20-F 1 file001.txt FORM 20-F SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C., 20549 ------------------- FORM 20-F [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to 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) 19 BENOI ROAD, LEVEL 3A SIGMA CABLE HIGH TECH COMPLEX SINGAPORE 629909 (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12 (b) of the Act.
Title for each class Name of each exchange on which registered COMMON SHARE, PAR VALUE $0.01 PER SHARE (THE "COMMON STOCK") NONE
Securities registered or to be registered pursuant to Section 12 (g) of the Act. None ------------------------------ (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. Common Stock ------------------------------ (Title of Classes) 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 shares of Common Stock 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. Yes [X] No [ ] Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 [ ] Item 18 [X] CONTENTS
OTHER CONVENTIONS.................................................................................................1 Item 1: Identity of Directors; Senior Management and Advisers.................................................1 Item 2: Offer Statistics and Expected Timetable...............................................................1 Item 3: Key Information about Asia Pacific Wire & Cable.......................................................1 3.1 Selected Consolidated Financial Data..................................................................1 3.2 Exchange Rates........................................................................................2 3.3 Risk Factors..........................................................................................5 3.4 Forward-looking Statements...........................................................................11 Item 4: Information on the Company...........................................................................11 4.1 History and Development of the Company; Recent Developments..........................................11 4.2 Business Overview....................................................................................14 4.3 Organizational Structure.............................................................................28 4.4 Property, Plant and Equipment........................................................................31 Item 5: Operating and Financial Review and Prospects.........................................................33 5.1 Disclosures of Critical Accounting Policies..........................................................33 5.2 Summarized Income Statement..........................................................................36 5.3 Operating Results....................................................................................38 5.4 Liquidity and Capital Resources......................................................................45 5.5 Inflation............................................................................................48 Item 6: Directors, Senior Management and Employees...........................................................48 6.1 Directors and Senior Management......................................................................48 6.2 Audit Committee......................................................................................49 6.3 Remuneration Committee...............................................................................50 6.4 Compensation.........................................................................................50 6.5 Employees............................................................................................50 Item 7: Major Shareholders and Related Party Transactions....................................................51 7.1 Major Shareholders...................................................................................51 7.2 Related Party Transactions...........................................................................51 Item 8: Financial Information................................................................................52 8.1 Legal Proceedings....................................................................................52 8.2 Dividend Policy......................................................................................54 Item 9: The Offer and Listing................................................................................54 9.1 Historical Trading Information.......................................................................54 9.2 Nature of the Trading Market.........................................................................56 i Item 10: Additional Information...............................................................................56 10.1 Memorandum of Association and Bye-laws...............................................................56 10.2 Material Contracts...................................................................................65 10.3 Environmental Matters................................................................................67 10.4 Insurance............................................................................................67 10.5 Credit Support.......................................................................................67 10.6 Taxation.............................................................................................68 10.7 Documents on Display.................................................................................72 Item 11: Quantitative and Qualitative Disclosures About Market Risk...........................................72 11.1 Foreign Currency Exposure............................................................................72 11.2 Interest Rate Risk...................................................................................73 11.3 Risks Relating to Copper.............................................................................74 Item 12: Description of Securities Other Than Equity Securities...............................................74 Item 13: Defaults, Dividend Arrearages and Delinquencies......................................................74 Item 14: Material Modifications to the Rights of Security Holders and Use of Proceeds.........................74 Item 15: Disclosure Controls and Procedures...................................................................74 Item 16: Audit Matters........................................................................................75 16.1 Audit Committee Financial Expert.....................................................................75 16.2 Code of Ethics.......................................................................................75 16.3 Principal Accountant Fees and Services...............................................................75 Item 17: Financial Statements.................................................................................76 Item 18: Financial Statements.................................................................................76 Item 19: Exhibits.............................................................................................76 19.1 Index to Asia Pacific Wire & Cable Corporation Limited Audited Financial Statements..................76 19.2 Index to Exhibits....................................................................................76 SIGNATURE PAGE CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AUDITED FINANCIAL STATEMENTS EXHIBIT 4.4 - SETTLEMENT AGREEMENT [TRANSLATION] EXHIBIT 10 - CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT EXHIBIT 16.2 - CODE OF ETHICS FOR CEO AND SENIOR FINANCIAL OFFICERS
ii 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, all references to "Australia" are to the Commonwealth of Australia and all references to the "US" 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. 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 ABOUT ASIA PACIFIC WIRE & CABLE 3.1 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data are derived from the consolidated financial statements of Asia Pacific Wire & Cable Corporation Limited (the "Company") for the years ended December 31, 1999, 2000, 2001, 2002 and 2003 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 Consolidated Financial Statements of the Company included in Item 5: Operating and Financial Review and Prospects, Item 18: Financial Statements, and the notes thereto. (See chart on following page) 1
Year ended December 31, --------------------------------------------------------------------- 1999 2000 2001 2002 2003 --------------------------------------------------------------------- (in thousands, except per share amounts) Income Statement Data: Net sales.......................... $143,144 $192,194 $197,311 $241,179 $211,399 Cost of sales...................... (125,365) (174,983) (177,352) (206,435) (178,239) --------------------------------------------------------------------- Gross profit....................... 17,779 17,211 19,959 34,744 33,160 Other operating income............. -- -- -- -- 1,336 Operating expenses................. (17,617) (13,347) (15,616) (19,282) (20,351) Goodwill written off............... (2,142) -- (506) -- -- Impairment loss.................... -- (1,404) -- (1,559) -- --------------------------------------------------------------------- Operating profit/(loss)............ (1,980) 2,460 3,837 13,903 14,145 Exchange gain/(loss)............... (554) (6,226) (81) (16) 4,161 Net interest income/(expense)...... (2,306) (3,686) (3,173) (1,499) (1,122) Share of net income/(loss) of equity investees ................ (387) (2,844) (2,535) (4,090) 1,475 Gain on share issuance by subsidiaries and affiliates...... -- -- -- 1,011 -- Gain/(loss) on sale of investment.. -- 2,716 743 (557) (885) Gain on disposal of property....... -- 6,634 -- -- -- Others............................. 297 1,299 1,619 2,502 (214) --------------------------------------------------------------------- Income/(loss) before income taxes and minority interests........... (4,930) 353 410 11,254 17,560 Income taxes....................... (1,163) (7,584) 1,411 (4,683) (2,477) Minority interests................. 1,268 3,791 (1,730) (1,780) (5,083) --------------------------------------------------------------------- Net income/(loss).................. $ (4,825) $(3,440) $ 91 $ 4,791 $ 10,000 --------------------------------------------------------------------- Earnings/(loss) per share(1)....... $ (0.35) $ (0.25) $ 0.01 $ 0.35 $ 0.72 1999 2000 2001 2002 2003 --------------------------------------------------------------------- Balance Sheet Data: Cash and cash equivalents.......... $21,206 $24,634 $14,241 $14,431 $25,032 Working capital.................... 36,999 30,988 36,900 46,446 71,141 Total assets....................... 214,118 209,951 193,426 208,193 232,176 Total debt......................... 53,541 84,475 54,559 49,681 33,780 Total shareholders' equity......... 96,658 84,674 80,718 92,047 107,176
3.2 EXCHANGE RATES Unless otherwise specified, references in this Annual Report to "$", "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 -------- (1) The calculation of the earnings/(loss) per share is based on 13,830,769 shares of Common Stock for the years ended December 31, 1999, 2000, 2001, 2002 and 2003, which gives effect to the issuance of 3,097,436 common shares in connection with the acquisition of Crown Century Holdings Limited and its wholly owned subsidiary. 2 of Australia; and all references to "Rmb" are to Chinese Renminbi Yuan, the legal tender currency of China. Unless otherwise noted, translation of amounts from Baht, Singapore dollars, Australian dollars and from Chinese Renminbi Yuan to U.S. dollars for the convenience of the reader 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, 2003. The respective Noon Buying Rates on December 31, 2003 were US$1.00 = Bt 39.63; S$ 1.699; A$ 1.330; and Rmb 8.28. The respective Noon Buying Rates on June 23, 2004, the latest practicable date before publication of this annual report, were US$1.00 = Bt 41.03; S$ 1.72; A$ 1.43 and Rmb 8.28. 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. Thailand On July 2, 1997, the Bank of Thailand announced it had switched from a system which had pegged the Baht to a basket of foreign currencies dominated by the U.S. dollar (the composition of which is not made public) to "a managed float which would allow the Baht's value to be determined by market forces to reflect economic fundamentals". This change in monetary policy allowed the Baht to decline in value relative to the U.S. dollar. The fall in the value of the Baht was exacerbated by subsequent financial crises in the region, particularly in Indonesia and South Korea. The Baht stabilized in 1999, buoyed by return of investors' confidence and some capital inflows. However, from mid-2000, the Thai economy began to decelerate as a result of weak domestic demand, coupled with a major fiscal expansion program espoused by the newly elected government, which contributed to a weakening of the Thai Baht. Since then, the Baht has remained relatively stable. At the rate of US$1.00 = Bt 41.03 as of June 23, 2004, the Baht has depreciated by approximately 40% since its flotation. The following tables set forth, for the periods indicated, certain information concerning the Noon Buying Rate. No representation is made that the Baht or US 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. (See chart on following page.) 3
YEAR ENDED DECEMBER 31, AT PERIOD END AVERAGE(1) LOW HIGH ---------------------------------------- -------------- ------------------ --------------- ------------- (BT PER $1.00) 1998............................... 36.500 40.764 56.100 35.780 1999............................... 37.450 37.048 38.650 36.180 2000 .............................. 43.478 40.000 44.380 36.970 2001 .............................. 44.240 44.517 45.820 42.300 2002.............................. 43.200 43.020 44.20 41.07 2003.............................. 39.630 41.564 43.18 39.09
(1) Average means the average of the Noon Buying Rates on the last day of each month during a year. The high and low exchange rates for the six months preceding the date of this report were: MONTH HIGH LOW ---------------------------------------- -------------- ----------------- December 2003 39.58 39.93 January 2004 38.89 39.54 February 2004 38.87 39.35 March 2004 39.28 39.62 April 2004 39.06 40.04 May 2004 39.93 40.93 ----------- Sources: Federal Reserve Bulletin, Board of Governors of the Federal Reserve System. Federal Reserve Statistical Release H.10(512), from the website of the Board of Governors of the Federal Reserve System at http://www.federalreserve.gov. Singapore The Singapore dollar is convertible into foreign currencies and floats against a trade-weighted basket of foreign currencies, the composition of which is not made public by Singapore's central bank, the Monetary Authority of Singapore, but of which the US dollar is a component. The following tables set forth, for the periods indicated, certain information concerning the Noon Buying Rate of the Singapore dollar. No representation is made that the Singapore dollar or US dollar amounts referred to herein could have been or could be converted into US dollars or Singapore dollars, as the case may be, at any particular rate or at all. (See chart on following page.) 4
YEAR ENDED DECEMBER 31, AT PERIOD END AVERAGE(1) LOW HIGH ---------------------------------------- -------------- ------------------ --------------- ------------- (S$ PER $1.00) 1998............................... 1.651 1.668 1.796 1.581 1999............................... 1.732 1.699 1.737 1.658 2000 .............................. 1.733 1.730 1.760 1.654 2001 .............................. 1.847 1.797 1.854 1.732 2002.............................. 1.735 1.791 1.852 1.731 2003.............................. 1.699 1.741 1.784 1.699
(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 report were: MONTH HIGH LOW ---------------------------------------- -------------- ----------------- December 2003 1.699 1.724 January 2004 1.691 1.707 February 2004 1.671 1.703 March 2004 1.675 1.716 April 2004 1.668 1.705 May 2004 1.685 1.728 ----------- 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 at http://www.federalreserve.gov. 3.3 RISK FACTORS 3.3.1 CONTROL BY PEWC; BANKRUPTCY OF PUSA; CONTRACTUAL ARRANGEMENTS WITH PEWC As of December 31, 2003, Pacific Electric Wire and Cable Co., Ltd ("PEWC") indirectly held approximately 75.4% of the outstanding shares of Common Stock. Of these shares, Pacific USA Holdings Corp. ("PUSA"), a subsidiary of PEWC, holds 53.0% of the outstanding shares of Common Stock. On December 2, 2002, PUSA filed a voluntary petition for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. The future ownership of these shares may be affected by these bankruptcy proceedings and the resolution of certain litigation involving an Amended and Restated Pledge Agreement dated as of February 20, 2002 among Swiss Re Financial Products Corporation ("Swiss Re"), PUSA, certain affiliates of PUSA and PEWC (the "Pledge Agreement") pursuant to which these shares (the "Pledged Shares") were pledged to Swiss Re. 5 On October 16, 2003, Swiss Re entered into an agreement with Set Top International, Inc. ("Set Top"), pursuant to which Swiss Re assigned its rights under the Pledge Agreement to Set Top. On December 4, 2003, the Company and PEWC commenced an action in the United States District Court for the Southern District of New York contesting the validity of the transactions underlying the assignment of the Pledge Agreement. However, Set Top proceeded to exercise the rights it believed it acquired under the assignment of the Pledge Agreement. On March 10, 2004, Set Top held a foreclosure sale and acquired for itself a beneficial interest in the Pledged Shares. Pursuant to a Settlement Agreement entered into by and among the Company, PEWC and Set Top as of July 2, 2004 (the "Settlement Agreement"), PEWC has agreed to pay Set Top $25 million (the "Settlement Amount") for all of Set Top's interest in the Company's shares. Also pursuant to the Settlement Agreement, Set Top has agreed to withdraw as a creditor and party in interest to the PUSA bankruptcy proceedings. If PEWC fails to pay the Settlement Amount by August 30, 2004 (subject to extension), Set Top will become the controlling shareholder of the Company. Consequently, Set Top would be able to elect the majority of the members of our Board of Directors and have the power to determine the outcome of other actions requiring the approval of our shareholders. While the Company, PEWC and Set Top have executed the Settlement Agreement, the actions called for by that agreement have not yet been implemented and the Company cannot provide assurances that each of the parties will take the actions which that party has agreed to take under the Settlement Agreement. See Exhibit 4.4 "Settlement Agreement [Translation]". See also Section 4.1.2 "Recent Developments" and Section 8.1 "Legal Proceedings". 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. This agreement is renewable at our option and currently in force. However, we are unable to predict whether PEWC would, at some future date, seek to limit the business it conducts with the Company pursuant to the terms of the Composite Services Agreement. 3.3.2 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. See Section 4.2.6 "Competition" for additional information with reference to the competitive environment we face in specific countries. 3.3.3 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") for copper for the one month prior to purchase. The price of copper is influenced heavily by global supply and demand as well as 6 speculative trading. As with other costs of production, an increase in the price of copper will increase our cost of sales. Whether this has a material impact on our operating margins and financial results depends primarily on our ability to pass on these increased costs to our customers. The selling 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 of purchase. Most of our sales of manufactured products reflect copper prices prevailing at the time the products are ordered. Copper prices have been subject to considerable volatility in recent years and this volatility has had a significant impact on our revenues and profits. Accordingly, significant volatility in copper prices could have an adverse effect on our operations. No assurance can be given that such volatility will not continue to recur. (See Section 11.3 "Risks Relating to Copper" for additional information). 3.3.4 EXPOSURE TO FOREIGN EXCHANGE RISKS Changes in exchange rates influence our results of operations. Our principal operations are located in Thailand and Singapore and a substantial portion of our revenues are denominated in Baht or Singapore dollars. 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 or the Singapore dollar 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. Forward foreign exchange contracts are used on a selective basis to hedge foreign exchange risk, but they do not provide any assurance that we will not incur substantial losses in the event of a devaluation of the Baht or Singapore dollar against the U.S. dollar. Although our reporting currency is U.S. dollars, the functional currency of our Singapore operations, which accounted for 16.7% of Company sales (including sales of Distributed Products) in 2003, is the Singapore dollar, and the functional currency of our Thai operations, which accounted for 44.2% of our sales in 2003, is the Baht. Accordingly, the functional currency accounts of these operations are 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 or Singapore dollar against the U.S. dollar would adversely affect our financial performance measured in U.S. dollars. 3.3.5 RISKS RELATING TO THAILAND A substantial portion of our Thai operations, which accounted for approximately 44.2% of our net sales in 2003, 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 performance will depend in part on the political situation in Thailand and the general state of the Thai economy. In July 1997, the 7 floatation of the Thai Baht caused the currency to fall in value against the U.S. Dollar and triggered declines in other regional currencies, such as the Singapore Dollar and Australian Dollar. The Thai Baht generally appreciated against the U.S. Dollar during the course of 1998 and largely stabilized in 1999. However, from mid-2000, the Thai economy began to decelerate as a result of weak domestic demand, coupled with a major fiscal expansion program espoused by the newly elected government, causing the Thai Baht to weaken further. Such fluctuations in the value of the Thai Baht may negatively impact our performance. The Baht has since stabilized at approximately Baht 39 to Baht 43 to US$ 1 in 2003. 3.3.6 RISKS RELATING TO CHINA The economy of China differs from that of most free-market economies in such respects as structure, government involvement, level of development, growth rate, capital reinvestment, allocation of resources, rate of inflation and balance of payments position. The economy of China has been a planned economy subject to one-, five- and ten-year plans adopted by central PRC government authorities and implemented, to a large extent, by provincial and local authorities, which set out production and development targets for state enterprises. Although the majority of productive assets in China are still owned by the PRC government, more recently the PRC government has implemented economic reform measures which emphasize decentralization, utilization of market forces and the development of foreign investment projects such as Ningbo Pacific Cable Co., Ltd. ("NPCDC"). Until March 1998, when a government restructuring plan to abolish fifteen ministries, including the PRC Ministry of Post and Telecommunications (the "MPT"), was approved by the National People's Congress, the MPT set telecommunications policies at the national level in China and supervised the provincial post and telecommunications bureaus in each province of China, which are (and are expected to remain) semi-autonomous and responsible for developing operating networks within each province. The PRC government, through the Ministry of Information Industry (the "MII") (which incorporates the MPT), remains the primary provider of telecommunications service in China and, along with the provincial post and telecommunications bureaus, is one of the few consumers of telecommunications cable in China. Consequently, the business of our companies in China may be more dependent on the political stability and general economic condition of China than if there were more consumers of telecommunications cable and if the government-related entities were not so closely involved in the telecommunications industry. In addition, the MII is expected to set the price at which telecommunications cable may be sold. By virtue of the adoption of the government restructuring plan, the former ministries of the MPT will become the ministries of the MII, and all of the regulatory functions of the MPT are to be transferred to the MII. Political or social instability in China may adversely affect our business operations or financial conditions. In addition, the spread of Severe Acute Respiratory Syndrome ("SARS"), a pneumonia-like infection, in China may negatively impact the country's economic growth outlook. 8 3.3.7 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 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 not currently present significant competition in the markets in which we conduct or plan to conduct business, no assurance can be given that the future development and use of such alternative technologies will not adversely affect our results of operations. 3.3.8 POTENTIAL CONFLICT OF CERTAIN OFFICERS AND DIRECTORS Certain of our officers and directors are also officers and directors of affiliates of PEWC and may be subject to various conflicts of interest in connection with, for example, pursuing corporate opportunities in which we and such affiliates of PEWC have competing interests, and the performance by us and PEWC of respective obligations under existing agreements, including the Composite Services Agreement and the Indemnification Agreement (discussed below in Section 10.2). 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. The Bermuda Companies Act 1981, as amended (the "Companies Act") subjects our officers and directors to certain fiduciary standards in the exercise of their fiduciary duties on our behalf. Under the Companies Act, an officer of ours (which term includes our directors) is subject to a duty of care requiring him to act honestly, in good faith and in the best interests of the Company in the discharge of his duties and to, among other things, give notice to the Board at the first opportunity of any interest he has in any material contract or proposed material contract with us or any of our subsidiaries. The Companies Act also prohibits us, subject to certain exceptions, from making loans to any directors without first obtaining the consent of shareholders holding in the aggregate not less than nine-tenths of the total voting rights of all the shareholders having the right to vote at any shareholders meeting. As of May 31, 2004, we do not make any loans to our directors or executive officers in accordance with The Sarbanes-Oxley Act of 2002. 3.3.9 POTENTIAL ILLIQUIDITY OF COMMON SHARES Our common shares are quoted on the Over-the-Counter Bulletin Board ("OTC BB") operated by the NASD, Inc. However, approximately 75.4% of our common shares are indirectly held by PEWC and management and are not publicly registered securities, and are, therefore, not freely tradable. In the recent past, the volume of trading in our common shares has 9 not been substantial. There can be no assurances that a shareholder wishing to dispose of his or her shares will be able to immediately sell his or her position, nor can there be any assurances as to the price which could be obtained in any such sale. Prior to December 24, 2001, the common shares were traded on the New York Stock Exchange (the "NYSE"), which has established certain continued listing criteria for companies whose shares are traded on it. The criteria impose certain minimum requirements with respect to the per share price and the aggregate value of the publicly traded securities of an issuer. In February 2001, the NYSE notified us that we had not been in compliance with those NYSE requirements, and that the NYSE would be authorized to suspend trading in our common shares and to commence delisting procedures subject to review and approval of our business plan. During the course of 2001, our business plan was submitted, amended and finally provisionally agreed with the NYSE, subject to the right of the staff to require continuous compliance within a designated time frame, which the Company was not able to achieve, due to, among other factors, delays in approvals by Thai regulatory authorities of the implementation of certain Thai-based elements of the plan. On December 24, 2001, the staff of the NYSE announced that it has determined that the trading of the common shares should be suspended on December 28, 2001. The decision was reached in view of the fact that the Company had fallen below the NYSE's continued listing standards. The Company appealed the NYSE's decision, but its appeal was denied by a Committee of the Board of Directors of the Exchange. The Company subsequently re-established a public trading market for its common shares on the OTC BB. It is traded under the symbol "AWRCF.OB". 3.3.10 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, as well as to 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. The foregoing restrictions may also affect our ability to fund operations of one subsidiary with dividends and other payments received from another subsidiary. 3.3.11 CORPORATE MATTERS; ORGANIZATIONAL DOCUMENTS We are incorporated in and organized pursuant to the laws of Bermuda. In addition, certain of our directors and officers reside outside the United States and a substantial portion of our 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. We have been advised by our legal counsel in Bermuda, Appleby Spurling Hunter, that there is doubt as to the enforcement in Bermuda, in 10 original actions or in actions for enforcement of judgments of United States courts, of liabilities predicated upon U.S. federal securities laws, although Bermuda Courts will enforce foreign judgments for liquidated amounts in civil matters subject to certain conditions and exceptions. 