Part I

⁽¹⁾     The calculation of the earnings (loss) per share is based on 13,830,769 basic and diluted weighted Common Shares issued and outstanding for the years ended December 31, 2007, 2008, 2009, 2010, and 2011.

3.2 Exchange Rates

Unless otherwise specified, all references in this Annual Report to “$,” “U.S. dollars” or “US$” are to United States dollars; all references to “Bt,” “Thai Baht” or “Baht” are to Baht, the legal tender currency of Thailand; all references to “S$” are to Singapore dollars, the legal tender currency of Singapore; all references to “A$” are to Australian dollars, the legal tender currency of Australia; and all references to “RMB” are to Chinese Renminbi, the legal tender currency of China.

Unless otherwise noted, for the convenience of the reader, translations of amounts from Baht, Singapore dollars, Renminbi and Australian dollars to U.S. dollars have been made at the respective noon buying rates in New York City for cable transfers in those currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) on December 31, 2011.  The respective Noon Buying Rates on December 30, 2011 were US$ 1.00 = Bt 31.51; S$ 1.295; RMB 6.294; and A$0.976.  The respective Noon Buying Rates on April 13, 2012, the latest practicable date before publication of this Annual Report, were US$ 1.00 = Bt 30.730; S$ 1.247 ; RMB 6.302  and A$ 0.964 .     No representation is made that the foreign currency amounts could have been or could be converted into U.S. dollars on these dates at these rates or at any other rates.

Sources: Federal Reserve Bulletin, Board of Governors of the Federal Reserve System.  Federal Reserve Statistical Release H.10(512), from the website of the Board of Governors of the Federal Reserve System at http://www.federalreserve.gov.

Thailand

The Thai Baht is convertible into foreign currencies and is subject to a managed float against a basket of foreign currencies, the most significant of which is the U.S. dollar.  The composition of the basket for determining the value of the Baht is not made public by the Bank of Thailand.  The following tables set forth, for the periods indicated, certain information concerning the Noon Buying Rate of the Thai Baht.  No representation is made that the Baht or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or Baht, as the case may be, at any particular rate or at all.

⁽¹⁾     Average means the average of the Noon Buying Rates on the last day of each month during a year.

The high and low exchange rates for the six months preceding the date of this Annual Report were:

Singapore

The Singapore dollar is convertible into foreign currencies and floats against a trade-weighted basket of foreign currencies, the composition of which is not made public by Singapore’s central bank, the Monetary Authority of Singapore, but of which the U.S. dollar is a component.  The following tables set forth, for the periods indicated, certain information concerning the Noon Buying Rate of the Singapore dollar.  No representation is made that the Singapore dollar or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or Singapore dollars, as the case may be, at any particular rate or at all.

⁽¹⁾     Average means the average of the Noon Buying Rates on the last day of each month during a year.

The high and low exchange rates for the six months preceding the date of this Annual Report were:

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.

China

The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign currencies and through restrictions on foreign trade.  The following tables set forth, for the periods indicated, certain information concerning the Noon Buying Rate of the Renminbi.  No representation is made that the Renminbi or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or Renmimbi, as the case may be, at any particular rate or at all.

⁽¹⁾     Average means the average of the Noon Buying Rates on the last day of each month during a year.

The high and low exchange rates for the six months preceding the date of this Annual Report were:

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.

Australia

The following tables set forth, for the periods indicated, certain information concerning the Noon Buying Rate of the Australian dollar.  No representation is made that the Australian dollar or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or Australian dollars, as the case may be, at any particular rate or at all.

⁽¹⁾     Average means the average of the Noon Buying Rates on the last day of each month during a year.

The high and low exchange rates for the six months preceding the date of this Annual Report were:

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

You should carefully consider the following risks before you decide to buy our Common Shares.  If any one of these risks or uncertainties were to occur, our business, financial condition, results and performance could be seriously harmed and/or the price of our Common Shares might significantly decrease.  The risks and uncertainties described in this Annual Report on Form 20-F are not the only ones facing us.  Additional risks and uncertainties that currently are not known to us or that we currently believe are immaterial also may adversely affect our businesses and operations.

3.3.1     Risks Related to PCAOB Inspection

Our auditor, like other independent registered public accounting firms operating in Hong Kong, is not permitted to be subject to inspection by Public Company Accounting Oversight Board (“PCAOB”), and as such, investors may be deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and applicable professional standards. Because our auditor is located in Hong Kong, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the relevant local authority, our auditor, like other independent registered public accounting firms operating in Hong Kong, is currently not inspected by PCAOB.

Inspections of other firms that PCAOB has conducted outside of Hong Kong have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in Hong Kong makes it more difficult to evaluate the effectiveness of our au ditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

3.3.2     Risks Related to Failure to Comply with Loan Covenants

Our credit facility agreement with Bangkok Bank Hong Kong Branch (the “Bank”) was entered into on March 17, 2011 with a total cash loan of $14 million and a trade facility of $8 million. The cash loan carries an interest rate of Singapore Inter-bank Borrowing Rate (“SIBOR”) plus 2.5%, with a term of 5.5 years. This agreement requires us to maintain at all times certain financial covenants and non-financial covenants for both the guarantor, APWC, and borrower, Crown Century Holdings Ltd. (“CCH HK”).  As of December 31, 2011, CCH HK was not in compliance with certain financial covenant ratios and APWC was not in compliance with a certain non-financial covenant relating to its disposal of a certain subsidiary when the Company failed to provide formal notification and to obtain the Bank’s consent.  As such, the cash loan would become callable on demand if the bank were to declare an event of default (which it has not to date).  The outstanding loan balance was therefore classified as current liability as of December 31, 2011. The Company started negotiations with the Bank on revision of the loan agreement and possibility of issuance of waivers with regard to those covenants.  Up to date of this annual report, the negotiation is still on going.

However, in addition to certain financial covenants relating to our financial position, operating performance and liquidity, the restrictions contained in our loan agreement may limit our ability to, among other things:

Ÿ              incur additional indebtedness for CCH HK for factory expansions, if any;

Ÿ              create liens on CCH HK’s assets

Ÿ              enter into business combinations (if it would be interpreted as major change in our business) or disposal of subsidiaries under CCH HK and under APWC; and

Our ability to comply with the requirements of the loan agreement is subject to certain risks, including:

Ÿ               violation of a covenant that stipulates that we must maintain our listing on the NASDAQ Stock Market, Inc. (“NASDAQ”) and cannot be suspended for more than ten days, in the remote likelihood that APWC’s stock price falls under $1 for consecutive thirty 30 days on NASDAQ;

Ÿ              our ability to sustain the net worth requirements for CCH HK and APWC, if our organic growth in future years for CCH HK and for APWC is not sufficient;

Ÿ              our ability to meet the proposed waivers which are still under negotiation with the Bank if our actual operational performance is not sufficient; and

Ÿ              future covenant compliance issues, in the event of a rise in copper prices that leads to an increase in the Company’s indebtedness

Our ability to comply with the loan covenants may also be affected by economic, financial and industry conditions, commodity prices such as copper and other factors beyond our control.

3.3.3     Risks Related to the Global Economic and Financial Crisis

            A number of economists forecast global growth to average 3.4% in 2012, with the performance differential between the generally weaker developed economies and the generally stronger developing economies continuing. The downward revision (0.2 percentage points) from the January 2012 forecast reflects the deepening recessions in the southern peripheral nations of the euro zone.  Advances in the faster-growing emerging nations are being constrained by both the trade shocks rippling around the world and by prior tightening moves to contain domestic inflationary pressures.  This is most notable in the Asia-Pacific region where growth forecasts for China, South Korea, and Australia have moved to a lower trajectory.  India too has recently experienced a diminished rate of growth, although this largely reflects past tightening moves to contain domestically generated inflationary pressures.  A more moderate pace of rebuilding in Japan has also contributed to the reduced growth momentum in the Asia-Pacific region.

            There is still considerable risk of further downward revisions to the forecast, in particular due to the euro zone’s festering sovereign debt problem. Although the European Central Bank has extended an important financial lifeline to the region’s ailing banking institutions, the delay in implementing the much-needed structural and fiscal reforms risks further contagion and financial market shocks.  Such developments would aggravate already unsustainable debt burdens in many of the affected countries, and exacerbate existing economic strains.  Also of concern is the potential for a sharp reversal in historically low government bond yields, driven by increasing investor angst if the expected improvement in the quality of government balance sheets fails to materialize.  A sharply rising debt burden would force many governments among the developed nations to implement further reductions in government expenditures that could eventually result in much weaker economic performances.  The decline in China’s speed of growth could also accelerate, with a bigger slide in exports triggering broader production and employment cuts that would undermine consumer spending, the country’s buoyant real estate market, and the demand for commodities. Recurring geopolitical problems remain an important threat to global stability as well.  Any disruption to the world’s oil supply chain in the Middle or Far East could send gas pump prices sharply higher and global growth sharply lower.

Actual and Possible Impacts on the Company

The fluctuation of copper prices in 2011 has further impacted the Company’s ability to improve its overall financial performance, particularly in the latter part of 2011. The increase in average   London Metal Exchange (“LME”) copper price over 2010 was higher than the increase in our prevailing selling price for manufactured products, resulting in a gross margin lower than in 2010 for operations in China. Elsewhere in Thailand, the net sales were slightly lower than that of last year as our production and our ability to ship our products was curtailed by the nationwide flooding that affected Thailand and severely disrupted many business operations in that country.  In Australia and Singapore, we witnessed an increase in net sales, as the copper price rose during the first three quarters of 2011 and production volume also increased by 29.8% and 31.2%, respectively.

Copper prices on the LME dropped at the end of last quarter 2011 to $7,500. Consistent with industry practice, customers would expect that the selling prices of our products, particularly of copper based wires, would therefore be lower than that in 2010.  The decrease in copper prices and other commodity prices also resulted in a decreased turnover for the last part of the year, as customers delayed placing orders with the Company or reduced the quantity of such orders in anticipation of a possible further reduction in copper prices.  A further decrease in copper prices would likely have an adverse effect on the revenues of the Company.  In such a case, the Company could find itself with overvalued inventory that requires a valuation write-down.

When compared with 2010 sales, sales in 2011 increased by 5.7%, boosted by an increase in sales in the power wire category by 35.3%, which was partially offset by decreases in sales of enameled wire and fiber optic out of Thailand by 10.9% and 36.4%, respectively. Sales of supply, delivery and installation project services decreased by 28.1%, while sales of distributed wire and cable products decreased by 5.9%.

The Company is unable to determine the precise impact of the Euro zone fiscal crises, and the fragile state of the global recovery, on its operations and cash flow, since its operating results are also affected by factors that are, or may be, unrelated to the economic turmoil, such as the completion of routine purchase cycles by customers and the completion, expansion or contraction of large infrastructure projects.  However, the Company has concluded that the current economic instability has negatively affected the Company’s operations and cash flow. The Company believes that any efforts to forecast likely future performance with any degree of specificity would be fraught with uncertainty.  Accordingly, the Company cautions against placing reliance on any efforts to identify trends for the foreseeable future.

Macroeconomic events and conditions may have a material adverse impact on the Company’s business operations until such time as the global financial crisis has substantially abated and financial and economic conditions have materially improved.  The Company notes, however, that the foregoing is subject to a number of unknown variables, including the impact of actions taken or that may be taken in the future by governmental entities to address the capital needs of banks and other financial institutions and to increase the flow of credit to businesses.

3.3.4     Risks Related to the Common Shares and Corporate Governance

Consolidation of Charoong Thai Group Accounts

As of December 31, 2011, the Company effectively owned 50.93% of the issued and outstanding shares of Charoong Thai Wire and Cable Public Company Limited (“Charoong Thai” or “CTW”), a decrease from the Company’s initial ownership percentage which is attributable to the exercise of warrants or conversion of convertible securities by third parties.  The Company’s present intention is to maintain majority ownership of the voting securities of Charoong Thai.  However, there may be circumstances under which the Company cannot maintain majority ownership of Charoong Thai.  In the event Charoong Thai were to make a further offering of voting securities, or securities convertible into or exchangeable for voting securities, and the Company was not in a position to fund or finance its participation in the offering, the ownership interest of the Company in Charoong Thai could fall below 50%.  If the Company’s ownership percentage in Charoong Thai were to fall below 50%, the accounts of the Charoong Thai group, which includes all of the Company’s Thailand operations, would not be consolidated but instead would be accounted for under the equity method.  In such an event, the Company’s accounts would show a decrease in revenue and most categories of assets and liabilities, which events could have a material adverse effect on the value of the Common Shares.

Potential Illiquidity of Common Shares

Approximately 75.4% of our Common Shares are either unregistered securities or registered securities held by affiliates, which are subject to restrictions on trading.  Accordingly, approximately 75% of our Common Shares are not fully liquid investments.  Since April 2011, when APWC was listed on NASDAQ,  the volume of trading in our Common Shares has picked up fractionally.  However, the value of our Common Shares may be impacted negatively by their relative illiquidity when compared to the publicly-traded shares of many issuers.

Control of the Company Rests with Majority Shareholder; Controlled Company Exemption; Risks Related to PEWC

As the majority shareholder, Pacific Electric Wire & Cable Co., Ltd. (“PEWC”) has sufficient votes to control the outcome of any matters presented for a shareholder vote, including the election of the members of the Board of Directors.  PEWC may vote its shares in the Company in the manner that it sees fit.  In addition, subject to compliance with applicable securities laws, PEWC may sell, convey or encumber all or a portion of its ownership interest in the Company without regard to the best interests of the other shareholders of the Company except to the extent that it is: (i) prohibited from engaging in conduct oppressive to minority interests under applicable law and (ii) required to comply with the terms of the Amended and Restated Shareholders’ Agreement dated March 27, 2009 among the Company, PEWC and MSD CREDIT OPPORTUNITY Master Fund, L.P . (“COF”) (as the assignee of SOF Investments, L.P. (“SOF”) in July 2011), a Delaware limited partnership which owns beneficially 9.8% of the issued and outstanding Common Shares (the “Amended and Restated Shareholders Agreement”).

The Common Shares of the Company are traded on the NASDAQ Capital Markets tier.  However, as the Company has a more than fifty percent (50%) shareholder, the Company is entitled to rely upon a “controlled company exemption” to the requirement that a company have a board of directors comprised of a majority of independent directors in order to be listed on NASDAQ. At present, a majority of the board of directors of the Company is affiliated with PEWC.

PEWC was delisted from the Taipei Stock Exchange in 2003 following the disclosure of a major corporate scandal involving fraud and embezzlement by certain former executives of PEWC, one or more of whom are now serving prison sentences for their actions. Commencing in 2004, PEWC brought a number of actions in different jurisdictions against those former executives and others seeking to recover substantial assets that had been misappropriated. Some of those actions are ongoing. PEWC is still seeking to recover financially, and in terms of its market reputation, from the malfeasance of those former executives. The financial and governance problems experienced by PEWC increase the uncertainty regarding its ability to perform under the Composite Services Agreement between PEWC and the Company, although to date PEWC has met its obligations under that agreement. (See---section 10.3 Material Contracts).

Limited Trading Volume

Although our Common Shares are traded on the NASDAQ Capital Markets tier, trading in, and demand for, our Common Shares has been limited. As a consequence, shareholders may find that their ability to sell their Common Shares quickly or in substantial amounts is adversely affected by the limited public trading market.  Thinly-traded equity can be more volatile than equity securities traded in an active trading market.  The high and low daily closing price for our Common Shares during the past 24 months (March 2010 – March 2012) has been $7.85 and $1.92, respectively.  In the future, our Common Shares may experience significant price fluctuations which could adversely affect the value of your ownership interest in the Company.

Disclosure Controls and Procedures and Internal Control over Financial Reporting      

  Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined und er Rule 13a-15(f) under the Securities Exchange Act of 1934.

Based on the Company’s evaluation under the applicable framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), our management concluded that a material weakness in the Company’s  internal controls over financial reporting was identified.

In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2011, our independent registered public accounting firm determined also the existence of a material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls. 

Deficiencies were noted in our controls over complex and non-routine transactions in our financial statement closing process, including the accounting of revenue recognition under bill-and-hold arrangements and consignment arrangement whereby the revenue was inappropriately recognized; the calculation and recording of income tax, deferred tax assets (and the related valuation allowance), inventory and related impairment accounts, and the misclassification of a number of intercompany balances. These deficiencies were attributable to our decentralized reporting structure, our complex and manual consolidation process and inadequate reviews over account balances at the reporting date. The aggregate effect of these deficiencies represented a material weakness. Based on this assessment, the Company’s management, including its CEO and CFO, concluded that the Company’s internal control over financial reporting was ineffective as of December 31, 2011.

Delinquency in Reporting Obligations; Reporting of Financial Results

The Company is currently compliant with its reporting obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and believes that it has addressed certain corporate governance obstacles that led to its delinquency in filing its annual report five years ago.  As a foreign private issuer, the Company is not required by the rules of the Commission to provide financial results on a quarterly or semi-annual basis.  In addition, Bermuda law does not require the Company to provide interim financial information to its shareholders, whether on a quarterly or semi-annual basis.  As such, investors may not have the same access to financial information of the Company as they customarily receive in the case of a domestic issuer disclosing quarterly results on a Form 10-Q.  Under the NASDAQ rules; however, listed issuers are required to report semi‑annual unaudited financial results, which the Company has done since its listing on NASDAQ.

Potential Conflict of Certain Officers and Directors

In March 2011, the Company appointed a third independent director as required by NASDAQ. Other than our three independent directors, all of the members of the Board of Directors are also directors or officers or otherwise affiliated with PEWC, the majority shareholder.  Certain of our officers are also affiliated with PEWC.  In each case, they may be subject to potential conflicts of interest.  In addition, certain of our officers and directors who are also officers and/or directors of PEWC may be subject to conflicts of interest in connection with, for example, pursuing corporate opportunities in which we and PEWC or one of its affiliates have competing interests, and the performance by us and PEWC of our respective obligations under existing agreements, including the Composite Services Agreement (discussed in section 10.3).  In addition, some of these persons will devote time to the business and affairs of PEWC and its affiliates as is appropriate under the circumstances, which could reduce the amount of time available for overseeing or managing our business and affairs.  Notwithstanding any such potential conflicts, however, such individuals, in their capacities as our directors and officers, are subject to fiduciary duties to our shareholders.

The Bermuda Companies Act 1981, as amended (the “Companies Act”), subjects our officers and directors to certain fiduciary standards in the exercise of their executive and management duties on behalf of the Company.  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 of Directors 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.  We do not make any loans to our directors or executive officers in accordance with the provisions of The Sarbanes-Oxley Act of 2002.

