009 (“Amended Shareholders Agreement”), and succeeded to all of the right, title, and interest in the common stock previously held by SOF.
Share Capital
On September 8, 2008, the Company’s shareholders approved an increase to the authorized share capital from 20,000,000 common shares, par value $0.01 per share, to 50,000,000 common shares, par value $0.01 per share.
ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. Dollars, except share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES(continued)
The subsidiaries of the Company are set out below:
Place of incorporation and operations | Percentage of equity interest As of December 31, | |||||||||
2010 | 2011 | |||||||||
Percentage of | ||||||||||
Equity interest | ||||||||||
As of December 31, | ||||||||||
Place of incorporation and operations | 2009 | 2010 | ||||||||
The British Virgin Islands |
| |||||||||
| ||||||||||
Asia Pacific Wire & Cable General Holdings Ltd | 100 | % | 100 | % | 100% | 100% | ||||
| ||||||||||
PRC (APWC) Holding Ltd. | 100 | % | 100 | % | 100% | |||||
| ||||||||||
Samray Inc. | 100 | % | 100 | % | 100% | |||||
| ||||||||||
Siam (APWC) Holdings Ltd. | 100 | % | 100 | % | 100% | |||||
| ||||||||||
Moon View Ltd. | 100 | % | 100 | % | 100% | |||||
| ||||||||||
Trigent Investment Holdings Limited | 100 | % | 100 | % | 100% | 100% | ||||
| ||||||||||
Crown Century Holdings Ltd. | 100 | % | 100 | % | 100% | 100% | ||||
|
| |||||||||
Singapore |
|
| ||||||||
|
| |||||||||
Sigma Cable Company (Private) Limited (“Sigma Cable”) | 98.3% | 98.3% | ||||||||
|
| |||||||||
Sigma-Epan International Pte Ltd. (“Sigma-Epan”) | 100% | |||||||||
|
| |||||||||
Epan Industries Pte Ltd. | 100% | |||||||||
|
| |||||||||
Epan Data-Comm System Pte Ltd | 100% | |||||||||
|
| |||||||||
Singvale Pte Ltd (“Singvale”) | 100% | |||||||||
|
| |||||||||
Malaysia |
|
| ||||||||
|
| |||||||||
Elecain Industry Sdn. Bhd. | 92.6% | |||||||||
|
| |||||||||
Sigma-Epan Malaysia Sdn. Bhd. | 100% | |||||||||
|
| |||||||||
The People’s Republic of China |
| |||||||||
|
| |||||||||
Ningbo Pacific Cable Co., Ltd. (“Ningbo Pacific”) | 94.31% | 95.80% | ||||||||
|
| |||||||||
Shanghai Yayang Electric Co., Ltd. (“Shanghai Yayang”) | 54.41% | |||||||||
|
| |||||||||
Shandong Pacific Fiber Optics Co. Ltd (“SPFO”)** | 51% | 0% | ||||||||
|
| |||||||||
Pacific Electric Wire & Cable (Shenzhen) Co., Ltd (“PEWS”) | 100% | |||||||||
|
| |||||||||
Hong Kong |
| |||||||||
|
| |||||||||
Crown Century Holdings Limited (“CCH (HK)”) | 100% | |||||||||
|
|
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. Dollars, except share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
Place of incorporation and operations | Percentage of equity interest As of December 31, | |
| 2010 | 2011 |
Australia |
|
|
|
|
|
Australia Pacific Electric Cable Pty Limited (“APEC”) | 99.40% | 99.40% |
|
|
|
Thailand |
|
|
|
|
|
Charoong Thai Wire and Cable Public Company Limited(“Charoong Thai”)* | 50.93% | 50.93% |
|
|
|
Siam Pacific Electric Wire & Cable Company Limited(“Siam-Pacific”) | 50.93% | 50.93% |
|
|
|
Pacific-Thai Electric Wire & Cable Company Limited(“Pacific-Thai”)*** | 50.93% | 0% |
|
|
|
Hard Lek Limited (“Hard Lek”) | 73.98% | 73.98% |
|
|
|
APWC (Thailand) Co., Ltd | 99.48% | 99.48% |
|
|
|
Thailand |
|
|
|
|
|
PEWC (Thailand) Co., Ltd | 99.48% | 99.48% |
|
|
|
CTW Beta Co. Ltd. | 50.89% | 50.89% |
|
|
|
Siam Fiber Optics Co. Ltd | 30.56% | 30.56% |
|
|
|
Myanmar |
|
|
|
|
|
Myanmar Sigma Cable Co., Ltd.(inactive) | 78.59% | 78.59% |
* Charoong Thai is listed on the Stock Exchange of Thailand and is engaged in the manufacturing of wire and cable products for the power and telecommunications industries in Thailand.