3.4 FORWARD-LOOKING STATEMENTS This annual report, including any documents incorporated by reference, contains statements that we believe constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements appear throughout this annual report and include statements regarding the intent, belief or current expectations of the Company and its management, including with respect to trends affecting the Company's financial condition or results of operations and the Company's plans with respect to capital expenditures and investments. These forward looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those described in these forward looking statements as a result of various factors. See Section 3.3 "Risk Factors" for a further discussion of some of the factors that could cause such material differences. ITEM 4: INFORMATION ON THE COMPANY 4.1 HISTORY AND DEVELOPMENT OF THE COMPANY; RECENT DEVELOPMENTS 4.1.1 HISTORY AND DEVELOPMENT OF THE COMPANY The Company (Asia Pacific Wire & Cable Corporation Limited), formed on September 19, 1996, is a Bermuda corporation which, through its operating subsidiaries, 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 Singapore, Thailand, Australia and China. The Company manufactures and distributes its own wire and cable products and also distributes copper rod and wire and cable products ("Distributed Products") manufactured by its principal shareholder, PEWC. From 1997, the Company has also offered project engineering services in the supply, delivery and installation ("SDI") of power cables. PEWC, a publicly owned Taiwanese corporation whose shares are listed on the Taiwan Securities Exchange, currently owns approximately 75.4% of the Company's outstanding Common Stock. The Company is one of the five largest producers of telecommunications and low voltage power cable and enameled wire in Thailand and believes that it is the largest producer of low voltage power cable in Singapore. In 2003, approximately 57.1% of the manufactured products sold by the Company were sold by its subsidiaries in Singapore and Thailand, with the remainder sold by its subsidiaries in China, Australia and Malaysia. In Singapore, the Company also sells Distributed Products, which largely consist of copper rod and medium and high voltage power cable. Sales of Distributed Products accounted for 7.2% of the Company's revenues and 1.5% of its operating profits in 2003. As the Company continues to focus its resources on manufacturing and distributing its own products, sales of Distributed Products are expected to decline over time as a percentage of the Company's 11 business. The Company's SDI project engineering services accounted for 1.9% of the Company's revenue in 2003. The Company sells its cable products primarily to government agencies and large construction companies and subcontractors bidding for government contracts. Telecommunications cable manufactured by the Company are largely used as access lines to connect buildings and residences to feeder and trunk cables. Power cable manufactured by the Company is used primarily in power transmissions for public lighting, outdoor installations and in and to commercial and residential buildings. Enameled wire is sold primarily to private sector manufacturers of electric motors for use in various consumer appliances. The Company maintains local sales personnel in each country where it has manufacturing operations, and export sales are conducted through independent suppliers as well as the Company's own sales personnel. The Company principally competes on the basis of product quality and performance, reliability of supply, timely delivery, customer service and price. The Company continues to explore opportunities to establish manufacturing and distribution operations in the Asia Pacific region, principally in countries where demand exceeds local production capacity and where there are high import tariffs for finished products and other substantial barriers for market entry by foreign distributors. The Company seeks to form similar joint ventures in new markets with well-established local partners to provide credibility in each market and access to sales opportunities on an accelerated basis. The Company's business office is located at 19 Benoi Road, Level 3A, Sigma Cable High Tech Complex, Singapore 629909, telephone number (65) 6663-2132, and its registered office is located at Canon's Court, 22 Victoria Street, Hamilton HM EX, Bermuda, telephone number (441) 295-2244. 4.1.2 Recent Developments Bankruptcy of PUSA On December 2, 2002 (the "Filing Date"), our majority shareholder and a subsidiary of PEWC, PUSA, filed a voluntary petition for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the "Bankruptcy Court"), along with its affiliates PUSA Investment Company, Montford Limited, Top Target Limited, Berger Systems Limited, Elan Investments Limited, Austway Services Limited, and Pacific Realty Group, Inc. (together with PUSA, the "Debtors"). At that time, PUSA had pledged the Pledged Shares to Swiss Re under the Pledge Agreement. We have been informed that an event of default occurred under the Pledge Agreement that entitled Swiss Re to foreclose on the Pledged Shares. On December 30, 2002, Swiss Re moved the Bankruptcy Court to lift the automatic stay that entered in effect on the Filing Date and which had prohibited Swiss Re from foreclosing on the Pledged Shares. After negotiations among the Debtors, PEWC and Swiss Re, the Debtors agreed to consent to a lifting of the automatic stay if Swiss Re entered an agreement to refrain from foreclosing on the Pledged Shares (the "Stay Agreement") on January 23, 2003. Under the 12 terms of the Stay Agreement, Swiss Re agreed it would not foreclose on the Pledged Shares before May 23, 2003, provided that, among other things: (i) by April 8, 2003, the Debtors obtained court approval of a disclosure statement detailing a plan of reorganization that would include paying Swiss Re $50 million to satisfy its claim; (ii) by April 8, 2003, PEWC either placed cash in escrow or obtained a letter of credit in the amount of $50 million to fund such a reorganization plan, or presented a sale agreement to purchase Swiss Re's claim against the Debtors for $50 million; (iii) by May 23, 2003, the Debtors have either obtained confirmation of the plan of reorganization by the court or PEWC has purchased Swiss Re's claim; and (iv) by June 6, 2003, Swiss Re has been paid $50 million in satisfaction of its claim. If any of the conditions or deadlines stated in the Stay Agreement is not met, then Swiss Re would be free to foreclose on the Pledged Shares. The Stay Agreement was approved by an order of the Bankruptcy Court on February 28, 2003 (the "Stay Relief Order") and the automatic stay enjoining Swiss Re from foreclosing on the Pledged Shares was lifted. On July 10, 2003, the Debtors filed an amended joint disclosure statement, (the "Disclosure Statement") in connection with a proposed amended joint plan of reorganization under the Bankruptcy Code. A Second Amended Plan of Reorganization was filed by the Debtors on February 26, 2004. The Bankruptcy Court has not yet approved the Disclosure Statement. On October 16, 2003, Swiss Re entered into an agreement with Set Top, pursuant to which Swiss Re sold all of its rights, title and interest in connection with certain "Assigned Assets," including: (i) Swiss Re's claim in the amount of $90.6 million dollars as filed in the Bankruptcy Proceeding and (ii) the Pledged Shares. A month later, Set Top, as the new pledgee, announced its intention to foreclose the Pledged Shares. PEWC and APWC commenced legal proceedings in the federal courts to enjoin Set Top from selling the Pledged Shares. See also Section 8.1 "Legal Proceedings". The Debtors and the Official Committee of Unsecured Creditors (the "Committee") also moved in the Bankruptcy Court for an injunction to prevent Set Top from foreclosing on the Pledged Shares (the "Injunction Motion"). The Injunction Motion was denied by the Bankruptcy Court on February 27, 2004 and Set Top subsequently sold the Pledged Shares to itself on March 10, 2004. On January 21, 2004, Set Top filed a motion requesting the Bankruptcy Court to compel PUSA to comply with the Stay Relief Order by sending a requisition notice to APWC demanding that APWC convene a special general shareholders meeting for the purposes of considering the removal of certain directors of APWC. Although Set Top did not have the right to require PUSA to call a shareholders meeting, the Debtors voluntarily agreed to convene a shareholders meeting of APWC. An agreed order was entered by the Bankruptcy Court on March 25, 2004, pursuant to 13 which PUSA sent a requisition letter to APWC formally requesting the board of directors to convene a special general meeting of the shareholders of APWC. The meeting was held on June 22, 2004. At the meeting, Tom C.Y. Tung was removed from the board of directors and five new directors were elected. See Section 6.1 "Directors and Senior Management". On May 19, 2004, Set Top filed an amended motion to convert the Debtors' bankruptcy cases to Chapter 7 liquidations. At a hearing held on May 31, 2004, the Bankruptcy Court declined to convert the Debtors' bankruptcy cases; however, the Bankruptcy Court maintained in effect a previously established deadline of August 30, 2004 by which a plan of reorganization for the Debtors must be confirmed. Pursuant to a Settlement Agreement entered into by and among the Company, PEWC and Set Top as of July 2, 2004, Set Top has agreed to withdraw as a creditor and party in interest to the bankruptcy proceedings. See Section 8.1 "Legal Proceedings". We are unable to predict the outcome of the bankruptcy proceedings, including whether a Plan would be confirmed by August 30, 2004. See Section 3.3 "Risk Factors - Control by PEWC; Bankruptcy of PUSA; Contractual Arrangements with PEWC". See also Section 8.1 "Legal Proceedings" (for a discussion of the status of litigation against Set Top). 4.2 BUSINESS OVERVIEW The Company's Thai operations are conducted through Charoong Thai Wire and Cable Public Company Limited ("Charoong Thai"), Siam Pacific Electric Wire & Cable Company Limited ("Siam Pacific") and Pacific-Thai Electric Wire & Cable Co. Ltd. ("Pacific Thai"). Charoong Thai is a publicly-traded Thai corporation, the shares of which are listed on the Stock Exchange of Thailand. Immediately after the acquisition of Siam Pacific by Charoong Thai, the shareholders of Charoong Thai comprised of the Company (68.42%), Ital-Thai (16.90%) and Bangkok Insurance (5.31%). The rest of the shares are publicly traded on the SET. After the sale of some of its Charoong Thai shares on the open market, the Company held approximately 55.41% of Charoong Thai as at December 31, 2003. Charoong Thai manufactures aluminum and copper electric wire, medium and high voltage power cable and telecommunications cable. It has subsidiaries and affiliates in the business of optic fiber cable manufacturing and the provision of telecommunication and network services. Siam Pacific is 100% owned by Charoong Thai. Siam Pacific manufactures telecommunications cable, power cable and enameled wire for the domestic Thai market. Pacific Thai is a 100%-owned subsidiary of Siam Pacific. Pacific Thai manufactures enameled wire for the export market. The Company's Singapore operations are principally conducted through its 98.2%-owned subsidiary, Sigma Cable Company (Private) Limited ("Sigma Cable"). Sigma Cable manufactures low voltage power cable for sale and distribution in Singapore and countries in the Asia Pacific region. Sigma Cable also distributes in Singapore copper rod and a wide range of wire and cable products produced by PEWC and provides SDI project engineering services. The Company has a 100% interest in Sigma-Epan International Pte. Ltd. ("Sigma-Epan"), a group of companies with operations in Singapore and Malaysia. Sigma-Epan group has its headquarters in Singapore. Sigma-Epan manufactures specialty cables and assembles cable 14 harnesses for the electronics, computer, building automation, audio and communication industries. The Company holds a 98.48% effective interest in Australia Pacific Electric Cables Pty Limited ("APEC"), a subsidiary of Sigma Cable, located near Brisbane, Australia. The company produces low voltage power cable for the Australian and export markets. The Company's China operations are conducted through seven business entities. The operating entities include NPCDC, a telecommunications cable manufacturing joint venture located in Ningbo Yin County, Zhejiang Province in eastern China. The Company owns a 94.31% interest in NPCDC. The other owner of NPCDC is China Ningbo City Yin County Yinjiang Town Industrial Corporation ("CIC"). NPCDC manufactures a range of telecommunications cable and local area network ("LAN") electronic cables for sale and distribution in the Chinese domestic market. NPCDC's performance since 1997 has been below expectations due primarily to difficulties faced in marketing its products and market penetration in China. In view of the poor performance of NPCDC, the Company has decided that it would be prudent to provide for a write-down of the carrying value of NPCDC in the Company's financial statements. The Company's 1999 results therefore included a write-off of unamortized goodwill of $2.1 million from the purchase of NPCDC in 1998, and of $1.0 million on receivables and inventory of NPCDC. Total net effect of these write-offs on the Company's results amounts to a loss of $3.1 million in 1999. The Company's 2002 results further included a write off of approximately $1.5 million in the carrying value of the telecommunication cable machinery. Shanghai Yayang Electric Co., Ltd. ("Shanghai Yayang"), formerly known as Shanghai Pacific Electric Co., Ltd., is a joint venture in Shanghai incorporated in June 1998 to manufacture enameled wire. The Company's effective holding in Shanghai Yayang is at 63.49% and is partly held by Pacific Thai. Shanghai Yayang manufactures enameled wire with a diameter of between 0.05mm and 2.5mm. Shangdong Pacific Fiber Optics Co., Ltd. ("SPFO") is a joint venture company in Yanggu County, Shandong Province, China. SPFO was established to manufacture fiber optic cables for the China market. The Company owns a 51.0% interest in SPFO, with the remaining interest owned by the joint venture partner, Shandong Yanggu Cable Company ("Shandong Yanggu"), an established cable manufacturer in Shandong Province that produces a wide range of cable products and is considered one of the leading cable producers in China. The Company has invested a total of $2.8 million in SPFO. On June 30, 2001, the Company invested approximately $1.2 million for a 25.0% interest in an existing profitable company Shandong Rubber Cable Company, Ltd. ("SRC"), which manufactures rubber cable for the China market. The remaining 75% is owned by Shandong Yanggu. The investment was in the form of machinery transfer and cash. On August 18, 2001, a joint-venture agreement was signed with Shandong Yanggu to establish Shandong Huayu Pacific Fiber Optics Communication Co., Ltd. ("SHP") for the 15 manufacture of optic fibers. The Company will invest $4.0 million for a 49% holding; the remaining 51% was originally held by Shandong Yanggu. In May 2002, the shareholding by Shandong Yanggu was transferred to Hebei Huayu Co. Ltd. Production is tentatively scheduled to commence in 2004 or 2005 with initial production of 900,000km of optic fibers annually. The actual operation commencement period will depend on the assessment of market conditions. The company plans to operate two optic fiber drawing towers and four production lines. Its products will be sold to Shandong Pacific Fiber Optic Cable Co., Ltd. and other external buyers. On March 22, 2002, the Company acquired two companies, namely, Crown Century Holdings Limited. ("CCH") and its wholly-owned subsidiary company, Pacific Electric Wire & Cable (Shenzhen) Co., Ltd. ("PEWS") from PEWC, the majority shareholder of the Company. The acquisition was in exchange for 3,097,436 new shares of the Company issued to PEWC. As a result of this new issue, PEWC's holding in the Company increased from 68.3% to 75.4%. Since PEWC was the majority shareholder of the Company and CCH prior to the transaction, the acquisition is considered a combination of companies under common control and has been accounted for at historical cost and given retroactive effect for financial reporting purposes. PEWS manufactures enameled wire for electronic, video and audio products for the South China Market and for export. CCH is the trading arm of PEWS. The operations of PEWS and CCH have been profitable since 1999 and have contributed to the profits of the Company in 2003. 4.2.1 PRODUCTS AND SERVICES The Company manufactures and sells a wide variety of wire and cable products primarily in four general categories: telecommunications cable, power transmission cable, enameled wire and electronic cables. 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 copper rod and wire and cable products manufactured by PEWC. In 1997, the Company also began offering SDI project engineering services of medium and high voltage cable for power transmission projects in Singapore. 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. Copper-based cables contain twisted pairs of insulated copper wire, each pair color-coded and corresponding to one telecommunications line. The cables are produced with different insulators such as polyethylene ("PE"), polyvinyl chloride ("PVC") and foam skin, suitable for different installations and environmental conditions. The Company manufactures 16 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 cable is mainly used as lighting and power supply cable inside and outside of buildings. The voltage capacity of the Company's power cables range from 300 volts to one kilovolt. 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 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 0.03 mm to 3.00 mm in diameter, varnished by various types of petroleum insulation materials including polyvinal formal, polyurethanea 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. Electronic Cables The Company produces a wide range of electronic cables and related by-products, which includes high specification telecommunication cables, data-communication cables, security cables, cable assemblies, fiber optic cables, local area network ("LAN") patch-cords products and harness assembly. The products are used in the electronics, building automation, telecommunications and data-communications industries. The customers include government bodies, large construction companies, subcontractors bidding for government contracts and system integrators. These cables are produced by the Sigma-Epan group, which has manufacturing operations in Singapore and Malaysia. In 2003, LAN cable production was introduced in NPCDC. Sales of Distributed Products The Company is also a distributor of copper rod and 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) and copper 17 rod, 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. SDI Project Engineering Services Based on trends of government and private sector expansion and upgrading of residential and commercial buildings and infrastructure projects in Singapore, the Company anticipates 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 operations supply, deliver and install primarily 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. In 2003, Sigma Cable recorded revenue of $3.9 million under project engineering turnkey contracts awarded by SP Powerassets, a government-linked corporation that maintains and manages electrical transmission and distribution networks in Singapore. The projects call for the supply and installation of 66kV (kilo-volt) high-voltage power cables along various distinct routes. The Company will continue to tender for future projects. 4.2.2 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 cover 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 Production of 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 PE or PVC compound in one of ten standard colors. 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 18 units are 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 "sheath" the cable and, finally, the sheathed cable core is covered by plastic outer coating. Power Cable Unarmored cable. 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 millimeter to 1000 square millimeters. The copper conductors are then covered in an extrusion process with a plastic insulator such as a PVC, after which 2-5 conductors are twisted into a circular cable core in a cabling process and covered by a plastic outer cover. Armored cable. Armored cable is produced in the same manner as unarmored cable, except that armored cable requires the addition of a helical wrap of galvanized steel or iron wires prior to the application of a final plastic outer cover. Enameled Wire Production of enameled wire begins by drawing the copper rods until they have reached the desired diameter, after which the drawn wires are annealed. The annealed wires are then varnished by one or more types of petroleum-based insulation material. Up to seven coats of varnish are applied, depending upon the intended application of the enameled wire. 4.2.3 RAW MATERIALS Copper is the principal raw material used by the Company, accounting for approximately 50% to 60% of total cost of sales of products using copper as a conductor. The Company purchases copper at prices based on the average prevailing international spot market prices on The London Metal Exchange (the "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, an increase in the price of copper will increase 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 pass on these increased costs to its customers. Most sales of Company manufactured products reflect copper prices prevailing at the time the products are ordered. 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 7.0% of the copper cathode purchase price. The Company presently relies on the services of Thai Metal Processing Co., Ltd. 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. In the future, the Company may construct a plant to process copper cathode into copper rods, which may reduce the Company's dependence on subcontractors. Construction of such a facility could 19 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. Under the Company's copper rod supply arrangements, orders will be placed between eight to ten weeks before the desired delivery date, with prices "pegged" to the average spot price of copper on the LME for the one month prior to delivery plus a premium. The Company purchases copper cathodes, which are subject to a 6.0% import tariff, for use at its Thailand operations in order to avoid the higher import tariff of 10.0% on copper rods. The Company obtains copper cathodes from three major suppliers which import cathodes into the Thai market. These suppliers are Mitsubishi Corporation, Mitsui & Co (Thailand) and Tomen Enterprise (Bangkok) Ltd. The Company has regularly signed one year contracts with each of its copper cathode suppliers pursuant to which the Company agrees to purchase a set quantity of copper cathodes each month. Under the terms of such contracts, the price of copper cathodes is usually "pegged" to the average of the spot price of copper on the LME for the delivery month plus a premium. The Company believes its relationships with its three copper cathode suppliers will allow access to alternative supplies in the event one or more of such suppliers was unable or unwilling to renew a supply contract on terms satisfactory to the Company, although the Company does not anticipate any change in relations 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. The Company has never experienced a material supply interruption or difficulty obtaining 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 of these raw materials and expects to continue to be able to purchase such raw materials at prevailing market prices. The Company is a major user of electric power and has not experienced any problem in obtaining a constant electricity supply in the past. The Company does not maintain any in-house power generating capacity. 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. 20 4.2.4 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 a 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. All the major companies in the group have attained International Standards Organization ("ISO") 9002 international standards for quality management and assurance standards in the manufacture of electric wire and cable. In September 1994, Sigma Cable received an ISO 9002 certificate from the Singapore Institute of Standards and Industrial Research. Charoong Thai received its ISO 9002 certification in September 1996. Siam Pacific and Pacific Thai, the Company's two major subsidiaries in Thailand, both achieved ISO 9002 certification in May 1997. The certifications mean that the companies have in place quality assurance systems and the capability to consistently manufacture products of quality. 4.2.5 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 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. The following table sets forth the Company's sales revenues by geographic area for the periods indicated together with their respective percentage share of total sales revenue for such periods:
Year ended December 31, ----------------------------------------------------------------------------------------- 2001 2002 2003 ----------------------------------------------------------------------------------------- $ % $ % $ % ----------------------------------------------------------------------------------------- Manufactured Products: Thailand 47,225 23.9 79,246 32.8 62,984 29.7 Singapore 15,804 8.0 16,637 6.9 12,514 5.9 Australia 11,009 5.6 13,961 5.8 22,058 10.4 China 46,838 23.7 46,095 19.1 60,606 28.7 Myanmar 591 0.3 - - - - Export 27,551 14.0 29,803 12.4 34,131 16.2 ----------------------------------------------------------------------------------------- 21 ----------------------------------------------------------------------------------------- Total 149,018 75.5 185,742 77.0 192,293 90.9 Distributed Products(1) 33,325 16.9 24,303 10.1 15,187 7.2 SDI Project Engineering(2) 14,968 7.6 31,134 12.9 3,919 1.9 ----------------------------------------------------------------------------------------- Total net sales 197,311 100.0 241,179 100.0 211,399 100.0 -----------------------------------------------------------------------------------------
(1) Distributed Products are largely sold in Singapore. (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 costliest 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 risk of copper price fluctuations, the Company attempts to determine the prices of its products based on the prevailing market price of copper. However, the Company may be affected, to a degree, in the short term by significant fluctuations in the price of copper. Payment methods for the Company's products vary with markets and customers. The majority of sales by the Company of its manufactured products require payment within 90 days, but may vary depending on the customer and payment record. Sales pursuant to a successful project tender or sales to governmental or public utilities are conducted in accordance with the tender or other applicable regulations. In connection with the distribution of medium and high voltage power cable manufactured by PEWC, the Company is required to pay PEWC 90% of the cost of the products either within 30 days of receipt of the product or, in the case of SDI products, upon installation, with the remaining 10% to be paid within one year. In connection with the purchase of copper rod, the Company is required to pay PEWC the cost of the copper rod within 30 days from obtaining the products from PEWC. For the export market, payment is usually made by prior delivery of an irrevocable letter of credit. Neither the Company nor its local subsidiaries offer financing for purchases of the Company's products. The Company sells its products in the local currency of the country of sale. Company employees engaged in sales and marketing are paid a salary and may also receive a bonus based on performance. Products are marketed under the respective names of each company. For instance, products manufactured by Siam Pacific are marketed under the "Siam Pacific" and "PTEWC" 22 brands, both registered trademarks in Thailand; products manufactured by Sigma Cable are sold under the "Sigma Cable" brand. Thailand The Company produces and sells telecommunications cable, enameled wire and power cable in Thailand. Sales of telecommunications cables, the Company's leading product in Thailand, are conducted either by tender for participation in large scale telecommunications projects of the Telephone Organization of Thailand ("TOT"), or directly to subcontractors of TT&T and TelecomAsia, the two private telephone line contractors which would be licensed by TOT with regard to particular projects. Power cable (and a limited quantity of telecommunications cable) is generally sold to construction firms or contractors for use in infrastructure, commercial and residential construction projects. The Company generally sells enameled wire directly to manufacturers of electric motors for use in various consumer appliances. Enameled wire purchasers tend to be smaller businesses than those that purchase telecommunications and power cable. A small quantity of power and telecommunications cable and enameled wire is sold to general electrical products supply companies which then resell to end users. Singapore The Company produces and sells low voltage power cable in Singapore. In addition, the Company sells copper rod and 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. Sales of Company manufactured products in 2003 accounted for 45.7% of the Company's net sales in Singapore; sales of Distributed Products accounted for 43.2% with the remaining 11.1% comprised of SDI project engineering services. In 2003, sales to SP Powerassets alone accounted for approximately 48.0% of the Company's total sales in Singapore and 8.0% of the Company's total aggregate sales. Additionally, sales of SDI project engineering services to SP Powerassets in 2003 accounted for all of the Company's SDI sales. Approximately 70.1% of the sales to SP Powerassets in 2003 were sales of Distributed Products, which sales have a low profit margin. Such sales are not made under a continuing contract, but pursuant to purchase orders placed from time to time with the Company by SP Powerassets. Although SP Powerassets is an important customer of the Company, neither the loss of Distributed Product sales to SP Powerassets, nor the loss of manufactured product sales to SP Powerassets, which the Company expects would be replaced by sales to other customers, would likely have a material adverse effect on the Company's results of operations. Although the Company does not believe that it could easily replace its SDI sales to SP Powerassets by sales to other customers, SDI sales presently account for only 1.9% of the Company's sales. 