Obligations under the Amended and Restated Shareholders Agreement

Pursuant to the original shareholders agreement dated June 28, 2007 (the “Shareholders Agreement”), the Company granted to SOF certain rights and protections (now held by COF, as successor-in-interest to SOF, as explained below).  Under the Shareholders Agreement, the Company agreed to indemnify SOF and its partners and certain of its affiliates (the “SOF Indemnified Persons”), for any additional taxes, interest, penalties and other costs that might be imposed upon or incurred by the SOF Indemnified Persons in the event that the Company is determined by the Internal Revenue Service (the “IRS”) to be a “controlled foreign corporation” (a “CFC”) or a “passive foreign investment company” (a “PFIC”), as such terms are interpreted and defined under IRS rules and regulations.  The Company has determined that it was not a CFC or PFIC at any time during the 2011 fiscal year and does not believe that it is likely to become a CFC or a PFIC; however, the Company cannot provide any assurances that it will not become a CFC or a PFIC in the future. 

In addition, the Company granted certain registration rights to SOF with respect to its Common Shares (the “Registrable Securities”) in the Shareholders Agreement.  In particular, the Company agreed to use its reasonable best efforts to prepare and file, and cause to go effective, as soon as practicable, a shelf registration statement covering the resale of the Registrable Securities on a delayed or continuous basis.  The Company also agreed to use its reasonable best efforts to keep its shelf registration statement effective until all Registrable Securities have been sold or until all Registrable Securities may be sold without restriction pursuant to Rule 144 promulgated pursuant to the Securities Act of 1933, as amended.  In addition, the Company granted to SOF two demand registration rights for underwritten offerings and customary piggyback registration rights with regard to the Registrable Securities.  Moreover, the Company agreed to use its reasonable best efforts to cause the Common Shares to be listed on a national “Securities Market,” which means any of the NASDAQ Stock Market, Inc. (Global Market or Global Select Market), the American Stock Exchange LLC (now known as NYSE Amex Equities) or the New York Stock Exchange LLC, not later than January 31, 2009, subject to notice and a sixty (60) day cure period.  All of the costs and expenses of the Company in connection with the fulfillment of its obligations under the Shareholders Agreement were to be paid by the Company, other than underwriting fees, discounts and commissions attributable to the sale of Common Shares held by SOF.

Under the Shareholders Agreement, if the Company failed to fulfill its obligations thereunder, SOF would have a claim for damages against the Company.  No such claim has been made.  In addition, if the Company fulfilled its reasonable best efforts undertakings but failed to meet one or more of the stated goals, SOF would have a put right of their Common Shares to PEWC.  In accordance with those terms, on February 2, 2009, SOF delivered to PEWC notice of its exercise of the put right under the Shareholders Agreement due to the fact that the Common Shares were not listed on a national Securities Market as of January 31, 2009.  On March 27, 2009, SOF sold 51% of its Common Shares to PEWC pursuant to the terms of a share purchase agreement between those parties.  Upon the consummation of that share purchase agreement, SOF held 1,355,415 registered Common Shares of the Company and PEWC held 1,410,739 registered Common Shares, respectively, representing 9.8% and 10.2% of the outstanding Common Shares, with PEWC holding an additional 7,664,615 unregistered Common Shares, giving it an aggregate of 65.6% of the total issued and outstanding Common Shares.  In connection with this transaction, the Company, PEWC and SOF entered into the Amended and Restated Shareholders Agreement, which among other things, granted to the Company an extension for listing the Common Shares on a national Securities Market until February 2011 and maintained for SOF the right to sell its remaining Common Shares to PEWC in the event the Company did not list its Common Shares on a national Securities Market by such time.  In April 2011, the Common Shares of the Company were approved for trading on the NASDAQ Capital Markets tier, which tier does not fit within the definition of a national “Securities Market”, as provided in the Amended and Restated Shareholders Agreement.  As of July 1, 2011, SOF transferred its Common Shares to COF, at which time COF executed a joinder agreement and became a party to the Amended and Restated Shareholders Agreement and succeeded to the rights and interests of SOF thereunder.  The Company is not aware that COF has taken any action with respect to the Common Shares held by it. The Amended and Restated Shareholders Agreement also provides for those put, registration and indemnification rights set forth above in the description of the Shareholders Agreement and such rights now apply to COF in place of SOF.  While the sale of Common Shares by SOF to PEWC resulted in PEWC holding a higher concentration of Common Shares which may impact liquidity for the other shareholders, the Company does not believe that any definitive impact can be determined. 

In addition, sales of Common Shares held by COF and registered under the shelf registration statement, or any registration statement that goes effective following an exercise of demand registration rights, will increase the number of Common Shares available for purchase in the public market and may adversely affect the value of the Common Shares held by other shareholders.  Even without substantial sales by COF or PEWC of their respective Registrable Securities, the possibility of such sales may create a “market overhang” that has the effect of depressing the trading price of the Common Shares.

The Company has also granted to COF preemptive rights in the event of any issuance of additional equity securities (or securities convertible into or exchangeable for equity securities) by the Company, such that COF may subscribe for additional securities in order to maintain its then percentage ownership interest in the issued and outstanding equity securities of the Company.

Holding Company Structure; Potential Restrictions on the Payment of Dividends

We have no direct business operations other than our ownership of the capital stock of our subsidiaries and joint venture holdings.  While we have no present intention to pay dividends, should we decide in the future to do so, as a holding company our ability to pay dividends and meet our other obligations will depend upon the amount of distributions, if any, received from our operating subsidiaries and other holdings and investments.  Our operating subsidiaries and other holdings and investments, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants contained in loan agreements, restrictions on the conversion of local currency earnings into U.S. dollars or other hard currency and other regulatory restrictions.  For example, PRC legal restrictions permit payments of dividends by our business entities in the PRC only out of their retained earnings, if any, determined in accordance with relevant PRC accounting standards and regulations.  Under PRC law, such entities are also required to set aside a portion of their net income each year to fund certain reserve funds.  These reserves are not distributable as cash dividends.  The foregoing restrictions may also affect our ability to fund operations of one subsidiary with dividends and other payments received from another subsidiary.

Requirement to Maintain Effectiveness of the Registration Statement and to List on a National Securities Exchange; Effect of the Put of the COF Shares to PEWC

Under the Amended and Restated Shareholders Agreement, COF has retained the right to sell its remaining Common Shares (the “COF Shares”) to PEWC if the Company does not achieve a listing on a national Securities Market within the time frame provided in the agreement.  The Company’s Common Shares are currently listed on the NASDAQ Capital Markets tier. The Company intends to apply to list the Common Shares on the Global Markets tier after the Company is satisfied that it qualifies in all respects for that tier. However, there are no assurances that the Common Shares will qualify for the Global Markets tier or that the Company’s application, when filed, will be approved. In addition, the Company has agreed to maintain the effectiveness of the registration statement on Form F-3, for the benefit of COF, and if the Company fails to do so for any period of thirty (30) consecutive trading days or an aggregate of sixty (60) trading days during any twelve month period, then COF may, subject to compliance with notice and other procedural requirements, exercise a right to sell its remaining Common Shares to PEWC.  At all times, the Company must exercise its reasonable best efforts to comply with its covenants under the Amended and Restated Shareholders Agreement.  Otherwise, the Company could be subject to a damages claim by COF. 

Corporate Matters; Limited Recourse; Limited Enforceability

We are incorporated in and organized pursuant to the laws of Bermuda.  In addition, all of our directors and officers reside outside the United States and our material assets are located outside the United States.  As a result, it may be difficult for investors to effect service of process within the United States upon such persons or to realize against them in courts of the United States upon judgments predicated upon civil liabilities under the United States federal securities laws.  Even if investors are successful in realizing against such persons in courts of the United States, the laws of Taiwan may render such investors unable to enforce the judgment against the Company’s assets or the assets of its officers and directors.  Also, investors may have difficulty in bringing an original action based upon the United States federal securities law against such persons in the Taiwan courts.  Additionally, we have been advised by our legal counsel in Bermuda, Appleby (Bermuda) Limited, that there is doubt as to the enforcement in Bermuda, in original actions or in actions for enforcement of judgments of United States courts, of liabilities predicated upon U.S. federal securities laws, although Bermuda Courts will enforce foreign judgments for liquidated amounts in civil matters subject to certain conditions and exceptions.  As a result, shareholders may encounter more difficulties in enforcing their rights and protecting their interests in the face of actions taken by management, the Board of Directors or controlling shareholders than they would if the Company were organized under the laws of the United States or one of the states therein, or if the Company had material assets located within the United States or some of the directors and officers were resident within the United States.  See “Enforceability of Certain Civil Liabilities” for additional information.

3.3.5     Risks Relating to Our Business

Risks Relating to Copper

Copper is the principal raw material we use, accounting for a majority of the cost of sales.  We purchase copper at prices based on the average prevailing international spot market prices on the LME for copper for the one month prior to purchase.  The price of copper is affected by numerous factors beyond our control, including international economic and political conditions, supply and demand, inventory levels maintained by suppliers, actions of participants in the commodities markets and currency exchange rates.  As with other costs of production, changes in the price of copper may affect the Company’s cost of sales.  Whether this has a material impact on our operating margins and financial results depends primarily on the Company’s ability to adjust selling prices to its customers, such that increases and decreases in the price of copper are fully reflected in those selling prices.  Most of our sales of manufactured products reflect the cost of copper used to manufacture those products at the time the products are ordered.  In the ordinary course of business we maintain inventories of raw materials and finished products reasonably necessary for the conduct of our business.  These inventories typically reflect the cost of copper prevailing in the market at the time of purchase.  A long-term decrease in the price of copper would require the Company to revalue its inventory at periodic intervals to the then net realizable value, which could be below cost.  Copper prices have been subject to considerable volatility and it is not always possible to manage our copper purchases and inventory so as to neutralize the impact of copper price volatility.  Accordingly, significant volatility in copper prices could have an adverse effect on our operations.  In the fourth quarter of 2011, there was a dramatic decline in the price of copper on global markets.  This decline impacted adversely on the Company’s fourth quarter and year-end results, as much of the Company’s copper inventory was procured prior to the fourth quarter price decline.  No assurance can be given that such volatility will not recur.

Risks related to our Customer Base and our Geographic Markets

Our sales of manufactured and distributed products are made primarily to customers that use our products as components in their own products or in construction or infrastructure projects in which they participate.  The volume of our sales is dependent largely on general economic conditions in the markets in which we compete, including how much our customers invest in their own product manufacturing or project development.  Increases or decreases in economic activity and investment in the markets where we operate generally will result in higher or lower sales volume and higher or lower net income for the Company.

Risks relating to Force Majeure Events

Operations and other business conducted at our plants and other facilities are at risk to acts of god consisting of uncontrollable natural and climatic events (often referred to as force majeure events), such as the 2011 flooding in much of Thailand that severely disrupted our manufacturing operations at our Thai plant controlled by our subsidiary, Charoong Thai.  The severe flooding affected much of our Thai operations and forced the suspension of operations for a period of 5 months. The temporary suspension of operations at Siam Pacific Electric Wire & Cable Company Limited (“Siam Pacific”), which is 100% owned by Charoong Thai impacted adversely on its 2011 sales, which experienced a 20% reduction in product sales in 2011 compared with that of 2010. With the help of  its affiliated companies such as Pacific Electric Wire & Cable (Shenzhen) Co., Ltd. (“PEWS”) and Shanghai Yayang Electric Co., Ltd. (“Shanghai Yayang” or “SYE”) , together with our parent company, PEWC, Siam Pacific partially restored its operations in January and February with shipments of 281 tons and 588 tons, respectively. Full production is expected to resume in the second quarter of 2012.  The insurance coverage includes flood, fire, and theft but does not include losses due to business interruption.

Risks Relating to China

We conduct substantial business operations in China.  Accordingly, our results of operations and prospects are likely to be materially impacted by economic, legal and other developments in China.

Economic Reform Measures in the PRC May Adversely Affect the Company’s Operations or Financial Condition

The PRC government has gradually moved away from a planned economic model and implemented economic reform measures emphasizing decentralization, utilization of market forces in the development of the economy and a high level of management autonomy.  While such economic reform measures are generally viewed as a positive development for foreign businesses investing or establishing operations in China, many of  the reforms are unprecedented and may be subject to revision, modification or termination based on the outcome of such economic changes and other considerations, such as their social impact.  There is not sufficient administrative or judicial precedent to permit the Company to determine with any degree of certainty how the reforms will impact our business in China. In year 2011, the government began to curtail credit in order to dampen an over-heated real estate market, including commercial and residential areas. While the extent of the impact is unknown at this time, any contraction in the construction sector would certainly affect the demand for building wires, one of the products that the Company manufactures and sells in the southeastern Asia.

PRC Civil Law System May Limit the Company’s Remedies

The Chinese legal system is a civil law system based on written statutes.  Prior court decisions may be cited for reference but have limited precedential value.  Since the late 1970s, the central government has promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade.  In particular, since 1979, the PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investment in China.  Foreign investment laws and regulations in China are evolving and the interpretations of many laws, regulations and rules are not always uniform.  Accordingly, enforcement of these laws, regulations and rules involves uncertainties, which may limit the remedies available to us in the event of any claims or disputes with third parties.  In addition, any litigation in China may be protracted and could result in substantial costs and diversion of resources and management attention.

PRC Control over the Convertibility of Currency May Restrict the Payment of Dividends

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and in certain cases, the remittance of currency out of China. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade related transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, approval from SAFE or its local branch is required where foreign currency is remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies unless SAFE has pre-approved the amortization schedule of the foreign currency loan in question. The PRC government may also at its discretion put restrictions on access in the future to foreign currencies for current account transactions. 

Pursuant to the Foreign Exchange Administration Regulation promulgated on January 29, 1996, as amended on January 14, 1997 and August 5, 2008, and various regulations issued by the SAFE and other relevant PRC government authorities, the Renminbi is freely convertible only with respect to current account items, such as trade-related receipts and payments, interest and dividends. Capital account items, such as direct equity investments, loans and repatriations of investments, require the prior approval of the SAFE or its local branches for conversion of Renminbi into foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC. Payments for transactions that take place within the PRC must be made in Renminbi. Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities, or their competent local branches.

On August 29, 2008, the SAFE promulgated SAFE Circular No. 142, a notice regulating the conversion by a foreign-invested company of foreign currency into Renminbi by restricting how converted Renminbi may be used.   This notice requires that Renminbi converted from the foreign currency-denominated capital of a foreign-invested company only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise in its business scope. In addition, the SAFE strengthened its oversight of the flow and use of Renminbi funds converted from the foreign currency-denominated capital of a foreign-invested company. The use of such Renminbi may not be changed without SAFE’s approval and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used for purposes within the Company’s approved business scope. Violations of SAFE Circular No. 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Regulation. As a result, SAFE Circular No. 142 may impose an additional layer of bureaucratic compliance and could, under certain circumstances, limit our ability to transfer the proceeds from our non-RMB denominated borrowing arrangements outside of the PRC to our PRC subsidiaries, which may, absent the requisite approvals from SAFE, adversely affect the continued growth of our business.

Pursuant to SAFE Circular No. 75, (i) a PRC resident must register with the local SAFE branch before establishing or controlling an overseas special purpose vehicle (“SPV”) , for the purpose of obtaining overseas equity financing using the assets of or equity interests in a domestic enterprise; (ii) when a PRC resident contributes the assets of or its equity interests in a domestic enterprise into an SPV, or engages in overseas financing after contributing assets or equity interests into an SPV, such PRC resident must register his or her interest in the SPV and any subsequent change thereto with the local SAFE branch; and (iii) when the SPV experiences a material event, such as a change in share capital, merger or acquisition, share transfer or exchange, spin-off or long-term equity or debt investment, the PRC resident must, within 30 days after the occurrence of such event, register such event with the local SAFE branch. On May 29, 2007, the SAFE issued guidance to its local branches for the implementation of the SAFE Circular No. 75, which guidance provides for more standardized, specific and stringent supervision regarding such registration requirements and requires PRC residents holding any equity interests or options in SPVs, directly or indirectly, controlling or nominal, to register with the SAFE.

Political or Social Instability in the PRC May Adversely Affect the Company’s Operations or Financial Condition

Political or social instability in China could also adversely affect our business operations or financial condition.  In particular, adverse public health epidemics or pandemics in China could not only interfere with our ability to operate our PRC subsidiaries, but could also affect the country’s overall economic growth, which could in turn affect the sales of our products in China.  In addition, as our corporate headquarters are located in Taipei, any escalation in political tensions between the PRC and the government of Taiwan could impact adversely our ability to manage our Chinese operations efficiently or without third party interference.

Inflation in the PRC May Adversely Affect the Company’s Operations or Financial Condition

The rapid growth of the PRC economy has historically resulted in high levels of inflation, coupled with a rise in the value of RMB against U.S. dollars.  The PRC government has publicly announced its commitment to control inflation, and the anti-inflation policies of the PRC government may have an adverse effect on the business climate and growth of private enterprise in the PRC.  An economic slowdown may increase our costs.  If inflation is significant, our costs would likely increase, and there can be no assurance that we would be able to increase our prices to an extent that would offset the increase in our expenses.

PRC Power Shortages and Lack of Insurance May Adversely Affect the Company’s Operations or Financial Condition

We consume substantial amounts of electricity in our manufacturing processes at our production facilities in China.  Certain parts of China have been subject to power shortages in recent years.  We have experienced a number of power shortages at our production facilities in China to date, particularly in Shenzhen where numerous clusters of factories are situated. We are sometimes given advance notice of power shortages and in relation to this we currently have a backup power system at certain of our production facilities in China.  However, there can be no assurance that in the future our backup power system will be completely effective in the event of a power shortage, particularly if that power shortage is over a sustained period of time and/or we are not given advance notice thereof.  Any power shortage, brownout or blackout for a significant period of time may disrupt our manufacturing, and as a result, may have an adverse impact on our business.

The insurance industry in China is still at an early stage of development and foreign insurance companies are limited to operate only in a certain number of big cities.  In particular, PRC insurance companies do not offer extensive business insurance products.  As a result, we have limited business liability and disruption insurance coverage for our operations in China.  Any business disruption, litigation or natural disaster might result in our incurring substantial costs and the diversion of resources.

PRC Tax Treatments May Affect the Company’s Operations or Financial Condition

On March 16, 2007, the National People’s Congress of the PRC, passed the new PRC Enterprise Income Tax Law (the “New EIT Law”).  Under the New EIT Law, effective January 1, 2008, China adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises) and revoked the then current tax exemption, reduction and preferential treatments applicable to foreign-invested enterprises.  However, there is a transition period for enterprises, whether foreign-invested or domestic, that were receiving preferential tax treatments granted by relevant tax authorities at the time the New EIT Law became effective.  Enterprises that are subject to an enterprise income tax, or EIT, rate lower than 25% may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after the effective date of the New EIT Law.  Enterprises that are currently entitled to exemptions or reductions from the standard income tax rate for a fixed term may continue to enjoy such treatment until the fixed term expires. PEWS is the only subsidiary of the Company in the PRC that still enjoys a reduced tax rate under the transitional period.  The preferential income tax rate of PEWS under the revised tax incentive regulations was 22% in 2010 and 24% in 2011, and is 25% in 2012.  In the beginning of 2012, the Chinese government announced that it was contemplating a conversion of its sales tax system into a value added tax system (“VAT”).  While a change to a VAT system would help alleviate sales taxes to some extent, the details of the proposed changes are still unknown to industries and trading enterprises.  Accordingly, the Company cannot say what impact, if any, a conversion to a VAT system of taxation might have on the Company’s financial results.