** SPFO was disposed of to independent third parties on December 1, 2011. See note 1(d) and 19.
*** Pacific-Thai transferred its business into its parent company, Siam-Pacific, on January 5, 2011 and registered its dissolution with the Ministry of Commerce on January 5, 2011. The Company anticipates the dissolution will be completed in 2012.
Percentage of | ||||||||
Equity interest | ||||||||
As of December 31, | ||||||||
Place of incorporation and operations | 2009 | 2010 | ||||||
Singapore | ||||||||
Sigma Cable Company (Private) Limited (“Sigma Cable”) | 98.3 | % | 98.3 | % | ||||
Sino-Sin Trading Pte. Ltd. (“Sino-Sin”) ** | 0 | % | 0 | % | ||||
Sigma-Epan International Pte Ltd. (“Sigma-Epan”) | 100 | % | 100 | % | ||||
Epan Industries Pte Ltd. | 100 | % | 100 | % | ||||
Epan Data-Comm System Pte Ltd | 100 | % | 100 | % | ||||
Singvale Pte Ltd (“Singvale”) | 100 | % | 100 | % | ||||
Malaysia | ||||||||
Elecain Industry Sdn. Bhd. | 92.6 | % | 92.6 | % | ||||
Sigma-Epan Malaysia Sdn. Bhd. | 100 | % | 100 | % | ||||
The People’s Republic of China | ||||||||
Ningbo Pacific Cable Co., Ltd. (“Ningbo Pacific”) | 94.31 | % | 94.31 | % | ||||
Shanghai Yayang Electric Co., Ltd. (“Shanghai Yayang”) | 54.41 | % | 54.41 | % | ||||
Shandong Pacific Fiber Optics Co.Ltd (“SPFO”) | 51 | % | 51 | % | ||||
Pacific Electric Wire & Cable (Shenzhen) Co., Ltd (“PEWS”) | 100 | % | 100 | % | ||||
Hong Kong | ||||||||
Crown Century Holdings Limited (“CCH (HK)”) | 100 | % | 100 | % | ||||
Australia | ||||||||
Australia Pacific Electric Cable Pty Limited (“APEC”) | 98.53 | % | 99.40 | % | ||||
Thailand | ||||||||
Charoong Thai Wire and Cable Public Company Limited (“Charoong Thai”)* | 50.93 | % | 50.93 | % | ||||
Siam Pacific Electric Wire & Cable Company Limited (“Siam-Pacific”) | 50.93 | % | 50.93 | % | ||||
Pacific-Thai Electric Wire & Cable Company Limited (“Pacific-Thai”) | 50.93 | % | 50.93 | % | ||||
Hard Lek Limited (“Hard Lek”) | 73.98 | % | 73.98 | % | ||||
APWC (Thailand) Co., Ltd | 99.48 | % | 99.48 | % |
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. Dollars, except share data)
Percentage of | |||||||||
Equity interest | |||||||||
As of December 31, | |||||||||
Place of incorporation and operations | 2009 | 2010 | |||||||
Thailand | |||||||||
PEWC (Thailand) Co., Ltd | 99.48 | % | 99.48 | % | |||||
CTW Beta Co. Ltd. | 50.89 | % | 50.89 | % | |||||
Siam Fiber Optics Co. Ltd | 30.56 | % | 30.56 | % | |||||
Myanmar | |||||||||
Myanmar Sigma Cable Co., Ltd. (Not active) | 78.59 | % | 78.59 | % |
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
ii) The equity investees of the Company are set out below:
Place of incorporation and operations | Percentage of equity interest As of December 31, | |
| 2010 | 2011 |
The People’s Republic of China |
|
|
|
|
|
Shandong Huayu Pacific Fiber Optics Communications Co., Ltd. (“Shandong Huayu”) | 48.73% | 48.73% |
|
|
|
Shandong Pacific Rubber Cable Co., Ltd. (“SPRC”) | 25.00% | 25.00% |
|
|
|
Thailand |
|
|
|
|
|
Siam Pacific Holding Company Limited (“SPHC”) | 49.00% | 49.00% |
|
|
|
Loxley Pacific Co., Ltd. (“Lox Pac”) | 21.39% | 21.39% |
Acquisitions accounted for as purchases and disposals undertaken by the Company during the years ended December 31, 2009, 2010 and 2011 included the following:
(a)In 2002, three wholly owned subsidiaries of Sigma-Epan were placed into liquidation. In April 2009, the liquidator received the clearance letters from government authorities of Singapore relating to the dissolution of three subsidiaries of Sigma-Epan. On May 22, 2009, Sigma-Epan conducted a final meeting to dissolve the subsidiaries. As at December 31, 2002, the Company’s balance sheet includes liabilities of $568 resulting from these subsidiaries which was recognized as gain on liquidation of subsidiaries in 2009.