23 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 seven business entities. Copper-based telecommunication cables and fiber optic cables are generally sold to state or provincial telecommunication agencies or sub-contactors of such agencies. The Company generally sells enameled wire directly to manufacturers of electric motors for use in various consumer appliances. Exports The Company's main export markets are Hong Kong, Brunei, Myanmar, China and Indonesia. Export sales are conducted by local agents or distributors of the Company in accordance with terms and prices negotiated between the local agent and the Company at the time of sale. In Thailand, the Company's principal export is enameled wire. In Singapore, the Company's principal export is power cable. The Company does not actively pursue an export business in Singapore, but benefits from Singapore's position as a trading center and makes export sales in response to buyer inquiries and solicitations. In Thailand, the Company has concentrated on promoting export sales for its enameled wire products and because of the decline in demand in the Thai market, the Company is seeking to expand its exports from Thailand of other products. In 2003, total export sales accounted for 16.2% of net sales. 4.2.6 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 30 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. Siam Pacific and Charoong Thai are two of the five largest wire and cable producers in Thailand and their principal competitors are the three other largest producers in Thailand. 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. 24 Singapore The Company principally competes with four other major wire and cable manufacturers in Singapore. Although the Company believes it is the largest manufacturer of 1ow voltage power cable in Singapore, it experiences significant competition from other local producers. There are no tariff or other barriers 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, there are two major wire and cable producers in Australia: Olex Cables (owned by Pacific Dunlop) and Pirelli Cables, which acquired the construction cable and power cable business of Metal Manufacturers Cables, formerly a major wire and cable producer in Australia, in 1999. APEC's principal competitors are Olex Cables and Pirelli Cables. With the April 1998 closing of the Olex Cables plant in Queensland in order to concentrate operations in the states of New South Wales and Victoria in Australia, APEC became the only cable producer in Queensland and therefore expects to have a pricing advantage over other competitors importing into Queensland. APEC has also opened sales offices with warehousing facilities in Sydney, Melbourne and Perth in order to attract and service the customers in those regions. China PEWS manufactures enameled wire in Shenzhen province for electronic, video and audio products for the South China Market and for export. CCH is the trading arm of PEWS. PEWS is one of the largest enameled wire manufactures amongst the six manufacturers in Shenzhen province. It supplies mainly to transformer, motor and coil manufacturers in and around Shenzhen. 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. It faces competition principally from overseas imports and manufacturers from other provinces. SPFO is one of the largest manufacturers of fiber optic cables in Shadong province and it supplies mainly to government and state telecommunication agencies such as China Netcom, China Telecom, China Mobile, China Railcom and China Powercom. It faces competition principally from approximately twenty of the larger fiber optic cable manufacturers in China. NPCDC anticipates significant competition in selling telecommunications cable in eastern China. Several established producers of telecommunications cable exist in Zhejiang province, including one of similar size to NPCDC in Ningbo, the city the company plant is located. Due to keen market competition in the regional China market, NPCDC is looking towards export of its telecommunication cables to countries such as Singapore. NPCDC has 25 recently also installed production machines for the manufacture LAN cables for the local China market with the objective of diversifying its product range. Other Markets In 2003, the Company exported approximately 31.2% of its products manufactured in Singapore and Thailand. These products are principally sold through independent suppliers in competition with domestic and foreign manufacturers. 4.2.7 REGIONAL CONSIDERATIONS Since the Asian currency and financial crisis which began in mid-1997, confidence has gradually returned to countries in the Asia Pacific region. The financial and currency markets have significantly stabilized with financial and economic reforms instituted by the local governments with assistance from the International Monetary Fund (IMF). By the end of 1998 and in 1999, regional currencies had significantly stabilized in value relative to the U.S. dollar. However, from mid-2000, the Thai economy began to decelerate as a result of weak domestic demand, coupled with a major fiscal expansion program espoused by the newly elected government, causing the Thai Baht to weaken further. In 2003, the Thai Baht strengthened from an exchange rate of Baht 43.17 to the U.S. Dollar at the beginning of 2003 to Baht 39.63 to the U.S. Dollar at the end of 2003. Thailand A substantial portion of the Company's Thai operations, which accounted for approximately 44.2% of the Company's net sales in 2003, 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 part on the general state of the Thai economy. For several years until late 1996, the wire and cable industry and the Company benefited from continued increases in Thailand's gross domestic product ("GDP") and the many infrastructure projects implemented by the Thai government. Since the impact of the financial and economic crisis in 1997, 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. Economic growth in 2003 has increased to 6.7% from 5.2% growth recorded in 2002 as a result of increased private investment, increased domestic consumption and robust exports. Thailand's exports, a key driver of the economy, rose 3.5% in 2003, compared to a 5.0% increase in 2002. The World Bank has projected Thai economic growth in 2004 to be approximately 7.2% followed by 6.5% in 2005. Telecommunications Sales of the Company's 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 products are affected by 26 the dollar value of contracts awarded by the government for telecommunications and other infrastructure projects. Historically, control of the telecommunications sector in Thailand, including the right to grant concessions for the installation and operation of telecommunications services, has rested with state owned enterprises. There are currently three public agencies responsible for communications in Thailand: TOT, which controls domestic telephone service, the Communications Authority of Thailand ("CAT"), which handles postal and international telephone service, and the Post and Telegraph Department, which controls and regulates the use of frequencies for radio communication stations and satellite communication networks. Telecommunications services in Thailand have traditionally been developed and expanded through grants by TOT and CAT of concessions to private operators to install and operate telecom projects on a build-transfer-operate basis, where the government enterprise involved would maintain control over the award of the concession and receive a profit share from the operations of the project. Power In past years, until the economic and financial crisis in Asia which began in 1997, economic growth in Thailand stimulated rapid growth in the demand for electric power, and annual rates of growth in electricity demand outpaced annual economic growth rates. Despite the rapid growth in electricity demand, electricity consumption in Thailand remains low by international standards. The Electricity Generating Authority of Thailand has estimated that aggregate country-wide consumption will increase from approximately 13,600 MW in 1996 to approximately 26,300 MW by 2006. 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 Singapore economy grew by approximately 1.1% in 2003 compared to a 2.3% increase in 2002. The weak global electronic sector, weak US consumer demand and the slow world economy in 2003 all contributed to the slow growth in Singapore's GDP. The World Bank has projected Singapore economic growth in 2004 to be approximately 5.6% followed by 4.5% in 2004. The Singapore government has established targets to increase the population from the current 3.2 million to approximately 4 million by the end of 2010. This planned growth in population, plus the decline in average household size from 4.2 persons per household in 1990 to 3.4 persons in 2000, is expected to result in an increase in demand for residential property and construction. 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 27 development, growth rate, capital reinvestment, allocation of resources, rate of inflation and balance of payments position. The economy of China is a planned economy subject to one-, five- and ten-year plans adopted by central PRC government authorities and implemented, to a large extent, by provincial and local authorities under the supervision of the State Development Planning Commission. These plans set out production and development targets for state enterprises. Although the majority of productive assets in China are still owned by the PRC government, more recently the PRC government has implemented economic reform measures which emphasize decentralization, utilization of market forces and the development of foreign investment projects, of which NPCDC, SPFO and Shanghai Yayang are examples. For information regarding a government restructuring plan to abolish fifteen ministries, including the MPT, approved by the National People's Congress, see Section 3.3.6 "Risks Relating to China." The Chinese economy is estimated to have expanded by 9.1% in 2003 (2002: 8.0%) as a result of fiscal stimulus and robust external demand. Exports and imports continue to surge. Fixed-asset investment, a crucial component of China's economic growth, rose during the period partly as a result of increased public expenditure on infrastructure projects and technology upgrades of state-owned entities. The World Bank has projected China economic growth in 2004 to be approximately 7.7% followed by 7.2% in 2005. 4.3 ORGANIZATIONAL STRUCTURE Thailand The Company's Thai operations are conducted by Siam Pacific, which produces telecommunications cable, power cable and enameled wire for the domestic market, Pacific Thai, a specialized producer of enameled wire for the export market and Charoong Thai, which manufactures power telecommunications cables and, through its subsidiaries, provides telecommunication and network services. As at December 31, 2003, the Company owns effective 55.41% interests in Siam Pacific, Pacific Thai and Charoong Thai. Siam Pacific was established in 1989 as a joint venture between PEWC and Ital-Thai, which is the largest diversified construction company in Thailand and is principally engaged in the design, engineering, construction and project management of large-scale civil engineering and telecommunications projects in Thailand. Capitalizing on PEWC's wire and cable manufacturing expertise and Ital-Thai's significant presence in the local market, the company was able to establish its presence in this market and gain knowledge of business opportunities in Thailand. Pacific Thai was established in 1989 and is a wholly owned subsidiary of Siam Pacific. Pacific Thai produces 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 must be renewed each year. Charoong Thai is a public company listed on the Stock Exchange of Thailand ("SET"). It manufactures aluminum and copper electric wire, medium and high voltage power cable and 28 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. 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 an amount of additional shares equal to its pro rata share of the 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 those additional shares, the Company may decide not to exercise this right in which case the Company's interest may be diluted. Siam Pacific and Charoong Thai are two of the five largest telecommunications and power cable and wire manufacturers in Thailand and are two of the five government-approved suppliers of telecommunications cable for major public telecommunications projects. As part of its restructuring plan, the Company has merged its Thai operations, which has generated cost savings while improving overall efficiency. The Company believes the synergistic effect of merging these operations will produce significantly reduced overhead and will centralize decision making and resource allocation for the Thai operations. The transaction was completed on July 2, 2002 when Charoong Thai issued 177,500,000 new shares at Baht 5 per share, representing 49.92% of its enlarged base of 355,660,000 paid-up shares. The new shares were exchanged for Siam Pacific's shares at a swap ratio of 1 Siam Pacific share for every 26.5 of Charoong Thai's newly issued shares. Immediately after the completion of this transaction, the shareholders of the new enlarged Charoong Thai company comprised of the Company (68.42%), Ital-Thai (16.90%) and Bangkok Insurance (5.31%). The rest of the shares are publicly traded on the SET. Singapore The Company's Singapore operations are conducted primarily through its 98.2%-owned subsidiary Sigma Cable. The Company believes that Sigma Cable is the largest producer of low voltage 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 copper rod and medium and high voltage wire and cable 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 increasing demand for medium and high voltage power cable and related turnkey installation projects in Singapore. In 1998 the Company acquired a 60.0% interest in Sigma-Epan, a primarily Singapore-based group of companies, which manufacture specialty cables and assemble cable harnesses for the electronics, computer, building automation, audio and communication industries. The Company bought over the remaining 40% interest in the Sigma-Epan in 2001. Sigma-Epan has 29 manufacturing operations in Singapore and Malaysia. It achieved ISO 9002 certification for its quality management system in 1990. Its customers are largely multinational original equipment manufacturers and its export markets include Malaysia, the Philippines, Indonesia, Thailand, Australia, New Zealand, China and the USA. Australia The Company has an effective 98.5% ownership interest in APEC, an Australian wire and cable distributor, which commenced operations at its power cable manufacturing facility in Queensland near Brisbane, Australia in 1997. The new facility produces low voltage power cable with a targeted production capacity of 2,000 tons per year. APEC has historically sold its production output to distributors and major wholesalers that have been primarily dependent upon imports from other countries. In 1998, it established a sales office with warehousing facilities in Sydney, New South Wales to attract and service customers in this region of Australia. In 2000, it established another sales office with warehousing facilities in Melbourne, Victoria. In 2002, a sales office in Perth was established. APEC bids for supply contracts in state and national power development projects in Australia. China In October 1997, the Company exercised its option to purchase from a subsidiary of Charoong Thai a 70.0% interest in NPCDC, for a consideration of $5.5 million. NPCDC manufactures a range of telecommunications cable and LAN electronic cables in Yinjiang Town, Zhejiang Province, China. NPCDC began commercial production of high quality telecommunications cable in December 1996. Total production capacity of the NPCDC operations is approximately 800,000 pkm per year. NPCDC currently obtains all of its copper rod requirements from PEWC through a licensed Chinese importer. NPCDC's primary customers are the government owned post and telecommunication bureaus in eastern China and major subcontractors bidding for government contracts. While NPCDC will enjoy normal management control over its production process and output, the prices it will receive for its telecommunications cable will be determined by the government. The term of the NPCDC joint venture is 50 years commencing from December 31, 1993, the date the joint venture received its business license. The joint venture may be terminated early with the consent of all the joint venture partners or following a serious breach by one of the joint venture partners of the terms of the joint venture contract. The joint venture partners will share future profits in proportion to their equity interests in the joint venture. The Company also has a 63.49% effective interest in Shanghai Yayang, a company in Shanghai, China. Shanghai Yayang is a joint venture company manufacturing enameled wire which was formed in 1998. The other party to the joint venture is South-West Power Cable in Chengdu Province. Shanghai Yayang manufactures enameled wire with a diameter of between 0.05mm and 2.5mm. SPFO is a joint venture company in Yanggu County, Shandong Province, China. SPFO was established to manufacture fiber optic cables for the China market. The Company owns a 30 51% interest in SPFO with the remaining interest owned by the joint-venture partner, Shandong Yanggu Cable Company, an established manufacturer in Shandong Province that produces a wide range of cable products and is considered one of the leading cable producers in China. The Company has invested a total of $2.8 million in SPFO. On June 30, 2001, the Company invested approximately $1.2 million for a 25.0% interest in an existing profitable company Shandong Rubber Cable Company, Ltd. ("SRC"), which manufactures rubber cable for the China market. The remaining 75% is owned by Shandong Yanggu. The investment was in the form of machinery transfer and cash. On August 18, 2001, a joint-venture agreement was signed with Shandong Yanggu to establish Shandong Huayu Pacific Fiber Optics Communication Co., Ltd. ("SHP") for the manufacture of optic fibers. The Company will invest $3.0 million for a 49% holding; the remaining 51% will be held by Shandong Yanggu. Production is tentatively scheduled to commence in 2004 or 2005 with initial production of 900,000km of optic fibers annually. The actual commencement of operations will depend on the assessment of market conditions. The company plans to operate two optic fiber drawing towers and four production lines. Its products will be sold to Shandong Pacific Fiber Optic Cable Co., Ltd. and other external buyers. The Company believes that the market for optic fiber and fiber optic cable remains promising in China in the long term. On March 22, 2002, the Company acquired two companies, namely, Crown Century Holdings Limited ("CCH") and its wholly-owned subsidiary, Pacific Electric Wire & Cable (Shenzhen) Co., Ltd. ("PEWS") from PEWC, the majority shareholder of the Company. The acquisition was in exchange for 3,097,436 new shares of the Company issued to PEWC. As a result of this new issue, PEWC's holding in the Company increased from 68.3% to 75.4% in 2002. PEWS manufactures enameled wire for electronic, video and audio products for the South China Market and for export. CCH is the trading arm of PEWS. The operations of PEWS and CCH have been profitable since 1999 and have contributed to the profits of the Company in 2003. 4.4 PROPERTY, PLANT AND EQUIPMENT The Company's manufactured products are produced at facilities on premises owned or leased by Siam Pacific, Pacific Thai, Charoong Thai, Sigma Cable, Sigma-Epan, APEC, NPCDC, Shanghai Yayang, SPFO and PEWS. Siam Pacific owns a 5.2 acre production facility near Bangkok, Thailand, located on a 26.9 acre site that it also owns. The production facility is mortgaged to Bangkok Bank as security for a $9.0 million line of credit. Pacific Thai operates a separate 92,800 square meter production facility located at the same site which it leases from Siam Pacific. Charoong Thai owns a 24.7 acre production facility in Chachoengsao province, near Bangkok, Thailand. The production facility is located on a 57.9 acre site which Charoong Thai also owns. Neither the production facility nor the land are mortgaged. 31 Sigma Cable operates at a new production facility 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. Sigma-Epan leased an office space from Sigma Cable in Singapore and two factory units in Johore Bahru and Penang, both in Malaysia. APEC owns a manufacturing facility in Brisbane, Australia, which is mortgaged to Westpac Banking Corporation of Australia as security for a bank facility of approximately Australian $4 million. NPCDC operates on 10.9 acres of state-owned land in Ningbo, Yinjiang, Zhejian Province, China. The factory area is 3.3 acres. A leasehold right of industrial land use for the land has been granted for 50 years. Shanghai Yayang operates a factory, partially mortgaged to a finance company, located in an area of approximately 5,000 square meters in an industrial district in Fengxian, Shanghai. SPFO operates in a purpose-built factory building on a leasehold state-owned land in Yanggu, Shandong Province, China. PEWS operates on 36,000 square meters of state-owned land with built-up area 20,367 square meters in Long Gang, Shenzhen Province, China. A leasehold right of industrial land use for the land has been granted for 50 years. The facility is mortgaged to Agricultural Bank of China as security for a Rmb 14 million bank facility granted in 2003. 32 The Company's primary facilities are briefly described below:
Location Company Products -------- ------- -------- Bangkok, Thailand Siam Pacific Telecommunications cable, power cable, enameled wire Bangkok, Thailand Pacific Thai Enameled wire Bangkok, Thailand Charoong Thai Telecommunications cable, power cable Ningbo, China NPCDC Telecommunications cable, LAN cable Shanghai, China Shanghai Yayang Enameled wire Yanggu, China SPFO Fiber optic cable Shenzhen, China PEWS Enameled wire Singapore Sigma Cable Power cable, SDI project engineering, distributed products Singapore and Malaysia Sigma-Epan Electronic cable Brisbane, Australia APEC Power cable
All of the Company's facilities in Bangkok, Singapore, Brisbane and China use production processes and equipment of international standard imported from Europe, the United States, Taiwan, and Japan. ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion should be read in conjunction with the annual consolidated financial statements, including the notes to those financial statements, which are included with this annual report. 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 on-going 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 33 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. Inventories Inventories are valued at the lower of cost or market value. Cost is determined using the first-in, first-out or weighted average method. In assessing the ultimate realization of inventories, we are required to make judgments as to future market requirements compared with current inventory levels. Revisions to our allowance for inventories may be required if actual market requirements differ from our estimates. Carrying values Valuations are required under accounting principles generally accepted in the United States to determine the carrying value of various assets. Our most significant assets that require management to prepare or obtain valuations are goodwill and deferred income taxes. Management must identify whether events have occurred that may impact the carrying value of these assets and make assumptions regarding future events, such as profitability. Differences between the assumptions used to prepare these valuations and actual results could materially impact the carrying amount of these assets and net earnings. Investments A judgmental aspect of accounting for investments 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. Revenue recognition A portion of our revenue is generated from installation activities which is recognized using the percentage-of-completion method. Recognized revenues and profit are subject to revisions as the activity progresses to completion. We allocate revenue from installation and sale of cables contained in a single arrangement, or in related arrangements with the same customer, based on their relative fair values. 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-specific return or refund privileges. The amounts of revenue recognized is impacted by our judgments as to whether an arrangement includes multiple elements. Changes to the elements in an arrangement could affect the timing of the revenue recognition. Bad Debt The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the 34 Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Impairment of Long-Lived Assets We evaluate the carrying value of our long-lived assets, consisting primarily of property plant and equipment, whenever certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. In 2002, the Company recorded impairment charges of $1.6 million related to the impairment of certain property, plant and equipment of Ningbo. These impairment charges were recorded to reduce the carrying value of the identified assets to fair value. 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. Changes in these estimates could have a material adverse effect on the assessment of our long-lived assets. Recent Pronouncements In January 2003, FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires a beneficiary to consolidate a variable interest entity ("VIE") if it is the primary beneficiary of that entity. The primary beneficiary is defined as having a variable interest in a VIE that will absorb a majority of the entity's expected losses if they occur, receives a majority of the entity's expected residual returns if they occur, or both. In December 2003, FASB completed deliberations of proposed modifications to FIN 46 ("Revised Interpretations") resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied in financial statements for periods ending after March 15, 2004. VIEs created after December 31, 2003 must be accounted for under the Revised Interpretations. Special Purpose Entities ("SPEs") created prior to February 1, 2003, may be accounted for under the original or revised interpretation's provisions no later than the first period ending after December 15, 2003. Non-SPEs created prior to February 1, 2003, should be accounted for under the revised interpretation's provisions no later than the first period ending after March 15, 2004. The Company has applied the provisions of FIN 46 on variable interest entities created after January 31, 2003 and for SPEs. The adoption did not have a material impact on the Company's financial statements of position, results of operations, or cash flows. In May 2003, FASB issued FASB Statement No. 150, "Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("Statement 150"). This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. In November 2003, the FASB issued FASB Staff Position (FSP) 150-3, "Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under Statement 150", which deferred the effective date of Statement 150 for certain mandatorily redeemable non-controlling interests. The 35 Company has adopted the provisions of Statement 150, except for certain mandatorily redeemable non-controlling interests, for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of Statement 150 did not have a material impact on the Company's financial statements of position, results of operations, or cash flows. 5.2 SUMMARIZED INCOME STATEMENT This discussion should be read in conjunction with the information contained in the Consolidated Financial Statements and notes thereto (the "Financial Statements") presented in Item 18 of this Annual Report. The following table sets forth a summary statement of income for the periods indicated: (See chart on following page.) 36
Year ended December 31, (US$ in thousands, except percentages) 2001 2002 2003 ------------------------------------------------------------------- (Restated) Net Sales: Manufactured products: Telecommunications wire and cable $36,606 $35,619 $33,640 Power cable 41,782 58,710 58,450 Enameled wire 65,240 86,635 95,541 Electronic cable 5,390 4,778 4,662 ------------------------------------------------------------------- Total manufactured products 149,018 185,742 192,293 SDI project engineering 14,968 31,134 3,919 Distributed Products 33,325 24,303 15,187 ------------------------------------------------------------------- Total net sales 197,311 241,179 211,399 =================================================================== Gross profit: Manufactured products: Telecommunications wire and cable 6,593 9,588 8,503 Power cable 6,548 13,466 11,224 Enameled wire 6,578 11,887 12,295 Electronic cable 635 252 555 ------------------------------------------------------------------- Total manufactured products 20,354 35,193 32,577 SDI project engineering (1,119) (787) 92 Distributed Products 724 338 491 ------------------------------------------------------------------- Total gross profit 19,959 34,744 33,160 =================================================================== Gross profit margin: Manufactured products Telecommunications wire and cable 18.0% 26.9% 25.3% Power cable 15.7% 22.9% 19.2% Enameled wire 10.1% 13.7% 12.9% Electronic cable 11.8% 5.3% 11.9% ------------------------------------------------------------------- Total manufactured products 13.7% 18.9% 16.9% SDI Project engineering -7.5% -2.5% 2.3% Distributed Products 2.2% 1.4% 3.2% ------------------------------------------------------------------- Total gross margin 10.1% 14.4% 15.7% ===================================================================
37 5.3 OPERATING RESULTS 5.3.1 YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002 General Results of operations are determined primarily by 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 approximately 50% to 60% of the cost of sales. 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. The monthly average copper prices in 2003 moved within the band of $1,586 to $2,200 per metric ton. Average copper prices per metric ton have increased by 14.0% from $1,560 in 2002 to $1,779 in 2003. The higher cost of copper resulted in lower gross profit margins for our products in 2003 than in previous years. Gross profit margins for manufactured products in 2003 were on average at 16.9% compared to 18.9% in 2002. Copper prices indicated in this report are quoted from the London Metal Exchange (LME) index. The 2003, 2002 and 2001 copper prices are as follows:
2003 2002 2001 -------------------------------------------------------- Average LME copper price ($/Ton) 1Q $1,663 $1,557 $1,764 2Q 1,640 1,611 1,652 3Q 1,753 1,516 1,472 4Q 2,059 1,554 1,426 -------------------------------------------------------- Year 1,779 1,560 1,578 ========================================================