Labor Law Legislation in the PRC May Adversely Affect the Company’s Operations or Financial Condition

The Labor Contract Law became effective on January 1, 2008.  It formalizes workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions.  Considered one of the strictest labor laws in the world, among other things, this new law requires an employer to conclude an “open-ended employment contract” with any employee who either has worked for the employer for ten years or more or has had two consecutive fixed-term contracts.  An “open-ended employment contract” is in effect a lifetime, permanent contract, which is terminable only in specified circumstances, such as a material breach of the employer’s rules and regulations, or for a serious dereliction of duty.  Such employment contracts with qualifying workers would not be terminable if, for example, the Company determined to downsize its workforce in the event of an economic downturn.  Under the new law, downsizing by 10% or more (or more than 20 persons) may occur only under specified circumstances, such as a restructuring undertaken pursuant China’s Enterprise Bankruptcy Law, or where a company suffers serious difficulties in production and/or business operations.  Any of the Company’s staff employed to work exclusively within the PRC are covered by the new law and thus, the Company’s ability to adjust the size of its operations when necessary in periods of recession or less severe economic downturns has been curtailed.  Accordingly, if the Company faces future periods of decline in business activity generally or adverse economic periods specific to the Company’s business, this new law can be expected to exacerbate the adverse effect of the economic environment on the Company’s results of operations and financial condition.  Additionally, this new law has affected labor costs of our customers which may result in a decrease in such customers’ production and a corresponding decrease in their purchase of our products.

Exposure to Foreign Exchange Risks

Changes in exchange rates influence our results of operations.  Our principal operations are located in Thailand, Australia, Singapore and China, and a substantial portion of our revenues is denominated in Baht, Australian dollars, Singapore dollars or Renminbi.  Nearly all of the raw materials for these operations are imported and paid for in U.S. dollars and a substantial portion of our future capital expenditures are expected to be in U.S. dollars.  We require a significant amount of U.S. dollars for our ongoing equipment upgrade and maintenance programs.  Any devaluation of the Baht, the Australian dollar, the Singapore dollar or the Renminbi against the U.S. dollar would increase the effective cost of foreign manufacturing equipment and the amount of foreign currency denominated expenses and liabilities and would have an adverse impact on our operations.

Although our reporting currency is U.S. dollars, the functional currency of our Thai operations, which accounted for 42.0% of our sales in 2011, is the Thai Baht. The functional currency of our Singapore operations, which accounted for 15.7% of our sales in 2011, is the Singapore dollar. The functional currency of our Australian operations, which accounted for 13.0% of our sales in 2011, is the Australian dollar. The functional currencies for our China operations, in total accounted for 29.3% of our sales in 2011, are divided into two groups: for Shandong Pacific Rubber Cable Company, Ltd. (“SPRC”, equity investee with 25% equity owned by APWC, accounting under equity method for consolidation purpose), SPFO  (which was disposed of on December 1, 2011) and SYE, their functional currency is Renminbi, while for CCH HK, PEWS and Epan Industries Pte. Ltd (“Epan Industries”) in Singapore, their functional currency is U.S. dollars. Accordingly, the functional currency accounts of these operations are all translated into U.S. dollars utilizing, for the year, the balance sheet exchange rate for balance sheet accounts, and an average exchange rate for the year for the income statement accounts.  Such translation of the functional currency accounts is recognized as a separate component of shareholders’ equity.  Any devaluation of the Baht, the Australian dollar, the Singapore dollar, or the Renminbi against the U.S. dollar would adversely affect our financial performance measured in U.S. dollars.

Competition

The wire and cable industry in the Asia Pacific region is highly competitive.  Our competitors include a large number of independent domestic and foreign suppliers.  Certain competitors in each of our markets have substantially greater manufacturing, sales, research and financial resources than we do.  We and other wire and cable producers increasingly compete on the basis of product quality and performance, reliability of supply, customer service and price.  To the extent that one or more of our competitors is more successful with respect to the primary competitive factors, our business could be adversely affected.

Risks associated with Required Productivity Increases

Our business strategy includes a focus on increasing profitability through increased efficiency and productivity.  In the event we are not able to implement measures to increase efficiencies and productivity, we may be limited in achieving increased profitability or may become less profitable.  Moreover, productivity increases are linked to capacity utilization rates.  A drop in the utilization rate of our manufacturing capacity would adversely impact productivity.

Indebtedness

A s of December 31, 2011, the Company had a total of $316.4 million in credit available to itself, or one or more of its operating subsidiaries. The available credit is provided by a total of 14 banks in the various regions/territories in which we operate.  Out of total available credit, $224.6 million was unused.  The Company, collectively and on individual basis, is not highly leveraged and management does not consider it to be likely that the Company will become highly leveraged. Weighted average borrowing rate, for all the outstanding loans combined, would sum up to be 3.71%, which runs slightly higher than like-kind borrowing rates in the marketplace, i.e., three month LIBOR (data of April 24, 2012) of 0.47% plus 2.5%.

Composite Services Agreement with PEWC

We engage in transactions in the ordinary course of business with PEWC, including the purchase of certain raw materials and the distribution of PEWC products in various countries in the Asia Pacific region.  We and PEWC have entered into a composite services agreement dated November 7, 1996, as amended and supplemented (the “Composite Services Agreement”), which contains provisions that define our relationship and the conduct of our respective businesses and confers certain preferential benefits on us.  The Composite Services Agreement is renewable at our option and is currently in force.  However, we are unable to predict whether PEWC would, at some future date, seek to limit, or be unable to perform in whole or in part, the business it conducts with the Company pursuant to the terms of the Composite Services Agreement.

Risks Relating to Thailand

A substantial portion of our Thai operations, which accounted for approximately 42.0% of our net sales in 2011, consists of the manufacture of telecommunications and power cable and sales of those products for use in large-scale telecommunications projects and various construction projects in Thailand.  As a result, our future results will depend in part on the political situation in Thailand and the general state of the Thai economy. Recent flooding in Thailand particularly in the greater Bangkok area, has caused a tremendous amount of damage to all industries, including one of our factories belonging to Siam Pacific.  APWC immediately organized an emergency rescue team comprising of engineers, technicians, and electricians to help restore the factory back to its operational mode. So far 90% of the machinery is restored and shipment to customers resumed with 281 tons in January 2012 and 588 tons shipped out in February.  However at the moment, Siam Pacific has experienced a slight delay in renewing its insurance policy in 2012, as most of insurance companies covering the Thai market are reluctant to bear the risk of providing companies with flood insurance coverage.

While the political turmoil in Thailand has subsided since 2010, the continuing political uncertainty and the risk of further social unrest lessens the attractiveness of the local market for foreign investment, and diminishes the focus of the government on infrastructure development, both of which considerations may adversely impact on the volume of business of the Company’s actual and potential customers in the Thai market.  The Company’s Thai operations remain vulnerable to uncertainties with regard to payment for current sales and the award of future contracts in view of the ongoing political instability in Thailand.  Additionally, in recent years the Thai economy has been highly cyclical and volatile, depending for economic growth in substantial part on a number of government initiatives for economic expansion. Moreover, the Baht remains volatile and subject to significant fluctuations in relation to the U.S. dollar.  Such fluctuations in the value of the Baht may negatively impact our performance.

Environmental Liabilities

We are subject to certain environmental protection laws and regulations governing our operations and the use, handling, disposal and remediation of hazardous substances used by us.  A risk of environmental liability could arise from our manufacturing activities in the event of a release or discharge by us of a hazardous substance.  Under certain environmental laws, we could be held responsible for the remediation of any hazardous substance contamination at our facilities and at third party waste disposal sites and could also be held liable for any consequences arising out of human exposure to such substances or other environmental damage.  There can be no assurance that the costs of complying with environmental, health and safety laws and requirements in our current operations or the liabilities arising from past releases of, or exposure to, hazardous substances, will not result in future expenditures by us that could materially and adversely affect our financial results, cash flows or financial condition.

Alternative Transmission Technologies

Our fiber optic and copper-based telecommunications business is subject to competition from other transmission technologies, principally wireless-based technologies.  Fiber optic cable is presently being used in telecommunications trunks and feeder cable businesses and minimally in the access cable business.  In November 2011 we sold our entire 51% equity interest in SPFO to a group of buyers in China for a cash consideration of $2.9 million, due to its low profit margin generation and fierce competition in the local fiber optic cable market. In the Asia Pacific markets where we compete, wireless telecommunications businesses have sometimes made substantial inroads in early emerging markets where sufficient funding may not then be available to install the infrastructure necessary for market-wide fixed line telecommunications.  In addition, the ease of use of wireless telecommunications may make that medium an attractive alternative in circumstances where access to fixed line telecommunications is limited.  While these technologies do present significant competition in the markets in which we conduct or plan to conduct business, the Company believes that demand for its fixed wire products will remain strong.  However, no assurance can be given that the future development and use of such alternative technologies will not adversely affect our results of operations.

International Business Risks

We are subject to risks specific to our international business operations, including:  the risk of supply disruption; production disruption or other disruption arising from events of force majeure, such as the severe weather and climatic events that caused the 2011 floods in Thailand; the outbreak of highly infectious or communicable diseases such as Severe Acute Respiratory Syndrome, swine influenza or pandemics of a similar nature; the risk of potential conflict and further instability in the relationship between Taiwan and the PRC; risks related to national and international political instability, such as disruptions to business activities and investment arising out of the political unrest and turmoil in Thailand; risks related to the recent global economic turbulence and adverse economic developments in a number of Asian markets; unpredictable consequences on the economic conditions in the U.S. and the rest of the world arising from terrorist attacks, and other military or security operations; unexpected changes in regulatory requirements or legal uncertainties regarding tax regimes; tariffs and other trade barriers, including current and future import and export restrictions; difficulties in staffing and managing international operations in countries such as Australia, Singapore, the PRC, Thailand and Taiwan; risks that changes in foreign currency exchange rates will make our products comparatively more expensive; limited ability to enforce agreements and other rights in foreign countries; changes in labor conditions; longer payment cycles and greater difficulty in collecting accounts receivable; burdens and costs of compliance with a variety of foreign laws; limitation on imports or exports and the possible expropriation of private enterprises; and reversal of the current policies (including favorable tax and lending policies) encouraging foreign investment or foreign trade by our host countries.  Although we have not experienced any serious harm in connection with our international operations, we cannot assure you that such problems will not arise in the future. 

Principal Capital Expenditures and Divestitures

Total purchases of property, plant and equipment amounted to $3.3 million in 2009, $3.7 million in 2010, and $8.9 million in 2011, mostly for old machinery replacements for Australia Pacific Electric Cable Pty Limited (“APEC”) and Sigma Cable Company (Private) Limited (“Sigma Cable”), and for newly purchased production machinery and equipment for Ningbo Pacific Cable Co., Ltd. (“NPC”).

4.2.1 Certain Recent Events

On April 30, 2012, the Company announced certain of its financial results for the fiscal year ended December 31, 2011, which included gross revenue of $471.9 million, net loss from continuing operations of $3.9 million and loss per share from continuing operations of $0.49.  

On March 21, 2012, the Company announced that it has been awarded three new supply contracts in Singapore valued at approximately $87 million.

On February 9, 2012, the Company announced the appointment of MZ-HCI as APWC’s new investor relations firm.  The contract with MZ-HCI would provide APWC with total solution in terms of investor relations work, investor relations website design, press releases and XBRL report printing with reduced costs.

On October 7, 2011, the Company’s shareholders passed a resolution at the Annual General Meeting (“AGM”) adopting the third amended and restated bye-laws of the Company (the “Bye-Laws”), which allow the Company to purchase its own shares for cancellation or acquire them to be held as treasury shares, as provided for in Section 42B of the Companies Act, and to be applied or allotted for any of the purposes permitted by said Section 42B.  At the AGM, the shareholders also elected to the Board each of the Directors named in Item 6 of this Annual Report.

On September 7, 2011, the Commission declared effective the Company’s Post‑Effective Amendment No. 8 to a registration statement on Form F‑1 reporting on and converting to Form F‑3, covering 2,766,154 Common Shares, of which 1,410,739 Common Shares are held by PEWC and 1,355,415 Common Shares are held by COF.  

On April 29, 2011, the Common Shares of the Company commenced trading on the NASDAQ Capital Markets tier.

On March 17, 2011, the Board passed resolutions whereby 1) it accepted the resignation of an existing director, Mr. Lee Gai Poo, 2) it appointed a new member to the Board, Dr. Lambert Ding, as an independent director, who also serves as a member of the Audit Committee, and 3) it passed on amendment to the Audit Committee charter, to clarify that the appointment of the independent auditors is subject to shareholder approval.

4.2.2 Managing Our Business in Current Market Conditions

In order to address the continuing market challenges facing our business, the Company has taken and plans to continue to implement a number of measures in order to maintain efficient operations.

Specifically, the Company has continued to focus on increased efforts to collect its receivables on a timely basis.  The days of sales outstanding in 2011 have improved from 102 days to 92 days. The Company continues to focus on working actively with all of its significant customers to reduce collection times and minimize write-offs.  The Company has also reduced its inventory levels through planned reductions in raw material purchases while negotiating with suppliers to reduce costs of raw materials and supplies.  The Company has focused also on reducing operating costs where practicable. Overall the Company has decreased its headcount by 92 since the beginning of 2011, which reflected management’s view that the business of APWC would experience some slowness in 2011, which would also cause an erosion on net income for the fiscal year.  Accordingly, headcount reduction became one of the cost containment measures taken by the Company.  The Company has entered into certain copper futures contracts in Singapore and at CTW in several instances in order to reduce the effect of the current volatility in copper prices on its operations.  The Company has also negotiated and finalized arrangements with banks for additional loans and credit facilities to be applied against construction of NPC’s plant.

We believe that the successful implementation of these actions has had a positive effect on our cash resources, and we intend to continue these measures in order to preserve our liquidity and maintain a strong cash position.  As of December 31, 2011, the Company had available and unused lines of credits from suppliers, banks and other lenders totaling, in the aggregate, approximately $224.6 million, an increase of $38.6 million from a year ago. We believe however that available and unused amounts of credit are sufficient to support our current working capital needs. The total bank loans and trust receipts outstanding as of year-end 2011 were also reduced to the lowest level in some time, from $67.4 million in 2010 to $52.8 million in 2011, reflecting the downward trend of copper price at end of fourth quarter 2011 and also our effort in controlling the raw material stock level.

4.2.3  Recent Business Trends

APWC experienced a 5.7% growth in overall revenues in 2011 over 2010, but suffered a decrease in gross margins of 3.5% in 2011 when compared with that of 2010. Operating profit was down from $28.7 million in 2010 to $1.9 million in 2011, due to the fact that the Company wrote off goodwill in the amount of $8.8 million and Siam Pacific incurred flood damage of $3.9 million. The gross margin erosion in 2011 can be attributed primarily to two factors: 1) the copper price per tonnage in 2011 increased by 17% whereas our average selling price only increased by 11.7% and 2) our factory machinery utilization rate was below the optimal level.  The cost of sales increased as a result of the 2011 drop in our factory utilization rate.  The material decline in gross margin, and the other factors that impacted adversely on our results, yielded loss per share of $0.49 per share in 2011 compared to earnings per share of $1.02 in 2010.

4.3 Business Overview

The Company is a holding company that operates its business through operating subsidiaries and joint ventures, principally located in Thailand, China, Singapore and Australia.

The following chart shows the organizational structure of the Company and its principal operating subsidiaries, including joint venture ownerships, and the percentage of ownership interest and voting power in each case.  The location of the headquarters of each company is indicated in parentheses under the company’s name (“S” for Singapore, “T” for Thailand, “A” for Australia and “C” for China or Hong Kong).

Thailand

The Company’s Thai operations are conducted through Charoong Thai, Siam Pacific and Pacific-Thai Electric Wire & Cable Co. Ltd. (“Pacific Thai”). Pacific Thai was transferred into Siam Pacific in March 2011.

Charoong Thai is a publicly-traded Thai corporation, the shares of which are listed on the Stock Exchange of Thailand (“SET”).  It manufactures aluminum and copper electric wire, medium and high voltage power cable and telecommunications cable.  It has subsidiaries and affiliates in the businesses of optic fiber cable manufacturing and telecommunication and network services.  Charoong Thai was established in Thailand in 1967 as a limited public company.  As of December 31, 2011, the Company effectively owned 50.93% of the issued and outstanding shares of Charoong Thai.  The Company’s present intention is to maintain majority ownership of the voting securities of Charoong Thai.  The board of directors of Charoong Thai may authorize the issuance of additional shares of common stock of Charoong Thai.  The Company has preemptive rights to purchase its pro rata share of any additional authorized shares, less amounts reserved for directors, officers and employees.  In the event the board of Charoong Thai decides to cause it to issue additional shares, the Company may decide not to exercise its preemptive rights, in which case the Company’s interest may be diluted.

Siam Pacific was established in 1988 as a joint venture between PEWC and Italian-Thai Development Plc (“Ital-Thai”), a third party, which at the time was the largest diversified construction company in Thailand, 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, Siam Pacific was able to establish its presence in this market and gain knowledge of business opportunities in Thailand.  Siam-Pacific is now a 100%-owned subsidiary of Charoong Thai and it focuses on the manufacture of telecommunications cable, and enameled wire for the domestic Thailand market. As stated above, the Siam Pacific operation suffered a flooding damage in September and October of 2011 but with the support from affiliated companies in Taiwan and in China, Siam Pacific is expected to resume full operations by the end of the second quarter 2012.

Pacific Thai (now transferred into Siam Pacific) was established in 1989 as a wholly-owned subsidiary of Siam Pacific.  Pacific Thai produced enameled wire for export only.

Based on information published by the Thai Ministry of Commerce on sales by dollar value, the Company believes that Siam Pacific and Charoong Thai are two of leading telecommunications and power cable and wire manufacturers in Thailand and are two of a very limited number of the government-approved suppliers of telecommunications cables for major public telecommunications projects in Thailand.

In a restructuring that included the transfer of the business of Pacific Thai into Siam Pacific, the Company achieved a reorganization, which has generated cost savings while improving overall efficiency.  The Company believes the synergistic effect of merging these operations will continue to produce significant savings in overhead cost as it facilitates the centralization of decision making and resource allocation for the Thai operations. Management of Pacific Thai and Siam Pacific was consolidated into Charoong Thai in order to enhance synergies and provide greater sharing of expertise. For example, each of Charoong Thai and Siam Pacific manufactures and distributes enameled wire and they are now in a better position to share technical expertise and resources. Under the restructuring, APWC owns 50.93% of Charoong Thai, which owns 100% of Siam Pacific. However, Siam Pacific continues to report its results separately to APWC headquarters.