(b)On March 31, 2010, CCH acquired 51% of APEC shares from Sigma Cable, thereby increasing the Company’s interest in APEC from 98.53% to 99.40%. On April 14, 2010, CCH acquired 100% of Sigma Epan from Samray, the Company’s interest in Sigma-Epan has not changed and Sigma-Epan remains as a wholly owned subsidiary of the Company.
(c)On May 31, 2011, the Company contributed additional capital in Ningbo Pacific in the form of a cash injection of $5 million. The Company’s interest in Ningbo Pacific increased from 94.31% to 95.80%.
(d)On December 1, 2011, the Company disposed its entire 51% equity interest in SPFO. Proceeds from the disposal of SPFO were $2.9 million (RMB18.5 million). The Company recorded a gain on disposal amounting to $1.96 million in thestatement of operations.
Put Right and Option
Under the terms of the Amended Shareholders’ Agreement, COF has the right and option (but not the obligation) to sell to PEWC upon the occurrence of a Put Event (defined below), and PEWC agreed to purchase from COF upon the occurrence of a Put Event, all Registrable Securities then owned by COF (the “ Put Shares ”), for an amount equal to the Put Price (defined below) together with interest (calculated on the basis of a 360 day year) on the Put Price, computed (x) from June 28, 2007 through May 31, 2010 at a rate per annum that shall be equal to the Libor Rate plus fifty (50) basis points (compounded annually), and (y) from June 1, 2010 until the Put Closing (defined below) at a rate per annum that shall be equal to the Libor Rate plus one hundred and fifty (150) basis points (compounded annually) (the “ Put Right ”). If the Put Event terminates prior to the closing of such Put Right, the exercise of the Put Right is deemed rescinded and the transaction relating to the Put
Percentage of | ||||||||
Equity interest | ||||||||
As of December 31, | ||||||||
Place of incorporation and operations | 2009 | 2010 | ||||||
The People’s Republic of China | ||||||||
Shandong Huayu Pacific Fibre Optics Communications Co., Ltd. (“Shandong Huayu”) | 48.73 | % | 48.73 | % | ||||
Shandong Pacific Rubber Cable Co., Ltd. (“SPRC”) | 25.00 | % | 25.00 | % | ||||
Thailand | ||||||||
Siam Pacific Holding Company Limited (“SPHC”) | 49.00 | % | 49.00 | % | ||||
Loxley Pacific Co., Ltd. (“Lox Pac”) | 21.39 | % | 21.39 | % |
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. Dollars, except share data)
1.ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
Right is deemed cancelled, but this will not terminate the existence of a future Put Right upon the triggering of a future Put Event.