The rates of year 2003 GDP growth for Thailand, Singapore and China were 6.7%, 1.1% and 9.1% respectively. The 2002 GDP growth rates for Thailand, Singapore and China were 5.2%, 2.3% and 8.0% respectively. Our performance is largely influenced by the level of growth in the telecommunication and power infrastructure, construction and electronic goods manufacturing sectors. We are beginning to see the return of growth in these industrial sectors following the recovery in the general economies of the respective countries and increases in governments' budget spending on infrastructure. 38 The Company showed improved net income of $10.0 million in 2003, more than double that of $4.8 million in 2002. Sales of manufactured product increased by 3.5%, although overall net sales fell due to decrease in revenue from SDI project engineering and Distributed Products. Overall gross profit margins have increased from 14.4% in 2002 to 15.7% in 2003 due to product mix and improved selling prices for electronic cable, SDI project engineering and Distributed Products. Selling, general and administrative expenses have increased due to expanded group operations in China and Australia. Our net results in 2003 were aided by positive contributions from exchange gain, lower net interest expense and share of net gain of equity investees. An exchange gain of $4.2 million was recorded in 2003 largely due to the appreciation of the Thai Baht and the Australian dollar. Net interest expenses have decreased by 25.2% due to decreased borrowings with payments from cash provided by operating activities. Net Sales Sales of manufactured product increased by 3.5% from $186 million in 2002 to $192 million in 2003, although overall net sales fell due to decrease in revenue from SDI project engineering and Distributed Products. Sales in enameled wire exhibited the strongest increase of 10.3% due to the strong demand from appliance manufacturers especially in China. Sales of Distributed Products and revenue from SDI project engineering in Singapore decreased in 2003 due to decreased demand and offers of tenders from SP Powerassets. The following shows the percentage share in net sales of the respective operations with respect to our total sales in 2003. Manufactured All products and products only services ------------------------------------------ Thailand 48.6% 44.2% Singapore 8.4% 16.7% Australia 11.5% 10.4% China 31.5% 28.7% ------------------------------------------ Total 100.0% 100.0% ========================================== In 2003, Sigma Cable recorded revenue of $3.9 million under project engineering turnkey contracts awarded by SP Powerassets. The projects call for the supply and installation of 66kV (kilo-volt) high-voltage power cables along various distinct routes. The Company will continue to tender for future projects. Gross Profit Gross profit for 2003 was $33.1 million, representing a decrease of 4.6% compared to $34.7 million for 2002. Gross profit contributed by sales of manufactured products was $32.6 million in 2003 compared to $35.2 million in 2002. Overall gross profit margins have increased from 14.4% in 2002 to 15.7% in 2003 due to product mix and improved selling prices for electronic cable, SDI project engineering and 39 Distributed Products. However, gross profit margins for manufactured products decreased from 18.9% in 2002 to 16.9% in 2003 due to higher cost of raw material copper. Operating Profit Selling, general and administrative expenses have increased due to expanded group operations in China and Australia. In 2002, impairment loss on NPC telecommunication machinery of $1.5 million was taken up in view of the weak copper telecommunication cable industry in the China region and dim prospects of future sales in this product. Despite the lower gross profit in 2003, income from operations increased by 1.7% from $13.9 million in 2002 to $14.1 million in 2003 due to other operating income of $1.3 million arising from the disposal of certain property, plant and equipment. Gain/Loss from Investees In 2002, investee loss was related to that of Loxley Pacific Co., Ltd. ("Lox Pac"), Thai Professional Telecom Network Co., Ltd. ("Thai Professional"), Siam Pacific Holding Company Limited ("SPHC") and Newcall Group Limited ("NGL"). The share of loss of equity investees in 2002 consists primarily of the share of loss in NGL, Thai Professional and Lox Pac. The loss was in part due to the impairment of investment in Lox Pac of $2.5 million. In 2003, the share of gain in equity investees was largely related to share of operating profits of LoxPac and the recovery of certain receivables from NGL. Gain on Share Issuance by Subsidiaries and Affiliates In 2002, the issuance of new shares by Charoong Thai, Shanghai Yayang and Lox Pac contributed to the $1.0 million net gain on share issuance by subsidiaries and affiliates. No such gain was recorded in 2003. Loss on Sale of Investment The loss on sale of investment in 2002 and 2003 was largely due to the disposal of our investment in Charoong Thai. Exchange Gain/Loss In July 1997, the floatation of the Thai Baht caused the currency to fall in value against the U.S. Dollar and triggered declines in other regional currencies, such as the Singapore Dollar and Australian Dollar. The Thai Baht generally appreciated against the U.S. Dollar during the course of 1998 and largely stabilized in 1999. However, from mid-2000, the Thai economy began to decelerate as a result of weak domestic demand, coupled with a major fiscal expansion program espoused by the newly elected government, which contributed to a weakening of the Thai Baht. Since then, the Thai Baht has remained relatively stable. The exchange differences in the income statements arose largely as a result of these movements in the Thai Baht exchange rate and, to a lesser extent, the movements in the other operating currencies. The exchange rates as of December 31, 2003, based on Noon Buying Rate, were as follows: 40 Foreign currency to US$1: December 31, December 31, 2003 2002 -------------------------------- Thai Baht 39.63 43.20 Singapore $ 1.70 1.74 Australian $ 1.33 1.78 Chinese Rmb 8.28 8.28 Based on the above rates, the revaluation of assets and liabilities denominated in U.S. Dollars or other foreign currencies in the companies resulted in $4.2 million exchange gain in 2003, largely due to the appreciation of the Thai Baht and the Australian Dollar. We use Thai Baht forward foreign exchange contracts to reduce our exposure to foreign currency risks for liabilities denominated in foreign currencies. A forward foreign exchange contract obligates us and our subsidiaries to exchange predetermined amounts of specified foreign exchange currencies at specified exchange rates or to make an equivalent U.S. Dollar payment equal to the value of such exchange. Realized and unrealized gains and losses on forward foreign exchange contracts are included in operations as foreign exchange gains or losses. Income Taxes In 2003, our income taxes charge has decreased partly due to the recognition of deferred tax asset in APEC as the company has demonstrated profitability. 5.3.2 YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001 General Results of operations are determined primarily by 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 approximately 50% to 60% of the cost of sales. 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. During 2002, the prices of copper had stabilized significantly compared to the fluctuations seen in 2001. The monthly average copper prices in 2002 moved within the band of $1,470 to $1,650 per metric ton. Average copper prices per metric ton have decreased by marginally by 1.1% from $1,578 in 2001 to $1,560 in 2002. The lower cost of copper resulted in 41 higher gross profit margins for our products in 2002 than in previous years. Gross profit margins for manufactured products in 2002 were on average at 18.9% compared to 13.7% in 2001. Copper prices indicated in this report are quoted from the London Metal Exchange (LME) index. The 2002, 2001 and 2000 copper prices are as follows: 2002 2001 2000 -------- -------- -------- Average LME copper price ($/Ton) 1Q $ 1,557 $ 1,764 $ 1,795 2Q 1,611 1,652 1,739 3Q 1,516 1,472 1,872 4Q 1,554 1,426 1,848 -------- -------- -------- Year 1,560 1,578 1,814 ======== ======== ======== The rates of year 2002 GDP growth for Thailand, Singapore and China were 5.2%, 2.3% and 8.0% respectively. The 2001 GDP growth rates for Thailand, Singapore and China were 1.9%, -2.0% and 7.3% respectively. Our performance is largely influenced by the level of growth in the telecommunication and power infrastructure, construction and electronic goods manufacturing sectors. We are beginning to see the return of growth in these industrial sectors following the recovery in the general economies of the respective countries and increases in governments' budget spending on infrastructure. The wire and cable industry has improved in 2002 with higher selling prices and sales margins. The Company showed improved results in 2002 compared to 2001. Net sales and gross profit have increased by 22.2% and 74.1%, respectively. Gross profit margins have also increased from 10.1% in 2001 to 14.4% in 2002 due to improved selling prices for telecommunication cable and power cable, and the lower cost of copper. Selling, general and administrative expenses have increased due to expanded group operations and additional provision for accounts receivables. Despite recording impairment loss on NPCDC telecommunication cable machinery of $1.5 million in 2002, income from operations has increased from $3.8 million in 2001 to $13.9 million in 2002. Our net results were affected by net interest expenses, share of loss of equity investees, gain on sale of investment, and income taxes charges. Net interest expenses have decreased by 52.8% due to decreased borrowings. The share of loss of equity investees in 2002 consists primarily of the share of loss in NGL and Lox Pac. Gain on share issuance by subsidiaries and affiliates arose from the issuance of shares by Charoong Thai, Shanghai Yayang and Lox Pac. Gain on sale of investment in 2001 arose from the sale of Charoong Thai warrants; while the net gain on sale of investment in 2002 arose primarily from the disposal of our investment in Charoong Thai. In 2001, $0.7 million of the valuation allowance on the deferred tax asset of Charoong Thai was written back as the company had demonstrated profitability in 2001. In 2002, our income tax charge increased primarily due to increased profitability of our Thai operations. Net income improved from $91,000 in 2001 to $4.8 million in 2002. 42 Net Sales Net sales for 2002 amounted to $241.2 million, representing an increase of $43.9 million, or 22.2%, against 2001 sales of $197.3 million. Sales in telecommunications cable decreased marginally by 2.7% partly due to a fall in copper prices. Sales in power cable increased by 40.5% reflecting increased power cable infrastructure spending by the Thai government and improved prices in Australia. Sales in enameled wire increased by 32.8% reflecting strong demand from the electrical product manufacturing sector especially in China. Sales of Distributed Products decreased 27.1% in 2002 compared to 2001 due to decreased demand from the Singapore government. Revenue from the SDI project engineering in Singapore increased by 108.0% due to Sigma Cable securing larger tender projects from Powergrid. The following shows the percentage share in net sales of the respective operations with respect to our total sales in 2002. Manufactured All products and products only services ---------------- ------------------- Thailand 48.6% 44.2% Singapore 8.4% 16.7% Australia 11.5% 10.4% China 31.5% 28.7% ---------------- ------------------- Total 100.0% 100.0% ================ =================== In 2002, Sigma Cable recorded revenue of $31.1 million under project engineering turnkey contracts awarded by Powergrid. The projects call for the supply and installation of 66kV (kilo-volt) high-voltage power cables along various distinct routes. The Company will continue to tender for future projects. Gross Profit Gross profit for 2002 was $34.7 million, representing an increase of 73.5% compared to $20.0 million for 2001. Gross profit contributed by sales of manufactured products was $36.5 million in 2002 compared to $21.6 million in 2001, representing an increase of 69.2%. Gross profit margins for manufactured products increased from 14.5% in 2001 to 19.6% in 2002. Gross profit margins increased in all categories of products except for electronic cable and Distributed Products. Gross profit increased as a result of better selling prices for telecommunication cable, power cable and enameled wire, and lower production costs due to weaker copper prices and higher production volumes. Operating Profit Selling, general and administrative expenses have increased due to expanded group operations and additional provision for accounts receivables. In 2001, goodwill related to 43 Sigma-Epan of $0.5 million was written off as the Company decided that it would be prudent to provide for a write-down of its carrying value in view of its poor performance. In 2002, impairment loss on NPC telecommunication machinery of $1.5 million was taken up in view of the weak copper telecommunication cable industry in the China region and dim prospects of future sales in this product. With higher gross profit in 2002, income from operations increased by 357.2% from $3.8 million in 2001 to $13.7 million in 2002. Loss from Investees In 2001 and 2002, investee loss related to that of Lox Pac, Thai Professional, SPHC and NGL. The share of loss of equity investees in 2001 consists primarily of the share of loss in NGL, which includes provision for advances made to NGL. The share of loss of equity investees in 2002 consists primarily of the share of loss in NGL, Thai Professional and Lox Pac. The loss is in part due to the impairment of investment in Lox Pac of $2.5 million. Gain on Share Issuance by Subsidiaries and Affiliates In 2002, the issuance of new shares by Charoong Thai, Shanghai Yayang and Lox Pac contributed to the $1.0 million net gain on share issuance by subsidiaries and affiliates. No such gain was recorded in 2001. Gain on Sale of Investment In 2001, we disposed of certain Charoong Thai warrants and achieved a gain on sale of investment of $0.7 million. In 2002, the deemed disposal of our investment in Charoong Thai contributed to the $0.5 million gain on sale of investment. Exchange Loss In July 1997, the floatation of the Thai Baht caused the currency to fall in value against the U.S. Dollar and triggered declines in other regional currencies, such as the Singapore Dollar and Australian Dollar. The Thai Baht generally appreciated against the U.S. Dollar during the course of 1998 and largely stabilized in 1999. However, from mid-2000, the Thai economy began to decelerate as a result of weak domestic demand, coupled with a major fiscal expansion program espoused by the newly elected government, which contributed to a weakening of the Thai Baht. Since then, the Thai Baht has remained relatively stable. The exchange differences in the income statements arose largely as a result of these movements in the Thai Baht exchange rate and, to a lesser extent, the movements in the other operating currencies. The exchange rates as of December 31, 2002, based on Noon Buying Rate, were as follows: 44 December 31, December 31, Foreign currency to US$1: 2002 2001 ---------------- ---------------- Thai Baht 43.20 44.25 Singapore $ 1.74 1.85 Australian $ 1.78 1.95 Chinese Rmb 8.28 8.28 Based on the above rates, the revaluation of assets and liabilities denominated in U.S. Dollars or other foreign currencies in the companies resulted in small exchange differences in both 2001 and 2002. We use Thai Baht forward foreign exchange contracts to reduce our exposure to foreign currency risks for liabilities denominated in foreign currencies. A forward foreign exchange contract obligates us and our subsidiaries to exchange predetermined amounts of specified foreign exchange currencies at specified exchange rates or to make an equivalent U.S. Dollar payment equal to the value of such exchange. Realized and unrealized gains and losses on forward foreign exchange contracts are included in operations as foreign exchange gains or losses. Income Taxes In 2001, $0.7 million of the valuation allowance on the deferred tax asset of Charoong Thai was written back as the company had demonstrated profitability in 2001. In 2002, our income taxes charge increased primarily due to increased profitability of our Thai operations. 5.4 LIQUIDITY AND CAPITAL RESOURCES Capital Expenditure and Capital Resources Net proceeds from the initial public offering of common shares on March 26, 1997 were $33.3 million. The proceeds have been used to finance a significant portion of the cost of our development. The following are the major investment and purchases in 2001, 2002 and 2003: On June 30, 2001, the Company invested approximately $1.2 million for a 25.0% interest in an existing profitable company Shandong Rubber Cable Company, Ltd. ("SRC"), which manufactures rubber cable for the China market. The remaining 75% is owned by Shandong Yanggu Cable Co., Ltd. ("Shandong Yanggu"), an established cable manufacturer in Shandong Province manufacturing a wide range of cable products and one of the top twelve cable producers in China. The investment was in the form of machinery transfer and cash. On August 18, 2001, a joint-venture agreement was signed with Shandong Yanggu to establish Shandong Huayu Pacific Fiber Optics Communication Co., Ltd. ("SHP") for the manufacture of optic fibers. The Company will invest $4.0 million for a 49% holding; the remaining 51% was originally held by Shandong Yanggu. In May 2002, the shareholding by Shandong Yanggu was transferred to Hebei Huayu Co. Ltd. Investment to date amounts to $2.3 million. 45 Production is expected to commence in 2004 instead of 2002 originally with an initial estimated production of 900,000km of optic fibers annually. The company will operate with an optic fiber drawing tower and two production lines. Its products will be sold to Shandong Pacific Fiber Optic Cable Co., Ltd. and other external buyers. Other investments in 2001 include: the acquisition of an additional 20.8% interest in NPC for $0.7 million, thereby increasing the Company's interests in NPC from 70.0% to 90.8%; the acquisition of an additional 40% interest in Sigma-Epan for $0.4 million, thereby increasing the Company's interests in Sigma-Epan from 60% to 100%; an investment in Shanghai Yayang by the Company's 66.15% held subsidiary, Pacific Thai, for $1.0 million; and, the acquisition of an additional 16.7% interest in Lox Pac for $1.1 million, thereby increasing the Company's interest in Lox Pac from 13.9% to 30.6%. On March 22, 2002, the Company purchased 100% of PEWC's interest in CCH and its wholly-owned subsidiary, PEWS, resulting in CCH and PEWS becoming wholly-owned subsidiaries of the Company upon completion of the transaction. The acquisition was funded by the issuance of 3,097,436 common shares. As a result of this new issue, PEWC's holding in the Company increased from 68.3% to 75.4%. PEWS manufactures enameled wire for electronic, video and audio products for the South China Market and for export. The consolidated revenues of CCH and PEWS for the year 2001 were $26.6 million with a profit of $1.4 million. For the year 2002, these companies contributed $35.0 million in sales and $4.8 million in net profits to the Company's results. Other investments in 2002 include: the acquisition of an additional 3.51% interest in NPC for $5.8 million, thereby increasing the Company's interest in Ningbo from 90.8% to 94.31%; the acquisition of additional new shares in Shanghai Yayang for $0.3 million, thereby increasing the Company's interest in Shanghai Yayang from 62.09% to 62.39%; the acquisition of an additional 1.84% interest in Newcall Communications Singapore Pte Ltd ("NCS") for $0.5 million, thereby increasing the Company's interest in NCS from 37.69% to 39.53%; the acquisition of additional new shares in Lox Pac for $1.2 million, however, the further issuance of new shares during the year by Lox Pac has caused the Company's effective interest in Lox Pac to be diluted from 30.56% to 24.58%; and, the acquisition of the remaining 33.85% interest in Siam Pacific for $11.6 million, in the form of Charoong Thai shares issued to the minority shareholders. NCS was liquidated during 2002 and the increased investment was written off. In 2003, the Company injected a further $1.7 million in Shanghai Yayang through its subsidiary, Pacific Thai, thereby increasing the Company's interest in Shanghai Yayang from 62.39% to 63.49%. The additional investment was in view of improved sales and operating performance and the need for capacity expansion as part of the company's operation strategy. The Company and its joint venture partner, Shandong Yanggu, have also injected $0.3 million each in SPFO. To date, the Company has invested a total of $2.8 million with a 51.0% interest in SPFO. The Company has also contributed $0.2 million capital injection into SHP. Total purchases of property, plant and equipment totaled $11.1 million in 2002 and $5.0 million in 2003. Purchases relate mainly to the capacity expansion of certain subsidiaries in 46 China, namely Shanghai Yayang and SPFO. The remaining purchases were for replacement of old equipment. Liquidity We met our working capital requirements from cash provided by operations and both short-term and long-term borrowings. Net cash generated from operating activities for 2003 was $23.8 million, compared to $19.3 million for 2002. Net cash generated from investing activities in 2003 was $2.5 million, compared to $14.6 million used in 2002, largely on account of lower capital expenditure and proceeds from disposal of investment in 2003. Net cash used in financing activities amounted to $16.5 million in 2003 largely for the repayment of bank loans. The Company maintains several working capital and overdraft credit facilities with various commercial bank groups and financial institutions. Under line of credit arrangements for short-term debt with the Company's bankers, the Company may borrow up to approximately $78 million on such terms as the Company and the banks may mutually agree upon. These arrangements do not have termination dates but are reviewed annually for renewal. As of December 31, 2003, the unused portion of the credit lines was approximately $42 million which included unused letters of credit amounting to $27 million. Letters of credit are issued by the Company during the ordinary course of business through major financial institutions as required by certain vendor contracts. As of December 31, 2003, the Company had open letters of credit totaling $18 million. Liabilities relating to the letters of credit are included in current liabilities. Our main source of liquidity in the near future continues to be the net cash provided by our operating activities. We continue to have sufficient liquidity to meet our anticipated working capital, capital expenditures, general corporate requirements, and other short-term and long-term obligations as they come due. We may further enhance our liquidity in the future, as needs arise, by establishing additional lines of credit, with the support of PEWC if necessary and available. The following table set forth our obligations and commitments to make future payments under contracts and other commitments.
Contractual obligations Payments due by period As of December 31, 2003 (In thousands of US$) Total 2004 2005-2006 2007-2008 After 2008 ----------------------------------------------------------------------------------------------------------------- Long term debt 1,654 - 1,654 - - Long term loan from PEWC 7,824 - - 7,824 - Capital lease obligations (principal amount only) 398 244 154 - - Operating leases 5,778 441 731 388 4,218 Purchase obligations - - - - - -------------------------------------------------------- Total contractual cash obligations 15,654 685 2,539 8,212 4,218 ========================================================
For more details on financial commitments and contingencies, please refer to Exhibit 19.1 "Asia Pacific Wire & Cable Corporation Limited- Audited Financial Statements", page F-31. 47 5.5 INFLATION We do not consider inflation to have had a material impact on our results of operations during the periods covered. ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 6.1 DIRECTORS AND SENIOR MANAGEMENT The following table sets forth certain information concerning the directors and executive officers of the Company. All directors are subject to annual election at the shareholders' meeting.
Name Age Position ---- --- -------- Andy C.C. Cheng 45 Director. Michael C. Lee 52 Director. David T. Sun 50 Director. Mr. Sun also serves as President of Charoong Thai. Tony Chun-Tang Yuan 53 Director. Jack T. Sun 54 Director. Charles Chung-Yuan Han 65 Director, member of the Executive Committee, Chairman and Chief Operating Officer of the Company since its formation. Mr. Han has also served as the general manager of Sigma Cable since 1982. Raymond Chin-Yung Kung 57 Director and member of the Executive Committee of the Company since its formation. Mr. Kung has been the president and general manager of Siam Pacific since 1989. Tim Wong 49 Director. Senior Finance Manager of Utahloy Education Foundation. Member of the Audit Committee and Remuneration Committee. Charles Xue 50 Director. Chief Executive Officer of United Medical. Member of the Audit Committee and Remuneration Committee. Aaron Chik 53 Director. Chief Financial Officer and Company Secretary. Jeffrey Too 39 Chief Executive Officer. James M. Keyes 41 Bermuda Resident Secretary. Appleby Corporate Services N/A Resident Representative in Bermuda.
48 Certain officers and directors of the Company are also officers and directors of PEWC and/or PEWC affiliates, as described below: Mr. Andy C.C. Cheng is a member of the Company's Board of Directors, as well as Executive Vice President and Director of PEWC. Mr. Cheng also serves as Director and Chief Executive Officer of PUSA and as a board member of other PEWC affiliates. Mr. Michael C. Lee is a member of the Company's Board of Directors, as well Chief Executive Officer of PEWC. Mr. Lee also serves as Chairman of PUSA. Mr. David T. Sun is a member of the Board of Directors of the Company, as well as President of PEWC and President of Charoong Thai. Mr. Tony Chun-Tang Yuan is a member of the Board of Directors of the Company. He also serves as Chairman of PEWC. Mr. Jack T. Sun is a member of the Company's Board of Directors, as well as Executive Vice Chairman of Charoong Thai. Mr. Sun also serves on a number of other boards of PEWC affiliates. Mr. Charles C.Y. Han is a member of the Board of Directors of the Company, a member of the Executive Committee, Chairman and Chief Operating Officer of the Company. Mr. Han also serves as General Manager of Sigma Cable, Managing Director of APEC and Chairman of NPCDC. Notwithstanding the relationships with PEWC or affiliates of PEWC, the above named individuals, in their capacities as directors and officers of the Company, are subject to fiduciary duties to the Company's shareholders. Actions may be taken by a quorum of directors (which consists of at least two directors) present at a board meeting. The Bye-Laws of the Company provide that any one director may call a board meeting. 6.2 AUDIT COMMITTEE The Audit Committee is a committee of the board of directors comprised of the two independent directors, Mr. Charles Xue and Mr. Tim Wong. Its primary function is to assist the board of directors 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. This function is carried out by: (i) reviewing the appropriateness of the accounting principles adopted by management in the composition and presentation of financial reports; (ii) overseeing the financial reports and the external audit of these reports; and (iii) overseeing the 49 establishment and management of risk limits and tolerances across our business and within our subsidiaries. The Audit Committee is solely and directly responsible for the appointment, compensation and oversight of the work of our auditors. Our auditors report directly to the Audit Committee. In addition, the Audit Committee has authority to engage independent counsel and other advisers as it determines is necessary to carry out its duties. 6.3 REMUNERATION COMMITTEE The Board has established a Remuneration Committee comprised of the two independent directors, Mr. Charles Xue and Mr. Tim Wong. This committee will help determine the remuneration to be paid to executive directors of the Company. 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 2003 was approximately $900,000. As of April 8, 2004, our directors and executive officers beneficially owned 8,000 common shares representing approximately 0.058% of the outstanding common shares. The Company has authorized a stock option plan for directors and key employees of the Company, pursuant to which any award of stock options will be made only with the approval of the Board of Directors. The Company has granted options to purchase 97,500 shares at the initial public offering price of $12.00 per share. These options vest in equal amounts over three years and are exercisable for a period of ten years. The Company has reserved 650,000 common shares for issuance under the plan. 6.5 EMPLOYEES As of December 31, 2003, the Company employed a total of approximately 1,980 employees, of which 300 are administrative and management personnel. In Thailand, the Company employs approximately 1,140 staff. In addition, the Company has approximately 190 employees in Singapore, 60 employees in Australia, 520 employees in China and 70 employees in Malaysia. 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. Approximately 60% 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 50 collective agreement. None of the employees of Siam Pacific, Pacific Thai, Charoong Thai or APEC 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 good and has not experienced difficulties attracting and retaining qualified employees. In Singapore, employee turnover is approximately 10% of total employees annually. In Thailand, employee turnover is approximately 3% of total employees annually. ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 7.1 MAJOR SHAREHOLDERS As of April 8, 2004, approximately 75.4% of the common shares of the Company are indirectly owned by PEWC, a company incorporated in Taiwan and listed on the Taiwan Securities Exchange. See Section 4.1.2 "Recent Developments". The following table sets forth certain information regarding ownership of the Company's capital stock as of April 8, 2004 by (i) all persons who are known to the Company to own beneficially more than five percent of the capital stock of the Company and (ii) the officers and directors of the Company as a group. The voting rights attaching to the Common Shares below are the same as those attaching to all other Common Shares.