China

The Company’s China operations are conducted through seven business entities – Shanghai Yayang,  CCH HK, PEWS, NPC, SPFO (which was disposed of in December 2011), SPRC (equity investee), and SHP (equity investee).  The operating entities include Shanghai Yayang, formerly known as Shanghai Pacific Electric Co., Ltd., a joint venture in Shanghai incorporated in June 1998 to manufacture enameled wires.  The Company’s effective holding in Shanghai Yayang is 54.41%.  Shanghai Yayang manufactures enameled wires with a diameter between 0.05mm and 2.5mm for sale and distribution in the eastern part of China, including to local and Taiwanese based end-users. Sitting on the board are six directors, either members of management of Shanghai Yayang who are expatriated from Taiwan or Thai representatives, also expatriated or designated by APWC or PEWC.

The Company owns 100% of CCH HK, a Hong Kong registered company, and its wholly-owned subsidiary company, PEWS.  PEWS manufactures enameled wires for electric, video and audio products primarily for export and with a little portion sold domestically. Since a restructuring in the first quarter of 2010, CCH HK is no longer the trading arm of PEWS, as it transferred its distribution role to Epan Industries in Singapore. The Company believes that PEWS is one of the major manufacturers of enameled wire products in the southern Chinese market. 

Until 2006, the Company’s China operations included NPC, a telecommunications cable manufacturing joint venture located in Ningbo Yin County, Zhejiang Province in eastern China.  The other owner of NPC is China Ningbo City Yin Jiang County Yin Jiang Town Industrial Corporation.    NPC used to manufacture a range of telecommunications cable and local area network (“LAN”) electronic cables for sale and distribution in the Chinese domestic market and export market.  In 2006, the Company decided to cease operations at NPC, as it concluded that the prospects for reversing the losses and achieving profitability were too remote. Thereafter, the Company liquidated certain machinery and equipment through sales to third parties.  The land, building and some leftover machinery and equipment remained with NPC.  In December 2009, the Company started a series of discussions with Bangkok Bank Hong Kong branch on a possible loan which would provide a cash infusion and a trade finance facility, each aimed at re-building NPC to be a viable operation focusing on producing electronic wiring. The new business draws upon the experience of, and technology from, our parent company, PEWC. The loan facility agreement was finalized in March 2011, thereby allowing for a total cash contribution of $14 million and a trade credit line of $8 million, with the first tranche of capital funding of $5 million infused to NPC at the end of May 2011, increasing APWC’s ownership to 95.80%. The construction of NPC’s factory is divided in two phases with the existing plant finished in October 2011 and the new plant targeted to be completed by the end of 2012.

In November 2011, the Company sold its 51% interest in SPFO, a joint venture company in Yanggu County, Shandong Province, China.  SPFO was established to manufacture fiber optic cables for the China market.  The Company determined that its resources in the China market are better deployed in further developing its core wire and cable business, rather than seeking to establish itself in the fiber optic business.

The Company holds a 25.0% interest in SPRC, which manufactures rubber cable for the China market.  The remaining 75% is owned by Shandong Yanggu Wire & Cable Corp. Ltd. (“Shandong Yanggu”), an established cable manufacturer in Shandong Province that produces a wide range of cable products and is considered one of the major cable producers in China.

The Company holds a 49% interest in a joint venture called SHP, which engages in the manufacture of optic fibers.  The remaining 51% of SHP is owned by Hebei Huayu Co. Ltd. (as the successor in interest to Shandong Yanggu).  Due to a severe downturn in the market for fiber optic cable after the SHP joint venture was established, the plant intended to be constructed for manufacturing fiber optic cable has yet to be completed and a production date for commencing operations has not been determined.  The actual commencement of operations, if it occurs at all, will depend on our ongoing assessment of market conditions.  The carrying value of the Company’s investment in SHP was $1.2 million as of December 31, 2011.  In the event that the commencement of operations continues to be delayed indefinitely or the joint venture determines to forego planned operations, due to continued depressed conditions in the fiber optic cable market, or other factors are determined to have a direct impact on the assessed value of SHP, the Company will recognize impairment losses in the foreseeable future that could result in the full write-off of its investment in SHP. SHP is currently seeking out potential buyers to take over the business.

Singapore

The Company’s Singapore operations are principally conducted through its 98.3%-owned subsidiary, Sigma Cable.  The Company believes that Sigma Cable is one of the major suppliers of power cable products in Sing apore.  Sigma Cable manufactures and sells a range of low voltage power cable products, used mainly in infrastructure projects and commercial and residential developments.  Sigma Cable is also the exclusive distributor in Singapore of medium and high voltage wire and cable products manufactured by PEWC.

Sigma Cable also has project engineering operations in Singapore to supply, deliver and install 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 modest demand for medium and high voltage power cable projects sponsored by Singapore government.

The Company also holds a 100% interest in Sigma-Epan Industries, Pte. Ltd. (“Sigma-Epan”), a group of companies with its headquarters and limited operations in Singapore. Prior to ceasing manufacturing operations in May of 2007, Sigma-Epan manufactured specialty cables and assembled cable harnesses for the electronics, computer, building automation, audio and communication industries. Sigma-Epan continues to trade specialty electronic and other types of cables. After the Company’s restructuring, which was completed in April 2010, Epan Industries, one of the subsidiaries of Sigma-Epan, became the trading arm for PEWS products in the South China market.

Australia

The Company went through a group restructuring in March 2010. CCH HK acquired 51% of APEC shares from Sigma Cable, thereby increasing the Company’s effective interests in APEC from 98.53% to 99.4%. APEC is located near Brisbane and is one of three major wire and cable manufacturers in Australia.  APEC produces a range of power cables supplemented by imports from overseas sister companies.  APEC possesses a substantial marketing and distribution infrastructure with a network of sales offices and warehouses in the major capital cities of Brisbane, Sydney, Melbourne and Perth.

4.3.1     Products and Services

The Company engages in three principal business lines consisting of the manufacture of wire and cable products, the distribution of certain wire and cable products manufactured by PEWC, as well as some third party products, and the provision of project engineering services to certain of its customers.  The Company manufactures and sells a wide variety of wire and cable products primarily in three general categories:  telecommunications cable, power transmission cable, and enameled wires.   The Company’s telecommunications and power cables are used in a range of infrastructure projects and in commercial and residential developments.  The Company’s enameled wire is used in the manufacturing of components and sub-components of household appliances and small machinery.  The electronic cables, which include cable harnesses, are used in the electronics, computer, building automation, audio and communication industries.  In addition, the Company acts as the Singapore distributor of wire and cable products manufactured by PEWC.  The Company also offers SDI project engineering services of medium and high voltage cable for power transmission projects in Singapore. 

Distribution Products

The Company has a sales and marketing force for the distribution of its Manufactured Products in the markets where it has manufacturing facilities and in certain other Asian markets.  In addition, the Company is a distributor of wire and cable products manufactured by PEWC.  The leading PEWC products sold by the Company are medium and high voltage power cable (with capacities ranging from 3.3 kilovolts to 69 kilovolts), with the vast majority of such sales made in Singapore.  The PEWC products sold by the Company do not compete with the Company’s Manufactured Products. In addition, certain subsidiaries also sell distributed products from other suppliers in Thailand and Australia during 2011.

SDI Project Engineering Services

Based upon the needs of government and the private sector with regard to residential and commercial buildings and infrastructure projects in Singapore, the Company anticipates modest demand for medium and high voltage power and for value added services in the power supply industry.  To take advantage of these opportunities, the Company has developed its SDI project engineering capability.  The SDI project engineering involves supply, delivery and installation primarily of medium and high voltage cable to power transmission projects in Singapore.  After entering into a contract to supply, deliver and install cable for a power transmission project, the Company delivers medium and high voltage cables and enters into subcontracting agreements with local companies to install the cable as required by the project.  As reported in a Company press release on March 20, 2012, Sigma cable has additionally won three new SDI projects totaling US$87 million with duration spreading out over three years.

4.3.2     Manufacturing

Copper rod is the base component for most of the Company’s products.  The manufacturing processes for these products require that the rod be “drawn” and insulated.  In the “drawing” process, copper rod is drawn through a series of dies to reduce the copper to a specific diameter.  For certain applications, the drawn copper conductor is then plated with tin.  Copper used in cable is covered with various insulating materials that are applied in an extrusion process.  The insulated wires are then combined, or “cabled” to produce the desired electrical properties and transmission capabilities.  Then, depending upon the cable, some form of protective 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

The Company produces a wide range of bundled telecommunications cable for telephone and data transmissions with different capacities and insulations designed for use in various internal and external environments principally as access cable to connect buildings and residents to trunk cables.  Telecommunications cables produced by the Company include copper-based and fiber optic cables.

Production of copper-based telecommunications cable begins by drawing a copper rod until it has reached the desired diameter, after which the drawn wires are subjected to a process called “annealing” in which the wires are heated in order to make the wires softer and more pliable.  Utilizing an extrusion process, which involves the feeding, melting and pumping of a compound through a die to shape it in final form as it is applied to insulate the wire, the wires are then covered by a polyethylene (“PE”) or polyvinyl chloride (“PVC”) compound and foam skin, suitable for different installations and environmental conditions.  In order to reduce the cross-talk between pairs of communication wires, the insulated wires are then “twinned” or twisted so that two insulated single wires are combined to create a color-coded twisted pair.  The twisted pairs of wire are then “cabled” or “stranded” into units of 25 twisted pairs for combination with other 25 pair units to form cable of various widths and capacities.  The appropriate number of units is cabled together after stranding to form a round cable core.  Depending upon the planned environment, a petroleum jelly compound may then be added to fill the cable core to seal out moisture and water vapor.  Aluminum or copper tape is used to “shield” the cable and, finally, the shielded cable core is covered by plastic outer sheathing.  The Company manufactures telecommunications cable with capacities and sizes ranging from 25 to 3,000 pairs of 0.4 mm-diameter wire to 10 to 600 pairs of 0.9 mm-diameter wire.

Power Cable

The Company produces a range of armored and unarmored low voltage power transmission cable.  Low voltage power cable, generally considered to be cable with a capacity of 1 to 3.3 kilovolts, is typically used to trans mit 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.

Production of unarmored cable begins by drawing and annealing of copper rods.  The drawn copper wires are then stranded or “bunched” into round or sector-shaped conductors in sizes ranging from 1.5 square millimeters to 1000 square millimeters.  The copper conductors are then covered in an extrusion process with a plastic insulator such as PVC, after which 2-5 conductors are twisted into a circular cable core in a cabling process and covered by a plastic outer cover.

Unarmored cable is composed of one or more cores of copper wire, insulated by substances such as PVC.  Armored cable is produced in the same manner and the same range of configurations as unarmored cable, but with the addition of an outer layer of galvanized steel or iron wires to protect the cable from damage.

Enameled Wire

The Company also produces several varieties of enameled wire.  Enameled wire is copper wire varnished, in an enameling process, by insulating materials.  The enameling process makes the wire more resistant to oil, heat, friction and fusion, and therefore suitable for use in machinery and components and sub-components of manufactured goods.  The Company manufactures enameled wire in sizes that range from 0.02 mm to 4.00 mm in diameter, varnished by various types of petroleum insulation materials including polyvinyl formal, polyurethane wire and polyester, among others.  Enameled wire products are used in the assembly of a wide range of electrical products, including oil-filled transformers, refrigerator motors, telephones, radios, televisions, fan motors, air conditioner compressors and other electric appliances.

4.3.3     Raw Materials

Copper is the principal raw material used by the Company for copper-based products.  The Company purchases copper at prices based on the average prevailing international spot market prices on the LME for copper for the one month prior to purchase.  The price of copper is influenced heavily by global supply and demand as well as speculative trading.  As with other costs of production, changes in the price of copper may affect the Company’s cost of sales.  Whether this has a material impact on the Company’s operating margins and financial results depends primarily on the Company’s ability to adjust selling prices to its customers, such that increases and decreases in the price of copper are reflected in those selling prices.  Most sales of the Company’s Manufactured Products reflect copper prices prevailing at the time the products are ordered.  A long-term decrease in the price of copper would require the Company to revalue the value of its inventory at periodic intervals to the then net realizable value, which could be below cost. 

The Company purchases copper in the form of rods and cathodes.  Copper cathodes are thin sheets of copper purified from copper ore.  Copper purchased by the Company in the form of cathodes must be sent to subcontractors to be melted and cast into the copper rods necessary for the manufacturing processes, for a processing fee equal to approximately 3.5% (based on the Company’s past experience) of the copper cathode purchase price.  The Company presently relies on the services of Thai Metal Processing Co., Ltd., the Company’s long term equity investment, to process its copper cathodes into copper rods in Thailand, although the Company has a variety of processing companies from which to obtain these services.  Construction of such a processing facility could also be an additional source of revenues and profit, to the extent that sales are made to unaffiliated parties.  Copper rods are drawn into copper wire for the production of telecommunications cable, power cable and enameled wire.

The Company has historically purchased a substantial portion of its copper rods from PEWC.  Under the Composite Services Agreement between the Company and PEWC, PEWC agreed to supply to the Company on a priority basis its copper rod requirements at prices at least as favorable as prices charged to other purchasers in the same markets purchasing similar quantities.  PEWC continues to be the principal supplier of copper rods to the Company’s operations in other Asian countries.  Under the Company’s copper rod supply arrangements, orders will be 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 both copper cathodes which are subjected to a 1.0% import tariff, and copper rods which normally are subject to a 5.0% import tariff for its Thailand operations. The key suppliers are Sterlite Industries (India) Ltd - India, PEWC-Taiwan, Prime Global Corp.-Korea, Lanexang Mineral Ltd.-Laos and the Mitsubishi Corporation Unimetal Ltd.-Japan, Mitsubishi Corporation, Glencore International AG., and Marubeni Corporation. The Company has regularly signed one-year contracts with each of the copper suppliers, pursuant to which the Company agrees to purchase a set quantity of copper each month. Under the terms of such contracts, the price of copper is usually pegged to the monthly average of the spot price of copper on the LME for the delivery month (M-0), or 1 month before delivery month (M-1) plus a premium. The Company has almost two decades of good relationships with many copper suppliers, and currently believes that the copper suppliers will be capable of providing an adequate supply of copper for the Company’s requirements. The Company does not anticipate any change in relations with its copper suppliers in the near term.

The Company attempts to maintain approximately a three to five week supply of copper rods and cathodes for its Thai operations and approximately a two to four week supply in Singapore.  In PEWS, the Company generally maintains one to two weeks of supply of copper rods and cathodes.  In APEC, the copper supply was maintained at one to two weeks during 2011. In Epan Industries whose copper is purchased through CCH HK, approximately three weeks of copper supply is preserved for manufacturing purposes.  The Company has never experienced a material supply interruption or difficulty obtaining a sufficient supply of copper rod or cathode.

Other raw materials used by the Company include aluminum used as a conductor in power cable and petroleum-based insulation materials such as PE, PVC and jelly compounds for insulating covers on cables and varnishes on enameled wire; aluminum foils for sheathing of communication cable; and galvanized steel wire for the production of armored wire.  The Company has not had any difficulty in maintaining adequate supplies of these raw materials and expects to continue to be able to purchase such raw materials at prevailing market prices.

Other than import tariffs in Thailand, the Company does not face any restriction or control on the purchase or import of its raw materials.  The Company may freely choose its suppliers and negotiate the price and quantity of material with its suppliers.  The Company formulates consumption plans for raw materials regularly and continually monitors market conditions in respect of the supply, price and quality of raw materials.

Inflation would increase the cost of raw materials and operating expenses for the Company.  The Company would try to maintain its gross margins by increasing the prices of its products.   

4.3.4     Quality Control

The Company places a significant emphasis on product quality.  The Company has implemented a range of quality control procedures with stringent quality standards under the supervision of dedicated quality control staff.  Quality control procedures are implemented from the raw material to the finished product stages at each of the Company’s major production facilities.  Raw materials are inspected to ensure they meet the necessary level of quality before production begins.  During the manufacturing process, quality control procedures are performed at several stages of production.  Upon completion, finished goods are brought to quality control centers set up in the factory for inspection and testing of different electrical and physical properties.

Depending on the requirements of its customers, the Company has the capability to manufacture its products to meet a variety of different quality and production standards.  These include local standards and certifications, such as the Singapore Institute of Standards and Industrial Research Quality Mark and the Thailand Industrial Standard, as well as other standards including the National Electrical Manufacturers Association Standard, the British Standard, the Japan Industrial Standard and Underwriters Laboratories Inc. Standard, as applicable.

All the major companies in the group have attained International Standards Organization (“ISO”) 9002 certification for quality management and assurance standards in the manufacture of electric wire and cable and have maintained that certification for at least the last ten years.  The certifications mean that the companies have in place quality assurance systems and the capability to consistently manufacture products of quality.

4.3.5          Sales and Marketing

The Company’s telecommunications cable and power cable products are primarily sold in the domestic markets of the countries where they are manufactured, whereas most of the enameled wire manufactured by the Company in Thailand is exported.  Enameled wire sold by Epan Industries in Singapore is manufactured by PEWS in Shenzhen, China.  The enameled wire is also exported to the customers throughout Southeast Asia.  The following table sets forth the Company’s sales revenues for the periods indicated among its three business segments — i.e., Manufactured Products, Distributed Products, and SDI and, within the Manufactured Products segment, by geographic locations of manufacturing, together with their respective percentage share of total sales for such periods.

(Figures in 2009 and 2010 were restated to reflect the results of discontinued operations of SPFO. For details, see “Item 5.3: Operating Results”)     

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 most significant component of the Company’s wire and cable products, the price of the Company’s products depends primarily upon the price of copper.  In order to minimize the impact of copper price fluctuations, the Company attempts to determine the prices of its products based on the prevailing market price of copper.  The Company may be affected, to a degree, in the short term by significant fluctuations in the price of copper.  In 2011, a $ 2.3 million forward purchase contract was entered into by Siam Pacific, Sigma Cable, and Charoong Thai to reduce the impact of fluctuations in the copper sale price.

Payment methods for the Company’s products vary with markets and customers.  The majority of sales by the Company of its Manufactured Products requires 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% in either case 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 offers financing for purchases of the Company’s products.  Except for PEWS, CCH HK and Epan Industries, the Company’s subsidiaries sell their 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”. Products manufactured by Sigma Cable are sold under the “Sigma Cable” brand.

Thailand

The Company produces and sells telecommunication cable, enameled wire and power cable in Thailand. Charoong Thai is one of the leading cable manufacturers in Thailand. Our distribution channels are both direct sell and agencies to the government and private sectors. The major customers of the Company are many prominent clients working with the government and contractors ( True Corporation Plc (“True”) , TT&T (“Triple T”), etc.), subcontractors, and distributors for the private sector. Charoong Thai successfully concluded many projects, for instance, Suwannabhumi International Airport, Government Center, PTT Maptaput, and BRT (Bus Rapid Transit).