A “Put Event” means any date (i) after March 11, 2009 whereby an Event has occurred and continues to occur, or (ii) after February 1, 2011 whereby the shares are not listed on a US Securities Market, which means any of the NASDAQ Stock Market, Inc. (Global Market or Global Select Market), Alternext U.S. (f/k/a the American Stock Exchange LLC), the New York Stock Exchange LLC or in conjunction with a dual listing on, or a transfer from, a US Securities Market to one or more of the principal or secondary exchanges for the public trading of equity securities in any of Hong Kong, Tokyo or Singapore. The “Put Price” means for (i) shares purchased pursuant to the Purchase Agreement, an aggregate amount equal to the product of (a) the number of shares being sold and (b) US$4.35 and (ii) Shares purchased under preemptive right provisions of the Amended Shareholders’ Agreement, and aggregate amount equal to the purchase price thereof.
The Shareholders’ Agreement does not contain any provisions that impose any purchase, reimbursement or financing obligations on the Company in the event that SOF exercises the Put Right. The Put Right is an obligation solely of PEWC and not of the Company. However, for the avoidance of doubt and as a re-affirmation that the financial and other obligation to SOF in the event
of an exercise of the Put Right rest exclusively with PEWC, the Company has, on March 27, 2009, entered into a Non-Recourse Confirmation Agreement with PEWC whereby PEWC (i) covenants that it has no put right against the Company relating to the Put Shares and that PEWC’s obligations to SOF are without recourse to the Company, (ii) waives any such right should it arise in the future, and (iii) agrees that it shall not cause the Company, directly or indirectly, to incur any costs associated with the exercise of the Put Right.
The Shareholders’ Agreement provides, and the Non-recourse Confirmation Agreement confirms, that the Put Right is solely the obligation of PEWC. The Company has no purchase, reimbursement or financing obligations in the event that SOF exercises the Put Right. As such, the Company has classified the Put Shares as equity in the accompanying financial statements.
The Company received an approval letter from Nasdaq on April 13, 2011 for the listing of its common stock on Nasdaq, with “APWC” as the trading symbol and, as noted, on April 29, 2011, the Company’s common stock commenced trading on NASDAQ (Capital Markets), which tier does not fit within the definition of a national “Securities Market”, as provided in the Shareholders’ Agreement. The Company intends to apply to list the common stock on the Global Markets tier after the Company is satisfied that it qualifies in all respect for that tier. The Company is not aware of that COF has taken any action with respect to the common stock held by it up to date.
2. BASIS OF PRESENTATION
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The basis of accounting differs from that used in the statutory financial statements of the Company’s subsidiaries and equity investee companies, which are prepared in accordance with the accounting principles generally accepted in their respective countries of incorporation.
All dollar amounts in the financial statements and in the notes herein are U.S. Dollars (“US$”) unless otherwise designated.
3. CHANGES IN PRESENTATION OF COMPARATIVE FINANCIAL STATEMENTS
SPFO was consolidated prior to its disposal and it met the criteria for reporting as discontinued operations. Therefore, the results of operations of SPFO and the gain of the disposal have been classified as “Income from operations of discontinued SPFO” in the consolidated statements of operations for the year ended December 31, 2011 and prior periods amounts have been reclassified accordingly.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. Dollars, except share data)
4.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated on consolidation. The Company’s investments for which its ownership exceeds 20%, but which are not majority-owned or controlled, are accounted for using the equity method if the Company has the ability to exercise significant influence over the companies’ operating and financial policies. When the Company’s carrying value in an equity investee company is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company has guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles accepted in the United States requires management to make estimates, judgements, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates reflected in the Company’s consolidated financial statements include, but are not limited to, useful lives and residual values of long-lived assets, impairment assessment of long-lived assets and goodwill, allowance for accounts and other receivable, accounting for deferred income tax, income tax position, inventory valuation, valuation allowance of deferred tax assets. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, bank deposits and all short-term highly liquid investments with an original maturity of three months and are readily convertible to known amounts of cash.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out or weighted average method.
If the expected selling price less completion costs and costs to execute sales (market) is lower than the carrying amount, a write-down is charged to expenses in cost of sales for the amount by which the carrying amount exceeds its market. When the finished goods that were previously written down to market are subsequently sold at above market, a recovery is credited to cost of sales. See note 10 – Valuation and Qualifying Accounts.
Income Taxes
The Company follows the liability method of accounting for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse.
Current income tax expense is the amount of income taxes expected to be payable for the current year. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. ASC 740, requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent the Company believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of its deferred tax assets, including its recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the carry-forward
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. Dollars, except share data)