Title of Class Identity of Person or Group Number of Percent of Class Shares ------------------------------ --------------------------------------- ---------------- ------------------- Common Stock Pacific Electric Wire & Cable Co., 10,430,769 75.4% Ltd. Common Stock Heartland Advisors, Inc. (1) 1,645,100 11.9% William J. Nasgovitz (1) 1,137,300 8.2% President and Principal Shareholder Heartland Advisors, Inc. Common Stock Directors and Officers of the Company 8,000 0.058%
(1) Based on Schedule 13G filed February 12, 2004. 7.2 RELATED PARTY TRANSACTIONS As at December 2003, the Company's largest short-term loan of $1.5 million was from Moon View Venture Limited, a subsidiary of PEWC. The loan is unsecured. As at December 2003, the only long-term loan of $7.8 million was from PEWC. The loan is unsecured and consists of $3.0 million being interest-free and the remaining portion bears interest at LIBOR plus 1%. Interest has been paid quarterly. The loan is repayable in 2008. Additional details regarding related party balances as of December 31, 2003 and related party transactions during the year 2003 are disclosed in Note 15 of Item 18: Financial Statements. 51 ITEM 8: FINANCIAL INFORMATION 8.1 LEGAL PROCEEDINGS All material litigation involving the Company discussed below is subject to a Settlement Agreement entered into as of July 2, 2004 by and among the Company, PEWC and Set Top International Inc., the material terms of which are summarized below. See also Exhibit 4.4 "Settlement Agreement [Translation]". Pacific Electric Wire & Cable Co., Ltd. & Asia Pacific Wire & Cable Corp., Ltd. v. Set Top International, Case No. 03 Civ. 9623 (JFK) (AJP) (the "New York Action") On December 4, 2003, PEWC and the Company (collectively "Plaintiffs") commenced an action in the United States District Court for the Southern District of New York (the "Southern District") against the following parties: Set Top, Kinbong Holdings Limited ("Kinbong"), Tom Ching-Yun Tung, Frank Wei-Feng Lin, Tai-Sheng Lien, Fu-Chuan Tsai, Fu-Nu Tsai, Yuan-Chun Hsu, Jack Takacs and Robert Everett Wolin (collectively "Defendants"). The Complaint alleges 12 causes of action, including fraud and conspiracy to commit fraud; violation of section 13(d) of the Securities Exchange Act; RICO violations under 18 USC ss. 1962; and breach of fiduciary duty. The case involves an alleged fraud perpetuated over a period of years by certain of the Defendants against Plaintiffs. Prior to the allegedly fraudulent transactions, PEWC owned (indirectly), free and clear of any competing claims, a 75.42% interest in the Company. As a result of the transactions, PEWC's controlling interest in the Company was purportedly transferred to Defendant Set Top. 52 The Southern District action did not progress to the discovery phase as the parties sought to agree to the terms of a settlement agreement on several occasions. On July 2, 2004, the Company, PEWC and Set Top entered into a Settlement Agreement (the "Settlement Agreement") pursuant to which PEWC has agreed to pay Set Top $25 million (the "Settlement Amount") by August 30, 2004 (subject to extension) to purchase all of Set Top's interest in the Company's shares. In the event that PEWC fails to pay the Settlement Amount to Set Top by August 30, 2004 (subject to extension), under the Settlement Agreement the ownership of 10,074,102 shares of the Company will pass to Set Top. Pursuant to the Settlement Agreement, the Company, PEWC and Set Top have agreed to withdraw all claims in all litigation proceedings against each other, including the actions in New York, Singapore and Bermuda, and Set Top has agreed to withdraw all of its claims in the PUSA bankruptcy proceedings. The parties are presently negotiating on the terms and the timing of the filing of the stipulations of discontinuance and/or dismissal. Prior to payment to Set Top of the Settlement Amount, Set Top is entitled under the terms of the Settlement Agreement to register in its name 50.44% of the total outstanding shares of the Company. Such shares of the Company, along with the approximately three million shares of the Company currently held of record by Kinbong, will be held by an escrow agent pending payment of the Settlement Amount. Set Top International, Inc. v. Asia Pacific Wire & Cable Corp., Ltd. & Others, Case No. S231/2004/S On March 23, 2004, Set Top commenced an action in the High Court of Singapore against the Company seeking damages and an injunction restraining the Company whether by itself, its related companies, its directors, officers, employees or agents from disposing of or dealing with or diminishing in its name or from causing or permitting any one to dispose of or deal with or diminish the value of any of its assets. Pursuant to the terms of the Settlement Agreement, the parties have agreed to dismiss all claims in the Singapore action. 53 Set Top International, Inc. v. Asia Pacific Wire & Cable Corp., Ltd., 2004 NO 192 On June 11, 2004, Set Top commenced an action in the Supreme Court of Bermuda to strike the name of PUSA from the share register of the Company and insert the name of Set Top in its place. Pursuant to the terms of the Settlement Agreement, the parties have agreed to dismiss all claims in the Bermuda action. In re Venturelink Holdings, Inc., et al., Case No. 02-80906-11-SAF PUSA, the record owner of approximately 53% of the issued and outstanding common shares of the Company, is a debtor in Chapter 11 bankruptcy proceedings in the United States Bankruptcy Court for the Northern District of Texas-Dallas Division (the "PUSA Bankruptcy"). Approximately 50.44% of the common shares of the Company are subject to an alleged assignment of a pledge in favor of Set Top, which has conducted a foreclosure proceeding on that pledge and claims to have an ownership interest in those shares. In the New York Action (see above), PEWC and the Company have challenged the validity of certain actions taken by Set Top and other named defendants with respect to the shares of the Company owned by PUSA. Pursuant to the Settlement Agreement, Set Top has agreed to dismiss its claims and withdraw as a party in interest in the PUSA Bankruptcy. See Section 4.1.2 "Recent Developments". 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 their ability to make distributions to the Company, including as a result of restrictive covenants contained in loan agreements, restrictions on the conversion of local currency earnings into US dollars or other hard currency and other regulatory restrictions. The foregoing restrictions may also affect the Company's ability to fund operations of one subsidiary with dividends and other payments received from another subsidiary. ITEM 9: THE OFFER AND LISTING 9.1 HISTORICAL TRADING INFORMATION From March 26, 1997 through December 31, 2001, the Company's common shares were listed and traded on the New York Stock Exchange (the "NYSE") under the symbol "AWC." Prior to such listing, there was no public market for the Company's equity securities. The NYSE has established certain continued listing criteria which impose certain minimum requirements with respect to the per share price and the aggregate value of the publicly traded securities of an issuer. In February 2001, the NYSE notified us that we had not been in compliance with those NYSE requirements, and that the NYSE would be authorized to suspend trading in our common shares and to commence delisting procedures subject to review and approval of our business plan. During the course of 2001, our business plan was submitted, amended and finally provisionally agreed with the NYSE, subject to the right of the staff to 54 require continuous compliance within a designated time frame, which the Company was not able to achieve, due to, among other factors, delays in approvals by Thai regulatory authorities of the implementation of certain Thai-based elements of the plan. On December 24, 2001, the staff of the NYSE announced that it has determined that the trading of the common shares should be suspended prior to December 31, 2001. The decision was reached in view of the fact that the Company had fallen below the NYSE's continued listing standards. The Company appealed the NYSE's decision, but its appeal was denied by a Committee of the Board of Directors of the Exchange. Following the suspension of trading of the common shares on the NYSE, the common shares have been 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, under the symbol "AWRCF.PK". Subsequent, to the quotation of the common shares on the "pink sheets" market by Pink Sheets LLC, the Company established relationships with several market markers and a public trading market for its common shares on the OTC BB. It is traded on the OTC BB under the symbol "AWRCF.OB". The common shares are not listed on any other exchanges or otherwise publicly traded within or outside the United States. The high and low sales price for common shares on the NYSE (up until December 2001) and on the OTC BB (from February 2002 when the Company re-established a public trading market for its common shares on the OTC BB) for each quarterly period from the first quarter of 1998 to the first quarter of 2004, and the high and low prices for November 2003 through April 2004, are as follows: Price per Share ($) ------------------------------- High Low 1998 First Quarter 8.75 7 Second Quarter 8 5 Third Quarter 6 1.875 Fourth Quarter 4.25 1.875 1999 First Quarter 4.75 2.25 Second Quarter 4.4375 2 Third Quarter 4.625 3.75 Fourth Quarter 4.125 3.3125 2000 First Quarter 4.625 3.625 Second Quarter 4.25 2.375 Third Quarter 3.375 2.50 Fourth Quarter 2.75 1.1875 55 Price per Share ($) ------------------------------- High Low 2001 First Quarter 1.6875 0.67 Second Quarter 0.85 0.65 Third Quarter 0.90 0.74 Fourth Quarter 0.86 0.40 2002 First Quarter 0.73 0.32 Second Quarter 0.90 0.48 Third Quarter 0.65 0.29 Fourth Quarter 1.55 0.51 2003 First Quarter 1.06 0.83 Second Quarter 1.60 0.75 Third Quarter 2.74 1.40 Fourth Quarter 3.60 2.15 2004 First Quarter 3.10 2.25 PRIOR SIX MONTHS December 2003 3.50 2.30 January 2004 3.10 2.30 February 2004 2.84 2.35 March 2004 2.90 2.25 April 2004 2.85 2.50 May 2004 2.40 1.90 9.2 NATURE OF THE TRADING MARKET Our common shares are quoted and traded on the OTC BB operated by the NASD, Inc., under the symbol "AWRCF.OB". ITEM 10: ADDITIONAL INFORMATION 10.1 MEMORANDUM OF ASSOCIATION AND BYE-LAWS 10.1.1 GENERAL For a detailed description of the Company's principal activities see Section 4.1 History and Development of the Company. The Company's Bye-laws, which have been incorporated by reference, are available for inspection upon prior written notice during customary business hours at the offices of the Company. 56 10.1.2 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 Spurling Hunter, our Bermuda counsel. Our authorized share capital consists of 20,000,000 common shares, par value $0.01 per share, of which, as of December 31, 2003, there are 13,830,769 common shares issued and outstanding. o Holders of the common shares have no preemptive, redemption, conversion or sinking fund rights. o 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. o In the event of our liquidation, dissolution or winding-up and subject to any alternative resolution that may be pursued by our shareholders, the holders of common shares are entitled to share ratably in our assets, if any, remaining after the payment of all our debts and liabilities. o Our outstanding common shares are fully paid and nonassessable. o Additional authorized but unissued common shares may be issued by the board of directors 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: o we are, or after the payment would be, unable to pay our liabilities as they become due; or o 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 the Bye-laws. We refer you to our memorandum of association and Bye-laws, copies of which have been filed with the SEC. You are urged to read these documents for a complete understanding of the terms of the memorandum of association and Bye-laws. 57 10.1.3 SHARE CAPITAL Our authorized capital consists of one class of common shares. Under our 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, special rights, 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. 10.1.4 VOTING RIGHTS Generally, under Bermuda law and our Bye-laws, questions brought before a general meeting are decided by a simple majority vote of shareholders present or represented by proxy. 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-laws by: o the chairman of the meeting; o at least three shareholders present in person or by proxy; o any shareholder or shareholders present in person or by proxy and holding between them not less than one-tenth of the total voting rights of all shareholders having voting rights; o a shareholder or shareholders present in person or represented by proxy holding common shares 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. 10.1.5 DIVIDEND RIGHTS 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, each share is entitled to a dividend if, as and when dividends are declared by the board of directors. The board of directors may determine that any dividend 58 may be paid in cash or, with the sanction of a shareholders resolution, by distribution of specific assets including shares or debentures. 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 conditions as our board of directors may deem relevant. 10.1.6 PURCHASES BY A COMPANY OF ITS OWN COMMON SHARES 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, as a result, our issued share capital would be reduced below the minimum capital specified in our memorandum of association. 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 a company's share premium account. Any common shares purchased by a 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. 10.1.7 PREEMPTIVE RIGHTS Our Bye-laws 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. 10.1.8 VARIATION OF RIGHTS We may issue more than one class of shares and more than one series of shares in each class. If we have more than one class of shares, the rights attached to any class of shares may be altered or abrogated either: o with the consent in writing of the holders of not less than fifty percent of the issued common shares of that class; or o pursuant to a resolution passed at a general meeting of the holders of such common shares, voting in proxy or present, at which a quorum is present. The Bye-laws provide that a quorum for such a meeting shall be two persons present in person or by proxy holding shares of the relevant class. The Bye-laws specify that the creation or issue of shares ranking on parity with existing shares will not, subject to any statement to the contrary in the terms of issue of these shares or rights attached to those shares, vary the special rights attached to existing shares. 59 10.1.9 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. 10.1.10 TRANSFER RESTRICTIONS The board of directors may in its absolute discretion and without assigning any reason refuse to register the transfer of any share that is not fully paid. The board of directors may refuse to register an instrument of transfer of a share unless it: o is duly stamped, if required by law, and lodged with us; o 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; o has obtained, where applicable, permission of the Bermuda Monetary Authority; and o is in respect of one class of shares. Our common shares are no longer listed on an "appointed stock exchange" and, therefore, do not qualify for a "blanket" authorization for free transferability from the Bermuda Monetary Authority for all transfers of our common shares between persons who are not resident in Bermuda for exchange control purposes. The Bermuda Monetary Authority has informed us that it has no objection to the continued free transferability of our common shares on the same basis as when the Company was listed on the NYSE except that the Bermuda Monetary Authority has requested it be informed of any new five percent or more shareholders. 10.1.11 TRANSMISSION OF SHARES In the event of the death of a shareholder, the survivor or survivors, where the deceased shareholder was a joint holder, or the legal personal representative of such shareholder, including executors and administrators, shall be the only persons recognized by us as having any title to the shares of the deceased. 10.1.12 DISCLOSURE OF INTERESTS Under the Companies Act, a director who has an interest in a material contract or assignment or a material proposed contract or assignment, 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 60 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-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 and he will be taken into account in ascertaining whether a quorum is present. 10.1.13 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, 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 they shall consist of property of the same kind or not and may for such purposes set such values as he deems fair upon any property to be divided and may determine how such division shall be carried out as between the shareholders. 10.1.14 MEETINGS OF SHAREHOLDERS Under Bermuda law, a company is required to convene at least one general meeting per calendar year. The directors of a company, notwithstanding anything in its 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. The Bye-laws provide that the board of directors may convene a special general meeting whenever in their judgment such a meeting is appropriate or necessary. Bermuda law requires that shareholders be given at least five days' notice of a meeting of the company. Our Bye-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 nonreceipt of a notice of a meeting by any person does not invalidate the proceedings of a meeting. Our Bye-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, 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. 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 telecopier. 61 10.1.15 ACCESS TO BOOKS AND RECORDS AND DISSEMINATION OF INFORMATION 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. Our shareholders have the additional right to inspect minutes of shareholder meetings and our audited financial statements, which must be presented at an annual general meeting. Our Bye-laws provide that the register of shareholders of a company is required to be open for inspection between 10:00 a.m. and 12:00 noon each working day without charge and to members of the general public on the payment of a fee. 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, EquiServe Trust Company, N.A. Under Bermuda 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, the register of directors and officers are available for inspection by the public between 10:00 a.m. and 12:00 noon every working day. Bermuda law does not, however, provide a general right for shareholders to inspect or obtain copies of any other corporate records. 10.1.16 ELECTION OR REMOVAL OF DIRECTORS The Bye-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 his successor is appointed or his prior removal in the manner provided by the Companies Act or the Bye-laws. The board 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 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: o 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; o if he becomes of unsound mind or a patient for any purpose under any statute or applicable law relating to mental health; 62 o if he becomes bankrupt under the law of any country or enters into a general settlement with his creditors; o if he is prohibited by law from being a director; or o if he ceases to be a director by virtue of the Companies Act or is removed from office pursuant to the Bye-laws. 10.1.17 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: o an aggregate of not less than twenty percent in par value of the Company's issued common shares; or o not less in the aggregate than twenty percent of the company's debentures are entitled to object to amendments to its memorandum of association, and 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-laws may be amended in the manner provided for in the Companies Act, which provides that the directors may amend the Bye-laws, provided that any such amendment shall be effective only to the extent approved by the shareholders. 10.1.18 MERGER OR CONSOLIDATION (AMALGAMATION) The Companies Act provides that, subject to the terms of a company's Bye-laws, the merger or consolidation of a Bermuda company with another company requires a merger or consolidation 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 at least one-third of the issued shares of the company. Under Bermuda law, in the event of a merger or consolidation of a Bermuda company, a shareholder who did not vote in favor of the transaction and who is not satisfied that 63 fair value has been offered for the shares, may apply to a Bermuda court within one month of notice of the meeting of shareholders to appraise the fair value of those shares. 10.1.19 CLASS ACTIONS AND DERIVATIVE ACTIONS Class actions and derivative actions are generally not available to shareholders under Bermuda law. A shareholder may commence an action in the name of a company to remedy a wrong done to the company where the act complained of is alleged to be beyond the corporate power of the company, or is illegal or would result in the violation of the company's memorandum of association or Bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders or, for instance, where an act requiring the approval of a greater percentage of the company's shareholders than those who actually approved it. When one or more shareholders believes the affairs of a company are being conducted in a manner which is prejudicial to the interest of some of the shareholders, a Bermuda court, 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. 10.1.20 REGISTRAR OR TRANSFER AGENT Our branch transfer agent and registrar is EquiServe Trust Company, N.A. In addition to a register held by our transfer agent, a register of holders of the shares is maintained by Appleby Corporate Services in Bermuda located at Canon's Court, 22 Victoria Street, Hamilton HM EX, Bermuda. 10.1.21 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, 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, resident representative 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, resident representative or committee member; provided that the indemnity contained in the Bye-laws will not extend to any matter which would render it void under the Companies Act as discussed above. 64 10.1.22 EXCHANGE CONTROLS We have been designated by the Bermuda Monetary Authority as a nonresident under the Exchange Control Act of 1972 (the "Exchange Act"). This designation will allow 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 Act and regulations thereunder. Any issues of shares, and any transfers of common shares to any person regarded as resident in Bermuda for exchange control purposes, require specific prior approval from the Bermuda Monetary Authority under the Exchange Act. Under Bermuda law, share certificates are only issued in the names of corporations, partnerships or individuals. In the case of an applicant acting in a special capacity, for example an executor or a trustee, certificates may, at the request of the applicant, record the capacity in which the applicant is acting. 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 such 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. As an "exempted company", we are exempt from Bermuda laws which restrict the percentage of share capital that may be held by non-Bermudians. However, as an exempted company we may not participate in certain designated business transactions, which we do not consider relevant to our present or planned business activities. 10.2 MATERIAL CONTRACTS Composite Services Agreement 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"), which originally expired on November 7, 1999 (but has been renewed yearly at the option of the Company), which 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. Pursuant to the Composite Services Agreement: o PEWC agrees to (a) sell copper rod to the Company, upon the Company's request, (i) at a price consisting of the spot price of copper on the LME plus an agreed upon premium and (ii) at prices and on terms at least as favorable as PEWC provides copper rod to other purchasers of similar amounts of copper rod in the 65 same markets, and (b) give priority in the supply of copper rod to the Company over other purchasers of copper rod from PEWC. o 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. o 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. o 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. o 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. o 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. 66 Indemnification Agreement The Company and PEWC are parties to an indemnification agreement dated November 6, 1996 (the "Indemnification Agreement"), pursuant to which PEWC agreed to indemnify the Company (including the Company's directors, officers, employees and agents) against any cost, expense, loss, liability or damage arising out of any claim asserted or threatened to be asserted by any third party as a result of certain actions taken or failed to be taken by PEWC or its subsidiaries (other than the Company) prior to March 1997 with respect to Sigma Cable, Sino-Sin, APEC, Siam Pacific, Siam Pacific Holding Company, Pacific Thai, Charoong Thai and NPCDC, following the exercise by the Company of its option to purchase, directly or indirectly, each of them (collectively, the "Transferred Businesses"). PEWC has a duty to indemnify the Company if such cost, expense, loss, liability or damage arises out of claims resulting from the actions or inactions of PEWC or its subsidiaries, with respect to the Transferred Businesses, to the extent such action or failure to act was not in compliance with applicable laws and regulations or obligations to third parties and, with respect to Charoong Thai, is limited to situations of which PEWC had knowledge. 10.3 ENVIRONMENTAL MATTERS The Company believes that all of its operations are in compliance with, and in certain circumstances exceed, all applicable environmental laws and regulations in Thailand, Singapore, Australia and China. The Company has not been subject to any legal, regulatory or other action alleging violations or breaches of environmental standards. While the Company does not believe that the nature of its operations create environmental hazards, no assurance can be given that new environmental laws or regulations in Thailand, Singapore, Australia, China or elsewhere, will not, in the future, require changes in the Company's production processes or otherwise adversely affect the Company's operations and financial condition. 10.4 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. The Company believes that it maintains insurance coverage commensurate with the nature of and risks associated with its business. 10.5 CREDIT SUPPORT PEWC has provided credit support to the Company and its subsidiaries through the provision of direct loans, credit terms in inter-company trade balances between PEWC and the operating subsidiaries and corporate guarantees for trade and credit facilities from banks and financial institutions for the purposes of financing working capital, capital expenditures, acquisitions and expansion programs. There can be no assurance that PEWC would continue to provide such support in the future if Swiss Re foreclosed on the Pledged Shares or for some other reason. 67 10.6 TAXATION The following is a summary of certain tax consequences of the acquisition, ownership and disposition of common shares based on the tax laws of the United States and Bermuda. 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. 10.6.1 UNITED STATES TAXATION The following is a summary of certain United States federal income tax consequences of the acquisition, ownership and disposition of common shares by a U.S. Holder (as defined below). 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. In particular, this summary deals only with common shares held as capital assets and does not address the United States tax treatment of U.S. Holders that are subject to special treatment under the United States Internal Revenue Code of 1986, as amended (the "Code"), such as dealers in securities, financial institutions, life insurance companies, tax-exempt entities, persons holding shares as part of a hedging or conversion transaction or a straddle, or persons whose functional currency is not the United States dollar or who own (directly, indirectly or by attribution) 10% or more of the stock of the Company. Consequently, prospective purchasers who are U.S. Holders are advised to satisfy themselves as to the overall United States federal, state and local tax consequences of their acquisition of, ownership and disposition of common shares by consulting their own tax advisors. The statements of United States tax laws set forth below are based on the laws in force as of the date of this Annual Report and may be subject to changes in United States law occurring after such date. As used herein, the term "U.S. Holder" shall mean a beneficial owner of common shares that is (i) a citizen or resident of the United States, (ii) a corporation or partnership 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 person" (as defined in Section 7701(a)(30) of the Code) has the authority to control all substantial decisions of the trust. Taxation of 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 68 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. 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 For United States federal income tax purposes, a U.S. Holder will recognize taxable gain or loss on any sale or exchange of common shares 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 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 or exchange 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 long-term capital gains are subject to U.S. federal income tax at a marginal rate of 15%, or 5% in the case of individuals in the 10% or 15% income tax brackets. (If an individual is subject to the "alternative minimum tax", the maximum effective tax rate on long-term capital gains will be 26% to 28%.) 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 long-term 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% 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 Internal Revenue Service notifies the 69 payor that the taxpayer identification number furnished by the holder or beneficial owner is incorrect, (iii) if there has been notification from the Internal Revenue Service 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 certifies as to its non-United States status or otherwise establishes an exemption. 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 Internal Revenue Service ("IRS"). Payment of the proceeds from the sale of common shares effected outside the United States by a foreign office of certain United States connected brokers will not be subject to backup withholding tax but will be subject to information reporting requirements unless the broker has documentary evidence in its records that the beneficial owner is a non-U.S. Holder and has no actual knowledge to the contrary, or the beneficial owner otherwise establishes an exemption. Passive Foreign Investment Company In general, the Company will be treated as a passive foreign investment company ("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. 70 The special tax rules described above will 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 information as to the procedures for making such an election. The QEF election is made on a shareholder-by-shareholder basis and can ordinarily be revoked only with the consent of the IRS. 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 QEF election if the Company is treated as a PFIC in the future. Controlled Foreign Corporation More than 50 percent of the Company's voting stock is owned by a single United States shareholder. Consequently, the Company is a "controlled foreign corporation" for United States federal income tax purposes. United States persons owning (directly, indirectly or by attribution) 10 percent or more of the Company's voting stock will be subject to a special United States tax regime with respect to their stock and their shares of certain types of income of the Company. Any such 10 percent shareholders are advised to consult with their own tax advisors. 10.6.2 BERMUDA TAXATION In the opinion of Appleby Spurling Hunter, the following discussion correctly describes certain tax consequences of the ownership of common shares under Bermuda law. 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, including any dividend or capital gains withholding tax, 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 71 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 registration 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. 10.7 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 will file annually a Form 20-F no later than six months after the close of our fiscal year, which is December 31st. 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") at Judiciary Plaza, 450 Fifth Street, N.W., 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 at http://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. ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to financial market risks derives primarily from the changes in interest rates, foreign exchange rates and the commodity price of our primary raw material, copper. 11.1 FOREIGN CURRENCY EXPOSURE Changes in currency exchange rates influence the Company's results of operations. The Company's principal operations are located in Thailand and Singapore and a substantial portion of its revenues are denominated in Baht or Singapore dollars. Nearly all of the raw materials for these operations are imported and paid for in US dollars and a substantial portion of the Company's future capital expenditures are expected to be in US dollars. The Company requires a significant amount of US dollars for its ongoing equipment upgrade and maintenance programs. Although the Company's reporting currency is US dollars, the functional currency of its Singapore operations, which accounted for approximately 16.7% of Company sales (including 72 sales of Distributed Products) in 2003, is the Singapore dollar, and the functional currency of its Thai operations, which accounted for approximately 44.2% of Company sales in 2003, is the Baht. Accordingly, any devaluation of the Baht or the Singapore dollar against the US dollar increases the effective cost of foreign manufacturing equipment and the amount of foreign currency denominated expenses and liabilities and has an adverse impact on the operations of the Company. We have 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 is 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 US dollar payment equal to the value of such exchange. Realized and unrealized gains and losses on foreign exchange contracts are included in income as foreign exchange gains or losses. As of December 31, 2003, we do not have any significant forward exchange contracts outstanding. 11.2 INTEREST RATE RISK The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's bank loans and overdrafts, long-term debt and interest-bearing long-term loans from PEWC. The Company maintains a mixture of both fixed and floating debt instruments. During 2003 interest paid totaled $1.6 million. The following table provides information about the Company's debt instruments that are sensitive to changes in interest rates. Principal Amount (In thousands of US$) ----------------- Bank loans and overdrafts 22,339 Long-term debt 1,654 Interest-bearing long-term loan from PEWC 4,818 ------- Total 28,811 ------- We have cash flow and earnings exposure due to market interest rate changes for our floating debt obligations. We manage the exposure to financial market risk by performing ongoing evaluations of our debt portfolios and restructuring our financial instruments 73 accordingly to provide the optimum interest structure. A half percentage point change in interest rates would affect our interest payments by approximately 13% annually. 11.3 RISKS RELATING TO COPPER Copper is the principal raw material we use, accounting for approximately 50% to 60% of the cost of sales in 2003. We purchase copper at prices based on the average prevailing international spot market prices on the London Metal Exchange (the "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, an increase in the price of copper will increase our cost of sales. Whether this has a material impact on our operating margins and financial results depends primarily on our ability to pass on these increased costs to our customers. 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 products reflect copper prices prevailing at the time the products are ordered. Copper prices have been subject to considerable volatility in recent years and this volatility has had a significant impact on our revenues and profits. Accordingly, significant volatility in copper prices could have an adverse effect on our operations. No assurance can be given that such volatility will not continue to recur. ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES (Not Applicable) PART II ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES (Not Applicable) ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS (Not Applicable) ITEM 15: DISCLOSURE CONTROLS AND PROCEDURES Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures within 90 days of the date of this annual report, have concluded that, as of that date, our disclosure controls and procedures were effective to ensure that material information relating to us was made known to them by others within our Company particularly during the period in which this annual report was being prepared. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. 74 There were no significant changes in our internal controls or in other factors that could significantly affect these controls and procedures subsequent to the date our chief executive officer and our chief financial officer completed their evaluation, nor were there any significant deficiencies or material weaknesses in our internal controls requiring corrective actions. ITEM 16: AUDIT MATTERS 16.1 AUDIT COMMITTEE FINANCIAL EXPERT The Company has identified a financial expert to serve as the Chair of the Audit Committee. Mr. Tim Wong is an independent director of the Company. His relevant experience includes, but is not limited to, the following: 1. Over 9 years experience as an external and internal auditor. 2. Over 7 years experience as Financial Controller in several companies. 16.2 CODE OF ETHICS The Company has adopted a code of ethics applicable to its Chief Executive Officer and senior financial officers. A copy of the Company's code of ethics is attached as Exhibit 16.2. 16.3 PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees The aggregate fees billed for the fiscal years 2002 and 2003 for professional services rendered by the principal accountant for the audit of the Company's annual financial statements total $0.3 million per year. Audit-Related Fees There were no other fees for the fiscal years 2002 and 2003 for assurance and audit-related services by the principal accountant. Tax Fees The aggregate fees billed for the fiscal years 2002 and 2003 for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning total approximately $20,000 and $37,000 respectively. These fees were for services including tax planning, compliance and general advice. All Other Fees There were no other fees for the fiscal years 2002 and 2003 for services, other than those services described in the preceding paragraphs of this Item 16.3, rendered by the principal accountant. Audit Committee Approval The engagement of the accountant to render audit or non-audit services is entered into pursuant to pre-approval policies and procedures established by the audit committee of the Company and all services described in this Item 16.3 were approved by the audit committee. 75 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 to F-43. ITEM 19: EXHIBITS