Singapore

The Company produces and sells low voltage power cable in Singapore.  In addition, the Company sells a wide range of wire and cable products produced by PEWC.  The Company also offers project engineering services for the SDI of medium and high voltage power cable to power transmission projects in Singapore.

In Singapore alone, sales of Manufactured Products in 2011 accounted for 70.6% of the net sales in Singapore; sales of Distributed Products in 2011 accounted for 7.8%, the remaining 21.6% representing SDI project engineering services. In 2011, sales of SDI project engineering services to SP Powerassets Ltd. accounted for 100% of the Company’s SDI sales. Such sales are under a comprehensive contract, with purchase orders placed from time to time with the Company by SP Powerassets Ltd.  Sales of Manufactured Products, i.e., power cable since 2009 have been as follows:

China

The Company produces and sells copper-based telecommunication cable and enameled wire in China.  The Company’s China operations are conducted through five business entities.  Copper-based telecommunication cables are generally sold to the national, provincial or local offices of the fixed-line and mobile telecommunications network operators or sub-contractors of such agencies.  The Company generally sells enameled wire directly to manufacturers of electric motors for use in various consumer appliances.

4.3.6        Competition

The wire and cable industry in the Asia Pacific region is highly competitive.  The Company’s competitors include a large number of independent domestic and foreign suppliers.  Certain competitors in each of the Company’s markets have substantially greater manufacturing, sales, research and financial resources than the Company.  The Company and other wire and cable producers increasingly compete on the basis of product quality and performance, reliability of supply, customer service and price.  To the extent that one or more of the Company’s competitors is more successful with respect to the primary competitive factors, the Company’s business could be adversely affected.

Thailand

The wire and cable industry in Thailand is highly competitive.  In its various product lines, the Company competes with a total of approximately thirty local wire and cable manufacturers and, to a lesser extent, with foreign producers for sales in Thailand of telecommunications cable, power cable and enameled wire.  The Company is one of the five largest producers in the Thai market.  These five largest producers are the only producers of telecommunications cable approved by the Thai Industrial Standards Institute and, therefore, the only cable producers whose products may be used in government-commissioned projects.  Stringent governmental approval processes, tariffs and other import restrictions have limited competition in the Thailand market from foreign wire and cable producers.  The Company also experiences significant competition from a number of smaller producers with regard to sales of enameled wire products.

Singapore

The Company believes that Sigma Cable is one of the major suppliers of power cable products in Singapore, it experiences significant competition from other local producers. There is no tariff or other barrier against foreign competition in the local Singapore market and potential competitors are free to enter the industry.  However, because of high capital costs, the Company believes it is unlikely that there will be new domestic entrants to the wire and cable industry in Singapore in the near future.

Australia

Currently, besides APEC, there are two major wire and cable producers in Australia:  Olex Cables (owned by Nexans) and Prysmian Cables, with factories in the states of Victoria and New South Wales, respectively.  Also, Advance Cable, a cable producer with a factory in Victoria, has recently obtained a bigger market share. In addition, a significant portion of the Australian market is serviced by two importers:  (i) General Cables Australia, which imports cables from its parent company General Cables, which manufactures cables in New Zealand and (ii) Electra Cables, which imports cables from factories in China.  These companies are APEC’s principal competitors.  APEC however is the only power cable producer in Queensland and therefore seeks to take advantage of its comparative proximity to customers in contrast to competitors that are required to transport their products into Queensland from other states in Australia.   APEC has also opened sales offices with warehousing facilities in Sydney, Melbourne, Brisbane, and Perth in order to attract and service the customers in those regions. In February 2011, APEC entered into a distribution agreement with one of the regional suppliers with the hope that this collaboration will bring extra business to Australia operations. Foreign competition barriers exist with import duties and the more stringent Australian cable specifications standards.  Asean (Association of South East Asian Nations) Free Trade Area (AFTA) Agreements are in effect with Singapore and Thailand, among other Asian countries.

China

PEWS manufactures enameled wires in the Shenzhen Special Economic Zone in Guangdong Province for electronic, video and audio products for the South China market and for export.  After a restructuring, Epan Industries, one of the subsidiaries of Sigma-Epan, became the trading arm of PEWS. It supplies mainly to overseas transformer, motor and coil manufacturers.  It faces competition principally from overseas imports and local manufacturers.

Shanghai Yayang is the only major enameled wire producer in Shanghai and it supplies mainly to transformer, motor and coil manufacturers in the eastern part of China.  It faces competition principally from overseas imports and manufacturers from other provinces in China.

In 2011, the Company made a strategic decision to exit the fiber optic cable market in Shandong Province by disposing of our 51% equity interest in SPFO. We observed increasing consolidation, and competition, in the fiber optic cable business in Shandong and concluded that our resources were better deployed by concentrating on our principal lines of copper-based Manufactured Products in that market.

4.3.7        Regional Considerations

The principal Asian markets in which we do business have displayed exceptional overall economic growth in recent years compared to the United States and a number of other more developed markets, subject to occasional episodes of economic and currency exchange volatility attributable to various factors including the increased risks of emerging market investment, actual or potential political instability and pandemics such as the SARS health crisis several years ago.  In some countries, the International Monetary Fund (the “IMF”) exerts considerable influence over economic policy and provides support to stabilize the domestic economy.  In general, the Asian markets in which we do business have been export-driven in recent years and have in the case of China and Singapore, for example, accumulated considerable capital reserves, which contributes to a more stable business environment.

Thailand

A substantial portion of the Company’s Thai operations, whose Manufactured Products accounted for approximately 39.4% of the Company’s net sales in 2011, consists of the manufacture of telecommunications and power cable and sales of those products for use in large-scale telecommunications projects and various construction projects in Thailand.  The volume of sales of these products tends to correlate with the general level of economic activity in Thailand.  As a result, the performance of the Company’s Thai operations depends in significant part on the general state of the Thai economy.  Infrastructure development and related construction projects in Thailand depend significantly upon government sponsored initiatives.  In recent years, the level of government involvement in infrastructure development has tended to track increases or contractions in Thailand’s gross domestic product (“GDP”).  Overall, the construction industry and infrastructure projects have slowed considerably, thereby affecting local sales, placing competitive pressure on prices and prompting the Company to rationalize Thai operations and actively seek overseas export markets.

Telecommunications

Sales of the Company’s telecommunication products in Thailand have depended to a significant degree on the substantial investment in and development of the telecommunications sector by the Thai government.  In particular, the Company’s sales of Manufactured Products are affected by the dollar value of contracts awarded by the government for telecommunications and other infrastructure projects.

The Company produces and sells copper core telecommunications cable, enameled copper wire and enameled aluminum wire to Thailand market, and also export enameled wire to overseas markets. Sales of telecommunications cable, one of the Company’s leading product in Thailand, are conducted either by tender for participation in large scale telecommunications project of the Telephone Organization of Thailand Corporation Plc. (“TOT”), or direct to subcontractors of Triple T and True, the two private telephone line contractors which would be licensed by TOT with regard to particular projects. The Company generally sells enameled wire directly to electrical appliance manufacturers or an OEM for both the local and export market, and in smaller units that are sold to local dealers.

Power

In Thailand, the prevailing historical trend has been that economic growth would stimulate rapid growth in the demand for electric power, and annual rates of growth in electricity demand would outpace annual economic growth rates.  Despite the rapid growth in electricity demand, electricity consumption in Thailand remains low by international standards.  The Company believes that, in the medium to longer term, there will be an increased demand for power supply which will lead to increased demand for the Company’s power cable products from both developers of power production facilities and contractors installing power supply lines. 

Singapore

The Company’s distribution and project engineering business segments are concentrated in the Singapore market.  In 2011, the Company realized $17.0 million in revenues from SDI projects, compared to $23.6 

The Singapore government has established targets to increase the population from 4.6 million in 2007 to approximately 6 million by the end of 2020.  This planned growth in population is expected to result in an increase in demand for residential property and construction. The Company continues to seek ways to increase its business volume in its project engineering business segment. In the first quarter of 2012, Sigma Cable has entered into three new SDI projects in Singapore valued at approximately $87 million.

China

The economy of China differs from that of most developed free-market economies in a number of respects, including structure, degree of government involvement, level of development, growth rate, capital reinvestment, allocation of resources, rate of inflation and balance of payments position.  In recent years, the PRC government has implemented economic reform measures which emphasize decentralization, utilization of market forces and the development of foreign investment projects of which Shanghai Yayang is an example.

4.4   Property, Plant and Equipment

The Company’s Manufactured Products are produced at facilities located on premises owned or leased by Siam Pacific, Charoong Thai, Sigma Cable, APEC, Shanghai Yayang, PEWS, NPC and, through November 2011, SPFO.  As of December 1, 2011, the Company disposed of its 51% equity interest in SPFO.  The following is a summary of the Company’s material facilities and operations as of December 31, 2011.

Siam Pacific owns a 7.45 acre production facility near Bangkok, Thailand, located on a 26.79 acre site that it also owns.  Telecommunications cable and enameled wire are manufactured here.  The production facility constitutes a portion of certain property and assets which are pledged to a financial institution.

Charoong Thai owns a 24.7 acre production facility in Chachoengsao province, near Bangkok, Thailand, where telecommunications cable and power cable are manufactured.  The production facility is located on a 57.9 acre site which Charoong Thai also owns.  Neither the production facility nor the land is mortgaged.

Sigma Cable produces power cable on a 19,373 square meter site in Singapore leased from the Jurong Town Corporation (“JTC”) for 30 years from September 16, 2000 to September 16, 2030.  JTC is a government-linked corporation and is Singapore’s largest industrial landlord.  Building assets, with a total loan value of $16.6 million are pledged to United Overseas Bank.

APEC owns a 6,735 square meter power cable manufacturing facility on a 39,000 square meter land parcel in Brisbane, Australia. The land and building therein is mortgaged to Westpac Banking Corporation of Australia as security for a bank facility of approximately A$10.0 million (equivalent to $10.2 million).

Shanghai Yayang operates a factory that produces enameled wires, located in an area of approximately 27,839 square meters of state-owned land in an industrial district in Fengxian, Shanghai.  Assets consisting of buildings of $0.8 million are pledged to the Agricultural Bank of China.

PEWS manufactures enameled wire in a facility on 36,000 square meters of state-owned land with a built-up area of 20,367 square meters in Long Gang, Shenzhen, China.  A leasehold right of industrial land use for the land has been granted for 49 years.  The land and building of $0.8 million is pledged to Agricultural Bank of China as security for a $7.9 million bank loan granted in 2003 and extended through May 2011. This facility is now further extended for one year to the end of May 2012.

Sigma-Epan leases an office space from Sigma Cable in Singapore where it employs nine individuals in its trading operations.

NPC ceased to be operational in 2006 due to unsatisfactory results and incompetent management team. The Board passed a resolution in October 2009 to re-construct NPC’s facilities to be used for production of electronic wires. The factory now occupies 44,000 total square meters, with a land usage right expiring July, 2044. NPC is situated in Ing-Chiang Township in Ningbo City in Zhè Jiāng Province, China.

All of the Company’s facilities in Thailand, Singapore, Australia and China use production processes and equipment of international standard imported from Europe, the United States, Taiwan, and Japan.

The production capacity and extent of utilization of the Company’s facilities varies from time to time and such information is considered to be commercially sensitive and proprietary information.

4.5 Insurance

The Company maintains insurance policies covering certain buildings, machinery and equipment against specified amounts of damage or loss caused by fire, flooding, other natural disasters and burglary and theft.  The Company does not carry insurance for consequential loss arising from business interruptions or political disturbances and does not carry product liability insurance.  In addition, the availability of insurance in China is limited, and the Company does not have business liability or disruption insurance for our operations in China.  The Company believes that it maintains insurance coverage commensurate with the nature of and risks associated with its business, to the extent that appropriate insurance is available in the markets in which we conduct business. Siam Pacific, however, encountered a slight delay when it was trying to secure insurance coverage for year 2012 as the insurance companies operating in the Thai market fear the flooding may re-occur this year. Siam Pacific is reasonably confident that ultimately it will find a suitable insurance company to cover fire, flood, and theft.

4.6 Environmental Matters

The Company is subject to a variety of laws and regulations covering the storage, handling, emission and discharge of materials into the environment.  The Company believes that all of its operations are in compliance with, and in certain circumstances exceed, all applicable environmental laws and regulations.  The Company has not been subject to any legal, regulatory or other action alleging violations or breaches of environmental standards.  While it is difficult to accurately estimate future environmental compliance costs and potential liabilities, if any, accurately, the Company does not currently anticipate any material adverse effect on its consolidated results of operations, financial position or cash flows as a result of compliance with these laws.

Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

       Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany accounts and transactions have been eliminated on consolidation.  The Company’s investments for which its ownership exceeds 20%, but which are not majority-owned or controlled, are accounted for using the equity method if the Company has the ability to exercise significant influence over the companies’ operating and financial policies. When the Company’s carrying value in an equity investee company is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company has guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.

       Use of Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles accepted in the United States requires management to make estimates, judgements, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates reflected in the Company’s consolidated financial statements include, but are not limited to, useful lives and residual values of long-lived assets, impairment assessment of long-lived assets and goodwill, allowance for accounts and other receivable, accounting for deferred income tax, income tax position, inventory valuation, valuation allowance of deferred tax assets. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents includes cash on hand, bank deposits and all short-term highly liquid investments with an original maturity of three months and are readily convertible to known amounts of cash.

Inventories

    Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out or weighted average method.

If the expected selling price less completion costs and costs to execute sales (market) is lower than the carrying amount, a write-down is charged to expenses in cost of sales for the amount by which the carrying amount exceeds its market. When the finished goods that were previously written down to market are subsequently sold at above market, a recovery is credited to cost of sales.

Income Taxes

The Company follows the liability method of accounting for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse.

Current income tax expense is the amount of income taxes expected to be payable for the current year. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. ASC 740, requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent the Company believes a portion will not be realized.  The Company considers many factors when assessing the likelihood of future realization of its deferred tax assets, including its recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the carry-forward  periods available to the Company for tax reporting purposes, and other relevant factors. Deferred income tax expense (benefit) is the net change during the year in the deferred income tax asset or liability.

The Company adopted the provisions of ASC 740 to account for uncertainties in income taxes.  ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions.  The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.  The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement.  The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less depreciation and any impairment losses. Asset leases qualifying as capital leases are also included in property, plant and equipment. Major renewals and improvements are capitalized and minor replacements, maintenance, and repair expenses are charged to current operations as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the respective lease term, whichever is shorter, as follows:

No depreciation expense is charged for construction in progress and machinery and equipment under installation.

Capitalized interest on construction in progress is added to the cost of the underlying asset and is depreciated over the estimated useful life of the asset in the same manner as the underlying asset. Interest capitalized for 2010 and 2011 amounted to $nil and $9, respectively. The capitalized interest was related to and has been included as part of the cost of Ningbo Pacific’s construction in progress. 

When property and equipment are retired, sold or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations.

In 2006, the Company terminated the Ningbo Pacific joint venture and liquidated its major equipment at the Ningbo Pacific facility. In October 2009, the Company has made a resolution to acquire additional 5.42% shareholding of Ningbo Pacific from the Republic of China (“PRC”) joint venture partner. The Company plans to resume manufacturing operation with new constructed facilities at the Ningbo Pacific site.  The acquisition of additional shareholding is expected to be completed in early 2013.

Goodwill

Goodwill represents the excess of the cost of purchased business over the fair value of the underlying net assets acquired. Goodwill, is not amortized, but tested for impairment at least annually or more frequently if circumstances indicate that impairment may exist.  The Company determined it has three reporting units in which the entire goodwill was allocated to manufactured product segment.

In accordance with ASC 350 “Intangible – Goodwill and Others”, (“ASC 350”), the Company performed a two-step test to assess goodwill impairment as of December 31, 2011. First, the Company identifies potential goodwill impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The Company determines fair value using a discounted cash flow approach and makes reference to the market capitalization of the Company. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of goodwill impairment loss.

Based on the Company’s assessment conducted as of December 31, 2011, the Company recognized goodwill impairment charges of $8.8 million, and the carrying amount was $nil as of December 31, 2011.

Investments

Management determines the appropriate classification of its investments at the time of purchase and re-evaluates such designation as of each balance sheet date. 

The Company accounts for its investments in equity securities of privately-held companies as cost method investment in accordance to ASC 325, “Investments – Others” as these securities do not have readily determinable fair value. Investments in which the Company does not have a controlling interest or an ownership voting interest to exert significant influence, and which are not publicly traded are accounted for at cost                                 

The Company accounts for its investments in equity securities that have readily determinable fair value using ASC 320, “Investments – Debt and Equity Securities”. Equity securities are classified as available-for-sale, as the Company does not trade in these securities, but rather they are held as longer term investments due to business relationships with the entities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of shareholders’ equity.  Realized gains and losses and declines in values judged to be other-than-temporary on available-for-sale securities are included in investment income.  The cost of securities sold is based on the specific identification method.  Interest and dividends on securities classified as available-for-sale are included in investment income.

Investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting under ASC sub-topic 323-10, (“ASC 323-10”), Investments—Equity Method and Joint Ventures: Overall, and included as investment in equity investees in the balance sheets. Under the equity method, the Company’s proportionate share of each equity investee’s net income or loss is included as share of income (losses) in equity investees in the consolidated statements of operations. An investor shall record its proportionate share of the investee’s equity adjustments for other comprehensive income (e.g. foreign currency items, etc) as increase or decrease to the investment account with corresponding adjustment in equity. The Company evaluated the investment in equity investee for impairment under ASC 323-10. An impairment loss on the investment in equity investee is recognized in the consolidated statements of operations when the decline in value is determined to be other-than-temporary.

A judgmental aspect of accounting for investments (including investments in equity investees) involves determining whether an other-than-temporary decline in value of the investment has been sustained.  If it has been determined that an investment has sustained an other-than-temporary decline in its value, the investment is written down to its fair value, by a charge to earnings.  Such evaluation is dependent on the specific facts and circumstances.  Factors that are considered by the Company in determining whether an other-than-temporary decline in value has occurred include: the market value of the security in relation to its cost basis; the financial condition of the investee; and the intent and ability to retain the investment for a sufficient period of time to allow for recovery in the market value of the investment.

In 2009, 2010 and 2011, the Company recorded an impairment charge of $nil, $346 and $nil, respectively, related to certain available-for-sale investment. 

Impairment of Long-Lived Assets

  The Company accounts for impairment of long-lived assets in accordance with ASC 360, “Property, Plant and Equipment”.  Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  In such instances, the Company estimates the undiscounted future cash flows that result from the use of the asset and its ultimate disposition.  If the sum of the undiscounted cash flows is less than the carrying value, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset group, determined principally using discounted cash flows. 

In 2009, the Company recorded an impairment charge of $77 related to the impairment of a factory in Thailand (included in the manufactured products segment) that is not being used for operation.  The impairment charge was recorded to reduce the carrying value of the identified assets to fair values. Fair values were derived using a variety of methodologies, including cash flow analysis, estimates of sales proceeds and independent appraisals. Where cash flow analyses were used to estimate fair values, key assumptions employed, included estimates of future growth, estimates of gross margins and estimates of the impact of inflation. The charges were primarily the result of management’s revised outlook due to the prolonged unfavorable market conditions.

There was no impairment charge in 2010. In 2011, the Company recorded an impairment charge of $25 related to the damage to Siam Pacific’s machinery due to the flooding in Thailand. The impairment is stated as a line item, “Charges related to flooding” within operating expenses.

Account Receivables and allowance for doubtful accounts

Accounts receivables are stated at face value less any allowance for doubtful accounts. The Company maintains allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, customer financial condition, past transaction history with the customer, current economic industry trends, and changes in customer payment terms.

Lease obligations

In accordance with ASC 840, Leases, leases for a lessee are classified at the inception date as either a capital lease or an operating lease. The Company assesses a lease to be a capital lease if any of the following conditions exist: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease term is at least 75% of the property’s estimated remaining economic life or d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. The capitalized lease obligation reflects the present value of future rental payments, discounted at the appropriate interest rates. The cost of the asset is amortized over the lease term. However, if ownership is transferred at the end of the lease term, the cost of the asset is amortized as set out below under property, plant and equipment.

Operating lease expenses are recognized on a straight-line basis over the applicable lease term.

Revenue Recognition

Revenue represents the invoiced value of goods sold, net of value added tax and returns, invoiced value on distribution activities, and service fee income on installation activities.  Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized.

Sales of manufactured goods and distributed products

The Company recognizes revenue from the sale of manufactured goods and distributed products upon passage of title to the customer that coincides with their delivery and acceptance. These revenue recognition are recognized in accordance with SEC Staff Accounting Bulletin (SAB) No. 104. The Company recognizes its revenue of sale of distributed products at gross as the Company is the primary obligor in the transaction.

The Company classifies shipping and handling costs incurred within cost of sales.

Supply, Delivery and Installation

The Company’s supply, delivery and installation services are considered as multiple elements arrangements and are accounted for in accordance with ASC subtopic 605-25, Revenue Recognition: Multiple-Element Arrangements (“ASC 605-25”). Elements such as installation service and sale of cables are considered as separate elements contained in a single arrangement, or in related arrangements with the same customer. The Company allocates revenue to each element based on its relative fair value. The allocation of the fair value to the delivered elements is limited to the amount that is not contingent on future delivery of services or subject to customer-specified return or refund privileges.  The Company prospectively adopted Accounting Standards Update (“ASU”) No. 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”), a consensus of the FASB Emerging Issues Task Force that amends ASC 605-25, on January 1, 2011.

In accordance with ASU 2009-13, certain delivered items in multiple-element arrangements, which previously would not qualify for separate units of accounting due to the lack of vendor-specific objective evidence or third-party evidence of selling price, are accounted for as separate units of accounting, to which the total consideration of the arrangements is allocated based on management’s best estimate of the selling price (“BESP”). We consider all reasonably available information in determining the BESP, including both market and entity-specific factors. The adoption of ASU 2009-13 does not have a material effect on our financial statements, the units of accounting and the pattern and timing of revenue recognition is not changed materially.

The Company recognizes revenue from installation activities using the percentage-of-completion method, based on the customer certification of the distance of cable laid with respect to the estimated total contract revenue, and in accordance with ASC 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts”. The timing of revenue recognition of cable sales and installation services are substantially identical.

Bill-and-hold arrangements

     The Company recognizes revenue of sale of cables under bill-and-hold arrangements requested by certain customers in Thailand, in accordance with SAB 104.

As at December 31, 2009, 2010 and 2011, the revenue recognized under bill-and-hold arrangements where the cables were not yet delivered was $8.6 million, $17.9 million and $5.8 million, respectively.

Customers’ incentive

The Company offers sales incentives in connection with power cable sales to wholesalers and distributors. These incentives include both rebates offered to customers for purchasing a certain volume of product during the year and settlement discounts for early payment of sales invoices. Both forms of incentives are recognized as a reduction to gross sales.

Foreign Currency Translation and Transactions

The functional currency of the Company’s international subsidiaries is generally the local currency or U.S. Dollars.  For these subsidiaries, the Company translates the assets and liabilities at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year.  Resulting currency translation adjustments are recorded directly to accumulated other comprehensive income within stockholders’ equity. 

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.  Gains and losses from foreign currency transactions are recorded in the consolidated statements of operations.

Foreign Currency Forward Contracts

The Company recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purposes or intent for holding the instrument. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders’ equity as a component of comprehensive income depending on whether the derivative financial instruments qualify for hedge accounting, and if so, whether they qualify as a fair value or cash flow hedge.

Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair value of the hedged items that relate to the hedged risks. Changes in fair value of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income net of deferred taxes. Changes in fair value of derivatives used as hedges of the net investment in foreign operations are reported in other comprehensive income as part of the cumulative translation adjustment. Changes in fair values of derivatives not qualifying as hedges are reported in the consolidated statements of operations.

The Company’s subsidiaries use forward foreign exchange contracts to reduce their exposure to foreign currency risk for liabilities denominated in foreign currency. A forward foreign exchange contract obligates the Company to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange.  Realized and unrealized gains and losses on foreign exchange contracts are included as foreign exchange gains or losses in the consolidated statements of operations as such contracts do not qualify for hedge accounting.

As of December 31, 2010 and 2011, the Company had outstanding forward exchange purchase contracts with notional values of $nil and $2,317, respectively. The outstanding forward exchange contracts as of December 31, 2011 matured in January 2012. The Company records these contracts at fair value with the related gains and losses of $nil, $nil and $64, for the years ended December 31, 2009, 2010 and 2011, respectively in the consolidated statements of operations.

Copper Future Contracts

Copper future contracts are designed to manage the Company’s consolidated exposure to change in inventory value due to fluctuations in market prices for selected operating units. Within the ordinary course of business the Company routinely enters into purchase transactions for copper. The majority of these transactions take the form of contracts that were entered into and continue to be held for the purpose of receipt or delivery of the copper in accordance with the Company’s expected sales or production timing or usage requirements. Such contracts are not within the scope of hedging accounting, or derivatives. To date, these contract positions have not had a material effect on the Company’s financial position, results of operations or cash flow.

Earnings (Loss) Per Share

Basic and diluted earnings (loss) per share are calculated in accordance with ASC 260, “Earnings Per Share”.  There are no dilutive equity instruments for all periods presented.

Fair Value Measurements

Effective from January 1, 2008, the Company adopted the provisions of ASC 820, “Fair Value Measurements and Disclosures” for financial assets and liabilities. Under ASC 820, fair value is defined as the price that would have been received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

In determining fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows:

•     Level 1 - Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

•     Level 2 - Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

•     Level 3 - Valuations based on unobservable inputs which are supported by little or no market activity and significant to the overall fair value measurement.

The availability of observable inputs can vary from investment to investment and is affected by a wide variety of factors, including, for example, the type of investment, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment and the investments are categorizes as Level 3.

The carrying amounts of financial instruments, including cash and cash equivalents, bank deposits, trade receivables, other current assets, trade payables, related party balances and other liabilities approximate their fair value due to the short-term maturities of such instruments.

Recent Pronouncements

In May 2011, the FASB issued an additional guidance ASU 2011-04  “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” which clarifies the application of existing fair value measurement and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued an ASU 2011-05 “Presentation of Comprehensive Income” which amended guidance for the presentation of comprehensive income. The amended guidance requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amended guidance also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The amended guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The Company believes the adoption of this update will change the order in which certain financial statements are presented and provide additional detail on those financial statements when applicable, but will not have any other impact on its financial statements or results of operations. The Company plans to adopt this standard with effect during and from the interim period ended March 31, 2012.

In December 2011, ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the  Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”. This ASU defers the changes in ASU 2011-05 that relate to the presentation of reclassification adjustments and supersedes certain pending paragraphs. ASU 2011-12 will be applied retrospectively. ASU 2011-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company believes the adoption of this update will change the order in which certain financial statements are presented and provide additional detail on those financial statements when applicable, but will not have any other impact on its financial statements or results of operations. The Company plans to adopt this standard during the interim period ended March 31, 2012.

5.2 Selected Gross Margin Data

This discussion should be read in conjunction with the information contained in our Financial Statements presented in Item 18 of this Annual Report.

Results are analyzed and reported along the lines of our three principal business segments, consisting of Manufactured Products, SDI project engineering, and Distributed Products.  The operating data that senior management collects and analyzes from our operating subsidiaries include, in certain cases, certain limited information regarding results along product lines that are components within our Manufactured Products segment.  For the benefit of our shareholders, included in the summary table below are certain results for product lines within our Manufactured Products segment with regard to net sales, gross profit and gross profit margin for the periods covered.  The following table sets forth selected summary data for the periods indicated (dollar ($) amounts in thousands of US$)

(Figures in 2009 and 2010 were restated to reflect the results of discontinued operations of SPFO. For details, see “Item 5.3: Operating Results”)

Note: Inventory impairment is separated from calculation of total manufactured gross margin but included in the total gross profit. 

5.3 Operating Results

The Company is 65.6% owned and controlled by PEWC, a Taiwanese company.  An additional 9.8% of the Common Shares are owned and controlled by a U.S.-based private equity fund.  The remaining 24.6% of the outstanding Common Shares are publicly-traded in the United States and listed on NASDAQ .  Based upon a review of Schedule 13D and 13G filings made with the Commission by shareholders, and a review of the share register maintained by the Company’s transfer agents in Bermuda and the U.S., the Company is not aware that it has any shareholders resident in the jurisdictions where the Company has business operations.  While the Company’s operations and results are impacted by economic, fiscal, monetary and political policies of the respective governments in the countries where the Company operates, that impact is not a function of the shareholder base of the Company.

5.3.1   Year Ended December 31, 2011 Compared with Year Ended December 31, 2010

General

Results of operations are determined primarily by market demand and government infrastructure projects, market selling prices of our products, our ability to manufacture high quality products efficiently in quantities sufficient to meet demand and to control production and operating costs.  Our results are also influenced by a number of factors, including currency stability in the countries in which our operations are located, competition and the cost of raw materials, especially copper, which accounted for majority of the cost of sales in 2011.

In order to minimize the impact of copper price fluctuations, we attempt to “peg” the prices of our products to the prevailing market price of copper and pass changes in the cost of copper through to customers as much as possible.  In certain circumstances, however, we remain affected by fluctuations in the price of copper.  A recent rise or decline in copper prices may not be fully reflected under this pricing scheme for several months.

Average copper prices per metric ton have increased by 17% from $7,534 in 2010 to $8,826 in 2011 (four quarters average). Gross profit margins for Manufactured Products in 2010 were on average at 13.5% compared to 10.0% in 2011.

Copper prices indicated in this report are quoted from the LME index.  The 2010 and 2011 copper prices are as follows:

The average copper price in February 2012 on the LME was $8,591 per metric ton.

Net Sales

Total sales of manufactured product increased by $33.4 million, or 8.4%, from $396.1 million in 2010 to $429.5 million in 2011. Sales of power cable increased by $52.4 million in 2011, or 35.3%, due to an increasing demand in Thailand and Australia as a result of expanded government and private construction contracts. Sales of enameled wire on the other hand decreased by $2.6 million, due to reduced customer demand in all of the enameled wire manufacturing sites, i.e., Charoong Thai, Siam Pacific, PEWS, and Shanghai Yayang. Sales of telecommunication cable were reduced by $16.3 million, as the government projects in Thailand shrank.

Revenue from supply, delivery and installation of wires and products in Singapore decreased in 2011 by $6.6 million, or 28.1% due to reduced Singapore government budget.  However, we do perceive some positive signs that the government’s spending is getting back on track and more tenders are expected in 2012 and beyond.

Revenue from Distributed Products was at $25.5 million in 2011, down from $26.9 million in 2010.  An overall strategy to boost sales and gross margin is underway beginning the second quarter 2012.

The following table shows the percentage share and dollar value (in thousands) of net sales of the respective geographical locations of manufacturing plant of Manufactured Products only and all products and services with respect to our total sales in 2011:

Gross Profit

Gross profit for 2011 was $43.9 million, representing a decrease of $13.1 million, or 23.0% down compared to $57.0 million in 2010.  The decrease was primarily attributable to the raw material (copper) cost that we were unable to pass on fully to our customers. In addition, our factory utilization was less than that of 2010, and thus we were unable to pass on the increased cost to our customers.

Apart from the inventory impairment of $2.0 million, gross profit contributed by sales of manufactured products was $42.9 million in 2011 compared to $53.4 million in 2010, a decrease of 19.7%, for the reason given above. The relative contribution to gross profit from Manufactured Products for 2010 and 2011 is as follows:

The contribution to gross profit from each segment line (and the components within the manufactured products segment) for 2010 and 2011 is as follows:

Overall gross profit margins decreased from 12.8% in 2010 to 9.3% in 2011 (reason as given above).  Gross profit margins for Manufactured Products also decreased from 13.5% in 2010 to 10.0% in 2011.  Manufactured Products and SDI project segments posted lower gross margin (reason as given before), as the competition from four Korean contractors, i.e., ILJIN Electric Co. Singapore Branch, LS Cable & System Ltd. Singapore Branch, Taihan Electric Wire Co., Ltd., and Hi Power Pte. Ltd., are bidding at the lowest price possible, thus driving down the gross margin generation for this sector. Gross profit from telecommunication cables posted a lower margin, as the price competition has become more and more intense.

Operating Profit

In 2011, we recorded a reversal of  allowance for doubtful accounts of $1.5 million, owing to the fact that one of the major customers of Siam Pacific, A.S. Associated Engineering (1964) Co., Ltd. continued to settle the long outstanding trade receivables.  Our internal controls provide that we perform a detailed review of our outstanding receivables, and make adjustments to our estimate to reflect significant delinquent accounts receivable.  The Company is not aware of any significant delinquent accounts receivable that have not already been adequately reserved.  In addition, we believe that our periodic allowance for doubtful accounts will continue to not have a material impact on our liquidity.

Overall Selling, General and Administrative (“SG&A”) expenses increased by $1.8 million, mainly due to the increase in transportation charges in APEC by $0.8 million resulted from the increase in fuel cost. The remaining variance was owing to currency translation adjustment.

Accounts receivable, net of allowance for doubtful accounts, decreased by $46.1 million from December 31, 2010 of $144.5 million to $98.3 million as of December 31, 2011 .  The decrease in accounts receivable reflects our continuous effort in collecting outstanding debt in a time of global economic uncertainty. The overall Day of Sales Outstanding stands at approximately 92 days, improved as compared to that of 2010 where the number showed 102 days to get the sales proceeds collected.

Based on the above rates, the revaluation of assets and liabilities denominated in U.S. dollars or other foreign currencies in the Company resulted in unrealized and realized foreign exchange loss of $1.3 million in 2011. 

Impairment of Investment

There have been no investment impairment losses recorded in 2011.

Other Income  

Other income refers to scrap sales of copper as a result of testing and quality control process and dividend income received.

Bill-and Hold Transactions

 During 2011, Charoong Thai entered into bill-and-hold arrangements with certain customers in Thailand. The Company recognized the revenue under such bill-and-hold arrangements in accordance with SAB Topic 13A.3.a , “Bill-and-hold Arrangements” . As of December 31, 2011, the revenue recognized under bill-and-hold arrangements where the cables were yet delivered was $8.6 million, compared to $17.9 million as of December 31, 2011.

Discontinued Operations

The divesture of Shandong Pacific Fiber Optics Co. Ltd (“SPFO”) was an important goal, and accomplishment, of the Company’s board of directors and management to enable the Company to focus on its core wire and cable businesses that are more profitable and thereby increase shareholder value.

While SPFO has been one of the larger manufacturers of fiber optic cable in Shangdong Province, the Company believes that an oversupply of fiber-optic cable products limits the opportunities for sustained development of what is a non-core product line for the Company. In addition, the fiber-optic cable sector throughout China has been dominated by a few large players, who together account for more than 80% of sales of fiber-optic cable products. This market concentration has made competition difficult for companies, such as the Company, that have not committed substantial resources to the fiber optic industry, and SPFO faces additional challenges, such as obtaining raw materials like optical fiber at prices that are competitive in the market place. Moreover, the Chinese government is encouraging further consolidation of fiber and cable manufacturers, and it is not part of the Company’s current business strategies to put substantial investment in this market sector.                    

The Company successfully entered into an agreement to sell its 51% interest in the SPFO joint venture to a group of third party investors in exchange for a total cash consideration of RMB 18.5 million (approximately $2.9 million), effective upon the directors approval on September 7, 2011. The share transfer was completed on December 1, 2011. Consequently, the Company’s deconsolidated SPFO effective December 2011. The Company recognized $2.0 million gain on disposal of a subsidiary in the consolidated of operations.

Goodwill Impairment

Goodwill of $8.8 million as of December 31, 2010 relating to the manufactured products segment and the changes in the carrying amount of goodwill are as follows:

In accordance with ASC 350, the Company assessed the fair value of the reporting unit as of December 31, 2011. The Company adopted the discounted cash flow approach and, considering that the reporting unit constituted the majority of the overall consolidated group, by reference to the closing price of its Common Shares on that date as well as an assumed control premium. From January 2011 to December 2011, the stock market downturn caused a decline in the Company’s stock price by 54.8%, which resulted in a significant reduction in the Company’s market capitalization. As of December 31, 2011, the assessed fair value was below the carrying value of the reporting unit. The Company then performed a hypothetical purchase price allocation using the fair value of reporting unit and determined that the goodwill was fully impaired. As a result, the Company recognized a goodwill impairment charge of $8.8 million for the year ended December 31, 2011 as a separate item in the consolidated statements of operations.

Thailand Flood Losses

       Siam Pacific suspended operations temporarily in the fourth quarter of 2011 due to damage sustained from the region’s recent flooding. The Siam Pacific facility, located 30 kilometers (18.6 miles) north of Bangkok, manufactures enameled wire and communication wire.  The facility sustained water damage, as the water level reached approximately 1.5 meters which damaged some of the machinery and equipment in the plant, as well as some of the inventory in the warehouse. As a result, the Company recorded $3.9 million of flood-related charges, including fixed asset impairments, recovery charges and a write-down of damaged inventory and recognized $0.9 million of deferred tax asset related to the charges in 2011. These charges are separately stated as a line item, “Charges related to flooding” within operating expense on the consolidated statements of operations.

The Company’s insurance policy covers the flood damage to the building, machinery, and inventory; however, it does not cover losses due to the business disruption.  The process of submitting claims to the Company’s insurers is in its early stages and the Company is unable to determine how much of its losses will be covered by insurance.