19.1 INDEX TO ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AUDITED FINANCIAL STATEMENTS Report of independent auditors F-2 Consolidated balance sheets as of December 31, F-3 2002 and 2003 Consolidated statements of operations for the years ended December 31, 2001, 2002 and 2003 F-5 Consolidated statements of shareholders' equity for the years ended December 31, 2001, 2002 and 2003 F-6 Consolidated statements of cash flows for the years ended December 31, 2001, 2002 and 2003 F-7 Notes to consolidated financial statements F-8
19.2 INDEX TO EXHIBITS 1.1 Memorandum of Association of Asia Pacific Wire & Cable Corporation Limited (incorporated by reference to Exhibit 1.1 of the Company's Form 20-F filed with the Securities and Exchange Commission on June 21, 2001) 1.2 Bye-Laws of Asia Pacific Wire & Cable Corporation Limited (incorporated by reference to Exhibit 2.1 of the Company's Form 20-F filed with the Securities and Exchange Commission on June 21, 2001) 4.1 Composite Services Agreement (incorporated by reference to Exhibit 3.1 of the Company's Form 20-F filed with the Securities and Exchange Commission on June 21, 2001) 4.2 Indemnification Agreement dated November 6, 1996 (incorporated by reference to Exhibit 10.2 of the Company's Form F-1 filed with the Securities and Exchange Commission on November 13, 1996) 76 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 Form 20-F filed with the Securities and Exchange Commission on July 1, 2002) 4.4 Settlement Agreement between Set Top International Inc. (Party A) and Pacific Electric Wire and Cable Co., Ltd. and Asia Pacific Wire and Cable Corporation Ltd. (Party B) [Translation] 8 List of significant subsidiaries (see Note 1 to the consolidated financial statements) 10 Certification under Section 906 of the Sarbanes-Oxley Act. 16.2 Code of Ethics. 77 SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED /s/ Jeffrey Too ------------------------------- Date: July 7, 2004 Jeffrey Too Chief Executive Officer CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT CERTIFICATION I, Jeffrey Too, Chief Executive Officer of Asia Pacific Wire & Cable Corporation Limited, certify that: 1. I have reviewed this annual report on Form 20-F of Asia Pacific Wire & Cable Corporation Limited; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days before the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 7, 2004 /s/ Jeffrey Too ---------------------------- Jeffrey Too Chief Executive Officer CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT CERTIFICATION I, Aaron Chik, Chief Financial Officer of Asia Pacific Wire & Cable Corporation Limited, certify that: 1. I have reviewed this annual report on Form 20-F of Asia Pacific Wire & Cable Corporation Limited; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: d) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; e) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days before the filing date of this annual report (the "Evaluation Date"); and f) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 7, 2004 /s/ Aaron Chik ----------------------- Aaron Chik Chief Financial Officer Audited Financial Statements ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED 31 December 2003 INDEX TO FINANCIAL STATEMENTS CONTENTS Page Report of independent auditors F-2 Consolidated balance sheets as of December 31, 2002 and 2003 F-3 Consolidated statements of operations for the years ended December 31, 2001, 2002 and 2003 F-5 Consolidated statements of shareholders' equity for the years ended December 31, 2001, 2002 and 2003 F-6 Consolidated statements of cash flows for the years ended December 31, 2001, 2002 and 2003 F-7 Notes to consolidated financial statements F-8 F-1 REPORT OF INDEPENDENT AUDITORS To the Shareholders of Asia Pacific Wire & Cable Corporation Limited We have audited the accompanying consolidated balance sheets of Asia Pacific Wire & Cable Corporation Limited and subsidiaries as of December 31, 2002 and 2003, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Asia Pacific Wire & Cable Corporation Limited and subsidiaries at December 31, 2002 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Ernst & Young Certified Public Accountants Singapore June 9, 2004 F-2 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of US Dollars, except share data) DECEMBER 31, 2002 2003 ASSETS Current assets: Cash and cash equivalents $ 14,431 $ 25,032 Short-term bank deposits 3,892 3,567 Accounts receivable (note 9) 53,740 58,867 Amounts due from related parties (note 15) 4,675 3,108 Inventories (note 9) Distributed products 2,750 5,819 Finished products 15,188 18,172 Products in process 7,634 9,703 Raw materials and supplies 13,948 12,002 --------- --------- 39,520 45,696 Investments (note 5) 541 1,041 Deferred tax assets (note 10) 657 774 Other current assets 3,332 2,785 --------- --------- Total current assets 120,788 140,870 --------- --------- Property, plant and equipment: Land 4,017 4,300 Land use rights 2,153 2,147 Buildings 33,191 37,282 Machinery and equipment 76,652 84,867 Motor vehicles 2,544 2,899 Office equipment 6,004 6,581 --------- --------- 124,561 138,076 Accumulated depreciation and amortization (56,311) (70,115) --------- --------- 68,250 67,961 --------- --------- Other assets: Long term investments (note 5) 2,412 2,441 Investment in equity investees (note 19) 8,735 10,249 Goodwill (note 4) 7,607 8,324 Other assets 168 218 Deferred tax assets (note 10) 233 2,113 --------- --------- 19,155 23,345 --------- --------- Total assets $ 208,193 $ 232,176 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. F-3 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of US Dollars, except share data)
DECEMBER 31, 2002 2003 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank loans and overdrafts (note 6) $ 36,808 $ 22,339 Accounts payable 12,767 16,508 Accrued expenses 2,408 2,562 Amounts due to related parties (note 15) 16,052 22,515 Short-term loans from a related party (note 15) 2,251 1,963 Income taxes 1,450 1,699 Current portion of long-term debt (note 7) 1,125 - Deferred income taxes (note 10) - 449 Other current liabilities 1,481 1,694 --------- --------- Total current liabilities 74,342 69,729 Long-term debt, less current portion (note 7) 675 1,654 Long-term debt from related parties, less current portion (note 15) 8,822 7,824 Other liabilities 232 197 Deferred income taxes (note 10) 2,336 1,774 --------- --------- Total liabilities 86,407 81,178 --------- --------- Minority interests 29,739 43,822 Commitments and contingencies (notes 6 and 12) Shareholders' equity (note 8): Common stock, $0.01 par value: Authorized shares - 20,000,000 shares Issued and outstanding shares - 13,830,769 in 2001 and 2002 138 138 Additional paid-in capital 111,541 111,541 Retained earnings 11,032 21,032 Accumulated other comprehensive income (loss) (30,664) (25,535) --------- --------- Total shareholders' equity 92,047 107,176 --------- --------- Total liabilities and shareholders' equity $ 208,193 $ 232,176 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-4 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of US Dollars, except share data)
Year ended December 31, 2001 2002 2003 Net sales Manufactured products $ 149,018 $ 185,742 $ 192,293 Distributed products 33,325 24,303 15,187 Sales, delivery and installation of wires and cables 14,968 31,134 3,919 ------------ ------------ ------------ 197,311 241,179 211,399 Costs of sales (purchases from related parties amounted to $51,469 in 2001, $81,910 in 2002 and $53,141 in 2003) (177,352) (206,435) (178,239) ------------ ------------ ------------ Gross profit 19,959 34,744 33,160 Other operating income - - 1,336 Selling, general and administrative expenses (15,616) (19,282) (20,351) Goodwill written off (506) - - Impairment loss - (1,559) - ------------ ------------ ------------ Income from operations 3,837 13,903 14,145 Exchange (loss) gain (81) (16) 4,161 Interest income 901 715 285 Interest expense (4,074) (2,214) (1,407) Share of net (loss) gain of equity investees (2,535) (4,090) 1,475 Gain on share issuance by subsidiaries and affiliates - 1,011 - Gain (loss) on sale of investment 743 (557) (885) Others 1,619 2,502 (214) ------------ ------------ ------------ Income before income taxes and minority interests 410 11,254 17,560 Income taxes (note 10) 1,411 (4,683) (2,477) Minority interests (1,730) (1,780) (5,083) ------------ ------------ ------------ Net income 91 4,791 10,000 ============ ============ ============ Basic and diluted income per share 0.01 0.35 0.72 ============ ============ ============ 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-5 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands of US Dollars, except share data)
Accumulated Additional other Common paid-in Retained comprehensive stock capital earnings income (loss) Total Balance at December 31, 2000 $ 138 $ 111,541 $ 6,150 $ (33,155) $ 84,674 Net income for 2001 - - 91 - 91 Currency translation adjustment - - - (4,024) (4,024) Unrealized losses on available-for-sale securities - net of income tax of $9 - - - (23) (23) --------- Comprehensive loss (3,956) --------- --------- --------- --------- --------- Balance at December 31, 2001 $ 138 $ 111,541 $ 6,241 $ (37,202) $ 80,718 Net income for 2002 - - 4,791 - 4,791 Currency translation adjustment - - - 6,919 6,919 Unrealized losses on available-for-sale securities - net of income tax of $10 - - - (381) (381) --------- Comprehensive income 11,329 --------- --------- --------- --------- --------- Balance at December 31, 2002 $ 138 $ 111,541 $ 11,032 $ (30,664) $ 92,047 Net income for 2003 - - 10,000 - 10,000 Currency translation adjustment - - - 4,754 4,754 Losses realized on disposal of available-for-sale securities - - - (89) (89) Unrealized gains on available-for-sale securities - net of income tax of $15 - - - 464 464 --------- Comprehensive income - - 15,129 --------- --------- --------- --------- --------- Balance at December 31, 2003 $ 138 $ 111,541 $ 21,032 $ (25,535) $ 107,176 ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-6 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of US Dollars, except share data)
Year ended December 31, 2001 2002 2003 Operating activities: Net income $ 91 $ 4,791 $ 10,000 Adjustments to reconcile net income to net cash provided by operating activities: Gain on disposal of property, plant and equipment - (7) (1,336) Depreciation 11,210 9,805 9,217 Goodwill written off 506 - - Deferred income taxes (2,247) 1,867 (2,110) Provision for doubtful accounts (255) 968 902 Provision for slow-moving inventories 1,205 847 77 Undistributed loss of equity investees 2,535 4,090 (1,475) Impairment loss - 1,559 - Gain on share issuance by subsidiaries and affiliates - (1,011) - (Gain) loss on sale of investment (743) 557 885 Minority interests 1,730 1,780 5,083 Foreign currency translation adjustment 447 5,192 (1,405) Changes in operating assets and liabilities net of acquisitions of businesses: Accounts receivable (4,075) (8,836) (2,637) Inventories 4,542 (7,746) (6,253) Other current assets (1,662) 3,024 547 Amounts due to related parties 715 1,404 8,030 Accounts payable, accrued expenses and other liabilities (2,958) 1,065 4,321 -------- -------- -------- Net cash provided by operating activities 11,041 19,349 23,846 Investing activities: Decrease in short-term bank deposits 4,274 3,221 603 Investment in equity investees (2,857) (4,018) (183) Advance to equity investees (1,380) (353) - Purchases of property, plant and equipment (9,116) (11,135) (4,877) Proceeds from disposal of property, plant and equipment 4,047 266 2,147 Acquisition of additional investment in subsidiary (1,341) (1,998) (1,091) Proceeds from disposal of investment 743 - 6,013 Disposal of other assets 44 - 81 Purchases of other assets - (364) (218) Investment in long-term investments (97) (197) - -------- -------- -------- Net cash (used in) provided by investing activities (5,683) (14,578) 2,475 Financing activities: Additions of loans from related parties - 459 - Repayments of loans from related parties (4,276) - (288) Additions of long-term debt 8,223 - - Repayments of long-term debt (7,598) (6,619) (1,750) Repayments of bank loans (20,956) (5,719) (65,884) Increase in bank loans 10,144 7,051 51,472 Net decrease in overdrafts (917) (50) (57) -------- -------- -------- Net cash used in financing activities (15,380) (4,878) (16,507) Effect of exchange rate changes on cash and cash equivalents (371) 297 787 -------- -------- -------- Net (decrease) increase in cash and cash equivalents (10,393) 190 10,601 Cash and cash equivalents at beginning of year 24,634 14,241 14,431 -------- -------- -------- Cash and cash equivalents at end of year $ 14,241 $ 14,431 $ 25,032 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-7 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES The Company, which is a subsidiary of Pacific Electric Wire & Cable Co., Ltd. ("PEWC"), 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. PEWC is a company listed on the Taiwan Securities Exchange and is principally engaged in the electric wire and cable industry. Background on the Pledge Agreement to Swiss Re As previously disclosed in 2002, PEWC and Swiss Re entered into an Amended and Restated Letter of Credit and Reimbursement Agreement (the "LC Agreement"), pursuant to which Swiss Re issued a letter of credit to satisfy certain credit and loan obligations of PEWC's subsidiary, Pacific USA Holdings Corp. ("PUSA"), to PUSA's lenders. Under the LC Agreement, Swiss Re issued a Standby Letter of Credit in favor of Standard Chartered Bank, Hong Kong Branch ("Standard"), in the total amount of $124,000 (the "Letter of Credit"), conditioned upon the closing of a $120,000 transaction between PUSA and Standard. As a condition to obtaining the letter of credit, in February 2002, PUSA, PEWC and Swiss Re finalized a Pledge Agreement ("Pledge Agreement"), pursuant to which PUSA pledged to Swiss Re shares representing approximately 50.4% of the equity of the Company (the "Pledged Shares"), together with certain shares of other related entities. PEWC is the ultimate beneficial owner of approximately 75.4% of the equity interest in the Company through its subsidiaries, Kinbong Holdings Limited ("Kinbong") and PUSA. PUSA Bankruptcy As also previously disclosed in the 2002 financial statements, in December 2002, PUSA filed a voluntary petition for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Because of the bankruptcy filing, in December 2002, Swiss Re paid to Standard $90,600 under the terms of the Letter of Credit as a result of which Swiss Re became entitled, under the terms of the Pledge Agreement, to foreclose on the Pledged Shares of the Company. Pending Litigations Following an internal investigation, it was discovered by the Boards of both PEWC and the Company that an ex-director, without the authorization of either Board, had separately negotiated a transaction whereby the Pledged Shares of the Company held by PUSA and the shares of the Company held by Kinbong would be transferred to Set Top International Inc. ("Set Top"), a British Virgins Islands company. The terms of the transaction were initially withheld from and, subsequently, misrepresented to the Boards of PEWC and the Company by the ex-director, together with certain of his associates. The Boards of both PEWC and the Company concluded that the ex-director has an undisclosed interest in, or control position over, Set Top, and that the terms he agreed to with Set Top are significantly less favorable to the companies than those that would have been available in a bona fide transaction with an unaffiliated party. F-8 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) The Boards of both PEWC and the Company commissioned a Special Committee which investigated the activities of the ex-director and certain of his associates in connection with the Set Top transaction. Based upon the conclusion of the Special Committee, the Boards of both PEWC and the Company have proceeded to take the necessary actions to remove the ex-director from his managerial positions in both companies. On December 4, 2003, PEWC and the Company filed an action in U.S. District Court for the Southern District of New York, alleging among other things that the transaction with Set Top was invalid and seeking a temporary restraining order ("TRO") on Set Top's announcement of its intention to sell 50.4% of the Company's shares in a public foreclosure sale on December 9, 2003. At a hearing on December 8, 2003, the District Court granted the request for a TRO, and prohibited the planned sale by Set Top from proceeding pending a hearing on a motion for a preliminary injunction set for December 15, 2003. At the hearing, Set Top also sought injunctive relief against PEWC, the Company and Asia Pacific Wire & Cable General Holdings Ltd., a subsidiary of the Company, to prevent an alleged looting of the Company through the pledge of stock of four of the Company's subsidiaries in other loan transactions. On December 29, 2003, the District Court dissolved the TRO of December 8, 2003 and denied Set Top's motion. Thereafter, Set Top re-noticed the foreclosure sale. PEWC and APWC again applied for a TRO to prevent the sale. The renewed application was denied by both the District Court and the U.S. Court of Appeals for the Second Circuit. On March 10, 2004, Set Top held a foreclosure sale at the Dallas office of Baker & McKenzie and acquired for itself a purported beneficial interest of approximately 50.4% of the Company's shares for only $13,000. However, Set Top is not registered in Bermuda as a shareholder of the Company and accordingly does not have any right to act on the behalf of the Company. On March 19, 2004, Set Top filed an action in the District Court to restrain PEWC, the Company and all of the Company's subsidiaries from impairing the value of the Company, by, among other things, disposing of shares or assets of the Company and seeking a TRO. That same day, the District Court denied Set Top's requested for a TRO and set a preliminary injunction hearing for March 30, 2004. Thereafter, Set Top requested an extension of time with respect to the hearing. The District Court postponed the preliminary injunction hearing without date. On April 6, 2004, Set Top filed its counterclaims. In its counterclaims, Set Top seeks, among other things, a deficiency judgment in the amount of $39,544, specific performance and/or damages for breach of contract against PEWC, and specific performance against the Company to compel registration of the Company's shares. On March 23, 2004, Set Top commenced an action in the High Court of Singapore against the Company seeking damages and an injunction restraining the Company from disposing of, diminishing in its name, dealing with, causing or permitting other parties in similar causes, the assets of the Company. The prohibition includes the Company's assets in particular the shares in and the assets of Charoong Thai Wire and Cable Public Company Limited and Asia Pacific Wire & Cable General Holdings Ltd. On March 24, 2004, the High Court of Singapore granted the request for injunctive relief until after the trial of the action or until further notice and ordered the Company to file an affidavit confirming all its assets, giving the value, location and details of all such assets. The grounds of Set Top's application for injunctive relief against the Company were premised on Set Top's purported ownership of a controlling interest in the Company and the alleged looting of the Company through the pledge of the stock of four of the Company's subsidiaries in loan transactions, substantially the same allegations and issues between the Company and Set Top in the proceedings in the U.S. District Court for the Southern District of New York. F-9 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) On April 1, 2004, the Company filed an application to set aside the order of the High Court of Singapore of March 24, 2004 and that the Company be relieved from complying with the part of the order that requires the filing of an affidavit disclosing the Company's assets, pending the final disposal of the application. On April 2, 2004, pursuant to the Company's application, the High Court of Singapore suspended the order of March 24, 2004 with immediate effect and adjourned the hearing of the application to a later date to be fixed. On May 18, 2004, Set Top applied to the High Court of Singapore to join nine additional parties (collectively referred to as the "Singapore defendants"), including PEWC Singapore Co (Pte) Ltd, certain directors and senior management of the Company, as defendants to the action and claimed the following relief: (a) An injunction restraining the Singapore defendants from disposing of, diminishing in their names, dealing with, causing or permitting other parties in similar causes, the assets of the Company, in pursuance of an alleged conspiracy by the Singapore defendants to injure Set Top by unlawful means. (b) Alternatively, an injunction restraining the Singapore defendants from disposing of, diminishing in their names, dealing with, causing or permitting other parties in similar causes, the assets of the Company, in pursuance of an alleged conspiracy by the Singapore defendants with the sole or predominant purpose of injuring Set Top. (c) Further or alternatively, an injunction restraining the Company, PEWC Singapore Co (Pte) Ltd, and certain Singapore defendants from procuring or inducing the breach of the amended and restated letter of credit and reimbursement agreement dated September 21, 2001 between Set Top and PEWC by the disposal of, the diminution in its name, the dealing with, causing or permitting other parties in similar causes, the assets of the Company. (d) Further or alternatively, an injunction restraining PEWC Singapore Co (Pte) Ltd, from dishonestly assisting the breach of fiduciary duty owed by certain Singapore defendants by disposing of, diminishing in its name, dealing with, causing or permitting other parties in similar causes, the assets of the Company. (e) Damages, payable by the Company to Set Top in respect of its infringement of Set Top's right to be registered as a holder of 72.84% of the shares of the Company, payable by the Singapore defendants to Set Top for the loss and damage suffered by Set Top as a result of their conspiracy to injure Set Top by unlawful means and with the sole or predominant purpose of injuring Set Top, payable by the Company, PEWC Singapore Co (Pte) Ltd and certain Singapore defendants to Set Top for the loss and damage suffered by Set Top as a result of their inducement or procurement of the breach of the amended and restated letter of credit and reimbursement agreement dated September 21, 2001 by PEWC. (f) A declaration that PEWC Singapore Co (Pte) Ltd holds the pledged share of Asia Pacific Wire & Cable General Holdings Ltd. for the Company as its constructive trustee. (g) Interest on any damages awarded to Set Top at such rate and for such period as the High Court of Singapore may award. On May 24, 2004, Set Top filed and served its statement of claim with the High Court of Singapore. F-10 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) On June 9, 2004, the Company filed an application to stay the Singapore proceedings on grounds of duplicity with the proceedings in the U.S. District Court for the Southern District of New York and for an order that Set Top provide security for the Company's costs of defending the Singapore proceedings up to the stage of the hearing of the Company's application to stay the Singapore proceedings. The Company's application for the provision of security for costs is scheduled for hearing on June 21, 2004. The Company's application for the stay of the Singapore proceeding is scheduled for hearing on July 12, 2004. Both PEWC and APWC intend to prosecute vigorously these actions, and PEWC will continue to seek to the regain clean title to the shares of APWC owned by it. However, there can be no assurance that the Company will prevail in these actions. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of the pending litigations. While these matters are being resolved, PEWC is able to elect the majority of the members of the Company's Board of Directors and has the power to determine the outcome of other actions requiring the approval of the shareholders. The Company engages in transactions in the ordinary course of business with PEWC. Both the Company and PEWC have entered into a composite services agreement dated November 7, 1996 (the "Composite Services Agreement") as described in Note 15. However, the Company is unable to predict whether PEWC would, at some future date, seek to limit the business it conducts with the Company pursuant to the terms of the Composite Services Agreement either because PEWC's controlling interest in the Company had been effectively transferred to Set Top or for some other reason. The Company's operating subsidiaries (the "Operating Subsidiaries") are engaged in the manufacturing and distribution of telecommunications and 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. Charoong Thai Wire and Cable Public Company Limited ("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. Acquisitions accounted for as purchases and disposals undertaken by the Company during the years ended December 31, 2001, 2002 and 2003 include the following: (a) purchase in 2001 of an additional 20.8% interest in Ningbo Pacific Cable Co., Ltd. ("Ningbo") (formerly known as Ningbo Pacific CDC Cable Co., Ltd.) for $725, thereby increasing the Company's interests in Ningbo from 70% to 90.8% in 2001. The increase in the Company's interests in Ningbo has been accounted for as a purchase. Accordingly, the excess of fair value of assets acquired over the amount paid for the incremental ownership of 20.8% resulted in a goodwill of $582. F-11 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) (b) purchase in 2001 of an additional 40% interest in Sigma-Epan International Pte Ltd. ("Sigma-Epan") for $425, thereby increasing the Company's interests in Sigma-Epan from 60% to 100% in 2001. The increase in the Company's interests in Sigma-Epan has been accounted for as a purchase. Accordingly, the excess of fair value of assets acquired over the amount paid for the incremental ownership of 40% resulted in a goodwill of $246. (c) purchase in 2001 of additional new shares in Shanghai Yayang Electric Co., Ltd. ("Shanghai Yayang") by the Company's 66.15% held subsidiary for $950, which resulted in a goodwill of $513. However, the issuance of new shares during the year by Shanghai Yayang has caused the Company's effective interest in Shanghai Yayang to be diluted from 62.88% to 62.09%. (d) purchase in 2001 of an additional 16.66% interest in Loxley Pacific Co., Ltd ("Lox Pac") for $1,054, thereby increasing the Company's interest in Lox Pac from 13.9% to 30.56%. (e) purchase on March 22, 2002 of 100% of PEWC's interest in Crown Century Holdings Limited ("CCH") and its wholly-owned subsidiary, Pacific Electric Wire & Cable (Shenzhen) Co., Ltd ("PEWS") (collectively referred to as "CCH"), resulting in CCH becoming a wholly-owned subsidiary of the Company upon completion of the transaction. The acquisition was funded by the issuance of 3,097,436 shares of the Company's common stock. Since the entities were under common control, the merger has been accounted for at historical cost in a manner similar to pooling-of-interests and accordingly, the consolidated financial statements for periods prior to the combination have been restated to include the accounts and results of both entities. (f) purchase in 2002 of an additional 3.51% interest in Ningbo for $5,830, thereby increasing the Company's interest in Ningbo from 90.8% to 94.31% in 2002. The increase in the Company's interest in Ningbo has been accounted for as a purchase. Accordingly, the excess of fair value of the assets acquired over the amount paid for the incremental ownership of 3.51% resulted in goodwill of $327. (g) purchase in 2002 of additional new shares in Shanghai Yayang for $250, thereby increasing the Company's interest in Shanghai Yayang from 62.09% to 63.81%. The increase in the Company's interest in Shanghai Yayang has been accounted for as a purchase. Accordingly, the excess of fair value of the assets acquired over the amount paid for the incremental ownership of 1.72% resulted in goodwill of $85. The Company further purchased additional new shares in Shanghai Yayang for $50. However, further issuance of new shares during the year by Shanghai Yayang has caused the Company's effective interest in Shanghai Yayang to be diluted from 63.81% to 62.39%. The Company recognized a loss of $79 on the issuance of new shares by Shanghai Yayang. (h) purchase in 2002 of a 48.72% equity interest in Shandong Huayu Pacific Fibre Optics Communications Co., Ltd ("Shandong Huayu") for a consideration of $2,330. (i) purchase in 2002 of an additional 1.84% interest in Newcall Communications Singapore Pte Ltd ("NCS"), thereby increasing the Company's interest in NCS from 37.69% to 39.53% in 2002. The purchase consideration of $535 was fully written off in 2002 as NCS was liquidated during that year. F-12 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) (j) purchase in 2002 of additional new shares in Lox Pac for $1,153. However, further issuance of new shares during the year by Lox Pac has caused the Company's effective interest in Lox Pac to be diluted from 30.56% to 24.58%. The Company recognized a loss of $77 on the issuance of new shares by Lox Pac. (k) purchase in 2002 of the remaining 33.85% interest in Siam Pacific Electric Wire & Cable Company Limited ("Siam Pacific") for $11,563, in the form of Charoong Thai shares issued to the minority shareholders. The excess of fair value of the assets acquired over consideration paid resulted in goodwill of $1,586. However, the further issuance of new Charoong Thai shares and the disposal of Charoong Thai shares have caused the Company's effective interest in Siam Pacific to be diluted from 66.15% to 63.87%. The Company recognized a gain of $1,167 and a loss of $557 on the issuance of new shares by Charoong Thai and the disposal of Charoong Thai shares, respectively. (l) purchase in 2003 of additional new shares in Shanghai Yayang for $1,670, thereby increasing the Company's interest in Shanghai Yayang from 62.39% to 63.49%. The increase in the Company's interest in Shanghai Yayang has been accounted for as a purchase. Accordingly, the excess of fair value of the assets acquired over the amount paid for the incremental ownership of 1.1% resulted in goodwill of $717. (m) disposal in 2003 of 8.46% interest in Charoong Thai for $6,013; thereby decreasing the Company's interest in Charoong Thai from 63.87% to 55.41%. The Company recognised a loss of $885 on the disposal of Charoong Thai shares. (n) convert in 2003 of $1,445 due from Newcall Group Limited ("NGL") to equity in NGL, thereby increasing the Company's interest in NGL from 20.81% to 27.45%. (o) purchase in 2003 of additional new shares in Shandong Pacific Fiber Optics Co., Ltd. ("Shandong Pacific") for $308. The Company's equity in Shandong Pacific remained at 51%. (p) purchase in 2003 of additional new shares in Shandong Huayu of $183, thereby increasing the Company's interest in Shandong Huayu by 1.19% to 49.91%. F-13 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) The Company was formed to take up PEWC's wire and cable business in Singapore, Thailand, Australia and the People's Republic of China and was successfully listed on the New York Stock Exchange in March 1997. The percentage of holding of the subsidiaries and equity investees of the Company are set out below.