        Income Taxes

Income tax expense was $4.6 million in 2011 compared to $6.4 million in 2010. The fluctuation was mainly due to the decrease in pre-tax income and non-deductible expense of goodwill impairment.

5.3.2   Year Ended December 31, 2010 Compared with Year Ended December 31, 2009

General

Results of operations are determined primarily by market demand and government infrastructure projects, market selling prices of our products, our ability to manufacture high quality products efficiently in quantities sufficient to meet demand and to control production and operating costs.  Our results are also influenced by a number of factors, including currency stability in the countries in which our operations are located, competition and the cost of raw materials, especially copper, which accounted for majority of the cost of sales in 2010.

In order to minimize the impact of copper price fluctuations, we attempt to “peg” the prices of our products to the prevailing market price of copper and pass changes in the cost of copper through to customers as much as possible.  In certain circumstances, however, we remain affected by fluctuations in the price of copper.  For example, the price of telecommunications cable sold for use in public projects in Thailand is determined semi-annually and is based upon the average spot market price of copper on the LME during the six-month period commencing on January 1 and July 1 prior to the month of order.  Thus, a recent rise or decline in copper prices may not be fully reflected under this pricing scheme for several months.

Average copper prices per metric ton have increased by 48.9% from $5,150 in 2009 to $7,534 in 2010 (four quarters average). Gross profit margins for manufactured products in 2009 were on average at 12.8% compared to 13.1% in 2010.

Copper prices indicated in this report are quoted from the London Metals Exchange (LME) index.  The 2010 and 2009 copper prices are as follows:

The average copper price in April 2011 on the LME was $9,483 per metric ton.

Net Sales

Sales of manufactured product increased by $131.9 million, or 50.0%, from $264.1 million in 2009 to $396.1 million in 2010. Sales of power cable increased by $45.3 million in 2010, or 44%, due to an increasing demand in Thailand as a result of expanded government and private construction contracts, coupled with increase in Australia due to much higher sales prices. Sales of enameled wire also increased, by 50.1% to $202.8 million.  In Thailand, enameled wire sales increased by $28.9 million due to much more demand locally. Elsewhere enameled wire sales in CCH HK also increased to produce over $86.8 million in 2010 compared to $64.3 million in 2009. Shanghai Yayang even increase its sales of enameled wire up to nearly $40.0 million in 2010 compared to $23.3 million in 2009 due to the heavy demand from eastern part of China customers. Sales of telecommunication cable, however in Thailand, the fiber optic business (i.e. telecommunication cable) picked up to $44.9 million in 2010 from $26.0 million in 2009.

Revenue from SDI project engineering in Singapore decreased in 2010 by $9.2 million, or 28.1% down as phase I of the government sponsored casino projects came to an end in mid-2010.

Revenue from Distributed Products was at $27.1 million in 2010, down from $28.1 million in 2009.

The following table shows the percentage share and dollar value (in thousands) of net sales of the respective geographical locations of manufacturing plant of Manufactured Products and provision of Distributed Products and SDI services with respect to our total sales in 2010:

* Figures in 2010 were restated to exclude revenue of SPFO which was presented as discontinued operations. See ”Item 5.3.1.”

Gross Profit

Gross profit for 2010 was $57.0 million, representing an increase of $16.4 million, or 40.3% compared to $40.6 million in 2009.  The increase was primarily attributable to the raw material cost increases and which we were able to pass on to our customers, while some of the fixed costs would stay at the same level. The upward adjustment of copper prices was in line with the general increase over the course of 2010 in commodity prices.

Apart from the write-back of inventory impairment of $2.0 million, gross profit contributed by sales of Manufactured Products was $53.4 million in 2010 compared to $14.3 million in 2009, an increase of 273.4%.  The increase in gross profit from sale of Manufactured Products is due to the higher sales price chargeable to customers across various markets in which the Company operates.  The relative contribution to gross profit from Manufactured Products for 2009 and 2010 is as follows:

The contribution to gross profit from each segment line (and the components within the manufactured products segment) for 2009 and 2010 is as follows:

Overall gross profit margins slightly increased from 12.5% in 2009 to 12.8% in 2010.  Gross profit margins for Manufactured Products greatly increased from 5.4% in 2009 to 13.5% in 2010. Both CTW and PEWS all suffered setback in terms of losing gross margins when compared with that of last year’s due to pricing issues. Gross margin of power cable increased to 17.0% in 2010 from 8.4% in 2009.

Operating Profit

In addition to estimating an allowance for doubtful accounts based on historical sales and collection data, we perform a detailed review of our outstanding receivables, and make adjustments to our estimate to reflect significant delinquent accounts receivable.  The Company is not aware of any significant delinquent accounts receivable that have not already been adequately reserved.  In addition, our periodic allowance for doubtful accounts will continue to not have a material impact on our liquidity.

Other than allowance for doubtful accounts, overall SG&A expenses increased by $4.7 million, as a portion of the corporate expenditure went to attending the road shows and investor relationship related activities in 2010. In addition, when business picks up, the headcount inevitably will increase, headcount number has increased by 102, up from 1,602 from beginning of 2010. Total SG&A expenses, when compared with that of 2009, increased by 19.4%.  Recovery for doubtful accounts in 2010 was amounted to $0.9 million, mostly relating to a trade receivable in Thailand as the repayment progress has exceeded management’s expectations. 

Accounts receivable, net of allowance for doubtful accounts, increased by $42.7 million from December 31, 2009 of $101.8 million to $144.5 million as of December 31, 2010 .  The increase in accounts receivable was attributable to more sales have been generated. The overall Day of Sales Outstanding stands at approximately 91 days, down from that of 2009 where the number showed 89 days to get the sales collected.

Based on the above rates, the foreign currency transactions which took place in 2010 in all of all operating units reported a realized foreign exchange gains of $3.0 million.  The realized exchange gains, mainly arising from Thailand operations, was due to 1) the appreciation of Thai Baht during 2010 and 2) the early settlement of trust receipts denominated in Thai Baht, when the trust receipts were bought in at a lower exchange rate.

Impairment of Investment

The impairment of investment in 2010 represents the impairment loss in TT&T securities in Thailand, owned by Siam Pacific. In the past, the unrealized loss, net of tax, was reported in separate component of shareholders’ equity. In 2010, the Company considered the continuing decrease in fair value was other-than-temporary and recognized such impairment loss in the consolidated  statements of operations.

Other Income

Other income in 2010 decreased by $1.08 million, compared with that of 2009 at $2.1 million.  The decrease in 2010 consisted of less scrap sales, and less dividend from other long-term investment when compared with that of 2009.

Income Taxes

Income tax expense was $6.4 million in 2010 compared to $4.6 million in 2009. The fluctuation was mainly due to the net effect of the increase in pre-tax income and utilization of prior year tax losses.

Net cash provided by operating activities in the fiscal year ended December 31, 2011 was $22.6 million, as compared to $2.6 million of net cash used by operating activities in the fiscal year ended December 31, 2010.  Days of sales outstanding (“DSO”) is a measure of the average collection period of accounts receivable, and although the calculation is influenced by the period used and the timing of sales within that period, it can provide insight into the variances in collections from period to period.  Our days of sales outstanding as December 31, 2011 were 92 days, as compared to 102 days as of December 31, 2010.  The improvement in DSO as of December 31, 2011 is due to re-enforcing collection efforts based on various company policies across the group. Also contributing to the net cash provided by operations in 2011 were two non-cash items 1) Impairment of goodwill of $8.8 million and 2) depreciation of $6.5 million, and one cash item: reduction in accounts receivable of $34.1 million.  Net cash used in investing activities amounted $13.9 million, incurred for the purchase of machinery and equipment at APEC, CTW, and NPC sites of $8.9 million. Proceeds from financing activities amounted to $5.6 million, mostly from a loan to re-construct the NPC plant.

We engage in various transactions with PEWC, including the purchase of certain raw materials and the distribution of PEWC products mainly in Singapore.  The Composite Services Agreement contains provisions that define our relationship and the conduct of our respective businesses and confers certain preferential benefits on us.  Under the Composite Services Agreement, the material terms of which are summarized in the “Material Contracts” section, there are no obligations binding on the Company in favor of PEWC, nor are there any pre-established purchase commitments for copper.  As such, the Composite Services Agreement should not impact cash flows or liquidity until such time as actual purchases are made in the ordinary course of business such as for the purchase of raw materials.  The Composite Service Agreement may, however, impact operations to the extent that PEWC is not able to fulfill its obligations, such as supplying copper, and copper is not otherwise readily available on comparable terms from other market sources.  Cash generated by operations and borrowings, when needed, from our credit facilities have been the primary sources of funding purchases under the Composite Services Agreement, and we believe these sources will continue to provide sufficient funds for future purchases under this agreement.  

On December 1, 2011, the Company exited from a non-core business in Shandong Province, China with the sale for approximately $2.9 million of its 51% interest in SPFO, a fiber optic cable joint venture. The Company had previously invested a total of $2.5 million to start up and develop the business at SPFO.

We believe funds generated by our operating activities, our cash on hand and amounts available to us under our credit facilities will provide adequate cash to fund our requirements through at least the next twelve months.  We continue to have sufficient liquidity to meet our anticipated working capital, capital expenditures, general corporate requirements, and other short-term and long-term obligations as they come due.  We may further enhance our liquidity in the future, as needs arise, by establishing additional lines of credit, with the support of one or more of our principal shareholders if necessary and available.  We currently anticipate that we will retain all of our earnings to fund our operations and do not anticipate paying any cash dividends in the foreseeable future.

5.5 Research and Development

The Company does not currently engage in its own research and development.  Under the Composite Services Agreement with PEWC described herein, the Company benefits from research and development conducted by PEWC at little or no cost to the Company.  Most recently, the Company utilized technology from its parent company, PEWC, to assist in developing the Company’s new business line of electronic wire being manufactured in NPC’s facility.  Accordingly, the Company has not made material expenditures on or commitments to research and development since formation.

5.6 Trend Information

We are not aware of any trend, commitment, event or uncertainty that can reasonably be expected to have a material effect on our current or future business other than the following, each of which has materially impacted our financial results in the past and may do so in the future:

·          Uncertainty arising from the volatility in the cost of copper, our principal raw material.   In 2011, the copper prices have gone from $9,555 per metric ton in the beginning of the year to less than $7,600 per metric ton at end of year. This decrease caused the Company to provide more of its inventory impairment, which amounted $2 million in year 2011. The copper price however bounced back in the beginning of 2012 and reached over $8,400 per metric ton. Our impairment will be completely consumed if the price remains stable for first half year of 2012.

·          Fluctuations in the demand for our products in the markets in which we do business , based upon variations in the level of governmental and private investments in communications, power and industrial projects and programs that utilize our products.

See “Quantitative and Qualitative Disclosures About Market Risk.”

5.7 Off-Balance Sheet Arrangements

There have been no off-Balance Sheet arrangements for the year ended December 31, 2011 and up to the date of this annual report.

For more details on financial commitments and contingencies, please refer to our audited consolidated financial statements and the notes thereto in Item 18:  “Financial Statements.”

Certain officers and directors of the Company are or were also officers and directors of PEWC and/or PEWC affiliates, as described below.  A brief professional summary for each member of the Board of Directors and senior management is as follows:

Mr. Anson Chan has been an independent member of the Company’s Board of Directors and a member and Chairman of the Audit Committee and compensation committee since 2007.  Mr. Chan is also a Managing Director of the Bonds Group of Companies and was a Senior Advisor to Elliott Associates from 2005 to 2008.

Mr. Andy C.C. Cheng was a member of the Company’s Board of Directors from 2004 to 2005 and was re-elected in 2007.  Mr. Cheng was appointed as Chairman of the Board in 2009.  From 1987 to 2003, Mr. Cheng served as Vice President in charge of procurement at PEWC.  Mr. Cheng has been an Executive Vice President at PEWC since 2004 and Chairman of each of the investment divisions of PEWC, Tai Ho Investment Co., Ltd. and You Chi Investment Co., Ltd., since June 2008.  Mr. Andy C.C. Cheng is not related to Mr. Fang Hsiung Cheng.

Mr. Fang Hsiung Cheng has been a member of the Company’s Board of Directors since 2006.  He also serves as Assistant Vice President of PEWC.  Mr. Fang Hsiung Cheng is not related to Mr. Andy C.C. Cheng.

Mr. Alex Erskine was appointed as resident Secretary in Bermuda in October 2008.  Mr. Erskine is a partner in the Bermuda law firm of Appleby, where he is the local team leader of the funds and investment servi ces practice group, which group he joined in 1999.  From March 2007 until October 2008, Mr. Erskine was the managing partner of the British Virgin Islands office of Appleby.  Prior to joining Appleby, Mr. Erskine was Deputy Legal and Compliance Director of the Asset Management Division of UBS AG.

Ms. Daphne Hsu has been Financial Controller of the Company since March 2005, prior to which she served as Financial Controller for ten years in Taiwan and China at a Thomson SA joint venture.

Dr. Lambert Ding was appointed March 17, 2011 as an independent member of the Board of Directors. Dr. Ding is the president and CEO of Union Environmental Engineering Services and before that, he was an associate professor at Yuan Ze University. Dr. Ding holds a Doctor of Philosophy degree from the University of Southern California, awarded in 1989. He is also a Registered Environment Assessor and holds several patents. Dr. Ding serves as a member of the audit committee and compensation committee.

Mr. Michael C. Lee has been a member of the Company’s Board of Directors since 2004 and is also Chief Executive Officer of PEWC and Chairman of Pacific USA Holdings, Ltd.  Mr. Michael C. Lee is not related to Dr. Yichin Lee.

Dr. Yichin Lee has been an independent member of the Company’s Board of Directors and served on the Audit Committee since 2007. He is also a member of the compensation committee.  Dr. Lee is the Managing Director of FCC partners, Inc. and CEO of Giga Media Limited.  Dr. Yichin Lee holds a doctorate degree in Resource Planning and Management from Stanford University.  Dr. Yichin Lee is not related to Mr. Michael C. Lee.

Mr. Ching Rong Shue has been a member of the Company’s Board of Directors since 2006.  He also serves as Vice President of PEWC.

Mr. David Sun has been a member of the Company’s Board of Directors since 2007.  He also serves as President of PEWC and Managing Director of Charoong Thai Wire and Cable Public Company Limited.

Mr. Yuan Chun Tang has been a member of the Company’s Board of Directors since 2004 and Chief Executive Officer since 2005.  Mr. Yuan served as the Company’s Chairman from 2005 to 2009.  He has also served as Chairman of PEWC since 2004 and has been the Director of Pacific Construction Corp. Ltd since 2002.  Mr. Yuan served as the Director of Taiwan Co-generation Corp from 2005 to 2008.  Mr. Yuan has also been the Chairman of Taiwan Electric Wire & Cable Industries Association since 2004.  He has served as the Supervisor to Taipei Importers/Exporters Association as well as the Director of Chinese National Federation of Industries in Taiwan since 1998 and 2004, respectively.

Mr. Carson Tien has been with PEWC or one of its affiliates such as APWC for his entire career.  He started out as engineer in PEWC’s Tao Yuan, Taiwan plant in 1969 and later was promoted to plant manager in 1977.  In 1990 Carson again was promoted to Assistant VP responsible for Engineering and Manufacturing in PEWC.  He then in 1996 was transferred from PEWC to APWC to head the Shenzhen, China plant as President of PEWS.  In 2005, he was appointed as Chief Operating Officer at APWC headquarters.

Mr. Frank Tseng was appointed as Chief Financial Officer and Non-Resident Company Secretary effective October 22, 2009.  Mr. Tseng previously served as the Deputy CFO for ABB Taiwan.  Prior to that, he served as the Financial Controller of the Asia Pacific region of Phoenix Technologies Co., a NASDAQ-listed California Silicon Valley-based high-tech company.

On March 15, 2011, Mr. Gai Po Lee resigned from the Board of Directors from the Board of Directors.

The Company’s Common Shares are traded on NASDAQ.  Notwithstanding that, the Board of Directors is not composed of a majority of independent directors.  The Company is relying upon the “controlled com pany exemption” that is available to issuers under the rules of NASDAQ.  In effect, the “controlled company exemption” provides that an issuer is not required to have its Board of Directors consist of a majority of independent directors if a shareholder, or two or more shareholders who constitute a group, have beneficial ownership of more than 50% of the issued and outstanding voting securities of the issuer.  PEWC owns and controls, directly or indirectly, 65.6% of the issued and outstanding Common Shares of the Company.

No service contract exists between any director and the Company or any of its subsidiaries providing for benefits upon termination of employment.

The Company has no arrangements or understandings with any major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management.

  6.2 Audit Committee

The Audit Committee of the Board of Directors primarily functions to assist the Board in its oversight of: (i) the reliability and integrity of accounting policies and financial reporting and disclosure practices and (ii) the establishment and maintenance of processes to ensure that there is compliance with all applicable laws, regulations and company policy and an adequate system of internal control, management of business risks and safeguard of assets.

The Company has several defined benefit and defined contribution plans covering its employees in Thailand, Australia, the PRC and Singapore.  Contributions to the plans are made on an annual basis and totaled $1.1 million in 2011.  Additionally, the Company has several defined benefit plans in accordance with Thailand labor law.  In its Thai subsidiaries, the Company must pay a retiring employee from one to ten times such employee’s salary rate during his or her final month, depending on the length of service.  During 2011, the Company’s total expenses under this labor law were $0.3 million.  These plans are not funded and the amount is recognized and included in Other Current Liabilities in the Company’s balance sheet.  The Company settles it obligations as and when employees retire.  The accumulated benefit obligations under this plan amounted to $2.9 million as at December 31, 2011.

Approximately 27% of the employees of Sigma Cable are members of the United Workers of Electronics & Electrical Industries, an employees’ union in Singapore.  Under the terms of a collective agreement signed in June 2003, the Company is required to negotiate salary and wage increases yearly.  All other worker benefits and employment terms are included in the collective agreement.  The Company believes that approximately 100% and 99% of the employees of PEWS and Shanghai Yayang, respectively, are members of their respective Company Workers’ Unions.  These unions generally operate in accordance with related labor regulations in China.  Approximately 15% of the employees of APEC are members of the Australian Workers’ Union.  None of the employees of the other operating subsidiaries of the Company are members of a union.  

The Company has never experienced a strike or other disruption due to labor disputes.  The Company considers its employee relations to be satisfactory and has not experienced difficulties attracting and retaining qualified employees.  In Singapore, employee turnover is approximately 27% of total employees annually.  In Thailand, employee turnover is approximately 8.7% of total employees annually.

(2)  MSD Credit Opportunity Master Fund, L.P. is the record and direct beneficial owner of the securities.  MSDC Management, L.P. is the investment manager of, and may be deemed to have or share voting and dispositive power over, and/or beneficially own securities owned by, MSD Credit Opportunity Master Fund.  MSDC Management (GP), LLC is the general partner of, and may be deemed to have or share voting and dispositive power over, and/or beneficially own securities owned by, MSDC Management, L.P.  Each of Glenn R. Fuhrman, John C. Phelan and Marc R. Lisker is a manager of MSDC Management (GP) and may be deemed to have or share voting and/or dispositive power over, and beneficially own, the common shares beneficially owned by MSDC Management.  Each of Mr. Fuhrman, Mr. Phelan and Mr. Lisker disclaim beneficial ownership of such common shares, except to the extent of the pecuniary interest of such person in such shares.

The Company has 6,166,154 Common Shares that are registered securities, of which 3,400,000 Common Shares are publicly-traded on the NASDAQ Capital Markets tier , which represents 24.6% of the issued and outstanding Common Shares.  The remaining registered securities, 2,766,154 Common Shares, are held by PEWC and COF, and are subject to trading restrictions under Rule 144 promulgated under the Securities Act.  Other than the approximately 50,000 Common Shares held by directors or officers who are not resident in the United States and the 1,410,739 registered securities held indirectly by PEWC, the Company believes that substantially all of its registered securities are held by U.S. residents.  The Company has no means to definitively confirm that belief, however, which is based upon a review of the share registers maintained by the Company’s Bermuda transfer agent and U.S. transfer agent and the addresses provided by the record holders.  Based upon a review of the records of the Company’s U.S. transfer agent, including a list of non-objecting beneficial holders (“NOBOs”), the Company believes there are substantially more than 400 beneficial holders that are resident in the United States, although that constitutes only the Company’s best estimate of the number of U.S. beneficial holders.

  7.2 Related Party Transactions

The Company incurs ordinary course trade payables with PEWC in connection with copper purchases under the Composite Services Agreement and the sale by the Company of Distributed Products on behalf of PEWC.

As of December 31, 2011 and the latest practicable date, the Company, including its subsidiaries, had a net principal balance outstanding of $10.4 million borrowed from subsidiaries of PEWC. This short-term indebtedness is payable on a demand basis and does not accrue interest.

The Company used the proceeds from each of the related party loans described above for working capital and purchases of capital equipment. The terms of borrowing by APWC or any of its subsidiaries from PEWC are on terms at least no less favorable than terms available in arms-length transactions with unaffiliated parties.

Other than the Amended and Restated Shareholders Agreement, the Company is not a party to any agreements, and has not engaged in any other transactions, with COF or SOF, or to the Company’s knowledge, their owners.  For a more detailed description of the Company’s obligations under the Shareholders Agreement, see the risk factor entitled “ Obligations under Amended and Restated Shareholders Agreement .” 

Under the terms of the Composite Services Agreement, APWC pays a management fee to PEWC in connection with the secondment, or temporary assignment and relocation, of certain PEWC managers to APWC facilities in Shenzhen and Thailand.  The assigned managers assist APWC in implementing the results of certain research and development conducted by PEWC and made available by PEWC to the Company under the terms of the Composite Services Agreement.  The assigned managers also assist APWC in the procurement of raw materials, primarily copper, which is also provided for under the Composite Services Agreement.  The amount of such annual management fee was $239,000 as of December 31, 2011.

Additional details regarding related party balances as of December 31, 2011 and related party transactions, including copper purchases from PEWC, are disclosed in Note 17 of our audited consolidated financial statements in Item 18:  Financial Statements. 

There have been no other related party transactions or contracts entered into between PEWC and APWC in 2011.

Item 8: Financial Information

9.2 Markets

The Company’s Common Shares have been listed on NASDAQ Capital Markets tier since April 2011 under the symbol “APWC”.  Prior to that, the Company was listed on the OTC BB since April 2008 under the symbol “AWRCF,” immediately prior to which the Common Shares were traded on the Pink Sheets.  See the risk factor entitled “ Potential Illiquidity of Common Shares .”  The Common Shares are not listed on any other exchanges or otherwise publicly traded within or outside the United States

10.1 Share Capital

As of December 31, 2011 and as of the date of the filing of this Annual Report, the Company has an authorized share capital of 50,000,000 Common Shares, par value $0.01 per share, and there were and are 13,830,769 Common Shares issued and outstanding.  No capital of the Company is under option or agreed conditionally or unconditionally to be put under option.  The Company does not have any classes of capital stock other than its Common Shares.

10.2 Memorandum of Association and Bye-Laws

10.2.1   General

For a detailed description of the Company’s principal activities, see Section 4.1:  “History and Development of the Business.” Pursuant to the Company’s Bye-Laws the Board of Directors consists of a single class of directors, each director has one vote on all matters put to the Board, and a quorum consists of a majority of the members of the Board of Directors then in office. The Company’s Bye-Laws were amended on October 7, 2011 to allow the Company to purchase its own shares for cancellation or acquire them to be held as treasury shares .  Such amended Bye-Laws are filed herein as Exhibit 1.2.

10.2.2   Description of Shareholder Rights Attaching to Our Common Shares

The Company was incorporated in Bermuda on September 19, 1996 under the Companies Act.  The rights of our shareholders are governed by Bermuda law and our memorandum of association and Bye-Laws.

The following discussion of our Common Shares and the laws governing the rights of our shareholders is based upon the advice of Appleby (Bermuda) Limited, our Bermuda counsel.

Our authorized share capital as of December 31, 2011 was $500,000 consisting of 50,000,000 Common Shares, par value $0.01 per share, of which, as of December 31, 2011 and as of the date of the filing of this Annual Report, there were and are 13,830,769 Common Shares issued and outstanding.

•     Holders of the Common Shares have no preemptive, redemption, conversion or sinking fund rights.

•     Holders of the Common Shares are entitled to one vote per share on all matters submitted to a poll vote of holders of Common Shares and do not have any cumulative voting rights.

•     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.

•     Our outstanding Common Shares are fully paid and non-assessable.

•     Additional authorized but unissued Common Shares may be issued by the Board without the approval of the shareholders.

The holders of Common Shares will receive such dividends, if any, as may be declared by the Board of Directors out of funds legally available for such purposes.  We may not declare or pay a dividend, or make a distribution out of contributed surplus, if there are reasonable grounds for believing that:

•     we are, or after the payment would be, unable to pay our liabilities as they become due; or

•     the realizable value of our assets after such payment or distribution would be less than the aggregate amount of our liabilities and our issued share capital and share premium accounts.

The following is a summary of provisions of Bermuda law and our organizational documents, including our memorandum of association and Bye-Laws.  We refer you to our memorandum of association, a copy of which has been filed with the SEC and our Bye-Laws, a copy of which is filed herein.  You are urged to read these documents in their entirety for a complete understanding of the terms thereof.

10.2.3      Share Capital

Our authorized capital consists of one class of Common Shares.  Under our Bye-Laws, our Board of Directors has the power to issue any authorized and unissued shares on such terms and conditions as it may determine.  Any shares or class of shares may be issued with such preferred, deferred, qualified or other special rights or any restrictions with regard to such matters, whether in regard to dividend, voting, return of capital or otherwise, as we may from time to time by resolution of the shareholders prescribe, or in the absence of such shareholder direction, as the Board of Directors may determine.  This provision in the Bye-Laws could be used to prevent a takeover attempt, or to make a takeover attempt prohibitively expensive, and thereby preclude shareholders from realizing a potential premium over the market value of their shares.

10.2.4      Voting Rights

Generally, under Bermuda law and our Bye-Laws, questions brought before a general meeting are decided by a simple majority vote of shareholders present or represented by proxy, with no provision for cumulative voting.  Matters will be decided by way of votes cast by way of show of hands unless a poll is demanded.

If a poll is demanded, each shareholder who is entitled to vote and who is present in person or by proxy has one vote for each Common Share entitled to vote on such question.  A poll may only be demanded under the Bye-Laws by:

•     the chairman of the meeting;

•     at least three shareholders present in person or represented by proxy;

•     any shareholder or shareholders present in person or represented by proxy and holding between them not less than one-tenth of the total voting rights of all shareholders having voting rights; or

•     a shareholder or shareholders present in person or represented by proxy holding Common Shares conferring the right to vote on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all Common Shares.

Unless the Board of Directors otherwise determines, no shareholder shall be entitled to vote at any general meeting unless all calls or other sums presently payable by that shareholder in respect of all shares held by such shareholder have been paid.

10.2.5      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, the Board may from time to time declare dividends or distributions out of contributed surplus to be paid to the shareholders according to their rights and interests.  With the sanction of a shareholders resolution, the Board of Directors may determine that any dividend may be paid by distribution of specific assets, including paid-up shares or debentures of any other company.  The Board of Directors may also pay any fixed cash dividend which is payable on any of our Common Shares half-yearly or on other dates, whenever our position, in the opinion of the Board of Directors, justifies such payment.

Dividends, if any, on our Common Shares will be at the discretion of our Board of Directors, and will depend on our future operations and earnings, capital requirements, surplus and general financial condition as our Board of Directors may deem relevant.

10.2.6      Purchases by the Company of its own Common Shares

Under Bermuda law and as authorized by the Company’s memorandum of association, we may purchase our own Common Shares out of the capital paid up on the Common Shares in question or out of funds that would otherwise be available for dividend or distribution or out of the proceeds of a fresh issue of Common Shares made for the purposes of the purchase.  We may not purchase our shares if, on the date on which the purchase is to be effected, there are reasonable grounds for believing that the Company is, or after the purchase would be, unable to pay its liabilities as they become due.

However, to the extent that any premium is payable on the purchase, the premium must be provided out of the funds of the Company that would otherwise be available for dividend or distribution or out of the Company’s share premium account.  Any Common Shares purchased by the Company are treated as cancelled and the amount of the Company’s issued capital is diminished by the nominal value of the shares acco rdingly but shall not be taken as reducing the amount of the Company’s authorized share capital.

10.2.7      Preemptive Rights

Our Bye-Laws generally do not provide the holders of our Common Shares preemptive rights in relation to any issues of Common Shares by us or any transfer of our shares.

However, the Company has in the Shareholders Agreement granted to COF preemptive rights in the event of any issuance of additional equity securities (or securities convertible into or exchangeable for equity securities) by the Company, such that COF may subscribe for additional securities in order to maintain its then percentage ownership interest in the issued and outstanding equity securities of the Company.  See the risk factor entitled “ Obligations under the Amended and Restated Shareholders Agreement .” 

10.2.8      Variation of Rights

We may issue more than one class of shares and more than one series of shares in each class.  The rights attached to any class of shares may be altered or abrogated either:

•     with the consent in writing of the holders of more than fifty percent of the issued shares of that class; or

•     pursuant to a resolution of the holders of such shares.

The Bye-Laws provide that the necessary quorum shall be two or more persons present in person or by proxy holding shares of the relevant class.  The Bye-Laws specify that the creation or issuance of shares ranking pari passu with existing shares will not, subject to any statement to the contrary in the terms of issuance of those shares or rights attached to those shares, vary the special rights attached to existing shares.

10.2.9      Transfer of Common Shares

Subject to the “Transfer Restrictions” section below, a shareholder may transfer title to all or any of his shares by completing an instrument of transfer in the usual common form or in such other form as the Board of Directors may approve.  The form of transfer is required to be signed by or on behalf of the transferor and also the transferee where any share is not fully paid.  The transferor shall be deemed to remain the holder of the shares until the name of the transferee is entered in the Register of Members.

10.2.10    Transfer Restrictions

The Board of Directors may, in its absolute discretion and without assigning any reason therefore, decline to register any transfer of any share which is not a fully paid share.  The Board of Directors may also refuse to register an instrument of transfer of a share unless the instrument of transfer:

•     is duly stamped, if required by law, and lodged with us;

•     is accompanied by the relevant share certificate and such other evidence of the transferor’s right to make the transfer as the Board of Directors shall reasonably require;

•     is in respect of one class of shares; and

•     has obtained, where applicable, permission of the Bermuda Monetary Authority.

Our Common Shares are traded on the NASDAQ  Stock Market, Inc. as of April 2011, which qualifies as an “appointed stock exchange” for purposes of the Companies Act and the Bermuda Exchange Control Act and regulations made thereunder, in particular a notice to the public dated 1 June 2005. Accordingly, our Common Shares benefit from a general permission for free transferability for all transfers between persons who are not resident in Bermuda for exchange control purposes, for as long as such Common Shares remain listed on an appointed stock exchange. 

The Company, PEWC and COF (as successor-in-interest to SOF), are parties to the Amended and Restated Shareholders Agreement which provides, among other things, for certain transfer restrictions, notice requirements and tag-along rights in the event PEWC wishes to transfer any of its Common Shares in certain types of transactions.  Under the Amended and Restated Shareholders Agreement, the Company was granted an extension until February 2011 to achieve a listing of the Common Shares on a national Securities Market.  Due to market conditions, the Company’s price per Common Share has not yet risen to the level necessary for a listing on NASDAQ (Global).  Accordingly, COF retains its right to sell its remaining Common Shares to PEWC under the put option provided in the Amended and Restated Shareholders Agreement. 

10.2.11    Transmission of Shares

In the event of the death of a shareholder, the survivor or survivors, where the deceased shareholder was a joint holder, and the estate representative, where the deceased shareholder was sole holder, shall be the only persons recognized by us as having any title to the shares of the deceased.  “Estate representative” means the person to whom probate or letters of administration has or have been granted in Bermuda, or failing any such person, such other person as the Board of Directors may in its absolute discretion determine to be the person recognized by us for this purpose.

10.2.12    Disclosure of Interests

Under the Companies Act, a director who has an interest in a material contract or a proposed material contract, or a 10% or more interest (directly or indirectly) in an entity that is interested in a contract or proposed contract or arrangement with us, is obligated to declare the nature of such interest at the first opportunity at a meeting of the Board of Directors, or by writing to the Board of Directors.  If the director has complied with the relevant sections of the Companies Act and the Bye-Laws with respect to the disclosure of his interest, the director may vote at a meeting of the Board of Directors or a committee thereof on a contract, transaction or arrangement in which that director is interested, in which case his vote shall be counted and he shall be taken into account in ascertaining whether a quorum is present.

10.2.13    Rights in Liquidation

Under Bermuda law, in the event of liquidation 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 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 such assets shall consist of property of the same kind or not, and may for such purposes set such values as such liquidator deems fair upon any property to be divided and may determine how such division shall be carried out as between the shareholders.

10.2.14    Meetings of Shareholders

Under Bermuda law, a company, unless it elects to dispense with the holding of annual general meetings, is required to convene at least one general meeting per calendar year.  The directors of a company, notwithstanding anything in such company’s bye-laws, shall, on the requisition of the shareholders holding at the date of the deposit of the requisition not less than one-tenth of the paid-up capital of the company carrying the right of vote, duly convene a special general meeting.  Our Bye-Laws provide that the Board of Directors may, whenever it thinks fit, convene a special general meeting.

Bermuda law requires that shareholders be given at least five days’ notice of a meeting of the Company.  Our Bye-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 non-receipt 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.  Any notice sent by post shall be deemed to have been served seven (7) days after dispatch.  A notice of a general meeting is deemed to be duly given to the shareholder if it is sent to him by cable, telex or tele-copier or other mode of representing or reproducing words in a legible and non-transitory form and such notice shall be deemed to have been served twenty-four (24) hours after its dispatch.

10.2.15    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.

Under Bermuda law, the minutes of shareholder meetings will be open for inspection by any shareholder or director without charge for not less than two hours during business hours each day, subject to any reasonable restrictions that we may impose.  The shareholders shall be entitled to receive a copy of every balance sheet and statement of income and expenditure before a general meeting as required under the Bye-Laws.

Under our Bye-Laws, unless the Board otherwise determines, the register of shareholders of the Company is required to be open for inspection between 10:00 a.m. and 12:00 noon each working day without charge to members of the general public.  A company is required to maintain its share register in Bermuda but may, subject to the provisions of the Companies Act, establish a branch register outside of Bermuda.  We have estab lished a branch register with our transfer agent, Computershare Limited, which is based in Jersey City, New Jersey. 

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 is available for inspection by the public between 10:00 a.m. and 12:00 noon every working day.

Bermuda law does not provide a general right for shareholders to inspect or obtain copies of any other corporate records, except for the Bye-Laws of the Company.

10.2.16    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 re-elected or his successor is appointed at the next annual general meeting or his prior removal in the manner provided by the Companies Act or the Bye-Laws.  There is no requirement under Bermuda law, the Company’s memorandum of association or its Bye-Laws that a majority of the Company’s directors be independent.

The Bye-Laws provide that each director shall have one vote on all matters presented to the Board for a vote.  At the Annual General Meeting held on October 7, 2011, all nine directors then in office were re-elected.   

The shareholders may by resolution determine that one or more vacancies in the Board of Directors shall be deemed casual vacancies for the purposes of the Bye-Laws.  The Board, so long as a quorum of directors remains in office, shall have the power at any time and from time to time to appoint any individual to be a director so as to fill a casual vacancy.  The shareholders may approve the appointment of alternate directors or may authorize the Board to appoint them.  Directors may also appoint and remove their own alternates. At the Annual General Meeting held on October 7, 2011, the shareholders approved the reservation of one directorship as a casual vacancy.

We may, in a special general meeting called for this purpose, remove a director, provided notice of such meeting is served upon the director concerned not less than fourteen days before the meeting and he shall be entitled to be heard at that meeting.

The office of a director will be vacated in the event of any of the following:

•     if he resigns his office by notice in writing to be delivered to our registered office or tendered at a meeting of the Board of Directors;

•     if he becomes of unsound mind or a patient for any purpose under any statute or applicable law relating to mental health and the Board of Directors resolves that his office is vacated;

•     if he becomes bankrupt or enters into a general settlement with his creditors;

•     if he is prohibited by law from being a director; or

•     if he ceases to be a director by virtue of the Companies Act or is removed from office pursuant to the Bye-Laws.

10.2.17    Amendment of Memorandum of Association and Bye-Laws

Bermuda law provides that the memorandum of association of a company may be amended by resolution passed at a general meeting of which due notice has been given.  An amendment to a memorandum of association does not require the consent of the Minister of Finance save for specific circumstances, for example, the adopting of any authority to carry on restricted business activities.

Under Bermuda law, the holders of:

•     an aggregate of not less than twenty percent in par value of a company’s issued share capital or any class thereof; or

•     not less in the aggregate than twenty percent of the company’s debentures entitled to object to amendments to its memorandum of association,

       have the right to apply to the Supreme Court of Bermuda for an annulment of any amendment of the memorandum of association.  Where such an application is made, the amendment becomes effective only to the extent that it is confirmed by the Bermuda Supreme Court.  An application for an annulment of an amendment of the memorandum of association must be made within twenty-one days after the date on which the resolution amending the memorandum of association is passed and may be made on behalf of the persons entitled to make the application by one or more of their number as they may appoint in writing for the purpose.

Our Bye-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.

10.2.18    Merger or Amalgamation