Place of Percentage of incorporation Company equity interest and operations ------- ------------------ -------------- 2002 2003 Asia Pacific Wire & Cable General Holdings Ltd. 100% 100% The British Virgin Islands Sigma Cable Company (Private) Limited 98.24% 98.24% Singapore Sino-Sin Trading Pte Ltd. 100% 100% Singapore Siam Pacific Electric Wire & Cable Company 63.87% 55.41% Thailand Limited ** Pacific-Thai Electric Wire & Cable Company 63.87% 55.41% Thailand Limited ("Pacific Thai") ** Australia Pacific Electric Cable Pty Limited ("APEC") 98.48% 98.48% Australia Ningbo Pacific Cable Co., Ltd. 94.31% 94.31% The People's Republic of China Crown Century Holdings Limited 100% 100% Hong Kong Pacific Electric Wire & Cable (Shenzhen) Co., Ltd 100% 100% The People's Republic of China Hard Lek Limited 73.98% 73.98% Thailand PRC (APWC) Holding Ltd. 100% 100% The British Virgin Islands Samray Inc. 100% 100% The British Virgin Islands Siam (APWC) Holdings Ltd. 100% 100% The British Virgin Islands
F-14 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
Place of Percentage of incorporation Company equity interest and operations ------- ------------------ -------------- 2002 2003 Moon View Ltd. 100% 100% The British Virgin Islands Trigent Investment Holdings Limited 100% 100% The British Virgin Islands Siam Pacific Holding Company Limited ("SPHC") 49% 49% Thailand Charoong Thai Wire and Cable Public 63.87% 55.41% Thailand Company Limited Sigma-Epan International Pte Ltd. 100% 100% Singapore Crown Century Holdings Ltd. 100% 100% The British Virgin Islands APWC (Thailand) Co., Ltd. 95.59% 95.59% Thailand PEWC (Thailand) Co., Ltd. 95.59% 95.59% Thailand Shanghai Yayang Electric Co., Ltd. 62.39% 63.49% The People's Republic of China Myanmar Sigma Cable Co., Ltd. 80% 80% Myanmar Singvale Pte Ltd 100% 100% Singapore Shandong Pacific Fiber Optics 51% 51% The People's Co., Ltd.^ Republic of China Shandong Huayu Pacific Fibre Optics 48.72% 49.91% The People's Communications Co., Ltd Republic of China ("Shandong Huayu") Loxley Pacific Co., Ltd. 31.24% 29.16% Thailand Thai Professional Telecom Network 19.16% 16.61% Thailand Co., Ltd. ("Thai Professional") Newcall Group Limited 20.81% 27.45% New Zealand
F-15 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) ^ Shandong Pacific was incorporated under the laws of the People's Republic of China on Joint Ventures using Chinese and Foreign Investment. The tenure for this joint venture is 50 years and the Company's interest in accordance to the joint venture agreement is 51%. Due to the timing difference in the of outstanding capital by the joint venture parties during 2001, the Company's effective interest has been diluted from 74.62% to 51%. ** On February 21, 2002, SPHC disposed of its shareholdings in Siam Pacific to its shareholders in proportion relative to their respective shareholdings in SPHC at a consideration of $3.87 per share. This transaction did not result in a change in the Company's effective interest in Siam Pacific. On July 2, 2002, Charoong Thai acquired 100% of the outstanding shares in Siam Pacific from the shareholders of SPHC by issuing 177,550,000 new shares at 5 Baht each in exchange for Siam Pacific shares at a swap ratio of 26.5 new Charoong Thai shares for every 1 Siam Pacific share. This transaction together with disposal of Charoong Thai shares has caused the Company's effective interest in Charoong Thai to be diluted from 69.18% to 63.87% in 2002. 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. In the opinion of management, the consolidated financial statements have reflected all costs incurred by the Company and its subsidiaries in operating the business. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant 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. Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Inventories Inventories are valued at the lower of cost or market value. Cost is determined using the first-in, first-out or weighted average method. F-16 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Property, Plant and Equipment Property, plant and equipment are stated at cost. Assets leases qualifying as capital leases are also included in property, plant and equipment. Major renewals and improvements are capitalized and minor replacements, maintenance, and repairs are charged to current operations as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. No depreciation is charged for construction in progress and machinery and equipment under installation. Depreciation is provided as follows: Land Nil Land use rights 49 - 50 years Buildings 5 - 30 years Machinery and equipment 5 - 10 years Motor vehicles 3 - 8 years Office equipment 3 - 10 years Depreciation for 2001, 2002 and 2003 amounted to $11,074, $9,805 and $9,217, respectively. Capitalized interest on construction in progress is added to the cost of the underlying asset and is amortized over the estimated useful life of the asset in the same manner as the underlying asset. In 2002, the Company capitalized interest of $207 on its construction of a factory building in Singapore. Goodwill Goodwill arose from the excess of the cost of purchased businesses over the value of the underlying net assets. In June 2001, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 141, "Business Combinations" ("Statement 141") and FASB Statement No. 142, "Goodwill and Other Intangible Assets" ("Statement 142"). The Company adopted Statement 141 and Statement 142 on January 1, 2002. Goodwill, including goodwill associated with equity method investments are not amortized, but tested for impairment annually or more frequently if circumstances indicate that impairment may exist. Statement 142 provides for a six month period from the date of implementation to record impairment under the new method. The impairment charge, if any, would be recorded as a cumulative effect of a change in accounting principle. The fair value exceeded the book value of each reporting unit as of January 1, 2002 and, accordingly, there was no impairment charge as a result of the implementation of the new standard. The impact on net income and earnings per share for the twelve months ended December 31, 2001 as if Statement 142 had been implemented as of the beginning of fiscal 2001 is disclosed in Note 4. Under Statement 142, the Company is required to assess whether goodwill is impaired at least annually using a two-step process. This assessment was made as of December 31, 2002 and 2003, and no impairment was indicated. In 2001, in view of the poor sales and operating performance of a subsidiary, the Company evaluated the goodwill attributable to that subsidiary and concluded that the goodwill was impaired. The carrying amount of goodwill of $500 was expensed during 2001. In 2001, goodwill was amortized using the straight-line method over the lesser of its expected useful life or 40 years. F-17 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Income Taxes Income taxes have been provided using the liability method in accordance with FASB Statement No. 109, "Accounting for Income Taxes." Investments Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Interest on securities classified as held-to-maturity is included in investment income. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. 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. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. 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 which the Company does not have a controlling interest or an ownership and voting interest so large as to exert significant influence, and which are not publicly traded are accounted for at cost. A judgmental aspect of accounting for investments 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. Impairment of Long-Lived Assets In August 2001, the FASB issued FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," ("Statement 144"). Statement 144 addresses significant issues relating to the implementation of FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("Statement 121") and develops a single accounting model, based on the framework established in Statement 121 for long-lived assets to be disposed of by sale, whether such assets are or are not deemed to be a business. Statement 144 also modifies the accounting and disclosure rules for discontinued operations. The Company adopted the standard effective January 1, 2002. F-18 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue Recognition Sales represents the invoiced value of goods sold, net of value added tax and returns, commission income earned 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 goods and distribution activities The Company recognizes revenue from the sale of goods and distribution activities upon passage of title to the customer which coincides with their delivery and acceptance. This method of revenue recognition is in accordance with Staff Accounting Bulletin, SAB 101 - "Revenue Recognition in Financial Statements." Installation activities 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 Statement of Position (SOP) 81-1, "Accounting for the Performance of Construction-Type and Certain Production-Type Contracts" issued by the American Institute of Certified Public Accountants. When elements such as installation and sale of cables are 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 adopted EITF No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21") in 2003. The impact of adopting EITF 00-21 was not material to the financial statements. Shipping and Handling Costs The Company classifies such costs as cost of sales. Product Warranties The Company provides for the estimated cost of product warranties based on the warranty policy and historical experience, and accrues for specific items at the time their existence is known and the amounts are determinable. F-19 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Foreign Currency Translation The consolidated financial statements have been presented in United States dollars. 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. Exchange differences are dealt with in the consolidated statements of operations. The financial statements of the Company's subsidiaries where the local currency is the functional currency have been translated into United States dollars in accordance with FASB Statement No. 52, "Foreign Currency Translation." All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statement of operations amounts have been translated using the exchange rate in effect during the year. The gains and losses resulting from the changes in exchange rates from year to year have been reported separately as a component of shareholders' equity. Foreign Currency Forward Contracts 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 US dollar payment equal to the value of such exchange. Realized and unrealized gains and losses on foreign exchange contracts are included in income as foreign exchange gains or losses. The Company recognizes all derivative financial instruments, such as interest swap contracts and foreign exchange contracts, 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. As at December 31, 2002 and 2003, the Company has entered into forward exchange contracts with notional value of $1,009 and $100, respectively. The fair value of the forward exchange contracts as at December 31, 2002 and 2003 were $1 and $1, respectively. These forward exchange contracts do not qualify for hedge accounting in accordance with FASB Statement No. 133 "Accounting for Certain Derivative Instruments and Certain Hedging Activities". F-20 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Allowance for Doubtful Accounts The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments based on the analysis of accounts receivable, historical bad debts, customer credit-worthiness and current economic trends. Gain on Issuance of Shares by Subsidiaries At the time a subsidiary sells its stock to unrelated parties at a price in excess of its book value, the Company's net investment in that subsidiary increases. If at that time, the subsidiary is not a newly-formed, non-operating entity, nor a research and development, start-up or development stage company, nor is there question as to the subsidiary's ability to continue in existence, the Company records the increase as a non-operating gain in the Consolidated Statements of Operations. Otherwise, the increase is reflected in "effect of subsidiaries' equity transactions" in the Company's Consolidated Statements of Shareholders' Equity. Earnings (Loss) Per Share Basic and diluted earnings (loss) per share is calculated in accordance with FASB Statement No. 128, "Earnings Per Share." Asset Impairment Loss In 2002, the Company recorded impairment charges of $1,559 related to the impairment of certain property, plant and equipment of Ningbo, included in the manufactured products segment. These impairment charges were recorded to reduce the carrying value of the identified assets to fair value. 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 unfavourable market conditions. The remaining carrying value of these impaired long-lived assets, immediately after recording the impairment charge, was approximately $173. During 2001, the Company disposed of the factory building and machinery equipment to the Myanmar Economic Corporation for $3,500 and the Myanmar operations ceased. For the year ended December 31, 2001, the Myanmar operations, included in the manufactured product segment, resulted in a gain of $52. F-21 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Recent Pronouncements In January 2003, FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires a beneficiary to consolidate a variable interest entity ("VIE") if it is the primary beneficiary of that entity. The primary beneficiary is defined as having a variable interest in a VIE that will absorb a majority of the entity's expected losses if they occur, receives a majority of the entity's expected residual returns if they occur, or both. In December 2003, FASB completed deliberations of proposed modifications to FIN 46 ("Revised Interpretations") resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied in financial statements for periods ending after March 15, 2004. VIEs created after December 31, 2003 must be accounted for under the Revised Interpretations. Special Purpose Entities ("SPEs") created prior to February 1, 2003, may be accounted for under the original or revised interpretation's provisions no later than the first period ending after December 15, 2003. Non-SPEs created prior to February 1, 2003, should be accounted for under the revised interpretation's provisions no later than the first period ending after March 15, 2004. The Company has applied the provisions of FIN 46 on variable interest entities created after January 31, 2003 and for SPEs. The adoption did not have a material impact on the Company's financial statements of position, results of operations, or cash flows. In May 2003, FASB issued FASB Statement No. 150, "Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("Statement 150"). This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. In November 2003, the FASB issued FASB Staff Position (FSP) 150-3, "Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under Statement 150", which deferred the effective date of Statement 150 for certain mandatorily redeemable non-controlling interests. The Company has adopted the provisions of Statement 150, except for certain mandatorily redeemable non-controlling interests, for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of Statement 150 did not have a material impact on the Company's financial statements of position, results of operations, or cash flows. Reclassification Certain prior-year amounts have been reclassified to conform to the current-year presentation. F-22 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 4. GOODWILL Goodwill relates to the manufactured products segment and the changes in the carrying value of goodwill for the year ended December 31, 2003 are as follows :-
Balance, December 31, 2001 $ 5,609 Goodwill acquired 1,998 ------- Balance, December 31, 2002 $ 7,607 Goodwill acquired 717 ------- Balance, December 31, 2003 $ 8,324 =======
The following tables adjust net income (loss) and earnings (loss) per share to adjusted amounts that reflect the elimination of goodwill amortization for the comparable year ended December 31, 2001 prior to adoption of Statement 142: -
December 31, 2001 2002 2003 NET INCOME Reported net income $ 91 $4,791 $10,000 Goodwill amortization 136 - - Equity method goodwill amortization 210 - - ------- ------ ------- Adjusted net income 437 4,791 10,000 ======= ====== ======= BASIS AND DILUTED EARNINGS PER SHARE Reported net income $0.01 $0.35 $0.72 Goodwill amortization 0.01 - - Equity method goodwill amortization 0.01 - - ------- ------ ------- Adjusted net income $ 0.03 $ 0.35 $ 0.72 ======= ====== =======
5. INVESTMENTS The following is a summary of available-for-sale securities and held-to-maturity securities:
Available-for-sale Securities ----------------------------------------------------- Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ----------------------------------------------------- December 31, 2002 Quoted equity securities $ 790 $ 53 $ (302) $ 541 ======= ====== ====== ======= December 31, 2003 Quoted equity securities $ 915 $ 141 $ (15) $ 1,041 ======= ====== ====== =======
F-23 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 5. INVESTMENTS (continued)
Held-to-maturity Securities ------------------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------------------ December 31, 2002 Corporate debts $ 120 $ - $ - $ 120 ====== ======= ====== ======== December 31, 2003 Corporate debts $ 50 $ - $ - $ 50 ====== ======= ====== ========
A summary of the carrying values and balance sheet classification of all investments in debt and equity securities including held-to-maturity and available-for-sale securities disclosed above was as follows:
December 31, 2002 2003 Available-for-sale equity securities $ 541 $ 1,041 ------- -------- Short-term investments 541 1,041 ------- -------- Held-to-maturity debt securities $ 120 $ 50 Equity securities in privately-held companies and other investments 2,292 2,391 ------- -------- Long-term investments 2,412 2,441 ------- -------- Total investments $ 2,953 $ 3,482 ======= ========
There were realized gains of $nil, $nil and $89 on disposal of available-for-sale securities in 2001, 2002 and 2003, respectively. The disposal of available-for-sale securities was for a consideration of $4, $nil and $175 in 2001, 2002 and 2003, respectively. The net adjustment to unrealized holding (losses) gains on available-for-sale securities included as a separate component of shareholders' equity totaled, $(23), $(381) and $464 in 2001, 2002 and 2003, respectively. On December 31, 2002 and 2003, the Company held available-for-sale and held-to-maturity securities issued by a minority shareholder of two of the Operating Subsidiaries with costs of $538 and $938, respectively. The estimated fair values of such available-for-sale and held-to-maturity securities were $394 and $120 and at December 31, 2002 and $1,027 and $50 at December 31, 2003, respectively. The contractual maturity dates of the debt securities held-to-maturity at December 31, 2003 have contractual maturity dates in 2005. F-24 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 6. CREDIT ARRANGEMENTS Under line of credit arrangements for short-term debt with the Company's bankers, the Company may borrow up to approximately $78,000 on such terms as the Company and the banks may mutually agree upon. These arrangements do not have termination dates but are reviewed annually for renewal. As of December 31, 2003, the unused portion of the credit lines was approximately $42,000, which included unused letters of credit amounting to $26,725. Letters of credit are issued by the Company during the ordinary course of business through major financial institutions as required by certain vendor contracts. As of December 31, 2003, the Company had open letters of credit totaling $18,212. Liabilities relating to the letters of credit are included in current liabilities. The credit lines of the Company were secured by: (i) Mortgage of the Company's land, buildings, machinery and equipment with a total carrying amount of $4,892 at December 31, 2003; (ii) Mortgage of the assets of a subsidiary of the Company; (iii) Pledge of short-term deposits of $3,567 at December 31, 2003; (iv) Joint and several personal guarantees from certain directors of a subsidiary of the Company; and (v) Corporate guarantees issued by the Company, a subsidiary of the Company and the holding company. The weighted average interest rates on bank loans and overdrafts as of December 31, 2002 and 2003 were 5.6% and 4.0%, respectively. 7. LONG TERM DEBT December 31, 2002 2003 Bank loan $ 1,800 $ 1,654 Less: Current portion (1,125) - ------- ------- $ 675 $ 1,654 ======= ======= During 2001, 2002 and 2003 interest paid totaled $1,093, $477 and $155, respectively. The bank loan on December 31, 2003 is secured by land and buildings of a subsidiary (the "Subsidiary") of the Company with a net book value of $2,848 on December 31, 2003 and the requirement to maintain a certain minimum percentage holding of the Subsidiary. The above loan bears interest at the bank's bill rate plus 1%, and the interest rates on December 31, 2002 and 2003 were approximately 8.8% and 5.83%, respectively. The above loan amount as at December 31, 2003 matures within the next 1 year. The Company renewed the bank loan upon its maturity in March 2004. The current portion of bank loans in 2002 were partially repaid and partially rolled-over during 2003. F-25 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 8. DISTRIBUTION OF EARNINGS The Company's ability to pay dividends is primarily dependent on the Company receiving distributions from the Operating Subsidiaries and the investee companies. As described in Note 2, the earnings reflected in the financial statements prepared in accordance with US GAAP differ from those reflected in the statutory financial statements of the Company's subsidiaries and investee companies. In accordance with the relevant laws and regulations applicable to the Company's subsidiaries and investee companies, the earnings available for distribution are based on their respective statutory financial statements. At December 31, 2003, the amount of the Company's retained earnings available for distribution was approximately $18,398 and the consolidated retained earnings included $3,223, $1,003, $676, $414 and $nil of Lox Pac, Thai Professional, SPHC, NGL and Shandong Huayu, respectively. 9. VALUATION AND QUALIFYING ACCOUNTS
Balance at Net charged Currency Balance beginning to costs and translation at end Description of year expenses Deduction adjustments of year ----------- ---------- --------- --------- ----------- --------- Year ended December 31, 2001: Deducted from asset accounts Allowance for doubtful accounts $ 3,615 $ (255) $ (272) $ (59) $ 3,029 Allowance for inventories 1,337 1,205 - (24) 2,518 -------- -------- ------- ------- -------- $ 4,952 $ 950 $ (272) $ (83) $ 5,547 ======== ======== ======= ======= ======== Year ended December 31, 2002: Deducted from asset accounts Allowance for doubtful accounts $ 3,029 $ 968 $ (123) $ 84 $ 3,958 Allowance for inventories 2,518 847 (1,012) 52 2,405 -------- -------- ------- ------- -------- $ 5,547 $ 1,815 $(1,135) $ 136 $ 6,363 ======== ======== ======= ======= ======== Year ended December 31, 2003: Deducted from asset accounts Allowance for doubtful accounts $ 3,958 $ 902 $ (279) $ 271 $ 4,852 Allowance for inventories 2,405 77 (370) 95 2,207 -------- -------- ------- ------- -------- $ 6,363 $ 979 $ (649) $ 366 $ 7,059 ======== ======== ======= ======= ========
F-26 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 10. INCOME TAXES Under current Bermuda law, the Company is not subject to tax on income or capital gains, and no Bermuda withholding tax is imposed upon payments of dividends by the Company to its shareholders. The Company's investments in the Operating Subsidiaries are held through subsidiaries incorporated in the British Virgin Islands ("BVI"). Under current BVI law, dividends from the BVI subsidiaries' investments are not subject to income taxes and no withholding tax is imposed on payments of dividends by the BVI subsidiaries to the Company. The Operating Subsidiaries and Equity Investees are governed by the income tax laws of Singapore, Thailand, Australia, New Zealand, the People's Republic of China and Myanmar. The corporate income tax rate in Singapore was 24.5%, 22% and 22% for 2001, 2002 and 2003, respectively, and there is no withholding tax on dividends applicable to the Company. For Thailand, the corporate income tax rate was 30% for each of the three years ended December 31, 2003 and a withholding tax of 3% is levied on dividends received by the Company. In Australia, the corporate income tax rate was 30% for 2001/2002, 2002/2003 and 2003/2004 tax years. The corporate income tax rate for New Zealand was 33% for 2001/2002, 2002/2003 and 2003/2004 tax years and a withholding tax of 30% is levied on dividends received by the Company. The applicable corporate income tax rate for the subsidiaries in the People's Republic of China was 33% for each of the three years ended December 31, 2003. The corporate income tax rate for Myanmar was 30% for 2000/2001, 2001/2002 and 2002/2003 tax years. Pursuant to the Income Tax Law of the PRC concerning foreign investment enterprises and various local income tax laws (the Income Tax Law), the enterprises generally are subject to income tax at an effective rate of 33% (30% State income taxes plus 3% local income taxes) on income as reported in their statutory accounts unless the enterprise is located in specially-designated regions or cities for which more favorable effective rates apply. PEWS is located in Shenzhen, which is a region where preferential tax rates apply and currently qualifies for a reduced rate of taxation of 15% (50% of the full rate of 30% State income taxes and no local income taxes). PEWS is exempt from income tax for the two years starting from its first profitable year of operations (2001). PEWS is entitled to a 50% tax exemption from the State income taxes for a further three-year period (2003 to 2005) under the Income Tax Law. Pre-tax income (loss) from continuing operations was taxed in the following jurisdictions:
Year ended December 31, 2001 2002 2003 Thailand $ 7,264 $ 17,131 $ 14,381 Singapore (3,450) (3,572) (4,194) Australia (1,361) 1,257 3,924 The People's Republic of China 1,516 1,117 4,598 Myanmar 52 (24) - Others (1,076) (561) (1,269) -------- -------- -------- 2,945 15,348 17,440 Equity investees Thailand (316) (3,357) 120 New Zealand (1,319) (221) - Singapore (901) (475) - Others 1 (41) - -------- -------- -------- $ 410 $ 11,254 $ 17,560 ======== ======== ========
F-27 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 10. INCOME TAXES (continued) Significant components of the provision (benefit) for income taxes are as follows:
Year ended December 31, 2001 2002 2003 Allocated to net income Current: Thailand $ 555 $ 2,787 $ 3,747 Singapore 281 (30) 150 Myanmar - 12 12 The People's Republic of China - - 252 Australia - - 286 -------- -------- ------- Total current 836 2,769 4,447 -------- -------- ------- Deferred: Thailand (2,074) 2,022 (466) Singapore (173) (108) (258) Australia - - (1,246) -------- -------- ------- Total deferred (2,247) 1,914 (1,970) -------- -------- ------- $ (1,411) $ 4,683 $ 2,477 ======== ======== ======= Allocated to comprehensive income (loss) $ (9) $ (10) $ 15 ======== ======== =======
On December 31, 2003, the Operating Subsidiaries had net operating loss carry forwards of approximately $16,538, for income tax purposes, of which $3,196 and $841 will expire in 2006 and 2007 respectively. The remaining net operating loss can be carried forward indefinitely. The provision for income taxes differs from the amount computed by applying the respective statutory rates to income before income taxes of the Company and the Operating Subsidiaries. The principal reasons for the difference are listed in the following table:
Year ended December 31, 2001 2002 2003 Tax at statutory rate in Bermuda $ - $ - $ - Higher statutory rate in Thailand 2,401 3,540 3,278 Higher statutory rate in Singapore (720) (891) (923) Higher statutory rate in Australia (407) 377 1,177 Higher statutory rate in New Zealand (733) (66) - Higher statutory rate in the People's Republic of China 500 369 1,114 Higher statutory rate in Myanmar (365) (7) - ------- ------ ------ 676 3,322 4,646 Expenses not deductible for tax purposes 515 1,023 121 Changes in valuation allowance (1,959) 740 (1,950) Withholding tax on net income retained 56 - - Others (699) (402) (340) ------- ------ ------ Total (benefit) charge for the year (1,411) 4,683 2,477 ======= ====== ======
F-28 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 10. INCOME TAXES (continued) Deferred tax liabilities and assets are comprised of the following:
December 31, 2002 2003 Deferred tax liabilities: Tax over book depreciation $ (791) $ (322) Book over tax basis in subsidiaries (950) (1,398) Translation adjustments (584) (503) Others (11) -- ------- ------- Total deferred tax liabilities (2,336) (2,223) ------- ------- Deferred tax assets: Unused tax losses and unused tax credits $ 4,509 $ 4,322 Provision for doubtful accounts 172 847 Provision for inventories 528 377 Provision for impairment in investment 952 595 Others 58 125 ------- ------- Total deferred tax assets 6,219 6,266 Valuation allowance for deferred tax assets (5,329) (3,379) ------- ------- Total deferred tax assets 890 2,887 ------- ------- Net deferred tax (liabilities) assets $(1,446) $ 664 ======= =======
Undistributed earnings of the Company's foreign subsidiaries included in the Company's retained earnings amounted to approximately $15,948 and $24,202 on December 31, 2002 and 2003, respectively. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to withholding taxes payable to the respective foreign countries. The Company has no intention of distributing the earnings that are subject to withholding taxes. Withholding taxes of approximately $237 would be payable upon remittance of all previously unremitted earnings on December 31, 2003. A subsidiary of the Company has been granted certain promotional privileges by the Board of Investment of Thailand for a project investment of manufacturing enameled copper wire for export purposes. Such privileges include exemption from import duty and tax on raw and essential materials used for export manufacturing up to January 2002. However, since the subsidiary has net operating loss carry forwards, no tax benefits have been obtained from the above privileges. PEWS is located in Shenzhen, which is a region where preferential tax rates apply and currently qualifies for a reduced rate of taxation of 15%. PEWS is exempt from income tax for the two years starting from its first profitable year of operations (2001). PEWS is entitled to a 50% tax exemption from the local income tax for a further three-year period (2003 to 2005) under the local income tax law. With the tax holiday exemption, current income tax liabilities of PEWS were reduced by approximately $252 for the year ended December 31, 2003. The tax holiday exemption also increased the net income per share by $0.02 for the year ended December 31, 2003. F-29 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 10. INCOME TAXES (continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company had net deferred tax assets totaling approximately $6,219 and $6,266 at December 31, 2002 and 2003, respectively. However, realization of all of these deferred assets is not reasonably assured; therefore, they were reserved by a valuation allowance of $5,329 and $3,379 at December 31, 2002 and 2003, respectively. The net change in valuation allowance for the years ended December 31, 2001, 2002 and 2003 was an increase (decrease) of approximately of $1,959, $740 and $(1,950), respectively, resulting primarily from net operating losses (gains) generated during the respective years. 11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The components of other comprehensive income (loss) are as follows:
UNREALIZED GAINS (LOSSES) ON CURRENCY AVAILABLE- TRANSLATION FOR- SALE ADJUSTMENTS SECURITIES TOTAL Balance at December 31, 2000 (33,310) 155 (33,155) Currency translation adjustment (4,024) - (4,024) Unrealized losses on available-for-sale securities - (32) (32) Deferred taxes relating to unrealized losses on available-for-sale securities - 9 9 ------- ------- ------- Balance at December 31, 2001 (37,334) 132 (37,202) Currency translation adjustment 6,919 - 6,919 Unrealized losses on available-for-sale securities - (391) (391) Deferred taxes relating to unrealized losses on available-for-sale securities - 10 10 ------- ------- ------- Balance at December 31, 2002 (30,415) (249) (30,664) Currency translation adjustment 4,754 - 4,754 Losses realized on disposal of available-for-sale securities - (89) (89) Unrealized gains on available-for-sale securities - 479 479 Deferred taxes relating to unrealized gains on available-for-sale securities - (15) (15) ------- ------- ------- Balance at December 31, 2003 (25,661) 126 (25,535) ======= ======= =======
F-30 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 12. COMMITMENTS AND CONTINGENCIES (a) Leases The Company leases certain machinery and equipment under capital leases. The Company leases a piece of land in Singapore and certain buildings under non-cancelable operating lease arrangements. Future minimum payments under capital leases and non-cancelable operating leases with initial terms of one year or more consisted of the following as of December 31, 2003:
Capital Operating Leases Leases ------- --------- 2004 244 441 2005 154 429 2006 - 302 2007 - 194 2008 - 194 Thereafter - 4,218 ------ ------- Total minimum lease payments $ 398 $5,778 ====== Amounts representing interest (35) ------ Present value of net minimum lease payments $ 363 ====== Rental expense consisted of the following: Year ended December 31, 2001 2002 2003 Rentals under operating lease $ 84 $ 117 $ 425 ===== ====== ======
The current and non-current portion of the capital lease liabilities of $222 and $141 as of December 31, 2003 are included in accounts payable and accrued expenses and other liabilities, respectively. The capital lease liabilities are secured by a charge over the leased machinery and equipment at cost of $575 and $811 as of December 31, 2002 and 2003, respectively. The accumulated depreciation of these leased assets for the years ended December 31, 2002 and 2003 amounted to $206 and $365, respectively. F-31 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 12. COMMITMENTS AND CONTINGENCIES (continued) (b) As of December 31, 2003, there were outstanding bank guarantees of $107, issued by the banks on behalf of Charoong Thai and its subsidiaries in respect of certain performance bonds as required in the normal course of business of the companies. These guarantees generally expire within 1 year. (c) As of December 31, 2003, Charoong Thai and its subsidiaries had given continuing corporate guarantee of $4,649 in respect of banking facilities extended to two Operating Subsidiaries of which $823 has been utilized. (d) Sigma Cable has agreed to provide continuing financial support to APEC to enable APEC to meet its liabilities as and when they fall due. 13. FINANCIAL INSTRUMENTS (a) Concentrations of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments, investment securities and trade accounts receivable. The Company maintains cash and cash equivalents, and short-term and long-term investments with various financial institutions. These financial institutions are located in Singapore, Thailand, Australia and the People's Republic of China. The Company policy is designed to limit its exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in the Company's investment strategy. Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of entities comprising the Company's customer base. The Company carefully assesses the financial strength of its customers and generally does not require any collateral. At December 31, 2003, there was no trade receivable which exceeded 10% of the Company's account receivable amounts. The Company is exposed to credit loss in the event of non-performance by counter parties on foreign exchange contracts, but the Company does not anticipate non-performance by any counter parties. F-32 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 13. FINANCIAL INSTRUMENTS (continued) (b) Fair value The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value because of the short-term maturity of these instruments. Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate their fair values because of the short-term maturity of these instruments. Investment securities: The fair values for marketable equity securities are based on quoted market prices, details of which are set out in Note 5. The fair values for debt securities are based on discounted cash flow analysis using current interest rates for instruments with similar maturities. It is not practicable to estimate the fair values of the equity investments that do not have a quoted market price, without incurring excessive costs. Long-term and short-term debt: The carrying amounts of the Company's borrowings under its short-term revolving credit arrangements approximate their fair values. The fair values of the Company's long-term debt are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the long-term debt from a related party is not determinable because of the related party nature of the loan. The carrying amounts and fair values of the Company's financial instruments as of December 31, 2002 and 2003 were as follows:
2002 2003 -------------------------- -------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- Cash and cash equivalents $ 14,431 $ 14,431 $ 25,032 $ 25,032 Short-term bank deposits 3,892 3,892 3,567 3,567 Equity securities available-for-sale 541 541 1,041 1,041 Debt securities held-to-maturity 120 120 50 50 Bank loans and overdrafts 36,808 36,808 22,339 22,339 Long-term debt 1,800 1,800 1,654 1,654 Forward exchange contracts 1 1 1 1
F-33 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 14. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS Copper is the principal raw material used by the Company. The Company purchases copper at prices closely related to the prevailing international spot market prices on the London Metal Exchange for copper. The price of copper is influenced heavily by global supply and demand as well as speculative trading. Consequently, an increase in the price of copper will have a direct effect on the Company's cost of sales. Changes in exchange rates influence the Company's results of operations. The Company's principal operations are located in Thailand, the People's Republic of China ("PRC") and Singapore and a substantial portion of its revenues are denominated in Thai Baht, PRC Renminbi ("RMB") or Singapore dollars, whereas a substantial portion of the Company's cost of sales are denominated in US dollars. In 1997, the devaluation of the Thai Baht against the US dollar adversely affected the operations of the Company in Thailand. Any devaluation of the Thai Baht, RMB or Singapore dollar against the US dollar would have an adverse impact on the operations of the Company. The Company has investments in subsidiaries in the PRC. The distributions of earnings outside the PRC are subject to control because the RMB is not freely convertible into foreign currencies. On January 1, 1994, the PRC government introduced a single rate of exchange as quoted daily by the People's Bank of China (the "Unified Exchange Rate"). The quotation of the exchange rates does not imply free convertibility of RMB into other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People's Bank of China. Approval of foreign currency payments by the Bank of China or other institutions requires submitting a payment application form together with suppliers' invoices, shipping documents and signed contracts. F-34 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 15. RELATED PARTY BALANCES AND TRANSACTIONS
December 31, 2002 2003 Due from: Pardee Assets Co. Ltd $ 2 $ 2 Shandong Yanggu Wire & Cable Corp Ltd ("Shandong Yanggu") 58 PEWC 603 -- Italian-Thai Development Public Company Limited ("Ital-Thai") and its affiliates 3,056 887 SPHC 731 1,624 A director of Siam Pacific 21 21 PEWS -- 277 Others 262 239 ------- ------- $ 4,675 $ 3,108 ======= ======= Due to: PEWC $12,297 $18,339 Fujikura Limited 266 16 Thai Metal Processing Company Limited 83 111 Shangdong Yanggu 92 -- SPHC 2,630 2,600 Pacific Overseas Investment Management Ltd 221 -- PEWS -- 1,000 Others 463 449 ------- ------- $16,052 $22,515 ======= ======= Short-term loans from: Moon View Venture Limited ("Moon View") $ 1,537 $ 1,537 PEWC 231 231 Fujikura Limited 69 -- Pacific Overseas Investment Management Ltd 195 195 Ital-Thai 219 -- ------- ------- $ 2,251 $ 1,963 ======= =======
F-35 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 15. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
December 31, 2002 2003 Long term loans from PEWC $ 8,822 $ 7,824 ======= =======
Moon View and PEWS are controlled by PEWC. Ital-Thai is the minority shareholder of one of the Company's Operating Subsidiaries. All balances with related parties are unsecured. The long term loans from PEWC included amounts of $5,818 and $4,818 as of December 31, 2002 and 2003, respectively, which bear interest at LIBOR plus 1% per annum. The long-term loans have no fixed term of repayment and are expected to be repaid in 2008. Except for the above loans, all the other balances with related parties are interest-free and are repayable on demand. The transactions undertaken with related parties can be summarized as follows:
Year ended December 31, 2001 2002 2003 Purchases of copper from PEWC $ 31,493 $ 42,959 $ 30,708 Purchases of power cable from PEWC 18,058 34,271 20,130 Subcontracting services provided by PEWC - 804 100 Commission income from PEWC 293 348 - Sales to Ital-Thai and its affiliates 1,378 1,014 520 Sales to PEWC 8 12 941 Sales to PEWC Singapore - - 146 Sales to Lox Pac 689 - 19 Sales to Shandong Yanggu - - 131 Sales to NCS 215 - - Purchases of machinery from PEWC 776 - - Purchase of raw materials from Thai Metal Processing Company Limited 876 1,157 995 Purchase of goods from Fujikura Limited 1,042 3,523 1,161 Interest expense paid to PEWC 392 111 129 Management fee paid to PEWC 328 141 292 Management fee received from PEWC - 11 12 Management fee received from PEWC Singapore - - 24 Rental income received from Thai Professional Telecom Network Company Limited 3 - - Rental income received from NCS 16 - - Interest income from NCS and affiliates 316 209 - Royalty fee paid to Fujikura Limited 69 69 14 Purchase of goods from Shandong Yanggu - - 147 Dividend income from Thai Metal Processing Co. Ltd. - - 152 ====== ====== ======
F-36 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 15. RELATED PARTY BALANCES AND TRANSACTIONS (continued) Copper is the major raw material of the Company's wire and cable products. The Company purchases copper in the form of copper rods and copper cathode. Copper cathode is purchased by Siam Pacific to avoid the high import tariff levied on copper rods. Copper cathode needs to be processed into copper rods prior to the manufacturing of wire and cable products. Substantially all of the Company's copper rods are supplied by PEWC while copper cathodes are supplied by unrelated third parties. The price of copper rods purchased from PEWC is determined by reference to the quoted copper prices on the London Metal Exchange (the "LME") plus a certain premium. In addition to copper rods, the Company purchases high voltage power cable from PEWC for distribution purposes. The purchase price of power cable from PEWC is determined by reference to the quoted copper prices on the LME. Prior to 2003, a sales commission at an average rate of 1% to 3% was received from PEWC in addition to sales proceeds received from customers. Pursuant to the Composite Services Agreement, (a) PEWC will sell copper rod to the Company, upon the Company's request, (i) at a price consisting of the average spot price of copper on the LME for the one month prior to purchase plus an agreed upon premium, (ii) at prices and on terms at least as favorable as it provides copper rod to other purchasers of similar amounts of copper rod in the same markets from PEWC and (iii) will give priority in the supply of copper rod to the Company over other purchasers of copper rod from PEWC. (b) PEWC will grant the Company 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 shall not be 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 a right to the Company. (c) PEWC will make available to the Company, upon the Company's request and on terms to be mutually agreed between PEWC and the Company from time and time, access to certain of PEWC's technology (and PEWC personnel necessary to use such technology) with respect to the design and manufacture of wire and cable products, including, without limitation, certain fiber optic technology. F-37 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 15. RELATED PARTY BALANCES AND TRANSACTIONS (continued) (d) PEWC will 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. (e) 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 shall have 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 will arrange for the Company to participate to the extent possible. (f) Without the consent of the Company, PEWC will not compete with respect to the manufacture of wire and cable products in any market in which the Company is manufacturing or has taken significant steps to commence manufacturing. (g) For purposes of the Composite Services Agreement, each province in China is considered the equivalent of a market. (h) The Composite Services Agreement dated November 7, 1996 has a three-year term. The Agreement originally expired on November 7, 1999 but has been renewed annually at the option of the Company. To the extent that transactions occur in the future between the Company and PEWC or affiliates of PEWC other than under the Composite Service 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. 16. SUPPLEMENTAL CASH FLOW INFORMATION
Year ended December 31, 2001 2002 2003 Interest paid, including amounts capitalized $3,890 $1,446 $1,630 ====== ====== ====== Income taxes paid $1,559 $1,139 $3,461 ====== ====== ======
F-38 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 17. SEGMENT FINANCIAL INFORMATION Description of Products by Segment The Company has three reportable segments - manufacturing of wire and cable products ("Manufactured products"), distribution of copper and cable products manufactured by PEWC ("Distributed products") and sales, delivery and installation of wires and cables. Measurement of Segment Profit or Loss and Segment Assets The Company evaluates performance and allocates resources based on profit or loss from operations before interest, gains and losses on the Company's investment portfolio, and income taxes. The accounting policies of the reportable segments, including transactions entered between reportable segments, are the same as those described in the summary of significant accounting polices.
Year ended December 31, 2001 2002 2003 Revenues Revenues from external customers: Manufactured products $ 149,018 $ 185,742 $ 192,293 Distributed products 33,325 24,303 15,187 Sales, delivery and installation of wires and cables 14,968 31,134 3,919 --------- --------- --------- Total revenues from external customers $ 197,311 $ 241,179 $ 211,399 ========= ========= ========= Intersegment revenues: Manufactured products $ 6,544 $ 1,206 $ 4,134 --------- --------- --------- Total intersegment revenues $ 6,544 $ 1,206 $ 4,134 --------- --------- --------- Total revenue $ 203,855 $ 242,385 $ 215,533 Reconciling items Intersegment revenues (6,544) (1,206) (4,134) --------- --------- --------- Total consolidated revenues $ 197,311 $ 241,179 $ 211,399 ========= ========= =========
F-39 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 17. SEGMENT FINANCIAL INFORMATION (continued)
Year ended December 31, 2001 2002 2003 Segment profit Manufactured products $ 20,354 $ 35,193 $ 32,577 Distributed products 724 338 491 Sales, delivery and installation of wires and cables (1,119) (787) 92 --------- --------- --------- Total segment profit $ 19,959 $ 34,744 $ 33,160 Reconciling items Corporate and other expenses (15,379) (20,387) (19,900) Exchange (loss) gain (81) (16) 4,161 Interest income 901 715 285 Interest expense (4,074) (2,214) (1,407) Share of net (loss) gain of equity investees (2,535) (4,090) 1,475 Others 1,619 2,502 (214) --------- --------- --------- Total consolidated income before income taxes $ 410 $ 11,254 $ 17,560 ========= ========= ========= Segment assets Manufactured products $ 171,025 $ 189,187 $ 209,721 Distributed products 2,639 2,016 6,348 Sales, delivery and installation of wires and cables 5,071 927 460 --------- --------- --------- Total segment assets $ 178,735 $ 192,130 $ 216,529 Reconciling items Corporate assets 6,334 7,512 5,398 Investment in equity investees 8,359 8,735 10,249 Intersegment accounts receivable (2) (184) -- --------- --------- --------- Total consolidated assets $ 193,426 $ 208,193 $ 232,176 ========= ========= ========= Expenditures for additions to long-lived assets Manufactured products $ 9,116 $ 11,135 $ 4,877 --------- --------- --------- Total expenditure for additions to long-lived assets $ 9,116 $ 11,135 $ 4,877 ========= ========= =========
F-40 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 17. SEGMENT FINANCIAL INFORMATION (continued)
Year ended December 31, 2001 2002 2003 Depreciation expenses Manufactured products $ 11,210 $ 9,805 $ 9,217 -------- -------- -------- Total consolidated depreciation expenses $ 11,210 $ 9,805 $ 9,217 ======== ======== ======== Impairment loss Manufactured products $ - $ 1,559 $ - -------- -------- -------- Total consolidated impairment expense $ - $ 1,559 $ - ======== ======== ======== Interest income Manufactured products $ 572 $ 208 $ 67 Distributed products 141 219 40 Sales, delivery and installation of wires and cables 94 280 153 Corporate 94 8 25 -------- -------- -------- Total consolidated interest income $ 901 $ 715 $ 285 ======== ======== ======== Interest expense Manufactured products $ 2,723 $ 2,033 $ 988 Distributed products 234 160 34 Sales, delivery and installation of wires and cables 156 205 132 Corporate 961 (184) 253 -------- -------- -------- Total consolidated interest expense $ 4,074 $ 2,214 $ 1,407 ======== ======== ======== Share of net (loss) gain of equity investees Corporate $ (2,535) $ (4,090) $ 1,475 -------- -------- -------- Total consolidated share of net (loss) gain of equity investees $ (2,535) $ (4,090) $ 1,475 ======== ======== ========
F-41 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 17. SEGMENT FINANCIAL INFORMATION (continued) The sales to a major customer, SP Powerassets, which include sales of manufactured products, distributed products, and sales, delivery and installation of wires and cables can be summarized as follows:
Year ended December 31, 2001 2002 2003 Manufactured products $ 882 $ 663 $ 1,127 Distributed products 9,381 9,175 11,840 Sales, delivery and installation of wires and cables 14,968 31,134 3,919 -------- -------- -------- $ 25,231 $ 40,972 $ 16,886 ======== ======== ========
Geographic Area Data Revenue from external customers is attributed to individual countries based on the customer's country of domicile and is summarized as follows:
Year ended December 31, 2001 2002 2003 Revenues from external customers Thailand $ 80,852 $107,264 $ 93,543 Singapore 58,021 73,859 35,193 Australia 11,009 13,961 22,058 The People's Republic of China 46,838 46,095 60,605 Others 591 - - -------- -------- -------- Total revenues from external customers $197,311 $241,179 $211,399 ======== ======== ======== Long-lived assets by area: Thailand $ 44,600 $ 43,238 $ 42,856 Singapore 3,460 10,013 9,720 Australia 4,765 4,731 5,312 The People's Republic of China 19,703 17,875 18,397 Others 7 - - -------- -------- -------- Total long-lived assets $ 72,535 $ 75,857 $ 76,285 ======== ======== ========
18. MATURITY FOR LONG-TERM DEBTS The aggregate maturities for long-term debts for the five years after December 31, 2003 are $nil, $1,654, $nil, $nil and $7,824, respectively. F-42 ASIA PACIFIC WIRE & CABLE CORPORATION LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US Dollars, except share data) 19. SUMMARIZED FINANCIAL INFORMATION OF EQUITY INVESTEES The following table presents summarized financial information of the Company's principal equity investees, Lox Pac, Thai Professional, SPHC and NGL for 2001, 2002 and 2003, and Shandong Huayu for 2002 and 2003. NGL is listed on the New Zealand Stock Exchange. The aggregate market value of the Company's investment in NGL amounted to approximately $586 and $1,278 as of December 31, 2002 and 2003, respectively. December 31, 2002 2003 Current assets $ 9,896 $ 9,322 Non-current assets 21,671 22,230 Current liabilities 7,135 4,371 Non-current liabilities - - Minority interests 356 4 Total shareholders' equity 24,076 27,177 Year ended December 31, 2001 2002 2003 Net sales $ 13,996 $ 11,105 $ 4,753 Sales less cost of sales (3,567) 2,135 1,062 Net (loss) income (5,487) 624 821 On December 31, 2002 and December 31, 2003, the unamortized difference between the amount at which the investment in Lox Pac and Thai Professional was carried and the amount of the Company's underlying equity in its net assets amounted to $2,081 and $2,081, respectively. In conjunction with the adoption of Statement 142, the Company discontinued the amortization of goodwill associated with equity method investments effective January 1, 2002. Amortization expense for the year ended December 31, 2001 of $210, is included in the Company's share of net loss in equity investees. F-43